Posted on 2020-02-03 19:00:00
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The Chinese yuan has been gaining strength against the dollar in recent weeks, in part because of optimism that there will eventually be a resolution to the trade war. But the Chinese currency is still over 17% lower than it was when the US imposed its first tariffs. Does this mean the markets are cautiously positioning for a deal, or is there still skepticism about the phase 1 deal? Peter focused on the bigger picture.
"Well look, a phase one might happen because a phase one is insignificant. The real deal is supposedly phase two. That’s the one that’s not going to happen. So, if anybody thinks we’re going to have a substantive deal, they’re wrong. But the reality is, I think the Chinese yuan is undervalued relative to the dollar and I expect it to rise rather dramatically over time.”
Peter said this is not good news for the US.
"It’s going to make imports more expensive for Americans, so it’s going to reduce our standard of living. And I do think ultimately, it’s going to push up interest rates as well, as the Chinese and a lot of other creditors are no longer lending money to Americans, and so we have to draw from our own savings pool, which is extremely shallow. It means the Federal Reserve is going to be printing a lot more money as it monetizes the debt that the Chinese and other nations no longer want to buy, and this is further going to lower the American standard of living.”
Horwitz said it’s hard to get a read on the yuan because it doesn’t trade freely. It’s always pinned by the Chinese government. He said he thinks the Chinese will keep their currency low as long as they can to offset tariffs and keep Americans buying their goods. He said he doesn’t agree with Peter at all that the yuan will explode to the upside.
Peter said, be that as it may, the Chinese have made a mistake undervaluing their currency and they’ll eventually figure that out.
"They did that deliberately because they wanted to maintain exports to the United States. But I think that was a key mistake. I mean, it helped America because we got to live beyond our means. But I don’t think it did anything for the Chinese economy. It helped undermine it. Because they accumulated a huge pool of US dollars and they ended up doing things with that – created malinvestments and other distortions. I think the best thing that can happen to China is simply to allow their currency to appreciate, to reduce their exports to the United States because we can’t afford to pay for those products, to let their own nation consume that production so that their own people can benefit from their hard work. But unfortunately, Americans are going to have a rude awakening when all of a sudden we have to live within our means. And our means have been dramatically diminished over the years. We haven’t been investing. We haven’t been saving. We’ve been relying on an overvalued currency to import what the rest of the world produces. And we haven’t saved very much. We’ve just been borrowing to consume and all this is going to come back to bite us.”
The stock markets continue to go up, despite a lot of bad economic data. Horwitz said stocks will continue to go up until they don’t, but at some point, the markets will melt down. Cheap monetary policy has created an environment where investors really have no place else to go. Horwitz said there is no way to time the crash, but people will have time to get out if they don’t panic when it starts selling off.
Peter said he doesn’t think people will have time to get out.
"I think with this — this is a bubble. It’s going to pop. I agree. there’s no way to know how much air they’ll successfully blow into it. The minute it drops, everybody says the correction is over, you gotta buy the dip. So, I think most people are going to watch all their paper profits vanish … It’s not just going to be that people are going to lose dollars when the stock market bubble pops, but the dollar bubble is even bigger. And when that pops, even the dollars you haven’t lost are going to lose most of their value. So, I think Americans are going to be wiped out in the US stock market and the bond market. I mean, people are going to be surprised at how much of their wealth they lose playing it safe in the bond market. Because you’re not playing safe. You’re playing with dynamite there. There are no US dollar-denominated assets that can be considered safe right now. It is a giant casino. And yeah, you know, people think the economy is good because they managed to blow more air into the stock market bubble and the bond market bubble, but the economy is in worse shape now than it’s ever been. It’s in far worse shape than it was before Trump took office, mainly because he continued to pursue the failed policies of Obama, who pursued the failed policies of Bush.”
The show opened with a discussion of Boeing and the impact lower aircraft sales could have on the US economy. Horwitz said this is what happens when a company gets in bed with the government and gets a plane out too fast. He said he thinks it will hurt US GDP going forward.
The host noted that Boeing has already lost $62 billion off its market cap and asked Peter if the company can recover?
"Well, I’m sure over the long term, there will be a recovery. But in the short run, certainly, this will weigh on our exports, which also could weigh on the dollar. You know, I’ve been thinking the US dollar was headed lower anyway, but if we end up with bigger trade deficits in part because we have fewer exports of aircraft, that is going to be another factor of many that I think will be weighing down the dollar and the US economy.”