The latest on China and its currency... An update from Steve... The biggest investment story of the next decade... New six-year lows for oil... Why prices are falling again...
The big moves in China's currency – the "yuan" or the "renminbi" – could be over...
Following several big drops versus the dollar last week, the yuan has stabilized.
For the past two days, China's central bank – the People's Bank of China, or "PBOC" – has set the yuan's exchange rate against the dollar near where it closed the day before.
The news suggests China may be following through with its pledge to let its currency trade more freely. From an article in the Wall Street Journal...
China set the yuan near Friday's close on Monday, further damping fears that the currency is headed for a protracted decline. A sudden drop in the currency last week after Beijing abruptly shifted its policy had been rattling global markets.
"It appears that calm regarding the Chinese exchange-rate policy is gradually returning and it is waning as a major market driver for global financial markets," said analysts at Danske Bank.
If you've only been following the financial media, that may come as a surprise. Based on the headlines alone, you might think the yuan is crashing and that you should be worried.
But as our colleague Steve Sjuggerud explained in the August 12 Digest, that isn't the case. And it's important to keep the moves in perspective. He explained further in today's DailyWealth...
The chart below should clear up what has been happening... In short, the yuan hasn't crashed... It has actually been incredibly strong. It has performed "in line" with the U.S. dollar since last summer, while most other major currencies have crashed. Take a look:
It's critical that you look at this chart... As you can see:
- Brazil's currency has fallen by nearly 40% since last summer versus the U.S. dollar. That is a crash! Other emerging-market currencies have fallen dramatically, too.
- Even in developed countries, currencies have fallen by a lot versus the dollar... The euro and the Australian dollar are both down roughly 20% since last summer. That's a heck of a fall in a currency!
- Meanwhile, China's currency has been strong.
Since last summer, the U.S. dollar has reigned supreme... It has crushed all competitors – except China.
As we discussed last week, this is because the Chinese government has "fixed" the price of its currency each day. More from Steve...
The yuan didn't fall over the last year because China's government didn't want it to... Until now, the Chinese government has "managed" the value of its currency...
Unlike the euro or the Australian dollar – which are determined by market prices – the Chinese government has had a policy of "pegging" the yuan to the U.S. dollar. China's government has used its trillions of dollars of currency reserves to keep its currency value stable versus the U.S. dollar. That's why it didn't fall.
After the huge currency moves of the past year, this "peg" to the U.S. dollar started to hurt the Chinese economy. Steve used a simple example to show why...
Imagine that you have a T-shirt company... Last summer, you chose to make your T-shirts in China, because it cost you $8 a shirt there versus $10 a shirt in Brazil. This summer – thanks to the major moves in the currency markets – it will only cost you $6 a shirt in Brazil. The thing is, it will still cost $8 in China – because China's currency has been pegged to the U.S. dollar.
What would you do? Where would you choose to make your T-shirts? You would choose to make them in Brazil. And that's all because China's currency peg with the U.S. dollar made China less competitive.
This is a simplified example, of course... but it explains why China's exports are struggling. And it's one explanation for why China chose to weaken its currency last week. It wants to become more competitive again.
But as we've mentioned, China also wants to have the yuan join the International Monetary Fund's ("IMF") basket of global reserve currencies. And it's likely last week's devaluation was also aimed at that goal. Like us, Steve believes the moves could be a "win-win" for China...
China ultimately wants its currency to become one of the world's "reserve" currencies. And one of the criteria for that is a currency must be reasonably freely traded – not government controlled. The Chinese government's moves this week were a bold step in that direction.
So China's devaluation killed two birds with one stone... 1) It helped its exports be more competitive, and 2) it proved that it will allow its currency to trade a bit more freely – a key step toward approval as a "reserve" currency.
While Steve isn't worried about last week's moves, he still thinks China's "when, not if" addition to the world's reserve currencies is likely to be one of the most important investing stories of the next several years.
In short, he says it could trigger one of the biggest transfers of wealth in our lifetime. And it won't just affect China... It will affect every single American and anyone else who holds U.S. dollars.
Steve updated his paid subscribers on his preferred way to prepare for the situation in a special True Wealth update on Friday. If you're already a True Wealth subscriber, you can find it here. And for more on how to become a subscriber – and on the opportunity in China – click here.
