Kingdom Knock

Only a few years after the creation of the SDR, the Bretton Woods system collapsed and the major currencies shifted to floating exchange rate regimes. Subsequently, the growth in international capital markets facilitated borrowing by creditworthy governments and many countries accumulated significant amounts of international reserves. These developments lessened the reliance on the SDR as a global reserve asset. However, more recently, the 2009 SDR allocations totaling SDR 182.6 billion played a critical role in providing liquidity to the global economic system and supplementing member countries’ official reserves amid the global financial crisis.

The SDR is neither a currency, nor a claim on the IMF. Rather, it is a potential claim on the freely usable currencies of IMF members. Holders of SDRs can obtain these currencies in exchange for their SDRs in two ways: first, through the arrangement of voluntary exchanges between members; and second, by the IMF designating members with strong external positions to purchase SDRs from members with weak external positions. In addition to its role as a supplementary reserve asset, the SDR serves as the unit of account of the IMF and some other international organizations. (www.imf.org)

Because of China's new place at the table of the SDR starting in 2016, it could make up 10% of the world's $12 trillion in government currency reserves.  Not as much as the U.S. Dollar or Euro, but more than the Japanese yen and British pound as you can see in the table below from www.zerohedge.com.

For those that are reading this and thinking it's not a big deal; for those that underestimate China as an economic power because it's been said that China's success has been based on currency manipulation, keep these two things in mind.  To begin with, China is now the world's leading exporter.  Secondly, It is the world's second largest economy!  The IMF placing the yuan in the SDR bucket means that the major players and powers in world economics has some confidence in Chinese economics.  It also means, more importantly, that this move by the IMF puts the yuan in place to be a major reserve currency asset.

The news in the market today was very strange!  Earlier in the day, Bloomberg made an announcement from Dow Jones news that said "China's Central Bank Signal Intentions to Loosen Yuan's *Peg To The Dollar".  The market dropped by 200 points (1%), and continued to drop throughout the day, closing down 309.54 points (1.76%).

*DEFINITION of 'Currency Peg' A country or government's exchange-rate policy of pegging the central bank's rate of exchange to another country's currency. Currency has sometimes also been pegged to the price of gold. Also known as a "fixed exchange rate" or "pegged exchange rate." (www.investopedia.com)

Then all of a sudden, the conversation about the volatility in the market today shifted to the tanking in oil prices, and the scare about the possible upcoming fed rate hike next week (most experts say that there is a 74% chance for a hike).  I'm in total agreement that these pieces of news together persuaded those substantial sell offs today, however, we can not continue to overlook China and it's place in the economic world.  

If you've noticed, there was plenty of talk earlier on about currency manipulation in China: if you have continued to notice, there has not been much talk about that lately.  That's because many are starting to understand that China wants it's currency to rise along with steady capital coming out of the country.  This is in sync with it's international and domestic goals which all point towards the ultimate goal.  A stronger yuan!  

Loosening the yuan's peg to the dollar can mean a number of things to China, but I believe the ultimate meaning behind this is to eventually one day establish the Chinese yuan as the U.S. Dollar is today: THE world reserve currency!  Instead of measuring the yuan against the dollar, China could very well want the dollar measuring itself against the yuan.  This would place them at the top of the food chain: the number one economic power with the currency that all currencies measure themselves by.  

I couldn't help but think, "why did the conversation become less and less about China's possible de-pegging and more about other areas of market influence?"  Maybe the economic gurus know that 2016 could be the year of the dragon: the start of a time in history where the world economy began to shift, establishing a new regime!  A new number 1!

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Years ago a Pastor in nearby Greensboro, NC, Pastor Jody Bullard, orated a message entitled "The Battle of Almost" and that title made me think about what almost brought this country to another depression worse than the first, and the current battle to keep us from reaching that fate again. What was it that brought us so close to an economic collapse? Our financial industry decided to bundle home loans together (mortgage backed securities) and sell a portion of that to investors. Well, big money was made from this endeavor so pressure was put on investment banks to lend more money to borrowers to secure home loans in order to make even more money. Greed! Loans were already given to people that had good credit (at least a 620 credit score with 20% to put down on a home) so where do you go after that? The bottom of the barrel! Investment banks began lowering their criteria; giving loans to people with bad credit (say a 500 credit score with no money down). Offering loans with this type of criteria increases the risk that the loan will be defaulted on. To guard against this, banks attempted to insure themselves with a type of insurance where if the borrower defaults, the insurance company pays for that default. Thus “Credit Default Swaps”. Banks insuring themselves against potential losses by moving these risks off of their books so they can invest more and make more money. Why would someone do this? Fees…100s of millions in dollars of fees. The potential for these fees would mean more profit for the banks. However, some companies (like AIG or Lehman Brothers) got in over their heads by obtaining too much risk than they could handle. AIG and Lehman Brothers thought that the housing market would continue to go up but it did the opposite…it went down…way down.

Those that purchased a home did it under the grounds of sub-prime interest rates. Sub-prime refers to the credit quality of the borrower who have weakened credit histories and a greater risk of loan default than prime borrowers. These loans were also adjustable which means that at some point in time, those interest rates would increase (for example, let’s say your rate starts at 6% and increases to 15 or 20%). The borrower can’t make the payments due to those higher interest rates and eventually defaults on the loan. Mortgage backed securities hit the bottom, companies like AIG has to pay off all of those loans: all over the world. But they can’t! AIG goes under. Every bank of the insured books massive losses on the same day…they too go under. As a result, the whole financial system comes down. This is what we call in the financial and business world systemic risk. Systemic risk is the risk of collapse of an entire financial system or entire market, as opposed to just one individual, entity, or group. This happens due to an interlink between the systems of market. The failure on an entity or group of entities can have a domino effect and bring down the whole market. Some banks thought they were too big to fail but banks like Lehman Brothers were allowed to fail.

Some investment banks that were going to fail were forced to join forces with commercial banks (i.e. Bank of America (commercial) acquiring Merrill Lynch (investment). An investment bank is different from a commercial bank. Commercial banks deal with loans and deposits. Investment banks deal with raising capital for certain projects. For example, if Pepsi wants to sell $5 billion in bonds to build a new bottling company in Asia, an investment bank will help them find buyers for the bonds and handle all of the paperwork; as well as get the lawyers and accountants together. Commercial banks don’t really like investment banks and some were not happy that they were forced to join forces with them. In essence, it created an atmosphere of bigger banks…too big to fail: or so they think.

The continued battle is one of discipline and true change; to live below ones means; stop the printing of money to stabilize the economy causing inflation that will at some point burst the bubble; cease borrowing and government spending that continues to increase debt. From my view, we did not stop anything from happening; we prolonged it!

10) Mookie Blaylock - 6'0pg - University of Oklahoma (1989-1992 New Jersey Nets; 1992-199 Atlanta Hawks; 1999-2002 Golden State Warriors)

Dr. Dre, DJ Premier, J.Dilla, Marley Marl...yeah I left out Pete Rock...I SAID IT, I SAID IT!!!! And I quote J. Lone, "Pete Rock is the king of remixes!" NUFF SAID!!!!!!!!! Okay, so he did make TROY, arguably the greatest hip-hop track ever made. However...name me 10 other classic joints he did...and don't take 15 minutes like these suckas did yesterday at G's birthday party.