China’s Currency Manipulation: About to Cause a Global Explosion?

Tim Geithner, Hillary Clinton and 200 other American bigwigs visited China this week.

First on the agenda: China’s position on the rising tensions between North and South Korea.

With the rest of the major economic powers of the world standing against the actions of North Korea — a nuclear threat run by an oppressive regime — a neutral standing China poses a reasonable concern for future global stability.

Another significant topic Geithner was hoping to make headway on was China’s currency policy. But China had little to say on the matter.

China’s currency continues to be a subject the U.S. is willing to tap dance around diplomatically. Because when the gloves eventually do come off, U.S./China relations could rapidly collapse.

That’s why China’s alignment on the Korean peninsula tensions is of particular significance …

It puts the catalysts in place for potential fallout between China and the Western world, which could mean economic war and perhaps military war ahead.

I think China’s currency policy represents too big a risk to global economic recovery and global stability for Washington to continue granting a stay. So today I want to revisit two of the arguments I’ve laid out in past Money and Markets columns to explain why we should worry about China, despite the headlines about it being an engine of global growth.

The first is …

China’s Currency Manipulation Poses a Roadblock to Sustainable Global Economic Growth

The G-20, the IMF, the OECD — all of the major institutions and central banks of the world have been harping on the importance of repairing global imbalances over the past year … and for good reason. When they do this, they’re talking specifically to China.

Over the last 14 years, China’s economy has grown a whopping eight-fold, to $4.9 trillion, and it has quickly soared to become the world’s third-largest economy.

During the same period, the U.S. economy has only doubled in size.

As far as currencies are concerned, the dramatic outperformance of the Chinese economy relative to the U.S. economy would normally be reflected in a much stronger Chinese currency.

But China controls the value of its currency. They allowed it to strengthen only 18 percent during those 14 years — a mere drop in the bucket, keeping the advantage squarely in China’s court.

Moreover, since the financial crisis and global recession kicked in two years ago, China has returned to a peg against the dollar, artificially keeping its goods cheap for a weaker U.S. consumer and undercutting its export-centric competitors.

Here’s the problem: The global trade imbalance driven by China’s cheap currency is a recipe for more frequent boom and bust cycles. So this issue has to be addressed.

Then there is the …

Threat of Protectionism

Ultimately, the rest of the world will have to choose action over diplomacy. That means imposing sanctions on China and trade restrictions on Chinese goods.

But the problem with protectionist activity is that it tends to bring about retaliation, and it becomes contagious. That’s exactly what happened in the Great Depression. And it’s what brought global trade to a standstill.

Today, with unemployment sustaining high levels, the political support to act is there. Many would think that “standing up to China, is standing up for us.”

You see, when jobs are tight the perception by most workers towards globalization becomes more negative. And studies show that during these times, the number of people who favor the idea of higher tariffs on imported goods increases considerably. As it becomes increasingly evident that China will not play ball on allowing its currency to appreciate to a fair value, geopolitical tensions are bound to elevate, and protectionism will likely follow.

And given the sovereign debt crisis that’s already underway, protectionism is yet another risk to the global economy that increases the probability of another bout with recession.

In fact, protectionism has historically put fragile economies in a deeper and more prolonged crisis …

I want to show you a chart of the S&P 500 from the Great Depression years. This gives you a clear understanding of why protectionism is so dangerous.

As you can see, the stock market topped in 1929 and fell 45 percent in just three months. Then, it had a sharp correction, recovering 47 percent from the November ‘29 low.

In June 1930, two U.S. Congressmen, Smoot and Hawley, championed a bill to slap a tariff on virtually every foreign good. And that was the catalyst for the second leg down … a massive plunge in the stock market and arguably the catalyst for the Great Depression.

Since April 15, Treasury Secretary Geithner has been “on the clock.” He’s past due on a currency report he owes Congress. In it he is expected, under recently adopted more stringent rules, to publicly name China a currency manipulator. And with that, a can of worms would be opened.

