Monday, July 13, 2015

Greece: Problem Solved, Now On To China

Okay, maybe not so much solved as...
Hell, who knows.
One of the smarter things you can do in finance or investing is figure out where the money is flowing and then get in front of it. As Ms. Kaminska makes clear, flows out of China are a good bet, into Bitcoin, yikes.

From Dizzynomics:

What do you call a freely floated RMB?
Currently, you can call it Bitcoin.

Bitcoin has risen above $300 on what seems to be mostly Chinese (not European or greek related) panic related volume/inflow.

This makes sense. The Chinese market is collapsing and there is real concern over the stability of the RMB.
Due to the scale of dollar and foreign liabilities in the country, RMB devaluation simply isn’t an option — not without compromising its financial track records on the international stage. The country needs a strong RMB to defend the interests of its wealthiest citizens but it also needs a cheaper RMB to keep those at the bottom of the ladder in jobs.

It’s a classic rock and a hard place situation. The positive feedback loops that were so great on the way up are now turning into a vicious negative feedback loop which can’t be suppressed unless a major restructuring of the economy occurs.

If the RMB remains supported deflation will grip the land. The Chinese miracle (equivalent of their industrial revolution) will be over and we will see 1929 level unemployment and the busting of many RMB capital markets. If it falls in value, the country will see mass defaults on doar liabilities and/or the draining of its foreign exchange reserves.

The Chinese might be quicker to enact big fiscal projects to remedy the situation than the US was, but as a whole even Keynesian stimulus becomes problematic if your country lacks the basic resources to materialize these plans or the credit reputation to keep importing them.

Those with what will soon be overvalued claims against foreigners are unsurprisingly super eager to recycle them into claims arising from someone else’s balance sheet.

Their choice currency (due to ongoing capital controls across most other major currencies ) seems to be Bitcoin.

This may look great for Bitcoin in the short run. But in the long run it’s going to be a disaster.

Because Chinese RMB is being swapped into Bitcoin at a massively overvalued conversion rate, on the presumption the official exchange rate is sound when really its value is entirely dependent on controlled capital flows.

Note the slippage already appearing....MUCH MORE