And it’s Not a Guess. It’s Legal
By Jeff D. Opdyke
Dear Sovereign Investor,
Let’s say I’m an insider and I’m telling you in no uncertain terms the exact actions I’m taking – actions that, if you invest based on the information, will make you some money.
Do you pursue those profits?
It sounds illegal, right? Ivan Boesky … Securities and Exchange Commission violations … prison showers.
Only, in this case it’s not illegal at all.
The information is out there for every investor to consume, analyze and act on. Most won’t think to act. Some won’t know how to act. But those who follow through will assuredly accumulate profits.
How much? Might be 30%; might be 50% – might be much, much more. These things are never clear before the fact.
But the point is, the investment is assuredly a winner.
And that investment is: the Chinese yuan.
The insider: Zhou Xiaochuan, governor of the People’s Bank of China.
Mr. Zhou Goes to Washington
Misguided, uniformed, vote-chasing U.S. lawmakers continue to push for sanctions on China – as though China is to blame for America’s inability to manage its finances prudently and the Obama administration’s inability to grow the jobs market quickly.
Not understanding the real ramifications of what they’re seeking, American policymakers insist China is manipulating the yuan and beggaring the U.S. (never mind that America’s current currency policies are beggaring the rest of the world).
But Mr. Zhou is clear in telling America to shut its apple-pie hole – though he’s much more diplomatic than that.
The central banker earlier this month told the National Press Club in Washington, D.C., that aiming to correct global imbalances by forcing China to quickly rebalance the yuan is the wrong approach.
“People may not have that kind of patience, so they would like to see a quick change in the balance, but it may cause a kind of overshooting,” the central banker said.
For “people” you can insert Messrs. Bernanke and Geithner, Democratic Sens. Chuck Schumer, Harry Reid, Nancy Pelosi … really, just about any Congressional member and/or policymaker overseeing the U.S. economy and constantly yapping these days about China’s currency policies.
I’m not defending China. They yuan clearly needs to revalue, and it will – over time. But the U.S. is trying to teach a dragon to sing from an American songbook, and the dragon doesn’t care for all that jazz.
And therein lies the profit opportunity.
China’s Unmistakable Message
Mr. Zhou, in a recent opinion piece in China Finance magazine, published by China’s central bank, said the government will continue to hew to its long-standing plan to keep the yuan “basically stable at a reasonable and balanced level.” To achieve that, he wrote, the People’s Bank of China will “dynamically manage and adjust the yuan exchange rate under the trading band that has already been announced.”
Strip out all the bureaucratic language and the message couldn’t be clearer: China will manage its currency based upon its own, domestic priorities … and China will allow the yuan to strengthen against the dollar, but at a pace China deems appropriate.
In the currency market, it’s not very often that an insider dishes up reliable information on an assured winner. But Mr. Zhou, perhaps the insider-est of insiders, is telling you, point blank, that the yuan is going higher against the dollar – China will see to it.
But he’s also telling the U.S. to drop the hissy-fit already and get back to managing what really needs managing – the U.S. economy.
The Trade of the Decade
As for the investment angle here … buy the yuan. And hold it.
For a long time.
In the currency world, the yuan will be the trade of the decade – which also happens to be the belief of one of the smartest currency guys I know – Chuck Butler, president of EverBank World Markets, who I first interviewed years ago when I covered the markets as a reporter for The Wall Street Journal.
At the moment, China is committed to letting the yuan trade within a 2% band. And each time China widens the band, the yuan quickly appreciates to the maximum end of that range.
Simply extend an annual 2% band expansion across the next decade – not illogical, given China’s commitment to a managed rise in the yuan – and you get a 26% rise in the yuan against the dollar.
But over the next decade it’s not hard to imagine that China will freely float the yuan. Technically, that has already happened in Hong Kong, where locals can trade the yuan back and forth as much as they want.
When that happens, you won’t see a 2% expansion of the trading band. You’ll see the yuan surge against the greenback.
My call? An investment in the yuan returns at least a 100% gain in dollar terms in the next decade. That means that by the end of 2020, US$1 buys just 3.3 yuan. (Today a buck buys about 6.6 yuan; if you spend a dollar to own those 6.60 yuan, you’ll have 6.60 yuan a decade from now and you’ll be able to buy back $2 – that 100% gain).
Why Buy the Yuan?
Look, you have China committed to increasing the yuan’s value over time. And you have the makers of American monetary policy committed to killing all value in the dollar as they try to re-inflate American assets with untested economic policies.
Bernanke, Geithner, et al. haven’t explicitly said the dollar is dead – they can’t say that without causing a major brouhaha here at home.
But Mr. Bernanke certainly has implied as much in his singular focus on stoking inflation and reducing joblessness at any cost. In doing so, he has completely ignored the impacts his policy decisions have on the dollar. (Comically, Mr. Geithner keeps talking about a “strong dollar” that is as laughable as it is demonstrably wrong.)
Ultimately, what we have is one guy telling you his elevator is going up, while the other guy promises you his elevator is going down.
I know which elevator I’m jumping on.
Which one do you want to ride for the next decade?
Until next time, keep a global view …
Jeff D. Opdyke
Editor, Emerging Market Strategist