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October 12, 2005

Inflation, Rates, Hong Kong stumble, all linked, Wed., Oct. 12, 2005, 8:34 AM

On Monday morning I sold Hong Kong. Actually I sold short the EWH at 13.03. I gave you the story in this blog.

Interest rates are rising because inflation is rising. A large part of the reason for the U.S. and global inflation problem is linked to China's hijacking of U.S. Fed monetary policies. That happened as the People's Bank of China (PBC) bought the U.S. Treasury paper that the Fed wanted to sell to U.S. banks. That kept interest rates lower than the Fed wanted for longer than the Fed wanted. It also kept more liquidity in the U.S. banking system than the Fed wanted. Consequently, prices started to rise faster in the U.S. than the Fed could control. Ergo: inflation problem.

So now the world is aware that interest rates must rise in order to crush the inflation menace that China has foisted on the world.

Rising interest rates kill the dreams of real estate developers, and if you have ever been to Hong Kong (as I have) you will know that the place is a real estate developer's paradise when rates are low... And a virtual hell when they are rising above a certain level.

If you doubt me, ask Donald Trump.

But Hong Kong also thrives on a manufacturing and distribution system that is second to none in the world. With its currency pegged to the USD, this sector always does well when interest rates and the USD are falling. That means that HK products are easy to sell. But, if the Renminbi is now allowed by the Chinese authorities to rise to fair market values, how long will it be before the authorities in Beijing put the kibosh on the HK Dollar peg.

If they don't move the HK Dollar together with the Yuan, then they will need the Chinese Army to erect mile-high gates around this Special Administrative Region of China. That's because all the mainland manufacturers in that area would want to jump aboard the HK gravy train.

So, all things considered, I'm not so hot on the prospects going forward for Hong Kong. That's not to say I expect a crash " I don't " but to reflect my belief that the HK economy and real estate prices are likely to settle back.

Keep your eye on the EWH. Watch the prices fall as inflation talk and interest rates rise.

p.s. 9:17am

Sergio wants me to give price targets. I don't do that because it is a mugg's game. Traders must try to understand the principles involved and to use them to your advantage in staying on the right side of trends, as early as possible in a trend reversal process. Trading is no more difficult than that.

Here is a list of the EWH holdings (from the AMEX.com website). More current lists are available from the ETF manager. What traders need to do is focus on the major components of an ETF and track changes in the RSI. When you see a topping or bottoming process occuring, you need to start making decisions. Don't wait to read about it in the newspapers or hear it from TH's spouting their drivel on Financial Entertainment Television.

Posted by Posted by Bill Cara on October 12, 2005 08:36:01 AM | Category: China , ETF

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