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Focus Is Increasingly On How Similar Conditions Are To The Lead Up To WW2: Rabobank
Focus Is Increasingly On How Similar Conditions Are To The Lead Up To WW2: Rabobank
Back with a bang
As mentioned on Friday, welcome to both La Grande rentrée and weltschmerz: and combining the two, this week we are ‘back with a bang’. That seems appropriate given yesterday marked 80 years since the start of WW2, which one would have thought would have received far more media coverage than it did: instead, far more focus was on how similar some conditions are to the lead up to WW2.
For just one market example, yesterday saw new US and Chinese tariffs kick in, taking a further step down the trade war path – if that is what one still insists on calling it. I underline that more holistic view of the US-China standoff as the Wall Street Journal reports that “SEC Revives Fight Over Inability to Inspect Chinese Auditors of Alibaba, Baidu”. The SEC could yet “impose more oversight on US-listed companies that rely upon those [Chinese] auditors. The measures could include forcing the firms to disclose more about their business or accounting and restricting their ability to sell new shares.” Given the Chinese firms are unlikely to comply, that is a potential step towards an eventual US delisting; and don’t forget there is also a push in the US Congress to stop US capital flows into China via bill S. 1731, which will get a further bipartisan tailwind when Congress returns on 4 September. In short, this is a whole other new front in the US-China struggle (capital flows, following tech limits and tariffs), not a ‘trade war’.
Markets May Focus on Dissenters in FOMC Minutes: Rabobank’s Foley
Let’s see just how weak CNY fixing, and CNY itself, are today. Indeed, after the Chinese manufacturing PMI stayed well below 50 over the weekend, will we take out the low of 7.1926 on the back of this news-flow? If not today, then soon, surely. And then where?
…click on the above link to read the rest of the article…
US Slaps New Tariffs On China; One Minute Later China Retaliates
US Slaps New Tariffs On China; One Minute Later China Retaliates
The biggest reason for last week’s torrid stock market rally was rekindled “optimism” that the escalating trade war between the US and China may be on the verge of another ceasefire following phone conversations, fake as they may have been, between the US and Chinese side. This translated into speculation that a new round of tariffs increases slated for this weekend may not take place or be delayed.
However, that did not happen, and with no trade deal in sight, at 12:00am on Sunday, the Trump administration slapped tariffs on $112 billion in Chinese imports, the latest escalation in a trade war that’s ground the global economy to a halt, sent Germany into a recession, and given the market an alibi to keep rising because, wait for it, “a trade deal is imminent.”
Only, it isn’t, and 1 minute later, at 12:01am EDT, China retaliated with higher tariffs being rolled out in stages on a total of about $75 billion of U.S. goods. The target list strikes at the heart of Trump’s political support – factories and farms across the Midwest and South at a time when the U.S. economy is showing signs of slowing down.
The 15% U.S. duty hit consumer goods ranging from footwear and apparel to home textiles and certain technology products like the Apple Watch. A separate batch of about $160 billion in Chinese goods – including laptops and cellphones – will be hit with 15% tariffs on Dec. 15. China, meanwhile, began applying tariffs of 5 to 10% on U.S. goods ranging from frozen sweet corn and pork liver to bicycle tires on Sunday.
…click on the above link to read the rest of the article…
Hong King Kong
Hong King Kong
Of course the notion of addressing Hong Kong has been in my mind for a while, but it’s a bit of a moving target: things change all the time, and seemingly on the fly. However, with today’s fresh developments, it seems silly to wait any longer. Hong Kong Civic party lawmaker Dennis Kwok yesterday expressed the reason way better than I could:
As I said time and again, the use of troops in Hong Kong will be the end of Hong Kong, and I would warn against any such move on the part of the central people’s government.”
He said that before today’s arrests -and subsequent release on bail- of a handful of alleged protest leaders Joshua Wong, Andy Chan, and Agnes Chow. Who, if you read between the lines, didn’t lead much of anything; they may be figure-heads, but that’s not the same thing. The protests are either lacking leaders or everyone’s a leader, depending on who you ask. So why arrest them to begin with? You tell me.
