What I Learned About The Yuan Playing Pool with Jim Rickards

Before he was a copper, and before he left the force to start up a business in the late 90s, my old man dropped out of the Victorian College of the Arts to smoke dope and hustle pool.

By the time my sister and I hit our teens, a queen size pool table (that’s 10 foot by 5 feet for those that don’t know their obscure pool tables) overtook the rumpus room.

General teenage boredom led my sister and I to bash the balls around the table.

While we’d smash the balls and dig the cues into the recently refurbished green, dad would come out and show us how to make a shot or two.

And then it was about setting up the balls for play. After a while, the lessons became about reading the play and learning your opponent’s weakness.

A quick game, perfecting the angle and reading the play, quickly became our after dinner routine.

And still, after all these years, I’m no match against my college dropout dad when it comes to pool.

In spite of all the years spent around the table, I’ve never really put these skills to good use.

Yet last week, in the oppressive evening Nicaraguan humidity, there I was playing pool with Jim Rickards on a rickety 8 foot by 4 inch table.

You see, I’d been invited to an exclusive conference at a secluded ranch in Nicaragua.

After a day of talking shop, Jim and I were unwinding — with stupidly strong margaritas in hand — over a game of good old, old-school fun.

Jim introduced me to American rules, which to an Aussie are just odd.

Firstly they call small balls ‘stripes’ and big balls ‘solids’. There was play on rule I’d never heard of that involved the cue ball and a solid. And a couple of other play on rules that didn’t surface in house rules pool.

As the talk drifted from family, cars and a decent drop, I couldn’t help but notice how the pool play resembled the biggest change to global monetary policy.

It’s old news now, but two weeks ago the International Monetary Fund (IMF) gave China the nod to join the Special Drawing Rights (SDRs) basket.

Given the rising power of the yuan it makes sense to add the China to the basket.

In December 2014, the yuan made up 2.17% of all international payments, according to the Society for Worldwide Financial Telecommunications.

It may sound small fry, especially when the US dollar and the euro account for 44.6% and 28.3% respectively. But even at 2.17% the yuan has passed the Canadian dollar to become the fifth most used currency in global transactions, as of January this year.

The British pound is third at 7.92%. However, it’s possible the yuan could overtake the Japanese yen this year or next. The yen only accounts for 2.69% of all international trade.

In addition, China is slowly opening its share market to international investors through a link in the Hong Kong exchange. Yes there are still tight capital controls, and only a small percentage of A Shares in the mainland can be accessed by overseas investors. But the point is Chinese authorities are relaxing their grip on the market.

Whether the US admit this or not doesn’t matter. The yuan is an important international currency.

The IMF has no choice but to accept China’s growing position.

For investors in a US dollar dominated world, adding the yuan to the SDR basket will have a big impact.

Essentially, this is China’s big break into the market. From here, the currency weightings in the SDR basket will be reshuffled. And the biggest loser is the US.

By adding a fifth currency, there’s no doubt that the US dollar and the euro will see their weightings significantly decrease.

As an investor, you need to understand the impact this has on your investments. Now is the time to prepare your portfolio for the biggest change to monetary policy since the Bretton Woods agreement. And helping you prepare for this seismic shift is precisely what Jim Rickards and I do over at Strategic Intelligence. You can learn more about that here.

China will officially be added in early 2016 on paper to the SDR basket. With the changes coming into effect around September 2016.

In other words, the break in the dominant currency has been made. Now it’s time for the IMF to set up the weightings.

Any good pool player knows it’s not necessarily the break that counts. It’s the first shot you take that matters. That’s where you set up your play, and ideally, make the play difficult for your opponent.

This is exactly what is happening with the yuan. The break into the currency elites has happened. Now it’s time for China to play this to their advantage, and capitalise on the death of the US dollar.

Oh, and in case you wondering, I won the match. Potting the black ball on a 90 degree angle in the middle left pocket. I couldn’t believe my luck either!

Jim tells me there’s a rematch scheduled when he’s next in Melbourne.

Shae Russell

Editor, Strategic Intelligence

From the Port Phillip Publishing Library

Special Report: If you want to get ahead in this world, it pays to have powerful friends in high places. With this new advisory, you’ll make one. A portfolio manager at the West Shore Group, and adviser on international economics and financial threats to the US Department of Defense. Jim Rickards is no ordinary financial newsletter writer. And Strategic Intelligence is no ordinary newsletter… (more)

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Since starting out in the financial markets over a decade ago, Shae has extensive experience across various aspects of the industry. Shae cut her teeth in the derivatives industry, teaching clients basic trading techniques with technical analysis.

Joining Fat Tail Investment Research eight years ago, Shae has worked across a number of publications, such as Australian Small-Cap Investigator, Gold Stock Trader and Microcap Trader. She’s spent the past two years however, honing her macro analysis skills alongside Jim Rickards, showing Australians how to invest and profit form global macro trends.

Drawing on her extensive experience, Shae is a contributor to Money Morning, and lead editor of sister-publication Markets & Money, where she looks at broad macro trends developing around the world, combining them with her distaste for central banks and irrational love of all things bullion.

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