牛刀： Speculative Frenzy Will Exceed 1997; Spec Home Prices Must Plunge 60-80%; USDCNY Below 12

Last year I posted the 2015 predictions of a couple of Chinese bloggers. One was Bull Knife 牛刀: Chinese Debate Yuan Risk in the Wake of Ruble Collapse, Liu Junluo Sees Path to 1997 Repeat, Niu Dao Sees Path to Latin American Crisis of 1980s

Another Chinese financial blogger "Bull Knife" (Niu Dao) argues that the collapse of oil shows the Chinese economy is collapsing: 原油崩盘昭示中国经济全面崩溃. He argues that the global rebalancing will take place via exchange rates. Chinese real estate is not "its own thing," rather in the age of globalization, it too is subject to global conditions. He says the A-share bubble is fueled by commercial bank loans funneled into stocks because Chinese shares have no investment value, only speculative value. Make some money and run. He criticizes the Chinese government printing money to pull up land prices and even copper. (From November 2014: Chinese State Agency Buys Up Copper, Keeping Floor on Prices. China needs to prop up copper for the same reason that it needs to prop up land and real estate prices: a mountain of speculative debt will collapse if the underlying collateral craters. And copper is at a critical juncture....) Ultimately, he compares China's fixed exchange rate system to the fixed currency regimes in Latin America during the early 1980s. They began collapsing when the U.S. Dollar Index climbed between 100 and 126. By 1984, the USD Index was at a new high of 165. Niu Dao sees the USD Index hitting 171 this time.

Now he sees the yuan breaking down and speculative home prices tumbling.

Now he sees the yuan needing to hit 8.2 to move the needle on exports: 牛刀：人民币贬值受惠哪些产业？

At present, some small business owners to engage in export relieved, to say it better than the original did a little bit, obviously feeling the RMB devaluation, but not very obvious. Baltic Dry Index has been hovering at the bottom, indicating that exports remain sluggish, because the nature of everything from the devaluation of the renminbi is not enough. I calculated that, really want to export better, at least to 8.2000 yuan devaluation, so the Hong Kong dollar against the yuan go back 108 Hong Kong dollars against 100 yuan, almost the same, the years are the best years of China's exports, but also conducive to Hong Kong and Shenzhen, Guangzhou and the Pearl River Delta and the whole re-prosperity.

He sees USDCNY 6.8 as the battle line. Beyond it things will get...exciting. 牛刀：血战人民币6.8000元

As I expected, the exchange rate war began as scheduled. Current indications are not enough to say that has been carried out, because being not really carry out what is going on, at most, only the long and short sides of the game renminbi, but to break through 6.8000 may occur a battle beyond our imagination, this point is too important, not just long and short sides, even all the average people are concerned, it will be very exciting. Whether it is from the trend point of view, or from the technical morphological analysis, the violent battle will soon erupt at 6.8000 yuan.

He next goes on to discuss Soros and 1997, saying this speculative battle will exceed 1997. He also says home prices will collapse, but don't worry if you own your own home:

The first battle play very important. Please do not be nervous, if you live in you own house it does not matter, those excessively overhyped city home prices must fall 60-80%, and everyone is captive. Devaluation time is here, as long as you seize the opportunity, there are opportunities everywhere. Do not believe the cynical economists that said there's "no price bubble", the Chinese real estate bubble is bigger than heaven. The first battle is just fun.

The big war will not begin until the Fed's third rate hike, he speculates. He also says it will not be Soros who emerges this time, but someone unknown who will shock the financial markets. He closes by saying the depreciation has not yet begun.

When 6.8 is broken, then the depreciation will begin for real. Right now this might just be the central bank playing games. But if international capital intervenes, then I will be the first to tell you to get rich dumping your renminbi!

He elaborates more on the 6.8 target in 牛刀：人民币突破6.8000的伟大意义. He says once 6.8 is broken, it is a straight shot to 8.2, which makes a lot of sense. This is a Schelling Point for traders and investors alike. He says a break of 6.8 will send AUDUSD below $0.70 (which isn't really much of a move since it's at $0.72 right now). He dubs the Aussie dollar the "shadow yuan." The drop to 8.2 isn't the end though, he sees the USDCNY climbing as high as 12.6 and real estates speculators ultimately suffering far more than equity speculators. He finishes by saying that if the currency floats, there's only one possible result: collapse. China's massive money supply inflation will meet its doom.

In another post, 牛刀：知道在人民币贬值下的投资吗？, he says Chinese officials will allow the real estate bubble to burst once the currency begins to depreciate. Devaluation will benefit the domestic economy, tourism and air travel (since going abroad will be too expensive).