What I did find enlightening was Reuters’ report yesterday on Beijing having rejected Hong Kong Chief Executive Carrie Lam’s (how is CEO a political function?) proposal to communicate with the protesters and perhaps allow some concessions to their demands. I know it’s only one source, but it appears quite feasible.
Carrie Lam is between a rock and a hard place, and she admits it -at least according to the Reuters piece-, though not to the protesters. Beijing is in exactly such a spot, but won’t admit it, ever. And that right there is Hong Kong’s main issue.
China Rejected Hong Kong Plan To Appease Protesters
…click on the above link to read the rest of the article…
Peter Schiff Compares Trade War to “Battle at Little Bighorn”
Peter Schiff Compares Trade War to “Battle at Little Bighorn”
Political commentators are increasingly critical of U.S. trade policy, particularly tariffs and the trade war with China. Radio host Peter Schiff went so far as to compare U.S. trade policies to General Custer and the Battle of Little Bighorn. Meanwhile, some economic red flags seem to support their worries.
In today’s polarized political climate, there is one topic both the Left and the Right seem to agree on: the trade war with China is eventually going to hurt the average American.
Radio host Peter Schiff has been hammering on the economic dangers posed by tariffs for months. He even compared the resulting trade war with China to General Custer’s Last Stand.
“General George Custer met his doom charging into a battle he thought he could win against an opponent he did not understand. Based on [certain] views about the fast-emerging trade war with China, it looks to me that [the U.S.]…is charging into an economic version of Little Bighorn.
“By mistaking the real nature of international trade, the costs of tariffs, the effects of currency movements, and the supposed ease with which the United States could quickly re-establish itself as a low-cost manufacturer, [the U.S.] risks shredding the safety nets that have undergirded the U.S. economy for decades and plunging us into a war we are ill-equipped to fight.”
Those are strong words. But is Schiff’s Little Bighorn analogy accurate? Are these tariffs pushing the U.S. toward a disastrous economic “ambush” that could devastate America’s economy? Let’s look at some economic indicators to see what they point to.
Currency Manipulation
Marc Chandler, chief market strategist at Bannockburn, agrees that China’s recent currency devaluation is part of an escalating trade war: “This is another step in the currency war. This also makes trade more difficult.”
…click on the above link to read the rest of the article…
Keep it Simple
Keep it Simple
Markets blow up on Friday on a series of tweets, markets jam higher on the pronouncement of dubious phone calls on Monday. The rapid back and forth has many heads spinning and makes for dramatic headlines as people are searching for explanations. To which I say: Keep it simple, especially in the age of the great confusion.
Background: In 2019 market gains have been driven by pure multiple expansion resting on 2 pillars of support in the face of deteriorating fundamentals: 1. Hope for rate cuts and Fed efficacy 2. Trade optimism. But in process little to no gains are notable since the January 2018 highs, in fact most indexes are down sizably since then.
And when markets are purely reliant on multiple expansion the risk for accidents increases when confidence gets shaken. Friday’s escalation on the trade war front again highlights this point.
And in context of global growth slowing an escalation in the trade war is akin to playing with fire as it risks being a trigger to nudge the world economy into a global recession. After all 9 economies are either in recession or on the verge of going into recession.
This morning I was speaking with Brian Sullivan and he asked me what matters most here, the China trade war, the Fed, or technicals. The short answer is they all matter as it is a battle for control, but how to delineate a complex interplay of conflicting forces into some clarity?
Let me give you my take on all 3 fronts. Before I do, for background here’s the clip from this morning:
China:
Occam’s Razor: The simplest explanation is often the best one and that’s really what’s happening on the China trade war front as far as I’m concerned.
…click on the above link to read the rest of the article…
The Anatomy of the Coming Recession
The Anatomy of the Coming Recession
Unlike the 2008 global financial crisis, which was mostly a large negative aggregate demand shock, the next recession is likely to be caused by permanent negative supply shocks from the Sino-American trade and technology war. And trying to undo the damage through never-ending monetary and fiscal stimulus will not be an option.
