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On the heels of its ‘stealthy’ easing.. and not so stealthy:
In the past 48 hours China has:
– Cut its 7-day Treasury rate by 103bps
– Launched quasi QE
– told banks to flood the system with liquidity
– Sent the Yuan tumbling
– Warned more easing is coming
The PBOC just lowered the ax on the Yuan Fix – slashing their reference rate by the most since June 2016.
Offshore Yuan is tumbling to new cycle lows after the fix…CNH is down over 1250 pips this week – the biggest weekly devaluation since August 2015’s plunge.
President Trump is gonna be pissed!!
Will China’s chaotic capital markets ripple across the world?
Yen just snapped stronger…
The Indonesian Rupiah tumbled 0.5%, and gold is falling…
As we concluded previously, so how long before the trade war, which is already shifting to a currency war as a result of the recent record devaluation in the yuan, morphs into a central bank war and a renewed race to the bottom between the world’s two most important economies? .. or worst still as Bannon suggested, a kinetic war.
Russia is an annoyance. China is our great challenge. Russia’s economy is the size of Texas or New York State? It’s got lots of nuclear weapons…but in today’s warfare…nuclear weapons are taking a less important role. Trump is trying to end the Cold War and the Korean War…and all he is getting is grief from the globalists.
And that’s a huge problem, because not only are we adversaries with China, we are at war with China, Bannon said.
We’re in a war with China. Ray Dalio tweeted the other day. There’s three types of war: information war, economic war, and guns-up kinetic war. They’ve been at war with us for 25 years. Many people in this room have exacerbated the rise of China.”
…click on the above link to read the rest of the article…
It has been another trade war week, as the market has been looking for clues on the Chinese retaliation measures against the Trump tariffs that are planned to go live on 6 July.
Global trade momentum started to weaken even before the trade conflict escalated. The three months from February until April marked the weakest running 3-month period for world trade since early 2015. A bad sign given that the period included a temporary cease-fire between Trump and Xi Jinping. Usually it adds downwards pressure on 10yr bond yields, when world trade is slowing (at least initially). A further slowdown of global trade in June/July/August could keep long bond yields under pressure over the summer. In other words, the trade war fog needs to dissipate for the 10yr US Treasury yield to unfold its upside potential to the range between 3.25%-3.50% (Major Forecast Update: USD to remain in the driving seat)
Last week we wrote that we found trade-based Chinese retaliation measures more likely than attempts to retaliate via the financial markets. The fact that Trump is threatening with new tariffs on goods worth a total of USD 450bn makes the retaliation process trickier for China. It is simply not possible to retaliate symmetrically, as there are not enough US exports into China to tax. This leaves an elevated risk of unorthodox retaliation measures being used. Prohibiting symbolic US products from entering Chinese territory could be one way of doing it. Expect more clarity on whether Xi Jinping will deliver an ALL-IN answer as early as this weekend.
…click on the above link to read the rest of the article…
Brexit is nowhere near the biggest challenge to western economies. And not just because it has devolved into a two-bit theater piece. Though we should not forget the value of that development: it lays bare the real Albion and the power hunger of its supposed leaders. From xenophobia and racism on the streets, to back-stabbing in dimly lit smoky backrooms, there’s not a states(wo)man in sight, and none will be forthcoming. Only sell-outs need apply.
The only person with an ounce of integrity left is Jeremy Corbyn, but his Labour party is dead, which is why he must fight off an entire horde of zombies. Unless Corbyn leaves labour and starts Podemos UK, he’s gone too. The current infighting on both the left and right means there is a unique window for something new, but Brits love what they think are their traditions, plus Corbyn has been Labour all his life, and he just won’t see it.
The main threat inside the EU isn’t Brexit either. It’s Italy. Whose banks sit on over 30% of all eurozone non-performing loans, while its GDP is about 10% of EU GDP. How they would defend it I don’t know, they’re probably counting on not having to, but Juncker and Tusk’s European Commission has apparently approved a scheme worth €150 billion that will allow these banks to issue quasi-sovereign bonds when they come under attack. An attack that is now even more guaranteed to occcur than before.
Still, none of Europe’s internal affairs have anything on what’s coming in from the east. Reading between the lines of Japan’s Tankan survey numbers there is only one possible conclusion: the ongoing and ever more costly utter failure of Abenomics continues unabated.
…click on the above link to read the rest of the article…
Most famously, back in 2010 during a BBC round table discussion with Jeffrey Sachs and Gillian Tett when discussing Europe’s crashing experiment with the single currency, he said that we should “purge this system of its rottenness. Let’s take on a recession. It’s going to be tough, people are gonna lose their jobs. They are going to lose their jobs anyway. We can spread this over 20 years, or we can get rid of it over 3 years” before concluding “I recommend you panic.”
Ultimately everyone did panic, which led to the single biggest episode of global QE and negative rates ever seen, resulting in ever louder speculation even among the most “serious” people that central bankers are now powerless.
But perhaps most notably, Hendry was one of the biggest China bears, certain that the country’s massive overcapacity, insolvency and bad debt problems will result in disaster (back then China only had about 200% debt/GDP, it has since risen to over 350%). His Chinese skepticism led to his fund generating a 40% profit by late 2011.
And then after a poor two year performance spell, Hendry had a historic burnout and threw in the towel on bearishness, infamously saying he can no longer “look at himself in the mirror“:
“I may be providing a public utility here, as the last bear to capitulate. You are well within your rights to say ‘sell’. The S&P 500 is up 30% over the past year: I wish I had thought this last year… Crashing is the least of my concerns.
…click on the above link to read the rest of the article…
NEW DELHI – Our world is facing an increasingly dangerous situation. Both advanced and emerging economies need to grow in order to ease domestic political tensions. And yet few are. If governments respond by enacting policies that divert growth from other countries, this “beggar my neighbor” tactic will simply foster instability elsewhere. What we need, therefore, are new rules of the game.
Why is it proving to be so hard to restore pre-Great Recession growth rates? The immediate answer is that the boom preceding the global financial crisis of 2008 left advanced economies with an overhang of growth-inhibiting debt. While the remedy may be to write down debt to revive demand, it is uncertain whether write-downs are politically feasible or the resulting demand sustainable. Moreover, structural factors like population aging and low productivity growth – which were previously masked by debt-fueled demand – may be hampering the recovery.
Politicians know that structural reforms – to increase competition, foster innovation, and drive institutional change – are the way to tackle structural impediments to growth. But they know that, while the pain from reform is immediate, gains are typically delayed and their beneficiaries uncertain. As Jean-Claude Juncker, then Luxembourg’s prime minister, said at the height of the euro crisis, “We all know what to do; we just don’t know how to get re-elected after we’ve done it!”
Central bankers face a different problem: inflation that is flirting with the lower bound of their mandate. With interest rates already very low, advanced economies’ central bankers know that they must go beyond ordinary monetary policy – or lose credibility on inflation. They feel that they cannot claim to be out of tools.
…click on the above link to read the rest of the article…
Though she had no intention of being funny, we laughed out loud, as undoubtedly many did with us, when incumbent and wannabe IMF head Christine Lagarde said last week in Davos that China has a communication issue. Of course, Lagarde knows full well that Beijing has much bigger problems than communication ‘with the market’. Or, to put it differently, if Xi and Li et al would ‘improve’ their communication by telling the truth about their economy, nobody would be talking about communication anymore.
Mixed signals from China, which is attempting to shift its economy away from exports and investment to a consumer-driven model, have deepened concerns about the outlook for world growth, she said. Uncertainty is “something that markets do not like”, Ms Lagarde told a panel of business leaders and economic regulators in the snow-blanketed Swiss ski resort. Investors have struggled with “not knowing exactly what the policy is, not knowing exactly against what the renminbi is going to be valued”, she said, referring to China’s currency. “I think better and more communication will certainly serve that transition better.”
The world’s second-largest economy this week announced its 2015 GDP growth as 6.9%, its slowest in a quarter of a century. The figure cast a shadow over the summit, where IHS chief economist Nariman Behravesh told AFP that Chinese policymakers had “fumbled” and had “added to the uncertainty and the volatility by their behaviour”. Mr Fang Xinghai, the vice-chairman of China’s securities regulator, said at the same panel that “in terms of communication, we should do a better job”. “We have to be patient because our system is not structured in a way that is able to communicate seamlessly with the market,” he added.
…click on the above link to read the rest of the article…
The Canadian dollar swooned 1% against the US dollar on Friday, to US$0.7270, after having gotten hammered for the past six of seven trading days. It’s down 5% in November so far, 15.5% year-to-date, and 31% from its post-Financial Crisis peak of $1.06 in April 2011. It hit the lowest level since June 2004.
The commodities rout would have been bad enough. Given the importance of commodities to the Canadian economy, the multi-year decline in the prices of metals, minerals, and natural gas, and then starting in mid-2014, the devastating plunge of the price of oil, would have been sufficient in driving down the loonie.
That the Fed has tapered QE out of existence last year and has been waffling and flip-flopping about rate hikes ever since made the until then beaten-down US dollar, at the time the most despised currency in the universe, less despicable – at the expense of the loonie.
Those factors would have been enough to knock down the loonie. But it wasn’t enough, not for the ambitious Bank of Canada Governor Stephen Poloz. The man’s got a plan.
He is in an all-out currency war. He’s out to crush the loonie beyond what other forces are already accomplishing. He’s out to pulverize it, and no one knows how far he’ll go, or where he’ll stop, or if he’ll ever stop. He has singlehandedly created the short of a lifetime.
It should spook every Canadian with income and assets denominated in Canadian dollars and those wanting to buy a home in Canada (we’ll get to that bitter irony in a moment).
Poloz has been in office since June 2013, and this is what he has accomplished so far:
…click on the above link to read the rest of the article…
Eventful days in the middle of summer. Just as the Greek Pandora’s box appears to be closing for the holidays (but we know what happens once it’s open), and Europe’s ultra-slim remnants of democracy erode into the sunset, China moves in with a one-off but then super-cubed renminbi devaluation. And 100,000 divergent opinions get published, by experts, pundits and just about everyone else under the illusion they still know what is going on.
We’ve been watching from the sidelines for a few days, letting the first storm subside. But here’s what we think is happening. It helps to understand, and repeat, a few things:
• There have been no functioning financial markets in the richer parts of the world for 7 years (at the very least). