Over the last month, I read several reports about how some chinese factories are raising prices or wages on US manufacturers by 15-30%. Then I was at the Adult Product Manufacturer convention (ANME) and I heard from several American sex toy manufacturers who work with chinese factories and are planning 15-30% price increases coming in the next couple months due to rising prices in China.
Thus, I am betting that the market will recognize significant inflation in China. Inflation is bad for the US and Chinese consumer. If China lets its currency appreciate, that will hurt the US consumer, but will help the Chinese consumer. Boosting Chinese consumer demand is the stated policy of China and the US and will help trade imbalances in the long run.
When the inflation news comes to the market, US consumer stocks will decline. (short XLY) It will also hurt chinese stocks thus I suggest continuing to avoid them for now, but eventually the Chinese will figure out the correct move is to increase the value of its currency. Shortly before a significant revaluation will be the best time to buy a chinese consumer stock play like HAO.
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