NEW YORK – There are three negative supply shocks that could trigger a global recession by 2020. All of them reflect political factors affecting international relations, two involve China, and the United States is at the center of each. Moreover, none of them is amenable to the traditional tools of countercyclical macroeconomic policy.
The first potential shock stems from the Sino-American trade and currency war, which escalated earlier this month when US President Donald Trump’s administration threatened additional tariffs on Chinese exports, and formally labeled China a currency manipulator. The second concerns the slow-brewing cold war between the US and China over technology. In a rivalry that has all the hallmarks of a “Thucydides Trap,” China and America are vying for dominance over the industries of the future: artificial intelligence (AI), robotics, 5G, and so forth. The US has placed the Chinese telecom giant Huawei on an “entity list” reserved for foreign companies deemed to pose a national-security threat. And although Huawei has received temporary exemptions allowing it to continue using US components, the Trump administration this week announced that it was adding an additional 46 Huawei affiliates to the list.
The third major risk concerns oil supplies. Although oil prices have fallen in recent weeks, and a recession triggered by a trade, currency, and tech war would depress energy demand and drive prices lower, America’s confrontation with Iran could have the opposite effect. Should that conflict escalate into a military conflict, global oil prices could spike and bring on a recession, as happened during previous Middle East conflagrations in 1973, 1979, and 1990.
…click on the above link to read the rest of the article…
China Responds To Trump’s “Barbaric” Tariffs: Vows To Fight “Until The End” And Have “The Last Laugh”
China Responds To Trump’s “Barbaric” Tariffs: Vows To Fight “Until The End” And Have “The Last Laugh”
After Friday’s blitz of reciprocal trade war escalations, which saw a furious Trump slam the two “enemies of the state”, Fed Chair Powell and China president Xi, following China’s widely expected tariff hike retaliation and Powell’s uneventful Jackson Hole speech, and further raise tariffs on virtually all Chinese imports after stocks suffered another major selloff, we said that the next steps were clear.
And now China has to retaliate and so on
Sure enough, in response China said it would continue fighting the trade war with the US “until the end” as tit-for-tat escalation is now virtually assured with no end in sight.
On Saturday, China’s commerce ministry issued a statement calling on Washington not to “misjudge the situation and underestimate the determination of Chinese people” after US President Donald Trump announced new tariffs on Chinese imports.
“The US should immediately stop its wrong action, or it will have to bear all consequences,” the statement said.
At the same time, a sharply worded commentary in the official party mouthpiece, People’s Daily, said China had the strength to continue the dispute and accused Washington of sacrificing the interests of its own people. Published under the pseudonym “Wuyuehe”, the piece described the latest tariff measures by the US as “barbaric”. The op-ed said China’s own tariffs on $75 billion worth of American products, announced late on Friday, were a response to America’s unilateral escalation of the trade conflict, and vowed that China was determined to fight back “until the end”.
“China’s will to defend the core interests of the country and the fundamental interests of the people is indestructible, and will not fear any challenge,” the author wrote, promising that “history will prove that the side on the path of fairness and justice will have the last laugh.”
…click on the above link to read the rest of the article…
CONfidence
CONfidence
Markets are subject to a giant con game. The game of CONfidence. Confidence must be maintained under all circumstances or we’re heading into a global recession first and then a US recession to follow.
Consider the macro context here: Nine major economiesare either in recession or on the verge of it. This includes Germany, UK, Italy, Mexico, Brazil, Argentina, Singapore, South Korea, Russia. Everything else is slowing down hard. Yields are plummeting for a reason and once again the world is looking to central banks to bail everyone out and for stimulus programs to be launched to rescue a global economy that hasn’t been able to do without in 10 years. US consumers are holding the US economy up is the consensus as they keep spending for now, but already we saw a dip in confidence. Why? Trade tensions, political tensions, and yes, concerns that the longest business cycle may come to an end. Add scary stock market headlines and before you know it the consumer is holding back.
And hence confidence must be maintained under all circumstances. This has been the game for 10 years and hence any market drops that would add pressure to confidence must be averted. You really think it’s an accident we see intervention always at the point of serious trouble?
