Effects of China's Clever Policy of Currency Manipulation

Briefly following up on the theme of the last piece, I felt it was important to point out some of the effects of China's clever policy of currency manipulation. Earnings reports that were published this week from many major companies which conduct business on an international basis blamed weaker earnings, or at least a derogation of earnings even if they were in line with analyst expectations, on the strength of the dollar. But as we pointed out the dollar is mainly strong relative to the Yuan which is deliberately weak. The strength of our domestic currency means that we get fewer dollars for products exported to countries with those "weak" currencies. Of course we are not the only targets of this policy, but any trade competitor with China is fair game.

Thus, Japan, experiencing a form of long-term financial somnambulism, also has a "strong" currency. Currently, and in fact going back to 2010 and prior, you will see coverage of their economic situation which describes their paradox: strong currency - weak economy. Today, Japan policy makers are once again overtly exploring what they can do to weaken their currency.

By contrast, China has managed to convince us all that they are in trouble and that is why their currency is impaired - while in actuality the country is booming.

Perhaps the most dramatic example of the success of China's policy was reported by Disney. Earnings were four cents lower than the consensus of analyst expectations, causing a sharp drop in the price of its stock.

Aside from being a marvelously successful company, with an enviable track record of earnings growth, Disney is also one of the most successful exporters of American products -- in this case American popular culture -- to China. The Disney park in Shanghai is doing very well, and the new "Capt. America" release earned $96 million in China in its first weekend. The news of the movie's success was announced more or less at the same time as were the disappointing earnings.

The Chinese are not buying American cars or refrigerators, but they are buying American movies and cultural icons. Our companies would do much better if currencies floated fairly against one another, in line with the stated policy of pretty much every major country, including China!

Maybe the American dollar should sport the image of Mickey Mouse instead of George Washington