Editor’s Note: Below is a transcript of Hedgeye CEO Keith McCullough’s remarks on The Macro Show yesterday morning following the big news out of Beijing. If you would like to subscribe to our live, interactive show where we take subscriber questions click here.
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Today’s top three things:
- China
- China
- China
You wake up to these non-linear, central-planning surprises, but you also wake up to something that is proactively predictable within the non-linearity. What do I mean by that? It’s non-linear because it’s a surprise. This of course is the biggest move in 20 years by the Chinese. But it’s a 2% move, so some will say, “Oh ho-hum. It’s not that much on an absolute basis.” But again, history will tell you that when a country starts to move down the slippery slope of an ideological path which is the proactively predictable point, it’s the first of many.
It’s the first of many.
So the Chinese have done effectively, they’ve tried almost everything that America has taught them… and Japan has taught them… and Europe has taught them… But now they are going to go to the wood and going to start to devalue their currency.
Every country in modern human history has tried this. You’ll note that it hasn’t worked. Maybe they don’t have to be beholden to that reality because they are a communist country? But again, it is what it is this morning.
The Chinese stock market—get this—is down one basis point on the news. One basis point on the news. So they’re centrally puppeteering this whole thing at this point.
It’s also telling you that the GDP number that they had allegedly in the second quarter (which they reported within a week of the second quarter ending, which was just magnificent) is not a 7.0. The 7.0 is just not a 7.0. With exports down -9%, what they’re doing now is panicking. They’re panicking. They’re making moves that they didn’t think they’d have to make this quickly. Again, trying to centrally plan a stock market and at this point devalue the currency should sound very familiar to countries that have panicked in the past.
It is what it is.
The regional fallout on that—Thailand, Taiwan, Indonesia, Singapore—big, big places, at least in terms of what has mattered historically to Asian asset allocation, Asian foreign currency asset allocations, equity markets. These markets are down 4-6% in the last month. If you didn’t know why, now you know.
The Chinese are going to start to compete with not only their customers, but with their people. With their people, they lose purchasing power. When you devalue a currency of a person, you can try it at home. You can take a Canadian loonie and just cut it in half, and you will say, “Wow that is worth less than what it was worth yesterday.” It used to be illegal in the US to do that, its called clipping coins.
So again, this is what it is. This is going to have much more unintended consequences than any of us could possibly think of right here.