Retail sales dropped hard in December as markets plummeted. It’s no coincidence. Hence any prolonged malaise must averted.
As Mohamed El-Erian pointed out so clearly this week:
“We may end up in a situation where people read these alarmist headlines, they get concerned, they stop spending. As they stop spending, companies stop investing. And then we get a major slowdown:”
Alarmist headlines? How about headlines that point out reality? But the larger point is clear: Lose the consumer and a recession is unfolding perhaps more quickly than anyone can imagine. After all nobody on the planet called for a 1.5% US 10 year yield in 2019 or a German 10 year bund at -0.72%.
…click on the above link to read the rest of the article…
Chinese Banks No Longer Trust One Another As Repo Rates Skyrocket
Chinese Banks No Longer Trust One Another As Repo Rates Skyrocket
For those who have grown bored with the ongoing US-China trade war whose escalation was obvious to all but the dumbest BTFD algos, the biggest news of the past week was that yet another Chinese bank was bailed out by the Chinese government – the third in the past three months – and a substantial one at that: with over 1.4 trillion yuan in assets ($200BN), Hang Feng Bank’s nationalization was certainly large enough to make a dent on the Chinese financial system and on the Chinese Sovereign Wealth Fund, which drew the short straw and was told to bailout the troubled Chinese bank (more here).
Hang Feng’s bailout followed those of Baoshang and Bank of Jinzhou, which means that 3 of the top 4 most troubled banks have now been either nationalized by an SOE or seized by the government, which is effectively the same thing.
Of course, to regular readers this development was hardly surprising, especially after our post in mid-July when we saw the $40 trillion Chinese banking system approach its closest encounter with the proverbial “Lehman moment” yet, when inexplicably the four-day repo rate on China’s government bonds (i.e., the cost for investors to pledge their Chinese government bond holdings for short-term funding) on the Shanghai exchange briefly spiked to 1,000% in afternoon trading.
While some attributed the surge to a fat finger, far more ominous signs were already present, and in the aftermath of the Baoshang failure, which has sent Chinese banking stocks tumbling, one-day and seven-day weighted average borrowing rates had remained low thanks to huge central bank cash injections – such as the 250BN yuan we described back in May – longer tenors such as the 1 month repo have marched sharply higher.
…click on the above link to read the rest of the article…
U.S. Currency Wars With China—Past And Present
In a purely political move, the Trump administration (read: the U.S. Treasury) has branded China as a currency manipulator. This is an act of war. After President Trump announced that even more tariffs would be imposed on China, the markets took the value of the Chinese yuan down a notch or two. So, who was “manipulating” the yuan, Beijing or Washington? Well, it looks like Washington is engaging in yet another Asian currency war.
As it turns out, the United States has a long history of waging currency wars in Asia. We all know the sad case of Japan. The U.S. claimed that unfair Japanese trading practices were ballooning its bilateral trade deficit with Japan. To “correct” the so-called problem, the U.S. demanded that Japan adopt an ever-appreciating yen policy. The Japanese complied and the yen appreciated against the greenback from 360 in 1971 to 80 in 1995 (and 106, today). But, this didn’t close the U.S. trade deficit with Japan. Indeed, Japan’s contribution to the overall U.S. trade deficit reached almost 60% in 1991. And, if that wasn’t enough, the yen’s appreciation pushed Japan’s economy into a deflationary quagmire.
Today, the U.S. is playing the same baseless blame game with China. And why not? After all, China’s contribution to the overall U.S. trade deficit has surged to 47%.
America’s recent declaration of economic war against China isn’t the first time the U.S. has used currency as a weapon to destabilize the Middle Kingdom. In the early 1930s, China was still on the silver standard, and the United States was not. Accordingly, the Chinese yuan-U.S. dollar exchange rate was determined by the U.S. dollar price of silver.
During his first term, President Franklin D. Roosevelt delivered on his Chinese currency stabilization “plan.” It was wrapped in the guise of doing something to help U.S. silver producers and, of course, the Chinese.
