In the last month or so we’ve been able to provide you with a little more action. We expect this to remain the norm for some time to come.

In other words, the market has changed. Anyone who’s been reading me for a while won’t be surprised to learn that the chief reason has been, yes, China.

China’s so-called debt problems are in a receding mode. It’s not that China doesn’t have any debt. It’s just that by any reasonable measure its debt worries are far less than our own.

So it’s no surprise that the Chinese yuan has been surging. With China helping to orchestrate it, the lion’s share of global growth today is occurring in the developing world. That will continue to be true, meaning China will play an increasingly important role, directly and indirectly, both in our economy and in our financial markets.

Embracing the New Reality

I suspect that investors’ growing awareness that China is now driving the story helps explain why the market has gotten more volatile. For us, the challenge is to embrace that reality and incorporate as much data from China as possible into our indicators. So far, so good.

To accommodate more trades, we’ve developed our 3-Pot system. Pot 1 is dedicated to trades based purely on our indicators. Over the past month or so we’ve made three Pot-1 trades with a combined cumulative gain of nearly 50%, including two wins and one loss.

In making our indicator-based trades, our expectation is that any losses will be the exception. The loss on our dollar trade came largely because of comments by government officials including Treasury Secretary Mnuchin implicitly favoring a weaker dollar. That prompted us to exit our trade because, as we said, you can’t fight City Hall.

But now the Trump administration itself doesn’t seem inclined to fight, either – fight the Chinese, that is. Did anyone besides me notice that in Trump’s State of the Union speech there was hardly a peep about slapping tariffs on China, in sharp contrast to all the heated rhetoric on the campaign trail? The tariffs we recently imposed, on solar components, are essentially meaningless in terms of any impact they will have either on China or on us.

The Likeliest Scenario

If we’re not going to tack on huge tariffs, the only other way to get around trade deficits is to let the dollar fall. But this is very much a two-sided game, and a falling dollar is likely to accentuate market volatility.

Certainly a falling dollar has led to sharply increased volatility in the past. And it has invariably ended badly, whether you point to the 1987 crash or the more recent 2008 crash, with volatility eventually culminating in a major economic and/or market debacle.

This time, though, I suspect it will play out differently. Instead of a single major negative event, a more likely scenario will be the gradual but unmistakable ascension of the yuan at the dollar’s expense. I don’t entirely dismiss the possibility of a major negative event, but if it happens at all, it’s likely at least 18 months off.

Even after being delinked from gold in the early 1970s, the dollar, through ups and downs, and even at its lowest point, always had an edge. In terms of purchasing power parity, it always was valued higher than the currencies of other major countries. That won’t change overnight, but look for it to be changing over the next two years or so. Among other things, it will mean far higher U.S. inflation.

A Potential Option Play

But let’s get back to our indicators and trades. Currently we have positions open in both Pot 2 and Pot 3, and we expect this will be our general modus operandi. We may even start recommending short positions. While our Pot 2 and Pot 3 trades aren’t directly indicator-propelled, they are, and always will be, consistent with whatever our indicators are telling us.

Right now, for instance, our gold indicator, although neutral, is improving. That bore on the timing of our purchase of Pretium Resources (NYSE:PVG), a gem of a company (excuse the pun) with tremendous fundamentals and superb management. Pretium remains a strong buy, and if our gold indicator turns bullish, we might recommend an option trade on Pretium as well.

To review our system, Pot 1 is reserved for trades based solely on our indicators. These trades tend to have very short time horizons, as evidenced by our recent successful two-day closeout. Trades in Pots 2 and 3 will often have longer time horizons, with six months not out of the question.

We’re also considering adding one or two more pots to our trading system, giving us more flexibility to enter into longer-term trades.