China Takes a Big Jab at US Power
I was reading my daughter her bedtime story last night when the phone rang. It was a mate who never usually calls — certaintly not on a Monday night.
‘Did you see the news?’ he asked.
‘China has banned initial coin offerings. The crypto market is selling off. I wanted to let you know I’ve sold all my bitcoin. I wanted to let you know in case you have a big holding of coins.’
He had a pretty big position — something like an 8% position size in a million-dollar portfolio.
At this stage, I’m lying in my daughter’s bed with a picturebook in one hand, suddenly pondering what to do about bitcoin.
My daughter is two. Her mum’s a Spaniard, so she’s learning to speak both Spanish and English (or actually, some sort of mishmash of both).
‘Quien es?’ she said. Who’s on the phone?
‘It’s my mate, Brett. Mum will have to read you this book. I have to find out what’s going on.’
I checked out the crypto market. True enough — bitcoin was down about 6%, ether about 13%. A lot of the other cyrptos were down a lot more.
Was there a reason to panic?
Stay in for the long haul or don’t play
In short, no. Not in my book.
As I’ve said before, I keep my position size in this market small enough that big swings don’t bother me.
Will bitcoin be around in 10 years?
I’m pretty sure it wiil.
Will the price be higher? I think that too.
Of course, I could be wrong about that. But that’s what I decided last night. At that stage, the people in the US hadn’t woken to the news.
China may close down this market for a while. There’s no reason it can’t reignite it once it has some sort of regulations in place, which the powers that be are happy with.
Here’s something else I’ve been thinking about.
Bye bye exorbitant privilege
Currently the world’s financial system runs on the US dollar.
As part of this, most commodity trading is done in the US. The benchmark prices are in US dollars, too.
This ‘exorbitant privilege’ means that the US can run persistent trade deficits and never worry. It can just print up the dollars needed to import what it needs.
It also means that any other country has to obtain US dollars before being able to import raw materials.
A crypto like bitcoin could upend this completely. Bitcoin is truly international, after all.
The potential there is to create some sort of international payment coin. It’s no secret that Russia and China are pushing to rebalance the world to be less tilted in favour of the US.
My fellow editor here at Agora Financial Australia, Jim Rickards, pointed out yesterday that a Russian development bank is setting up a crypto research centre.
Jim writes, ‘They want to create a fully-encrypted, distributed, inexpensive payments system that does not rely on western banks, SWIFT or the US to move money around.’
That won’t go down well with the US, of course. The NATO invasion of Libya has been linked to Libyan leader Muammar Gaddafi’s plan to establish an African dinar backed with gold.
Saddam Hussein of Iraq tried to sell oil in euros — and regime change quickly followed.
And now we have some big news out of China…
Commodity futures heading to China
The Nikkei Asian Review reports that China is going to launch an oil futures contract priced in yuan.
Oil is mostly traded in US dollars.
Not only that, any oil trader using this new Shanghai contract can convert their yuan into gold.
China is the biggest importer of oil in the world now.
This is big.
This is China directly shutting out the US’s ‘soft power’ leverage over other countries. For example, countries under US sanctions like Iran and Russia can give the US the bird.
They can sell their oil to China and either invest in Chinese assets or keep their reserves in gold.
How long before other commodities are added to the exchange, alongside oil and gold? Not long, in my view.
China has so much buying power over global commodities that it can really throw its weight around here.
The interesting country to watch here is Saudi Arabia. Apparently, Chinese imports of Saudi crude are falling. Russia is now China’s number one supplier.
China may be putting pressure on Saudi Arabia to accept yuan for its oil — something that would not go down well in Washington.
The US-Saudi alliance underpins the ‘petrodollar’ standard that the world currently runs on.
The problem for the Saudis is that China is its most important customer, now that the US is on its way to being energy sufficient from the shale boom.
I don’t know what the US pushback will be on this, but I’m sure it’s coming. Stay tuned.
And finally, just take a look at this…
Source: Small Cap Alpha
Check out the gains to the right.
Two of those plays are my ‘Amazon Jackpot’ stocks. We had some big news this week.
I’m telling you, this is a story that is simply not going away.
The trend in Australian ecommerce is only just beginning. And we intend to ride it all the way.
Editor, The Daily Reckoning Australia