…click on the above link to read the rest of the article…
Here Are The Signs The US Gov’t Is Preparing For Farmageddon
Here Are The Signs The US Gov’t Is Preparing For Farmageddon
President Trump on Tuesday morning hinted at what appears to be yet another farm bailout (the third one must be the charm), as farm bankruptcies soar and agricultural debt loads become unbearable.
As they have learned in the last two years, our great American Farmers know that China will not be able to hurt them in that their President has stood with them and done what no other president would do – And I’ll do it again next year if necessary!
A farm crisis on par to what was observed in the early 1980s could be coming, especially since the US Senate passed a bill late last week that makes it more accessible for farmers with larger debt loads to file for bankruptcy protection, reported Reuters.
The bipartisan bill, designated as the Family Farmer Relief Act of 2019, increases the total debt load of how much a farmer can have to meet the qualifications to file Chapter 12 bankruptcy, to $10 million from the prior $4 million ceiling.
According to the US Department of Agriculture (USDA) data, operating a farm today involves much higher costs than it did three decades ago. Experts say without a complete reform of the law, mom-and-pop farmers would be subjected to Chapter 11 bankruptcy protection, which is expensive and chaotic.
The bill was passed last Thursday and earlier by the US House of Representatives, is headed for President Trump’s desk to sign. Judging by the president’s comments on Tuesday morning about the potential of a third farm bailout, it seems that this bill will most likely get passed.
Republicans and the Trump administration are preparing for Farmageddon with new interventionist measures that will hopefully cushion farmers from retaliatory tariffs by China.
The new bill once signed, will support President Trump’s farm base that has been walloped by retaliatory tariffs by China on agriculture products.
Pakistan Suspends Bilateral Trade With India, Expels Envoy
Pakistan Suspends Bilateral Trade With India, Expels Envoy
The Kashmir crisis triggered by India’s revoking of Article 370 from its constitution has exploded into a fast escalating renewed crisis between nuclear armed arch-rivals India and Pakistan.
Merely within the last 24-hours Pakistan has recalled its ambassador while expelling its Indian envoy, and more importantly has taken the drastic step of suspending bilateral trade with India.
“We will call back our ambassador from Delhi and send back their envoy,” foreign minister Shah Mehmood Qureshi announced in televised comments, according to the AFP, while a separate government statement declared trade suspended and a downgrading of diplomatic ties.
The committee has decided on “downgrading of diplomatic relations with India” and “suspenstion of bilateral trade with India,” according to the statement.
PM Khan further directed the military to “continue vigilance” after previously saying Pakistan would take “all possible options” in support of Kashmir’s Muslim-majority population – this after regional media has reported “tens of thousands” of Indian troops have surged into Jammu and Kashmir (J&K), while a phone and internet blackout is in place.
In a worrisome sign that the two historic rivals and neighbors could be again moving to open war, Khan is reported to have said, “We have to choose between dishonor and war.”
Pakistan’s foreign minister informed the United Nations early this week it is prepared to act in response to the “critical situation”- which Khan reiterated to the high level defense committee meeting Wednesday.
The now voided Article 370 is legally and historically what assured a high degree autonomy for the Indian administered Muslim-majority state, enshrined in the constitution, which inhabitants there see as justifying remaining part of India. The Hindu nationalist Bharatiya Janata leadership in New Delhi, led by Prime Minister Narendra Modi, revoked J&K’s status quo ability and rights to maintain their own local governance on Monday.
…click on the above link to read the rest of the article…
4 Reasons To Expect Even More US-China Trade (And Currency) War Escalation
4 Reasons To Expect Even More US-China Trade (And Currency) War Escalation
As we noted earlier when summarizing some of the more notable Wall Street reactions to China’s jarring trade war escalation, we highlighted the take of Morgan Stanley’s chief US public policy strategist, Michael Zezas, who said that he saw incentives for the U.S. to escalate quickly. Specifically, referring to the now viral chart of the circular dynamic of Trump-Powell interaction…
… Zezas said that if the administration understands the Fed’s trade policy reaction function – which it clearly does after it unleashed a new round of tariffs less than 24 hours after the Fed’s rate cut which has the market now pricing 33% odds of 2 rate cuts in September (see more here) – then it may also perceive that a more rapid escalation could deliver one or more of three beneficial points ahead of the 2020 election:
- A quicker, potentially more aggressive Fed stimulus response that could help the economy heading into the election;
- More time to re-frame the potential economic downside; and
- A major concession by China (not our base case, but it is, of course, a possibility).”
