Xavier's Thoughts on the Fed Minutes

I like simple things and explanations.  Maybe because I do not have a rocket science mind or because I am not into the theater of the absurd. In either case here is my humble thoughts on the Fed…although you all know very well my true thoughts.

I read the Fed’s minutes yesterday like many of you - well at least all you bond lovers. Still the same old stuff. Maybe-maybe dependent on conditions. I have long said that they would not raise rates, but if they do  it will be in June because September is too close to the American elections and, independent or not, the Fed is loath to raise hackles.

So what if we get one more bump for the year? It is not going to be a earth-shattering event, of that you can be certain. The hike will be small and manageable even if it is ill advised. It may come, it may not come, but, I assert, it will be overtaken by the actions of the other major central banks and the inflow of capital into American securities where some yield is still attainable even if it is paltry.

Thoughts On China Volatility

As most of you know –tough to miss considering that all the news is discussing it- the Chinese stock market took another dive last night. As a matter of fact the CSI 300 index plunged 7% and the market closed in under 30 minutes, which means that Erich did NOT get a good night sleep.

Part of the reason is that while the Chinese government is devaluing the yuan, they still have to spend money to buy yuan to control the fall. After all, devaluation is causing dramatic capital outflows already. The funny thing is that since 2011 the government has complained about an excess of foreign exchange reserves. However, we can all be certain that they do not want a feeding frenzy and a complete collapse of the yuan. The PBOC said back in 2011 that reserves exceeded a “reasonable” level when they were just over $3 trillion. The latest figures show them at $3.3 trillion, after peaking at almost $4 trillion. So, what is “reasonable”? I suspect that something under $3 trillion is the goal. What does this mean? More devaluation, more stock market volatility. And, the Japanese – I mean Abe- must be HATING this, as their currency has risen, because many investors in Asia rush to Japan when things look bleak in China.

Who needs Star Wars when we have Currency Wars.

PS. This is all to say that in today’s world the markets ALL revolve around central government actions.