As an investor, it’s always important that you anticipate plausible scenarios. Because if a China conflict scenario plays out, you can expect the outcome to be bad for global growth, bad for global stocks, bad for commodity demand and likely good for the continued safe haven appeal of the U.S. dollar.

Regards,

Bryan

Bryan Rich is an accomplished currency specialist with more than 12-years of experience in trading, research, and consulting in the global foreign exchange markets. He is President of Logic Fund Management, a currency management and consulting firm.

He has a BA from the University of North Florida and an MBA from Rollins College.

This investment news is brought to you by Money and Markets. Money and Markets is a free daily investment newsletter from Martin D. Weiss and Weiss Research analysts offering the latest investing news and financial insights for the stock market, including tips and advice on investing in gold, energy and oil. Dr. Weiss is a leader in the fields of investing, interest rates, financial safety and economic forecasting. To view archives or subscribe, visit http://www.moneyandmarkets.com.

Stockscores.com Perspectives for the week ending June 5, 2010

In this week’s issue:

Weekly Commentary
Strategy of the Week
Stocks That Meet The Featured Strategy

Trading decisions are often made in the blink of an eye, the result of a sometimes emotional thought process. Maybe you want to find a stock that will go up to pay for the loss you just suffered on a previous trade or you enter a trade because you are tired of watching it go up without you. These impulse decisions often lead to losses and show why it is important to have a well thought out plan when making a trade.

Planning your trades means you will likely trade less, leaving many marginal opportunities for those that have the best profit potential. When you make a plan you establish a series of criteria for entering and holding a position. You write down those criteria and check to see how your stock is trading relative to your plan. If it is behaving the way you expect then you have understood the stock correctly. If not, it may be better to get out of the position.

The best trades are those that you have the most confidence in. Confidence comes from being proven right, from having the market live up to your expectations. You are probably not too sure of whether you are right or not if you find yourself monitoring your positions every possible moment.

A key to having a good trading plan is to have a good method. You need a good method for entering a stock and managing risk. You need a good method for exiting a stock. You need a good method for managing your emotions through the process. Once you have a method that works and is one you can believe in, you can write the plan. Plan the trade and then trade the plan.

A plan should at least answer the following:

What is my strategy for entry?
What is my risk tolerance?
What do I expect to happen after I enter the trade?
What has to happen for me to consider my decision to enter the trade wrong?
What are my criteria for exiting the trade at a profit?
What are the emotional obstacles that I will face and how will I overcome them?
How will I judge my success?
How will I learn from my mistakes?

Is all this worth the effort? The little bit of time that it takes to make and follow a trading plan should improve your performance in the market. Is it worth it to make a plan when building a house? Is it worth it to make a plan when starting a business? Most of us answer yes to these questions but fail to plan our trades. Why?

The answer lies in emotion. Too many traders treat the stock market like a casino. They make trades with the hope that they will make money just like a gambler puts down money on the hope their number will come up. Hope should not be part of your plan. If you are a trader who believes your success in the market is a matter of luck then you should probably close your brokerage account and head to Las Vegas. At least there they give you free drinks when you gamble.

Think when you trade. Impulsive decisions are not likely to succeed. Well thought out trades may not always succeed either but at least you will have a means to judge when you are wrong. When a trade ceases to go according to plan, it is time to get out.

The Sentiment Stockscore indicator was designed to help position traders determine whether a stock or market is worth considering. As an indicator, it is based on the characteristics of the chart. Points are awarded for technically positive things and taken away for negative. If a stock is breaking out through resistance, points are earned. If it has an abnormal day to the downside, points are lost.  Continued below….

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There are two reasons for using the Sentiment Stockscore to help you with your investment picks. First, it is a quick and easy way to determine whether a stock is worth considering. I don’t consider the longer term position trades on stocks with a Sentiment Stockscore of less than 60 (for swing and day trading, I don’t consider the Sentiment Stockscore as it is not designed for short term trades). So, if I look at the chart of Research in Motion and see that it has a Sentiment Stockscore of 31, I know it is not worth buying.

The second reason for the Sentiment Stockscore is that it allows the computer to do a lot of the work for us. With the Stockscores Market Scan, we can filter the market using the Sentiment Stockscore combined with other technical indicators to find stocks that are worth our consideration. It is a way to build a short list of stocks to check in to futher.

You can also apply the Sentiment Stockscore to market indexes to determine whether the market is suitable for buying, short selling or sitting on the fence. I do this by looking at a few Exchange Traded Funds which give me an overview of North American markets.

1. SPY
The US market is best represented by the S&P 500 ETF, symbol SPY. As of Friday, the Stockscores could not get much worse with a Sentiment Stockscore in the red at 36 and a Signal Stockscore of 2. After trying to bounce, it looks like the SPY (and the US market in general) is likely to go lower. The downside to support is about 2% so we may not see a major continuation of the downtrend, but for now I would not be a buyer of US stocks in general.

2. T.XIU
The TSX ETF is T.XIU. It has a Sentiment Stockscore of 47 which is neutral. Its chart is stuck in a trading range with a slight upward bias over the last year. It does not look very bad, but there is nothing great there either. Based on that, I would only be a buyer of Canadian stocks that are trading abnormally because they will likely be trading on their own story and able to overcome the general market complacency among Canadian investors. However, unlike the US, the Canadian market should provide a few position trading opportunities from the buy side.

References
Get the Stockscore on any of over 20,000 North American stocks.
Background on the theories used by Stockscores.
Strategies that can help you find new opportunities.
Scan the market using extensive filter criteria.
Build a portfolio of stocks and view a slide show of their charts.
See which sectors are leading the market, and their components.

Click HERE for the Speaker Lineup and to Purchase the video if you want to learn from some of the worlds best traders including Tyler Bollhorn.

Tyler Bollhorn started trading the stock market with $3,000 in capital, some borrowed from his credit card, when he was just 19 years old. As he worked through the Business program at the University of Calgary, he constantly followed the market and traded stocks. Upon graduation, he could not shake his addiction to the market, and so he continued to trade and study the market by day, while working as a DJ at night. From his 600 square foot basement suite that he shared with his brother, Mr. Bollhorn pursued his dream of making his living buying and selling stocks.

Much of Mr Bollhorn’s work was pioneering, so he had to create his own tools to identify opportunities. With a vision of making the research process simpler and more effective, he created the Stockscores Approach to trading, and partnered with Stockgroup in the creation of the Stockscores.com web site. He found that he enjoyed teaching others how the market works almost as much as trading it, and he has since taught hundreds of traders how to apply the Stockscores Approach to the market.

Disclaimer
This is not an investment advisory, and should not be used to make investment decisions. Information in Stockscores Perspectives is often opinionated and should be considered for information purposes only. No stock exchange anywhere has approved or disapproved of the information contained herein. There is no express or implied solicitation to buy or sell securities. The writers and editors of Perspectives may have positions in the stocks discussed above and may trade in the stocks mentioned. Don’t consider buying or selling any stock without conducting your own due diligence.

SUGAR could well be white gold, if veteran investor Jim Rogers turns out to be right.

Mr Rogers singled out sugar as poised for a bull run at the Asia Pacific Sugar Conference where he gave a keynote address yesterday.

…..read more HERE

Chart via Money Talks

The biggest slump in commodities since Lehman Brothers Holdings Inc. collapsed is undermining Wall Street forecasts for accelerating economic growth and higher prices for everything from copper to crude oil.

….read more HERE

Mark Leibovit – “Despite my overall bullish bias for Gold and still bigger picture unfulfilled upside objectives from 1300 to 2000+, I must issue a caution……”

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