Yesterday I was asked how I could explain the fact that German Bunds were yielding less than US treasuries. On the surface this seemed to make very little sense.

Everyone gave the same answer that if Germany goes back to the Deutsche Mark it will appreciate relative to the dollar.

#1 how likely is that to happen anytime soon?

#2 Who says the Deutsche mark will be a safe haven and increase drastically compared to the dollar? There’s many other ones including dollar, Pound, Swiss Franc and many others not mentioned here. Plus Germany wouldn’t like that as I am pretty sure that they are net exporters to America (and most other countries).

It is normally a good advice in sports to keep your eye on the ball; but if you are into juggling….

For starters: I have tried to go into the Chinese acting on the markets –and why I can’t share the adoration for their performance – because when you are juggling that many gold bars there is likely to be some clinking.

China is trying to keep the RMB undervalued with respect to the EUR: Just note what I said about China selling solar panels to Germany at 50% discount (at least) – strangely: Germany is buying solar panels like there is no tomorrow (quite right: There isn’t any – for China). China wants to stimulate their exports with scant regard as to cost of production and raw materials.

At the same time China wants the RMB overvalued with respect to the USD: Just look at how raw materials and grain has soared in price. The trick isn’t exactly working – the price in USD just goes up.

Now there is a time lag between importing rubble (iron ore), oil and corn and delivery of the finished products to the customers. It takes time to produce toothpicks when you start with a nut (pun intended).

[put exhibit 1 HERE]

I have shown this graph over exchange rates before.

But look at how the relatively stable USD/RMB – the blue line – is split between the USD/EUR and the EUR/RMB: (USD/EUR)*(EUR/RMB) = (USD*EUR)/(EUR*RMB)= USD/RMB. Simple arithmetic.

That is: The Chinese attempt to have their cake and eat it works out in fluctuations between the USD and EUR. The curve – more or less – gives us the nut-to-toothpick time period: From May 2010 to approx May 2012 – Let’s say two years.

Now the universe obviously isn’t going to conform to feeble minded Chinese central planners’ pipedreams just like that. So apart from obvious maladjustments in the USD/EUR relationship some of the slack is taken up by fluctuations in the interest rates:

there is no tomorrow (quite right: There isn’t any – for China). China wants to stimulate their exports with scant regard as to cost of production and raw materials.

At the same time China wants the RMB overvalued with respect to the USD: Just look at how raw materials and grain has soared in price. The trick isn’t exactly working – the price in USD just goes up.

Now there is a time lag between importing rubble (iron ore), oil and corn and delivery of the finished products to the customers. It takes time to produce toothpicks when you start with a nut (pun intended).

[put exhibit 1 HERE]

I have shown this graph over exchange rates before.

But look at how the relatively stable USD/RMB – the blue line – is split between the USD/EUR and the EUR/RMB: (USD/EUR)*(EUR/RMB) = (USD*EUR)/(EUR*RMB)= USD/RMB. Simple arithmetic.

That is: The Chinese attempt to have their cake and eat it works out in fluctuations between the USD and EUR. The curve – more or less – gives us the nut-to-toothpick time period: From May 2010 to approx May 2012 – Let’s say two years.

Now the universe obviously isn’t going to conform to feeble minded Chinese central planners’ pipedreams just like that. So apart from obvious maladjustments in the USD/EUR relationship some of the slack is taken up by fluctuations in the interest rates: