Observations

The markets are always right. It is difficult to accept this concept, even for the major players on Wall Street.

Take the idea that yields have to rise because the administration is following inflationary policies. Major bond investors have gone aggressively public with this view for a few years. And they have been dead wrong. Yields are still at the levels of early 2003, at 4.2% to be exact. Eventually they will be right. Eventually.

The other big idea, discussed in the press for the past several years and recently in Davos at the World Economic Forum, is that China has to revalue the renminbi. At that meeting, Vice-Premier Huang Ju has provided the vision that the per capita income will rise from the current US$ 1000 to US$ 3000 by 2020. In other words, China, in spite of all the hype, is still a deeply underdeveloped country.

I always believed that a strong country has a strong currency. A currency is an asset for that country. It reflects the strong productivity of most of its industries. It reflects widespread innovation and a visible competitive advantage vs. its trading partners.

Investors in strong currency countries can go around the world and buy productive assets at a discount. This is what the US did after WWII in Europe until the late 1960s. Everybody was respecting us then. If China does not want to float its currency, it is because they believe the renminbi would devalue, not revalue. They are smart. A strong renminbi would give them a tremendous advantage in procuring resources to grow. A devaluation is too costly. Why risk?

They do not let their currency float because if it devalues relative to the US$, the cost of acquiring badly needed US technology would be greater and would hinder their development programs.

They still have enormous problems in the banking system, infrastructures, and the little publicized outrageous income differential between the fast growing regions and the farmland. We cannot blame an underdeveloped country for our problems.

(This Observations appeared in the 2-7-05 issue of The Peter Dag Portfolio ).

George Dagnino, PhD Editor,
The Peter Dag Portfolio.
Since 1977
2009 Market Timer of the Year by Timer Digest
Portfolio manager

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