In previous posts, I mentioned German interest rates and GE massively reducing its credit exposure. All of these signs pointed to massive fundamental changes in capital flows. In the 45 days while I took a little break from writing, we have seen a couple of more major signs and the resultant volatility.
The big story was China devaluing its currency. The market understood that the Chinese were playing the mercantilist card to assist their exporters to the detriment of all others. The move unleashed massive capital flows out of EM markets, brought about a risk-off signal as volatility rose, and led to the big sell-offs in the Western markets. Although China claims not to desire further devaluations and has spent significant forex to shore up the yuan in the face of outward capital flows, they will be soon tested to the extreme as the country heads toward a depression. I will follow up in another post that has been incomplete since July, but in essence China’s massive overcapacity will now be aimed all the other producers outside of China.