Yesterday, we reported that China's yuan devaluation was causing currency chaos in Asia. On Thursday, that chaos deepened in Asia, and spread to global stock markets.
Thursday's most dramatic event was the crash in Kazakhstan's currency, devaluing by 23%.
Kazakhstan's economy has been hit from all sides. It's biggest export is oil, and the price of oil has fallen almost 60% in the last year, and is still falling. The 23% tenge devaluation means that now Kazakhstan will get about 23% more for its oil. Russia and China are its top trading partners, and both Russia and China have already had substantial currency devaluations against the US dollar. The 23% tenge devaluation will help Kazakhstan's balance of trade with these and other countries.
The global currency war that we discussed last week ( "12-Aug-15 World View -- China's yuan devaluation a humiliating setback for 'China dream'") seems to be in full swing. South Africa's rand, Brazil's real, and Malaysia's ringgit currencies all fell to multi-year lows against the US dollar in the last week.
That's only going to be the start, according to a new report by Morgan Stanley that lists the top ten troubled currencies: Taiwan dollar, Singapore dollar, Russian ruble, Thai baht, South Korean won, Peruvian sol, S. African rand, Chilean peso, Colombian peso, Brazilian real.
According to Morgan Stanley's foreign exchange strategy head Hans Redeker: It’s all about vulnerability. Major victims of the policy change this time are currencies of countries with high export exposure and export competitiveness with China."
"A 1930s-style global currency war, or "race to the bottom," appears to be in full swing."
So far, the United States dollar is not directly affected by the devaluations, but that may have to change. All of these currency devaluations have been against the US dollar, which is the international reserve currency, which means that as the other currencies have been getting weaker, the US dollar has been getting stronger. Currency devaluations are a zero-sum game, in that one country's devaluation is another country's revaluation.
The global devaluations and the dollar's strengthening are going to affect America's balance of trade with other countries, which means that the US will be able to export fewer goods. This will affect the US economy, as hinted by the sharp Wall Street plunges on Wednesday and Thursday, and that effect will grow as the devaluations continue, so that at some point the US may have to devalue as well, and join the race to the bottom. Bloomberg and Reuters and Bloomberg(8/16)
Global stock markets plummet over currency devaluations China's Shanghai stock market index plummeted 8.2% in the last three days (Tuesday-Thursday). As those who have been following the situation in China will recall, China's stocks are in huge bubble that began to implode on June 12, with the index quickly plummeting 30% within a couple of weeks.
The Chinese Communist Party (CCP) went into full-scale panic, and poured hundreds of billions of dollars into the stock market to prop it up, and also passed regulations making it illegal for large companies to sell stocks, or for the media or bloggers to use words like "panic."
So the significance of the 8.2% fall in the last three days, beyond just the fact that a lot of elderly Chinese are losing their life savings, is that the CCP is rapidly losing more and more credibility, and chances of a "people's rebellion" against the CCP are increasing.
Other stock markets followed suit. Wall Street stocks sold off broadly, as did European and Asian shares.
The S&P 500 price/earnings ratio (stock valuation index) is still above 21, far above the historical average of 14, indicating a huge Wall Street stock market bubble. China's bubble had to implode sooner or later, and the same is true of Wall Street. It's possible that it's happening right now. Guardian (London) and Reuters
We have been warning our viewers since 1999 about the word “deflation”, and the negative stock market action when the deflation occurs. In fact, we authored the chart, “Cycle of Deflation” (first attachment) which shows the flow of the typical deflation. The deflation starts with excess debt and over-investment leading to excess capacity and weakness in pricing power. This leads to the devaluation of the countries’ currency. When that starts to affect exports the deflationary country typically gets into a “currency war” with its’ trading partners. This competitive devaluation leads to protectionism and tariffs followed by “beggar-thy-neighbor”, where countries affected by deflation resort to selling goods and services below cost in order to keep their plants open. As you can see this is a vicious cycle that eventually leads to plant closings and debt defaults until pricing power returns.
Commodities are clearly the “canary in the coal mine” as far as deflation is concerned. Remember when we first talked about this in 1999, (Windows Word) never heard of deflation and kept trying to correct us by stating, “do you mean inflation?” Now, the world is concerned about almost every commodity on earth declining in sync with each other. Ever since Saudi Arabia announced last fall that they will not decrease oil production to support crude oil prices, the price of crude has plummeted.
The concurrent economic slowdown in China has exacerbated this decline not only for oil but also most other industrial commodities. Zinc, lead, copper, nickel, aluminum, precious metals and many more commodities are breaking through technical support areas that have held up for years. Actually the CRB Raw Industrial Spot Index (Chart 3 from our best data resource Ned Davis Research—middle chart) represents these metals as well as many more commodities.
Since we started warning our viewers about the impact of deflation the CRB had some major declines and rebounds as the Fed pumped in a flood of money to try to prevent the inevitable deflation as the debt continues to decline. This index peaked about 1998 as the dot com bubble was about to burst and declined to the 220 area in 2002 (that also troughed after the 1987 stock market crash). Then the Fed dropped the Fed Funds Rate to 1% in 2003 and kept it there for a year.
This started the housing bubble which was made worse when sub-prime loans exploded as Alan Greenspan encouraged banks and mortgage companies to make these loans (and put his blessing on the home price frenzy). The peak of the housing market in 2010 coincided with the next peak in the CRB at 610. The CRB has declined to 440 presently from 610 and it is our opinion that this decline will continue down below the trough of 310 in 2009 and the 220 trough that occurred in 2002 and 1987.
Oil could go to $10 to $20 [VIDEO]
DYI Comments: If oil and other commodities drop to the equivalent of $10 to $20 dollars per barrel the U.S. will be back in recession and the stock and junk bond market will take a 50% plus decline.
OH Canada, OH Canada! Despite 75% of their population lives within 100 miles of the U.S. border due to high commodity prices and ultra low interest rates has created a massive debt bubble manifesting a housing bubble larger than the U.S. experience. At the very least Canada will experience a nasty recession AND a possible depression. This petroleum commodity state country is in big trouble. If oil does reach a ten dollar handle then the U.S. will have an additional illegal immigration problem; Canadians looking for jobs south of the 49th parallel!
DYI
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