Letter from Paul Tudor Jones
- Thread starter Chuck Krug
- Start date
the devaluation is a side issue.
The peg is the problem.
1. China sells more product because it prices are lower.
2. Extra cash keeps makes jobs in china - causes jobs in manufacturing to vanish. We used to make tennis racquets and golf clubs for instance.
3. China's extra trillions in cash needs home - most homes for dollars would would make things like euros, oil and gold go up - which reveals weakness of holding dollars
4. Therefore - go to Fed reserve owners and say... I have all this cash where can I put it without breaking peg or dollar?
5. For investment banking fees we on the street can place cash into 100% real estate mortgages. As long as real estate goes up... no risk. (i am sure they said no risk - and we will stand by the agency bonds we issue.. as they are quasi govt and barney frank and chris dodd are on the payroll.)
but it is important that FED does not raise rates to break back of bubble. No worries we are shareholders in Federal Reserve banks. Greenspan pretends Congress has power, but they do not.
We control FED and greenie gets paid by us.
6. RE bubble takes would be employed factory workers and turns turns them into Mortgage brokers, real estate developers and Wall street bankers while our industries get exported to China.
Good deal as long as Americans are house rich.
Now we have to unwind 10 to 15 years of a misallocation of resources.
The first thing we have to do is erect tariffs if China will not break the peg.
---
Allowing a country to peg its currency.... is sure way to distort markets. It prevents the efficient allocation of resources and it can put people out of work in the target country. That is the intent of the peg... keep more people in the predator country at work than would be at work if the currency adjusted.
The peg is the problem.
1. China sells more product because it prices are lower.
2. Extra cash keeps makes jobs in china - causes jobs in manufacturing to vanish. We used to make tennis racquets and golf clubs for instance.
3. China's extra trillions in cash needs home - most homes for dollars would would make things like euros, oil and gold go up - which reveals weakness of holding dollars
4. Therefore - go to Fed reserve owners and say... I have all this cash where can I put it without breaking peg or dollar?
5. For investment banking fees we on the street can place cash into 100% real estate mortgages. As long as real estate goes up... no risk. (i am sure they said no risk - and we will stand by the agency bonds we issue.. as they are quasi govt and barney frank and chris dodd are on the payroll.)
but it is important that FED does not raise rates to break back of bubble. No worries we are shareholders in Federal Reserve banks. Greenspan pretends Congress has power, but they do not.
We control FED and greenie gets paid by us.
6. RE bubble takes would be employed factory workers and turns turns them into Mortgage brokers, real estate developers and Wall street bankers while our industries get exported to China.
Good deal as long as Americans are house rich.
Now we have to unwind 10 to 15 years of a misallocation of resources.
The first thing we have to do is erect tariffs if China will not break the peg.
---
Allowing a country to peg its currency.... is sure way to distort markets. It prevents the efficient allocation of resources and it can put people out of work in the target country. That is the intent of the peg... keep more people in the predator country at work than would be at work if the currency adjusted.
I agree that this is a highly informative thread and thank you for digging out the paper.
For the benefit of further discussion and for the convenience of other viewers, can we agree on the following points discussed so far?
1.There were two exchange rates in China, one official and one black market.
2.The black market exchange rate hovered around 1 US = 8.2 in the years prior to 1994, and probably dropped slightly, say from 8.2 to 8.5, in 1994. In other words, it did not change much.
3.The official exchange rate was terminated on Jan 1, 1994.
Now the question is what was the effective rate faced by the exporters? I think the effective rate was much closer to the black market rate than to the official rate. The reason is that almost all international trades are settled in US dollar. After exporters received the dollar, what they would do? Would they go to a government agency to get the official rate $1 = 5 RMB or would they go to the black market to get $1= 8.2 RMB? For me the choice is clearly the latter.
This letter is a great find. Thank you for sharing.
Interesting to note that Paul Tudor Jones is still looking at correlations; now comparing 1999-2000 nasdaq to today's India nifty.
In the Trader Video back in the late 1980's, he was comparing US stock market to late 1920's. Correlation must work for him, history repeats ifself.
http://www.tudou.com/programs/view/XH5W4vffBbY/
Interesting to note that Paul Tudor Jones is still looking at correlations; now comparing 1999-2000 nasdaq to today's India nifty.
In the Trader Video back in the late 1980's, he was comparing US stock market to late 1920's. Correlation must work for him, history repeats ifself.
http://www.tudou.com/programs/view/XH5W4vffBbY/
These are the actual rates according to the study:
So I don't really agree, because the tip off is the 8.27 rate after 1998: that's basically 8.3, and is what my informant says it was after the revaluation, so he's obviously remembering this one.