In another, he suggests the yuan should be added to the U.S. Dollar Index (DXY) so that the euro will not need to depreciate as much. The euro bottomed at $0.82 when DXY hit 126 at the start of the millenium. If DXY were to climb to 165, the euro could bottom at $0.82 if it was reduced to a 40% weighting, otherwise it could drop to around $0.60. In that piece he also argues there are forces (the Fed) currently working to keep DXY below 100. 牛刀：这次100点危机远胜前次100点

In another recent post, he lays out some price targets for 2016. 牛刀：2016年美元指数与黄金价格

Iron Ore below $32
Crude Oil below $35
He sees inflation jumping in 2016 and the Fed hiking 3 times, taking DXY to 126
Gold will fall and he gives several targets at which point gold could bottom: $789 is the first resistance level, the next resistance level would be $618, then $389, may eventually drop back to $275 in 2017.
As for DXY 126, that is the toughest resistance level to break. This will rely on inflation jumping in the U.S., which he's not sure how to explain (he sees the breakout from the technical analysis).

Commentary: 牛刀 was a popular financial blog in China, but as far as I can tell, it is now banned. Not hard to guess why, although other bloggers saying similar things can be found.

As for the DXY and inflation, U.S. healthcare inflation is rising and core inflation is already 1.9%, with the Fed looking for 2% to 3% inflation. Were oil prices to spike along with some commodities (even if only a bear market rally), the yoy comparisons could push up headline inflation. With oil in the $30s this isn't likely, but at about $50 or more, the yoy turns decidedly positive in August. The healthcare market is a mess due to the Affordable Care Act and inflation has always been a result of government policies that increase spending on the demand side. The Obama admin may want to goose the economy to help the Democrats keep the White House in 2016. Finally, there's the theory that low rates are causing deflation and higher rates will change perception and sentiment enough to increase spending and risk taking. Higher rates might move home buyers off the sidelines, as one example. With core inflation at 1.9% in the U.S., if a couple of these things happened it might be enough to push inflation to where the Fed would want to hike sooner. Obviously, there are plenty of deflationary forces pushing the other way and a deflationary wave larger than 2008 and 2000 could also push DXY through 126.

Update: Speaking of inflation, core CPI rose to 2.0% in November and ZeroHedge had this to say about the rising rental prices driving it.

One can only hope that the Fed, in its attempt to stabilize core inflation, manages to tame surging rents with its 25 bps rate hike, otherwise it may find itself in a very unpleasant situation of chasing record asking rents across the nation and pushing rate hikes far more often than those hoping for a dovish rate hike would like.

Core CPI Rises 2.0% Driven By Surging Rents, Giving Fed Green Light To Hike Rate

Chinese Debate Yuan Risk in the Wake of Ruble Collapse, Liu Junluo Sees Path to 1997 Repeat, Niu Dao Sees Path to Latin American Crisis of 1980s

Since the ruble's collapse, there have been several articles comparing the Russian situation to the Chinese one. Most of the opinion argues the yuan is not going to depreciate like the ruble due to China's large reserves and more diversified economy, but popular financial bloggers Liu Junluo and Niu Dao disagree (no surprise) and see paths to yuan collapse.

人民币有贬值压力 不会重蹈“卢布式”危机 (Yuan Has Depreciation Pressure, Won't Follow "Ruble Style" Crisis)

With a stronger dollar, currencies of emerging market countries will go where? "Ruble" type of crisis will be transmitted to the renminbi and the currencies of other emerging market countries?

Yu Xuejun of the PBOC Shenzhen branch:

He told the 21st Century Business Herald interview, said the crisis affected the ruble devaluation will increase pressure on the yuan, but now China and Russia's economy and is quite different, coupled with China is sitting on nearly 1/3 of the world's foreign exchange reserves, is perfectly capable of maintaining the RMB exchange rate at a reasonable level. Therefore, the RMB is unlikely to occur, "ruble" type of crisis.

He goes on:

Of course, in addition to the supply side, there are reasons for the demand side. That is, since the 2008 global financial crisis, after adjustment for years, the global economic downturn has not yet out of the quagmire. Meanwhile, the 2014 world economic growth is weak there is an important factor, that is downward pressure on the Chinese economy, the demand for energy, raw materials decreased significantly. A few years ago, although the financial crisis hit the global economy, but oil, iron ore, copper and other bulk commodity prices have remained high, which is an important reason for the huge investment in China provides a huge demand. Now, as China's economy was continuing downward pressure on demand for bulk commodities significantly reduced, which makes almost all of the world's bulk commodities are declining. Therefore, the sharp decline in oil prices is not independent and accidental, but there is a macro-trend of problems. In this trend, the United States and Europe to Russia before they can make the best use of sanctions, the flow, and thus to exert enormous pressure on Russia.

This article (好淡因素相当 人民币汇率以稳为主基调) argues the yuan is stable, but don't forecast otherwise! It could lead to a self-fulfilling prophecy:

From a broader perspective, the market should not be made for the expected depreciation of the RMB, but also to avoid the authorities concerned to make such a policy orientation. At present, the global fluctuations in currency exchange rates increased, the potential risk of the outbreak of the currency crisis in emerging economies in the increase. The recent outbreak of the ruble crisis, the financial system and the economy caused serious injury. Southeast Asian financial crisis in history, starting from the currency crisis and also transmitted to the financial system and the real economy. If the yuan devaluation is expected to form a broad, eventually self-reinforcing, and finally transmitted to the real economy and deeply hurt China's real economy.

