NEW YORK (TheStreet) -- The crisis of the global financial markets that so many have been fearing looks as though it has arrived.
The importance of China devaluing the yuan is that it effectively starts the process of "de-pegging" its relationship to the U.S. dollar. The change in policy is likely to have unintended consequences which are leading to new problems in today's currency wars -- especially as the Federal Reserve lacks the initiative to start increasing its own rates.
China's preemptive currency strike complicates the process of the Federal Reserve's long-range policies which would strengthen the U.S. dollar. The Federal Reserve has paused and believes that this is not the right time to raise rates.
Two weeks ago, the global equity markets came to the same conclusion as global markets plunged, as equity prices accelerated.
The devaluation of the yuan would normally be viewed as positive for Chinese businesses that will attract a greater market share of world trade due to the value of a lower currency. Instead, the Chinese market plummeted last week.
Their indecision to hold off raising rates would usually have a bullish effect in the U.S. stock markets, but instead they fell to their lowest level of this year -- Friday's carnage alone being a 530-point decline in the DJIA. The Dow Jones Industrial Average is now down 10% from its high of May 19, 2015 at 18,351.
Fed Chair Janet Yellen is currently paralyzed and is lacking the leadership and decision-making ability for what the next steps should be -- a point mentioned in my August 20 column.
This is a preview of what to expect in mid-September, rather than the "irrational exuberance" associated with panic and hysteria. We are approaching the 7-year bear market cycle and the months of September and October typically are the starting months for such trend changes. At that time, markets are destined to remain volatile, with opportunities for both up and down periods, as noted in my Global Financial Reset newsletter.
China's yuan devaluation has sparked the beginning of a new battle in a continued currency war, in which many nations desire a cheaper currency in order to aid them with their exports. The U.S. dollar is already considered overpriced. This places the Fed in a dilemma. If it raises short-term rates for the first time in six years, the dollar will become more overpriced than ever before. Exports will suffer.
India, Russia and Thailand are now preparing for a new currency war. The rest of the world is now scrambling so that they are not the last nations standing to devalue their currencies. The Federal Reserve's lack of leadership, by increasing interest rates, will cause other countries to devalue their currencies even further.
In terms of equity markets and geopolitical events, the next few weeks are critical.
Last week, I forecast that the Federal Reserve could not raise interest rates. My views remain fully intact and align with my analysis that the Fed has already sparked a "currency crisis".
The financial carnage we witnessed last Thursday and Friday was truly global in its scope. On a percentage basis, China stocks crashed even more than the U.S. stocks did. Japan's stocks also crashed, as well as stock markets all over Europe and the emerging market currencies were impacted globally, which is causing an "asset bubble" to explode exponentially.
Our monetary expansion policy has been based on "quantitative easing." Our current resulting deflationary spiral has sucked the global economy into it a dark vortex. Wall Street is going under due to the fact that this time, the Fed is utterly powerless to reverse this trend again.
Our entire economy is currently based on the concept of a "Ponzi scheme." It has been built on the expectations that should never have been assumed. The idea that we can create real economic growth and distributed wealth using temporary artificial fixes is absurd.
I do not believe that this crisis will be over by the end of 2015. This is just the start of the crisis. Events will continue to unravel as we move into 2016 and beyond. This existing crisis will continue to last for years and it is going to be very painful beyond what most people can imagine.
Any attempts by the Fed to raise interest rates, at this time, will further exacerbate the existing economic global disaster.
In my next economic update, I will share with you some sobering information on what U.S. equities have experienced in the past 10 months, and what it means for traders and investors.