'Most people don't even know it happened'...
'Most people don't even know it happened'... A new reserve currency is here... 'The greatest opportunity of my career'... Three things every investor needs to know about China now...
Editor's note: Today's edition of our holiday series comes from our colleague Steve Sjuggerud.
Outside of Porter's repeated warnings about the credit markets, Steve earns kudos for the year's biggest call...
Earlier this year, Steve was among the first analysts anywhere to predict that China's currency – the yuan – would soon become one of the world's reserve currencies. Even more impressive, Steve predicted it would happen this year.
Of course, regular readers know that's exactly what happened. On November 30, the International Monetary Fund ("IMF") announced it will add the yuan to its basket of reserve currencies – known as the Special Drawing Rights or "SDR."
The following essay – adapted from the December issue of Steve's True Wealth advisory, published just days before the announcement – explains why Steve was so confident about his prediction... and more important, what investors need to know now...
Most people don't even know it happened.
It wasn't widely reported. I didn't see any mention of it on the major news networks.
But last Friday, China became a world superpower. Finally.
China is getting admission into an elite club with just four other "members." No new members have been allowed into this club for decades... Until now.
Specifically, last Friday, the head of the IMF, Christine Lagarde, said:
The IMF staff assesses that [China's currency] meets the requirements to be... [included] in the SDR basket as a fifth currency, along with the British pound, euro, Japanese yen, and the U.S. dollar.
At first glance, this seems like no big deal. Nobody actually uses the IMF's currency.
But when you think about what it means symbolically, it's huge...
One of the world's most powerful organizations is finally acknowledging China's status in the financial world. It's an unequivocal vote of confidence in the success of China's drastic reforms. And it's a major step toward establishing China's currency – the yuan – as a major reserve-currency asset... that could – one day – challenge the U.S. dollar.
Most folks are blowing off the significance of this. I think that's a mistake...
Importantly, this mistake creates possibly the greatest investing opportunity of my career for us.
If you don't remember anything else from this letter, please remember these three things:
| 1. | China is the world's second-largest economy. |
| 2. | NOBODY owns its stocks. |
| 3. | NOBODY holds its currency. |
Think about the insanity of that...
I never imagined that – at any point in my career – there'd be a moment when NOBODY owned the stocks and NOBODY owned the currency of the world's second-largest economy. That makes no sense!
As I will show you today, $1 trillion could flow into China's currency (through Chinese bonds). And nearly the same amount could flow into Chinese stocks.
So far, nobody seems to care.
People are completely underestimating what has happened in China...
I've been buying and selling Chinese stocks for more than 20 years now. In 1993, I was a broker specializing in international stocks, and I bought and sold China plays trading in Hong Kong on a daily basis. I first set foot on the stock exchanges in Shanghai and Shenzhen in 1996. Back then, if you had told me that China would become the world's second-largest economy within two decades, I would have laughed...
I remember standing on the banks of the Huangpu River in Shanghai in 1996, looking across to "Pudong New Area." Chinese officials showed me their scale models and their plans, and I could hardly hold in my laughter. What they were proposing was impossible... What they were proposing would be one of the greatest human achievements ever, in my opinion. It was not possible... Not even close.
I've never been so wrong about anything in my career...
The pictures below tell the story better than any words I could use to describe it. It is extraordinary. I've run it in True Wealth before, but it never ceases to amaze me. Across the river is Pudong New Area. You can see the changes for yourself. I've circled a Big Ben-style clock for scale. It's incredible.
I consider Pudong New Area to be one of the greatest human achievements that I have ever witnessed.
People outside of China have no idea what has happened in such a short time. But it HAS happened...
China is now the world's leading exporter. It is the world's second-largest economy. When you think of those two statements, it's hard to imagine the IMF not giving China its rightful respect in the world. When looked at from the Asian perspective, the IMF (and the Western leaders) would lose credibility if they did NOT allow the yuan into its SDR reserve-currency basket.
If China gets into the club, $1 trillion will move into China's currency.
Those aren't my words... Those are the words of Standard Chartered bank. Insurance giant AXA agrees, saying China could make up 10% of the world's $12 trillion in government currency reserves. (You can read this story here.)
Standard Chartered's analysts said that the IMF decision "would likely have a significant market impact, driving an immediate sharp increase in global diversification into renminbi [another word for China's currency] assets."
Here's the timeline for all of this...
The IMF will OFFICIALLY announce if the yuan gets to join its SDR reverse currency basket on November 30, 2015. If the yuan gets approved, China will "join the club" on October 1, 2016.
The thing is, it's already a foregone conclusion...
There's no need to wait to hear the answer. You see, any country protesting this conclusion at this point would look like an idiot. (The U.S. was the major idiot, I mean, protestor here... but once the U.S. realized it was the only bully at the playground trying to hold China down, it backed off.)
So what does this mean? In short, it's a vote of confidence in China's drastic reforms by the world's major powers. It's also a big step toward establishing the yuan as a major reserve-currency asset.
But as I said earlier, NOBODY is invested in Chinese stocks... and NOBODY holds any money in the yuan.
This creates possibly the greatest opportunity of my career. We will see the largest transfer of U.S. dollars into Chinese assets in all of human history.
Hundreds of billions of dollars will likely flow into China's currency in the coming years, and from a variety of sources... As a reserve currency for central banks... as a way for investors to diversify outside of the U.S. dollar... as a speculation... as a medium of exchange in global trade... etc.
The era of China's yuan as a legitimate currency starts today.
My humble suggestion is to get your money there first...
Regards,
Steve Sjuggerud
Editor's note: Steve believes the IMF's announcement has created a once-in-a-lifetime opportunity for investors. In fact, he thinks the situation is so important – and the opportunity is so tremendous – he put together a full presentation explaining all the details.
Steve says taking just a few simple steps today will help you protect your savings and investments and set you up for extraordinary gains over the next few years. Learn more here.
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