Switching gears, regular Digest readers know we've been following the decline in oil prices and its negative influence on the oil industry.
And the latest news isn't getting any better...
Oil prices began falling again last month, touching a new six-year low this morning before recovering slightly.
U.S. oil – as measured by the price of West Texas Intermediate crude oil, the U.S. benchmark – is currently trading below $43 per barrel. Brent crude oil, the global benchmark, is trading below $50.
Incredibly, oil is plunging again even as oil demand is increasing...
In a report last week, the International Energy Agency ("IEA") – a top energy "watchdog" – said demand for oil is increasing at the fastest pace in five years. The IEA also upgraded its demand-growth forecast for the rest of the year from 1.4 million barrels per day (bpd) to 1.6 million bpd.
Of course, the problem is oil demand is still dwarfed by oil supply, and supply is still growing, too...
As we noted last month, leaders of the Organization of the Petroleum Exporting Countries ("OPEC") agreed at the biannual meeting in June to keep the production "ceiling" at 30 million bpd.
Despite the "agreement," OPEC actually produced much more than 31 million bpd in June. And data this month show production jumped again in July to a new three-year high. From the Wall Street Journal...
In its monthly oil-market report, the 12-nation cartel of some of the world's biggest oil producers said members pumped 31.51 million barrels a day in July – its highest level since May 2012 and representing an increase of 101,000 barrels a day, compared with the previous month. That is more than 1.5 million barrels a day above the group's stated output ceiling of 30 million barrels a day – a level OPEC endorsed at its last gathering in June.
Here in the U.S., production remains strong as well.
Despite a dramatic reduction in "rig count" – the number of U.S. drilling rigs currently being used – production has not been falling. And U.S. shale-oil producers in particular are still producing as much oil as possible.
We'll take a closer look at the reasons behind both these moves in tomorrow's Digest. But in the meantime, the implications are clear...
Don't expect higher sustained oil prices anytime soon. Several Wall Street analysts are now saying prices could fall into the $30s, just as Porter predicted earlier this year...
You might recall back in 2011 and 2012 when we began predicting this oil boom and the coming oil glut. I famously lost a bet that oil would be trading for less than $60 a barrel by the end of 2013. I was just a little early.
Meanwhile, back then, no one thought it was possible that oil would sell for $40 a barrel. But I kept saying it was inevitable. Now, I'm wondering why oil hasn't broken $30 per barrel yet. It will.
New 52-week highs (as of 8/14/15): American Financial Group (AFG), Inogen (INGN), iShares U.S. Home Construction Fund (ITB), Prestige Brands Holdings (PBH), Constellation Brands (STZ), Sysco (SYY), short position in Viacom (VIAB), W.R. Berkley (WRB), and SPDR S&P Homebuilders Fund (XHB).
In the mailbag, another subscriber has a question about Doc's income strategy. If you have a question for one of our analysts, e-mail us at feedback@stansberryresearch.com. But remember, we can't offer individual investment advice.
"Though the presentation and explanations were excellent and made it easy to see how the risk can be minimized, I found one question remaining. He mentioned a couple of times that the worse case scenario: you might have to buy some of the stock. The question is how much would you be required to purchase? The number of shares required to equal the pay out you received? Can Doc elaborate on that a little... and thanks in advance." – Paid-up subscriber Jim M.
Brill comment: Each options contract controls 100 shares. In this example, if you sold one put-option contract to receive $400 in premium, you would be required to buy 100 shares if the stock closes below the strike price at its expiration date.
As we explained, this doesn't always happen, but it is a possibility. This is why Doc only recommends selling puts on high-quality stocks like Apple that you'd be happy to own anyway. It's also why appropriate position sizing is so important.
For example, if you would normally buy 100 shares of a particular stock, you'd only sell one put option. As the example showed, this would actually lower your risk compared with buying shares outright, while also boosting your potential income by two to five times what you'd receive in annual dividends alone.
But if you sold five put options instead, you'd be taking on the potential obligation of buying 500 shares. This is an example of using options to increase risk rather than reduce it... and it's one of the biggest reasons why new investors lose money with options.
Regards,
Justin Brill
Baltimore, Maryland
August 17, 2015
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