Wednesday, May 18, 2005

SOME SEE THE TRAP

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Just this last hour, Reuters found some pundits to say pretty much what this blog has been saying about the stock market rally and the loud noises Bush and Congress are directing towards the triumphant Chinese.
The U.S. stock market's upbeat reaction to the heated rhetoric between Washington and Beijing over China's currency has puzzled some strategists who say a revaluation of the yuan is ultimately negative for equities.
Should China revalue its currency, the huge inflow of its goods to the United States would become more costly for U.S. consumers and companies, potentially ramping up inflation, which could hurt corporate profits and stock prices.

Ah! They see part of the trap! We can't go somewhere cheaper to buy whatever since almost all the whatevers are being made in China now. So it won't be cheaper. And a much stronger yuan means they can outbid us for oil and note how the stock market rises and falls in tandem with the oil see saw. Oil up/stocks down, oil down/stocks up. Add to that the inflation see saw and we get this four way rocking motion: oil up/inflation up/stocks down, etc. Of course, this latest see sawing has been produced by rank lying with the Feds crowing about no inflation when there certainly was inflation.

Back to the Chinese:
"The last thing the Chinese like is to come across as being bullied into making a decision," said one strategist, who preferred not to be named "It usually backfires."

But stocks rose sharply after the announcement on Tuesday and continued their gains on Wednesday, when the Dow closed at a one-month high. Wednesday's rise was spurred mainly by other factors such as lower oil prices and tame inflation data, but the gains illustrate the lack of concern by equity investors.

OK. Who is the cowardly "strategist"? Greenspan? Seriously. Reuters, please, if you must quote people, call me. Or email me at emeinel@taconic.net. I will be thrilled to clue you in on these matters.
Anthony Chan, managing director and senior economist at JPMorgan Asset Management, argues that a revaluation could nudge up prices, ultimately meaning the Federal Reserve needs to push up interest rates to battle inflation.

"The news on the Chinese front is good for the U.S. economy, but I remember just a short time ago that good news for the U.S. economy wasn't necessarily good news for the equity market," Chan said.

He argued that a revaluation could make Chinese products more expensive, giving a breather to U.S. manufacturers who could potentially produce more in the United States. It could also give U.S. producers some leeway to raise their prices.

Higher inflation isn't "exactly news that the Fed would be dancing about, and ultimately not news the equity market would be dancing about either," Chan said.

Mr. Chan at least isn't shy. And he understands half of this trap we are in. This is rather amusing. Perhaps the Reuters article will explain the trap entirely?
Peter Schiff, chief global strategist at Euro Pacific Capital Inc., thought a float of the Chinese currency would be bad news for the U.S. economy because "our economy is based on the artificial low interest rates and low consumer prices that are a direct result of this peg.

"China is providing a massive subsidy in the form of low interest rates and low consumer prices," Schiff said.

"For all the tough talk -- it's all politics -- the last thing the U.S. government wants is for China to float the currency," Schiff said.

BINGO! Give Mr. Schiff a lollypop! He says outright what Culture of Life News has been bellowing since day one! Knock me over with a tea caddy!

My hopes rise. Will the article explain the really terrible part of this trap? Sadly, no. It stops short of that final goal. China is buying our national debt. They are doing this because they want us to go deeply into debt and we are cheerfully doing this and as we dig our collective grave they watch the mound outside grow and measure it carefully.

Already we are up to our heads in this little pit we are digging.
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