“The dynamics of U.S.-China negotiation and macro conditions mean the next round of tariffs will likely be enacted, and investors are likely to behave as if further escalation will follow in 2019 until markets price in impacts,” Zezas wrote. “This supports our core view of weaker growth and skews the Fed dovish.”
Zezas also highlighted several key global trade risks amid the rising geopolitical uncertainty, which he expects to keep rising:
- WTO Courts at risk
- US/EU confrontation set to intensify
- Nov 15th auto deadline
- OECD negotiations
- US/China resume escalation
…click on the above link to read the rest of the article…
DHL Sounds Alarm On Collapsing World Trade: “Significant Downturn” Underway
DHL Sounds Alarm On Collapsing World Trade: “Significant Downturn” Underway
A new quarterly report from logistics company DHL, measured global air and sea cargo trade volumes between March and June, found trade data continues to deteriorate in the US and China as there is still no resolution to end the trade war, reported South China Morning Post(SCMP).
Chinese imports were “losing significant momentum,” the report stated, indicating the epicenter of the slowdown was situated in basic raw materials, capital equipment and machinery, and consumer fashion goods. The loss of momentum in DHL trade data has also been confirmed in official Chinese import data releases.
The report indicated that the US trade outlook is more dangerous than China: DHL expected a “significant downturn, driven by heavy losses in exports outlook.” DHL said both air and sea freight have plunged into negative territory in 2Q19, with extreme weakness in basic raw materials, chemicals, and technology.
“The declining outlook for US exports indicates that, so far, the US is missing its goal of strengthening its export economy with a harsher trade course against China,” DHL said.
DHL’s Global Trade Barometer measured air and sea container freight for seven countries, which together accounted for more than 75% of world trade
The report focused on early-cycle commodities to detect turning points in global trade flows — goods such as automobile bumpers, touch screens for smartphones, and brand labels for clothes.
If shipments of early-cycle commodities edged down, DHL was able to forecast lower demand finished goods.
“The data is expressed as a figure, with a reading above 50 indicating a positive outlook over the three month period, and below 50 a negative. For the US, air trade fell from 53 in March to 45 in June, while sea trade fell from 57 to 43. In the case of China, air trade fell from 57 to 51 over the same period, while sea trade fell from 55 to 47,” said SCMP.
…click on the above link to read the rest of the article…
For Those Who Don’t Understand Inflation
FOR THOSE WHO DON’T UNDERSTAND INFLATION
This article is a wake-up call for those who do not understand the true purpose of monetary inflation, and do not realise they are the suckers being robbed by monetary policy. With the world facing a deepening recession, monetary inflation will accelerate again. It is time for everyone to recognise the consequences.
Introduction
All this year I have been warning in a series of Goldmoney Insight articles that the turn of the credit cycle and the rise of American protectionism was the same combination that led to the Wall Street crash in 1929-32 and the depression that both accompanied and followed it. Those who follow statistics are now seeing the depressing evidence that history is rhyming, though they have yet to connect the dots. Understandably, their own experience is more relevant to them than the empirical evidence in history books.
They would benefit hugely from a study of the destructive power of the Smoot-Hawley Tariff Act combining with the end of the 1920s credit expansion. The devastating synergy between the two is what crippled the American and global economy. And as we slide into a renewed economic torpor, contemporary experience tells us the Fed and all the other central banks will coordinate their efforts to restore economic growth, cutting interest rates while accelerating the expansion of money and credit. The current generation of investors argues that this policy has always worked in the past (at least in the past they have experienced) so the valuation-basis for financial assets and property should stabilise and improve.
This brief summary of current thinking in financial markets ignores the fact that a catastrophic tariff-cum-credit-cycle mixture is baking in the economic cake. Crashing government bond yields, reflecting a flight to relative safety, are only the start of it.
…click on the above link to read the rest of the article…