This study also says the exporters were using a rate that was a weighted average of the three rates prior to 1994. That's really the rate we're after here. We don't know what that was, and we don't know what the weighting was either, but look at what happened to the swap rate, which we know was part of that weighted average: it went from 5.76 per dollar in 1993 to 8.62 in 1994 (my informant said it was 8.5 and settled at 8.2: 8.5 is closer to that 8.62 rate you see here, which I also find interesting). That's basically a 50% pop, which is not too far from the 40% the FRB said was a best guess.
This is the point I was trying to make: both my guy's and your guy's testimony is really just anecdotal: it's what they as ordinary citizens did, but that's not the same as what an exporter subject to government regulation would have had to do.
If exporters were being forced to use a non-market rate that was a half-baked compromise between the black market and the official rates prior to 1994, which is what that weighted average rate sounds like, but then allowed to use what amounted to the black market rate after that date, you've got a pretty severe competitive shock that's being applied to China's direct competitors in the other poorer countries of East Asia.
I could very easily see that being the case. You have to infer a lot, but it looks for all the world like a textbook example of the central government being forced to cave in and face reality, which happens periodically in Third World countries. The fact the swap rate deteriorated so sharply between 1993 and 1994 means the pressure on the government probably got a lot worse at that time: it looks like they were unable to enforce anything close to the official rate, and I could just close my eyes and see the exporters clamoring away that it was time to get real and let them use the market rate.
Once that happened, it would have been just a matter of time before the other poorer countries of East Asia would have been forced to face the music as well, as we know they were a few years later.
Anyway, that's the picture I see forming from all this.
What makes you think that? Consensual trade creates wealth, almost by definition - people would not make economic transactions at all unless they felt they were better off after having made them.
This is one of the most elementary ideas in economics, it's not exactly controversial.
Ghost -
What I initially meant wasn't trade in the traditional sense here... It's financial trade i.e - derivatives, rates, etc...that I'm speaking about. There are capital flows and capital flight and that activity I don't think is subject to your point about trade not being zero sum.
The relationship with China and the US isn't just trade in your usual sense. There are relationships of trading intangibles like interest rate differentials, currency pegs, how the economies respond to regimes of monetary expansion and contraction, etc... while at some points, they come out as appearing non zero-sum, I believe that there are many times when the payoff of the relationship is zero sum at best, and possibly negative sum. It has to do with the inherent instability of certain financial Markets for one, and the failure of policy with the other arm.
So I just try to keep this in mind when thinking about something as a simplified relation of a currency peg or a devaluation, etc, because these events render the idea of non zero sum trade moot imo.
What I initially meant wasn't trade in the traditional sense here... It's financial trade i.e - derivatives, rates, etc...that I'm speaking about. There are capital flows and capital flight and that activity I don't think is subject to your point about trade not being zero sum.
The relationship with China and the US isn't just trade in your usual sense. There are relationships of trading intangibles like interest rate differentials, currency pegs, how the economies respond to regimes of monetary expansion and contraction, etc... while at some points, they come out as appearing non zero-sum, I believe that there are many times when the payoff of the relationship is zero sum at best, and possibly negative sum. It has to do with the inherent instability of certain financial Markets for one, and the failure of policy with the other arm.
So I just try to keep this in mind when thinking about something as a simplified relation of a currency peg or a devaluation, etc, because these events render the idea of non zero sum trade moot imo.
Yes, producers are not immune to the lures of the market. They were fully hedged at 250 and now want to dehedge at 1380. At the top, some of them will probably be buying GC futures to get extra exposure
Presumably PTJ was talking about the official FX rate - you know, the FX market traded internationally by banks and funds, rather than the black market operation run by some shady-looking dude, dealing in chump change with tourists in a back alley behind the local chicken market.
But there is nothing unique about financial assets. Risk and return are goods, just as much as apples and oranges are. And many financial assets are almost perfect substitutes for goods - orange juice futures replicate the price of orange juice pretty darn closely, for example.
With the China peg, effectively China is under-selling its produce on the world market. I fail to see why 1 billion people labouring to produce our consumer goods at 30%+ discounts is a bad thing overall for westerners. Yes, some bargain bucket western manufacturers will go broke - but the other 290 million Americans or Europeans are making out like bandits. What's even more crazy is that they are accepting payment in absurdly overvalued Treasuries in depreciating dollars.
If someone offered to build you a new car or house for half price, you'd be a fool not to take it. China is willingly being the underpaid serf of the 1st world, this is a great boon to the west, on balance. Trying to restrict it is like trying to stop a guy from giving you cash every day for nothing.