Popular blogger Liu Junluo disagrees with the optimists. 中国央行将加息了和楼市

Dollar index broke the 100 later, China's central bank about $ 2.3 trillion in the hands of "non-US currencies," oil and mineral assets will face a loss of up to 70% of losses.

Now, in China in 1994 is similar to the famous Mexican Tesobonos bond size at about $1.5 trillion, which is "dollar interbank bond." And, most did not do currency hedging. 1994, Tesobonos problem outbreak in Mexico, Mexican currency and overnight sent the Mexican economy, "hell."

He's talking about Chinese investments in natural resources and minerals around the globe, as well as short-term debt and dollar denominated loans at SOEs and real estate developers.

Now the problem is that Chinese real estate developers, Chinese state-owned enterprises and the Chinese central bank's position is a "single position", "single position" in the financial markets is a suicide pact. For example, if the dollar rises, Chinese developers and state-owned companies will start panic buying dollars, and that will cause a loss to China's central bank due to reserve diversification. Thus, China's central bank will raise interest rates sharply to attract dollars, however, a substantial hike will lead to China and the Chinese state-owned real estate to further losses, so that China and the Chinese state-owned real estate would be more mad rush to buy dollars, while China's central bank diversification of official reserves will be further loss, therefore, China's central bank will raise interest rates further. In 1997, the ASEAN region was annihilated by this real estate and central bank suicide pact.

Liu goes on to argue that the stock market bubble isn't there to prop up the economy or repay debt, but to keep hot money from pouring out of the country and triggering a currency devaluation. It will also trap Chinese citizens when the central bank closes the dollar window (although Chinese stocks will be better than cash in the long-run if the yuan devalues sharply).

So, we see the Chinese central bank quickly creating super hot Chinese stock market in the past few months, has attracted hundreds of trillions of money into the stock market. Soon, we will see all these hundreds of trillions of money is buried in "the stock market dead pit" scene. Will China's stock market is now crazy aunt who rushed to the time to become China's aunt who ruin, and that also what the Chinese central bank stepped into the doorway to exchange American dollars?

After the Spring Festival, China's central bank will allow the rapid devaluation of the RMB exchange rate. And in this year, May 4 to domestic residents dollar closed the window. At the same time, tightening the money supply began to promote the domestic real estate fell to lock estate liquidity.

This year in March, the launch of the "real estate registration" to "anti-corruption", or for overseas Chinese central bank's huge losses to lock in domestic liquidity. Let's central bank has not yet entered the door, ready to exchange dollars people first "dead" mean?

This isn't new ground for Liu, who argued in 2013: Gold going to $500; Chinese yuan will collapse; China will nationalize dollar deposits

Another Chinese financial blogger "Bull Knife" (Niu Dao) argues that the collapse of oil shows the Chinese economy is collapsing: 原油崩盘昭示中国经济全面崩溃. He argues that the global rebalancing will take place via exchange rates. Chinese real estate is not "its own thing," rather in the age of globalization, it too is subject to global conditions. He says the A-share bubble is fueled by commercial bank loans funneled into stocks because Chinese shares have no investment value, only speculative value. Make some money and run. He criticizes the Chinese government printing money to pull up land prices and even copper. (From November 2014: Chinese State Agency Buys Up Copper, Keeping Floor on Prices. China needs to prop up copper for the same reason that it needs to prop up land and real estate prices: a mountain of speculative debt will collapse if the underlying collateral craters. And copper is at a critical juncture....) Ultimately, he compares China's fixed exchange rate system to the fixed currency regimes in Latin America during the early 1980s. They began collapsing when the U.S. Dollar Index climbed between 100 and 126. By 1984, the USD Index was at a new high of 165. Niu Dao sees the USD Index hitting 171 this time.

Liu and Niu don't give a lot of background to why they thing as they do. While I can make a case for their conclusions, they don't connect many dots in their posts. These bloggers have a flair for rhetoric, but do not give a good foundation for their forecasts. Their predictions are also extreme and Liu has at least poor timing (see some of Liu's other projections here, including a 40% drop in the yuan in 2013). They are entertaining though, and show that China allows a wide range of debate in areas such as economics.

For all their flaws, their conclusions may still be pointing in the right direction. The yuan is at a greater risk of breakdown than is recognized by the market, and the path to serious devaluation (or the threat of it) would likely involve the Chinese central bank ending dollar convertibility. Liu earlier had a post noting how the U.S. dollar collapsed as China gobbled up treasuries in the aughts (2000s) and goes to argues it will surge as China diversifies away from the dollar in the 2010s. Foreign exchange and billions upon billions of dollars invested in natural resource projects, plus the Chinese real estate bubble, are all at risk from deflation, the flip side of a dollar rally. Michael Pettis has noted how China today is very similar to the USA in 1929 and Japan in 1989; both nations had huge foreign reserves and were creditor nations. Most yuan bulls cannot conceive of a path to yuan devaluation because of the large reserves and seemingly invulnerable Chinese economy, but the yuan is literally a paper tiger, as are all fiat currencies. Even many yuan bears base a yuan devaluation on internal economic conditions, not an external dollar rally. Chinese bloggers, however, see a US dollar rally as the genius Federal Reserve and Wall Street about to skin their biggest prize yet.