Strains

As the Dow's bear awakens for the first time since 2002 and S&P's bear is beginning to stir out of its own 6 year slumber, prospects for the US economy are becoming increasingly dim. As the dollar falls and inflation rises commodities such as oil and steel continue to rise rapidly. Inflation is now the largest threat the global economy faces. At home we can see its effects as individuals are beginning to shut themselves in their homes to protect them from the discomforts that these predators may have to offer.

China is in a different bind. Its economy, despite having a sharp prick of its own market bubble and a moderate slowing, is still roaring ahead. Its own inflation rates have recently hit upwards of 7% by official accounts and its government is increasingly running out of options. In its efforts to push back upon these powerful forces, the Chinese government is imposing strict price controls on staple goods and fuel. Inevitably these measures will crack under the weight of underground market activies. The government will need to raise interest rates or take other measures to curb inflation.

In order to maintain their currency peg to the dollar in this environment, the government is currently adding to its foreign-exchange reserves with voracious rigor. If China wishes to quash the current levels of inflation the appropriate reserve levels will most likely be unsustainable. Something will have to break. In my opinion, the most obvious choice would be for a significant revaluation of the Yuan. Fortunately, there is a new and relatively easy way to take advantage of this situation. WisdomTree is now offering a new Chinese Yuan Fund (NYSE: CYB ). This approach, in my opinion, offers limited downside and significant potential upside - a rarity in such a difficult market.