Don't Blame China

Monkeys, it blows my mind that there are folks on Wall Street that believe the Federal Reserve can raise rates. China devaluing their currency is NOT why our markets are in turmoil. If you take a look back, there are some folks that have forecasted what is occurring now. In short, it is...

A bluff.

The Federal Reserve stopped Quantitative Easing and has yet to raise interest rates, however the truth is that they CANNOT raise rates without sending equities plunging. Even the expectation of a future microscopic increase of 25 basis points is killing the market. But, perhaps the Federal Reserve wanted to have this correction as an excuse to further delay the rate hike?

There is flat out too much debt based on dollars for the Federal Reserve to ever raise interest rates to a free market level. If interest rates were allowed to float here, it would be FAR worse than what occurred in the late 1970's. 80+ months of 0% interest rates has consequences, but the Federal Reserve will "have their cake and eat it too" so long as other countries buy into their promises of a rate hike, which they never intend to deliver.

I admit, I don't know what the Federal Reserve's play here is. I expect them to delay raising rates forever. Like some economists(and even some hedge fund heads) say, I even think QE4 is on the way in 2016. The fundamentals of the U.S. and much of the global economies are completely broken. We need Congress to get the Fed to drop their employment mandate if we ever hope of stabilizing our nation. Then, the Fed must not monetize the massive deficits that Congress is not willing to pay for.

With that said, the "surprise" is just funny at this point. It is a market driven completely by cheap money. Earnings are propped up by share buy-backs, paid for by cheap debt and valuations are asinine for many industries.

In short I expected this, but I don't have any brilliant insight other than I expect this to be a temporary buying opportunity and the Federal Reserve will eventually throw the market a lifeline with rhetoric about delaying a rate hike. If they do hike rates, they will have to just lower them again or an actual financial crisis will occur which is badly needed. This Fed driven market will march upwards until the party actually stops.

Politically, it's shameful to watch Presidential candidates blame China for OUR problems. If China floats their currency, or allows their Yuan to rise, we are toast as the economic superpower of the world. I think the Chinese government has been aware of this for a long time, but are content with taking over slowly over the course of 10 years or so, for fear that their citizens will demand more political freedoms upon experiencing a greater influx of wealth than the American Middle Class did in post-WWII. China's economy is only weak because we export our inflation to them. In exchange they lend us money, to buy goods they produce.

That won't last forever.

Comments (12)

Aug 25, 2015 - 2:45am
4.2kformerpro, what's your opinion? Comment below:

Honestly whether is it their intent, the Fed is pretty stuck to keeping interest rates down for a little while if they don't want to completely crush the securities market / struggling foreign countries. As I see it, we're all fucked for the next financial crisis (and I assume it will indeed be a crisis) with no obvious monetary or fiscal policies to haul our asses out.

Aug 25, 2015 - 7:43am
ArcherVice, what's your opinion? Comment below:

They need to raise them, you're missing the bigger long term risks.

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Aug 25, 2015 - 10:56am
Anonymous Monkey, what's your opinion? Comment below:
ArcherVice:

They need to raise them, you're missing the bigger long term risks.

No doubt, interest rates should have never been lowered in the first place and need to be raised now for the world to face the music while things are still fixable.

Best Response
Aug 25, 2015 - 8:52am
Greg Marmalard, what's your opinion? Comment below:

I think China's problem is manufactured liquidity. When you have mandated buying and selling, in addition to a bunch of farmers day trading all over the country, that high trade volume is going to look really good but it's essentially worthless as no real investing is taking place. China has been a bubble propped up by a falsely inflated currency for a long time and foreign investors have finally realized that, hence the devaluing of the yuan after China realized it was too late to stem the tide.

We need to eventually raise interest rates, but it's going to a long time until China's economy catches up to ours. They haven't even had their real estate bubble burst yet, trust me, that one is coming too.

On a more practical note, China hasn't been, nor conceivably will be, a safe haven for investment, at least in the next decade. If and when they get there, then we'll have a big problem.

Aug 25, 2015 - 12:56pm
RedRage, what's your opinion? Comment below:

@BTOWN" I agree as I've seen too many retail investors in China (everyday folks and maybe even farmers) buying and selling stocks who don't understand what it is that they're transacting in (India has a similar issue). When you have people who don't have a remote understanding of how the stock market works, buying shares and inflating prices you're bound to have problems (obvious).

Also why the hell do the Chinese lend on the basis of stock as collateral? Which yahoo thought this was a good idea? This I believe is another example of the foolishness that is China and her citizens (or should I say comrades).

As for interest rates why wait for the inevitable? Raise them now, suffer the consequences, and move on. We have survived ups and downs in the past and will continue to do so.

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Aug 25, 2015 - 11:53am
jankynoname, what's your opinion? Comment below:

Monetary policy "tools" are basically nonexistent from here. Next crisis will need to be handled on the fiscal policy side (e.g. massive stimulus package) which is going to require some coordination in D.C. I actually think a huge public works undertaking like building a giant wall across Mexico might not be the worst idea, given it will create a lot of construction jobs. I would wait until we hit a recession to start it though...

I do agree that the cost of interest is a huge disincentive for the Fed to tighten from here. With $17T total debt, each 100bps increase results in an extra $170B in annual interest cost. It's amazing to me that we still can't balance our f*cking budget even with interest costs at these levels.

Aug 25, 2015 - 8:11pm
Hopeful-Incoming-At-GS, what's your opinion? Comment below:

As with Greece, people are over thinking this IMO. Most of wall street is expecting a hike, so I think the Fed will raise rates not to surprise the markets. A few bad red days won't make the Fed re-plan their policies. There is also the issue of long-term risk and the fact that not long ago, we were at all time highs.

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Aug 25, 2015 - 9:14pm
Anonymous Monkey, what's your opinion? Comment below:

Long-term risks are massive indeed. Zerohedge and Peter Schiff had a great article on the subject as well. My favorite part is the graph marking the China action and FOMC minutes.

http://www.zerohedge.com/news/2015-08-24/fed-spooking-markets-not-china

Aug 25, 2015 - 9:36pm
UncleCarl, what's your opinion? Comment below:

Not trying to be a dick, but you lost me in the first paragraph, second sentence when you used "are" instead of "our"..

"Monkeys, it blows my mind that there are folks on Wall Street that believe the Federal Reserve can raise rates. China devaluing their currency is NOT why "OUR" markets are in turmoil. If you take a look back, there are some folks that have forecasted what is occurring now. In short, it is..."

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Aug 25, 2015 - 10:53pm
Anonymous Monkey, what's your opinion? Comment below:

Thanks for that. Made a draft and made my edits, but missed that one.

Aug 28, 2015 - 12:00am
Chimp101, what's your opinion? Comment below:

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