On August 14, 1998 Russian president Boris Yeltsin declared – very definitively – that Russia’s currency would not be devalued. (YouTube clip here.) What happened three days later is a lesson for anyone who believes politicians when they talk about bad things not happening.
In an article called “Here’s Everything That Could Go Wrong in 2016,” news service Bloomberg warned that “Investors can’t ignore… so-called Black Swan scenarios following a year that surprised the world with record refugee flows and brutal terror attacks.”
There’s a lot of uncertainty in markets right now – particularly as the U.S. Federal Reserve is about to raise interest rates. And in a related article, Bloomberg lists some things that could cause different kinds of uncertainty. “Oil prices soar after Islamic State destroys facilities across the Middle East. Angela Merkel is forced to resign, throwing the European Union into disarray. The dollar slumps as Russian and Iranian hackers team up to launch cyber-attacks on U.S. banks.”
Some of these might happen. Most probably won’t. But you’ll know that something is close to happening when a politician announces that, no matter what, a very specific bad thing is not going to happen.
For example… three days after Boris Yeltsin’s declaration, the Russian currency collapsed 2.4% against the dollar. And it continued falling…
The People’s Bank of China (PBOC) provided a more recent, if less extreme, example. As we wrote recently (here), on November 30, the International Monetary Fund announced it would add China’s currency, the renminbi, to its Special Drawing Right (SDR), a basket of the world’s four most liquid and freely traded international currencies. This is an important step in the renminbi becoming a currency that’s not as tightly controlled by the government.
On December 1, the Wall Street Journal reported, “The People’s Bank of China pledged again on Tuesday to keep the yuan largely stable… The comments were aimed at allaying any concerns that, with the IMF decision behind it, China would now feel free to devalue the yuan—the base unit of the currency known as the renminbi—to help spur growth.”
“In terms of whether the renminbi will depreciate after its inclusion in SDR, there is no need for such a worry,” Yi Gang a deputy governor at the PBOC, said at a news conference.”
Since the PBOC’s pledge, and Yi Gang’s promise, the yuan has depreciated 1%. That might not sound like much – but for the yuan, it’s a huge move. And it’s only the beginning according to Jim Rogers and a lot of other people.
So, when a politician tries to assure people that something bad is not going to happen… get ready for it to happen.