The yuan and yawn of a policy

China recently announced the beginning of allowing their currency (yuan) to float freely. While not completely free for now since this declaration, actually just a little peck, the Chinese have once again play a 'one upsman' with global markets. How long will the peg to the US dollar last? This is anyone's guess and I would say most are way off. One has to remember that in the China tomorrow could mean 100 years from now or simply tomorrow, given their cultural view of time and events. The 'honorable' Sen. Chuck Schumer of New York (how does he keep getting re-elected?) proposes trad tariffs and sanctions against the Chinese. This is a clear sign he is not fit for the role of elected representative. How does he propose that cheap goods be imported into the US? Hey Chuck do you want to pay $100 for your next t-shirt?

When and if the Chinese ever allow their currency to truly float it is almost guaranteed to touch the tops of pine trees, thus driving up their cost to engage in business and thus driving prices on their ordinarily cheap products. This will be, your author's opinion, when the Chinese economy pops.

Now let's assume this event plays out-what will be the consequences? China has historically been seen as communist country that liens on controlling their massive population. This worked for sometime during the days of Mao Tse-Tung and subsequent leaders. The government wisened up and gave the People's Republic what they wanted and that was the beginning of capitalism, which started showing signs in the late 1970s. If an economic does develop who is to say the government will not revert back to the same communist policy? In other words 'we tried and see what happened, besides we can't control the masses' mentality would loom.

These are just some things to ponder given what is known about China's history and stages of an advancing economy. I submit the following article from today's Financial Times. Infinitespeculator.com


China ends renminbi's decade-old peg to dollarBy Richard McGregor in Beijing, Edward Alden in Washington and John Burton inSingaporePublished: July 21 2005 12:27 Last updated: July 21 2005 18:59
Chinese Renminbi

China has bowed to intense foreign pressure and growing domestic economicimbalances by replacing its decade-old currency peg to the US dollar with a moreflexible exchange rate system that will be tightly managed by the central bank.
The People's Bank of China, the central bank, announced a 2.1 per centrevaluation on Thursday and the details of a system that will allow the renminbito fluctuate by 0.3 per cent in daily trading.

The PBoC said the exchange rate would be kept "basically stable" and set withreference to a basket of unspecified currencies. The decision is a victory forthe administration of George W. Bush, US president, which had urged Beijing torevalue but also fended off congressional demands for trade sanctions if Chinarefused to move. John Snow, US Treasury secretary, said the action was a firststep towards currency flexibility and noted China's objective of allowing themarket fully to play its role in resource allocation. The change was consistentwith the Chinese government's aim of modifying the currency system gradually, tomain-tain the economy's high growth rate. The aim, the bank said, was to "promote basic equilibrium of the balance ofpayments and safeguard macroeconomic and financial stability".


With China's trade surplus rising sharply and its foreign exchange reservesreaching a record $711bn last month, the bank's ambition of equilibrium in thebalance of payments sug-gested Thursday's revaluation would not be the last.
There was nothing in the PBoC's statement to hinder speculative flows of moneyinto China. The bank said market developments would influence its decisions tomake more adjustments to the renminbi's value.

The US made it clear that it expected the renminbi to continue to rise againstthe dollar. Mr Snow said the US would "monitor China's managed float as theirexchange rate moves to alignment with underlying market conditions". China hopesthe announcement will ease rising tensions with the US and clear the way for asuccessful visit to Washington in September by Hu Jintao, China's president.

The yen jumped sharply against a range of currencies following news that thePeople's Bank of China would revalue the renminbi, following pressure fromleading industrialised countries.
Senator Charles Schumer, a Democrat who had pressed for tariffs on Chineseimports if China did not revalue, said: "It is smaller than we had hoped but toparaphrase the Chinese philosophers, a trip of a thousand miles can begin withthe first baby step." Analysts said the revaluation, although small, and theintroduction of more currency flexibility, would help boost consumption in Chinaand take the steam out of rapidly growing exports, now rising by 30 per cent ayear.

"Both domestic fiscal and monetary policies are likely to gear towardsstimulating domestic demand," said Hong Liang, of Goldman Sachs, in Hong Kong.In an immediate response to the move, Malaysia dropped its currency peg againstthe US dollar and switched to a managed float against a basket of currencies.The new exchange rate against the US dollar will be made known today. Malaysia'sdecision was taken after the spot ringgit market was closed and the currency isnot traded offshore.

EU and the terrorists

As with the rest of the world I am saddened and shocked at the terrorist attack experienced in London on 7 July 2005. I am, however, optimistic about the future regarding fighting against this global plague that has been brewing for decades. Your author believes that by striking the UK, the terrorist may have played their final hand and much of depends on the less than rosey future of the European Union.

Besides the celebration of London being awarded the future Olympic games, UK PM Tony Blair also is at the helm of the EU and with that comes needed influence in the wake of the terrorist attacks on the London train system. Prior to this, in June 2005, the EU met for a summit and made clear their agenda-economic reform and removal of social programs that primarily benefited France. The main program was agriculture subsidies, something the states still engage in and the fact that these payments do nothing but hold an economy back from full potential.

Another issue facing the EU is the admittance of Turkey, a subject your author has already pontificated about and will spare the reader a rehash. The main culprit for their entry has been France. Why? Well one can imagine the Muslim leaving ghettos outside of Paris for Istanbul. Also Turkey has the ability or at least the desire to manage a sound economy, therefore creating sway and influence over the EU. This could be considered 'imaginative thinking' but at this point, given the predictable chaos and fall-out from the EU, anything is possible.

I digress, with Great Britain at the helm of the EU and France's decision to stand alone, Blair could very well rally behind the admittance of Turkey into the union. This would appease the Muslims. Of course he would be advised that the EU propose that countries agree to fight against the terrorists and make way for additional countries to be admitted.

Putin of Russia has already said more should be done to combat terror. Is it possible that trade negotations could be in the future for Russia and the EU? Possibly centered around oil, given that is one of the few products the Russians are able to present to the free market? Given the fact that the remaining countries seeking admittance into the EU are all former Soviet block nations or remnants of former USSR allies, such a scenario could be possible. For the past 18 months, on more than one incident, Putin has publicy decried that the breakup of the USSR was their 'national tragedy'. Also the reader should keep in mind the Muslim population of Chechnya and the Russia's potential to become a leader against the Muslim terrorists, perceived or legitimate.

Your author freely admits, as stated in the introduction, that these thoughts suffer from over optimism to the highest degree. However, they do appear to be logical and your author firmly believes the terrorist will be dealt a serious blow; ultimately understanding why Great Britain will fight for freedom and why they are 'Great'.

Hype and more hype

Hope all who read had a wonderful 4th. Mine was spent off the coast of West Palm Beach relaxing about ten miles out.

I'm catching Kramer's Mad Money program on CNBC and just saw a commercial advertising a special report on the hottest real estate markets to invest in. I am fearful this market just may be showing signs of a peak. Property values in Cleveland or Detroit will no longer be able to substain these values. People have been fleeing, along with their wallets, to the southeast and southwest. Property values in Tampa, Phoenix or Houston will be able to maintain their premium levels.

Traditionally property has risen in value, consolidated on a price-level, often slightly dipping and then rising again. This time, however, will Des Moines be able to carry this trend? Naples, FL will be able to do so along with Houston. When CNBC is promoting places to invest, essentially following the herd at this time, an investor must know the time to flee is now.

I read recently where the average combined income in California can no longer afford the mortgage to a median priced home. If all trends begin in California, this should tell the investor something. The crash is coming. Imagine you hold an interest only loan and suddenly you are whacked with rate hikes. What if you cant sell? Imagine the loan backed bonds issued by Fannie Mae. What will happen when mortgage payments aren't sent in a timely manner? What about the bondholders? Fannie Mae and Hong Kong Singapore Bank stand to lose, since they are the biggest players in the secondary market. What about the insurance (P&I) written on these mortgage? Will they too suffer?

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Stocks.....
Oil appears to be reluctantly holding the 60 dollar a barrel level. The US equity markets still look weak. However take note in the specialiy retailers (Best Buy, Bed Bath Beyond, etc) and notice the pricing of Wal Mart stock. My advice, for the two cents its worth, is buy Target. They will certainly grab some of Wal's marketshare if not on quality of products, certainly for customer service given my recent at Wal Mart.

Secondly note the financials, Met Life (MET) is making new highs along with Prudential (PRU). Your author owns Met, Bank of America and the S&P spys financial sector (XLF). Also still sitting on ABB, despite the recent pounding if not for the potential for the company's global growth, much of it now becoming apparent. The other holding is Progressive Energy (PGN), which I will buy more once it breaks out of this $40-46 range.

Stafe safe-
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