|And because they are dumping here and else where to prop up their imaginary bubble market I see dilution not just by China but other countries as they fight to defend their currencies. So essentially the stock market will look like it is going up but it is actually a phenomenon of a devalued currency. Well, like you said, there are no places to dump enmass, so this will be a constant event for a while. Investors and traders will need to consider defensive positioning "to not to loose money". There is no where else for little people to go.|
Bonds may be ok in the short term but over time, they will peter out.
Moral disapproval is a powerful stimulant ~ Garrison Keillor (A Prairie Home Companion)
Peace, commerce and honest friendship with all nations--entangling alliances with none. ~ Thomas Jefferson (First Inaugural Address)
| Reply to luvb2b - Msg #2568206 - 09/08/2015 07:23|
the whole thing is very tricky, but i think the surest place the selling comes is long dated fixed income in the usa. china has large holdings on the short end, but what can happen is they sell on the short end and then hand the dollars to whomever is running out of china. then the guy who was running away parks the money in us short-term treasuries. that means the short end gets no net selling.
the long end i think doesn't have that same issue as hot money usually doesn't go into longer dated paper.
another problem is that not all the selling happens in us dollars. assuming they are trying to maintain a balanced portfolio of forex reserves and the majority of the outflow is in dollars, then a lot of the selling actually ends up in other currencies:
imagine for example that china holds
2 trillion usd (50% portfolio)
1 trillion euro (25% portfolio)
and 1 trillion "other" currencies (25% portfolio)
and we know a lot of these other currencies are just lousy, so a lot of the flow that's leaving goes out in usd.
now let's say that they get 0.1 trillion of usd outflow, as they just did. if they just sell the usd, they get
1.9 trillion usd , 1 trillion euro , 1 trillion other
that's portfolio weightings of
48.8%, 25.6%, 25.6%
and what's happened is their usd portfolio weighting has declined. typically one would expect the reserves to be managed on a portfolio basis, and so what the pboc will do is sell down to:
1.95 trillion usd, 0.975 trillion euro, and 0.975 trillion other
that's portfolio weightings of 50%, 25%, and 25%, as was their target.
this is why the emerging market currencies are getting destroyed - even though china's outflow is in usd, they go and sell other things too to maintain portfolio balance, and the other markets are not big enough to handle them making large moves in short periods of time.
soon what will happen is the em currencies will be forced to defend themselves against the dollar, and they will do that by selling dollar reserves... and that selling should show up in treasuries as well!
Re: getting short. chinese have to sell ..will be interesting to see where ri...