There used to be a commercial that said, “When E.F. Hutton talks . . . everybody listens.”
Well, the new E.F. Hutton is China! Why? The country has quickly become the world’s second largest economy, and it now holds almost $3 trillion worth of foreign-currency reserves. It is also the biggest foreign holder of U.S. Treasurys.
So needless to say, I keep a sharp eye out on what they are saying.
China’s central bank (the People’s Bank of China) recently released a very detailed 125-page report. In it, it told of two of the country’s greatest fears.
The first one was that Europe’s sovereign debt crisis could continue to be a threat to the world’s recovery, and that there was a risk that the crisis could spread further.
The report even went so far to say that it could be so bad over there that it actually becomes supportive of the U.S. dollar this year. Now that’s pretty bad.
But my readers know that’s exactly what I’ve been calling for in the near-term . . . for the euro to fall due to anemic GDP, high inflation, high unemployment, and the worsening sovereign debt crisis.
It should cause a three- to six-month rally in the dollar. Then afterwards, the greenback will go back into its long-term descent to new all-time lows!
China was fairly frank in this report. It basically said it is so busy sparring over an emergency aid system that it may struggle to quell the region’s debt crisis.
China’s concerns are certainly valid. Even this past week, Standard & Poor’s and Fitch downgraded the debt of Portugal. Then that country’s prime minister resigned. Basically, Portugal’s government is unraveling.
Now, there have been some that have admitted that Portugal may need a 70 billion euro ($99 billion) bailout! And you can tack that onto the 195 billion euro bill that’s already out there due to the EU and IMF bailout of Greece and Ireland. This picture just keeps going from ugly to uglier.
I’ve been warning my Money Matrix Insider members that this was coming. I’ve been discussing it with them since late December, and now it’s here.
So what’s China’s other big fear? It’s that the Quantitative Easing of “some countries,” as they called it, will run up inflation and have a relatively large impact upon developing nations.
I wonder who they were talking about when they said “some countries”? It’s the United States, mainly. But there are others, like the U.K. for instance.
China blames our “overly loose monetary policies” and the “depreciation of their currencies” as the tools that are causing negative impacts upon the developing nations.
China itself is battling inflation. Its inflation has exceeded the government’s targets for the past eight months now. The report went on to be more specific in saying that “rising crude oil, grain, and other commodity prices pose risks to the world economy.”
I must say that I have to agree with them.
So when you put all this together and you see some European countries unraveling because they can’t pay their debt payments . . . and you have soaring inflation that is eating up the purchasing power of people all around the globe, it’s not a pretty sight.
These are the reasons why I believe that stock markets will correct severely soon and money will run towards the “defense” of the world’s reserve currency as the euro falls under a gloomy sentiment in that region of the world.
Then once things finally get somewhat under control in Europe and stocks stop their slide-off, the dollar will resume its long-term downtrend.
But in the meantime, the buck will actually end up getting a pop higher in the upcoming months due to all of these woes happening around the world.
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