Thursday, September 3, 2015

How the Yuan Currency Devaluation Could Trigger a Stock Market Crash.......

How the Yuan Currency Devaluation Could Trigger a Stock Market Crash

Stock markets around the world have been reeling since the surprise move by the People's Bank of China (PBOC) to let the markets play a greater role in determining the value of the yuan currency.

Investors are worried that the sudden willingness of the PBOC to devalue the yuan currency is a sign the Chinese economy is much weaker than suspected.

We spend a lot of time obsessing over Greece or Puerto Rico, but China is a much bigger economy and a much bigger problem to the global economy, and devaluing the currency is shaking people up.

Because the move came as such a surprise, the markets didn't have time to sort out the full impact of a devalued yuan currency, adding fear to an already unsettled mood. But two days in, dire implications have become clear: A  stock market correction is a strong possibility, and it could easily lead to a full-blown stock market crash.

In fact, the devaluation of the yuan could lead to a stock market crash on the scale of what we saw during the 2007-2008 financial crisis.

How the Yuan Currency Devaluation Could Trigger a Stock Market Crash

Societe Generale strategist Albert Edwards warned that China's move to devalue the yuan will set forces in motion that ultimately will lead to a major stock market crash.

"We expect the acceleration of [emerging market] devaluations to send waves of deflation to the West to overwhelm already struggling corporate profitability and take us back into outright recession," Edwards said. "As investors realize yet another recession beckons, without any normalization of either interest rates or fiscal imbalances in this cycle, expect a financial market rout every bit as large as 2008." I WOULD SUGGEST A COLLAPSE AND RESET ARE ABSOLUTELY POSSIBLE. AFTER ALL EVERYONE WILL REALIZE THE FED IS COMPLETELY FULL OF SHIT, WHO ARE THEY GOING TO TRUST?

Even if you disagree with Edwards' argument for a major stock market crash, the yuan currency devaluation clearly has investors worried. And after a six-year bull market, almost any negative catalyst could cause a big sell-off. MARKETS ARE VERY EXTENDED AND ANY FALL WILL BE A BIG ONE BECAUSE OF THIS. ADD THE FACT THAT THE FED WILL HAVE EGG ON IT'S FACE BIG TIME AND A SEVERE MARKET ROUT IS POSSIBLE. IT WON'T JUST BE STOCKS AND BONDS EITHER, REAL ESTATE IS GOING TO GET KILLED, IT WILL BE WORSE THAN THE LAST TIME AND THERE WON'T BE ANYONE THERE TO PUT HUMPTY DUMPTY BACK TOGETHER AGAIN AT THE BOTTOM THIS TIME.

The PBOC move can hurt the markets in several ways:

Yuan Currency Devaluation Concern No. 1: Impact on U.S. Multinationals

Earnings of U.S. multinationals that do business in China were already under pressure from the slowing Chinese economy and the strong U.S. dollar. The devaluation of the yuan will make U.S. products and services more expensive in China, reducing sales and eating further into profits. Many of these stocks have suffered larger losses than the broader market over the past two days: Apple Inc. (Nasdaq: AAPL) lost 5.2% Tuesday. General Motors Co. (NYSE:GM) lost 3.75%. Micron Technology Inc. (Nasdaq: MU) also lost about 3.75%. And Yum Brands Inc. (NYSE: YUM) is down a painful 8.5% over both days. As the weaker yuan hurts big companies like these, they will drag down the markets.

Yuan Currency Devaluation Concern No. 2: Falling Commodities

One of the indirect impacts of yuan devaluation is the suggestion of a weaker Chinese economy, which brings lower commodity prices, particularly for energy and industrial metals. It's especially acute because most commodities are priced in U.S. dollars. That's why oil prices fell 4% Tuesday and copper prices plunged 8%. Falling commodity prices are bad for those who pull them from the earth, such as oil drillers and mining companies. And there's a double whammy here. The yuan currency devaluation increases commodity prices in China, encouraging mining while discouraging consumption. Both will serve to depress commodity prices further.

Yuan Currency Devaluation Concern No. 3: This Is Just the Beginning

The hope that the PBOC was doing a "one-off" on Tuesday evaporated quickly on Wednesday as the yuan currency slid further. And that raised the specter of a long slide for the Chinese currency, creating uncertainty about how low it might fall. Several analysts, including Deutsche Bank (NYSE: DB), predicted the yuan will slide as much as 10% to 15% further in the weeks ahead before it stabilizes. The longer this process takes (and the lower the yuan goes), the heavier the toll on stocks. IT COULD FALL MUCH FURTHER THAN EXPECTED, AFTER ALL EVERY OFFICIAL METRIC IN CHINA IS A LIE, THEY HAVE GHOST CITIES GALORE, AND THE REST OF THE WORLD IS HURTING AND CAN'T BUY ALL THE WORTHLESS CRAP CHINA MAKES AND NEEDS TO MAKE IN ORDER TO KEEP PRETENDING THAT EVERYTHING IS OKAY. THE WHOLE CHINA MIRACLE IS A FICTION PROPPED UP BY NUMEROUS LIES.

Investors trying to cope with the prospect of a stock market crash should consider putting some money into assets that stand to benefit from the yuan devaluation.

The Bottom Line: The devaluation of the yuan currency hit stocks hard and has a strong chance of triggering a stock market crash. 

At this point: "Canaries continue to drop like flies." 


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