NEW YORK (
TheStreet) -- In advance of the Wednesday
Fed meeting, here's how to read the news behind the news.
QE2 is not designed to stimulate domestic investment as most pundits pontificate. QE2 is designed to stimulate U.S. exports by devaluing the dollar. King Dollar must die to save the kingdom!
The broader agenda of QE2 is to force China to strengthen the yuan -- Bernanke rightly believes he needs to do this because the White House won't and the U.S. economy can't recover without currency reform.
QE2 puts pressure on China because falling interest rates in the U.S. and rising interest rates in China is unsustainable with the yuan pegged to the dollar. (Capital flows shift strongly to China and put upward pressure on the yuan)
Bernanke is trying to get other central banks to coordinate QE2 -- England, Europe and Japan.
Japan is the most likely to hop on the QE2 wagon because a rising yen is killing its economy and China has been strategically pushing up the yen by buying Japanese bonds.
A joint US-Japanese squeeze on the yuan could be a harbinger of future coordinated economic and policy measures taken to contain China.
QE2 is less likely in Europe because of German opposition and less likely in England because the UK economy is growing a bit faster than expected
The best QE2 trades are:
WisdomTree:Dr Chn Yuan
(CYB), which bets on a stronger yuan; and
ProShs II:UlS Yen
(YCS), which is a 2X bet on a weaker yen.
Worst case scenario: QE2 adds to the building inflationary coil from a bloated Fed balance sheet and a federal budget out-of-control. When the coil unwinds, the bond market implodes.
Peter Navarro is a TheStreet contributor and author of "Seeds of Destruction"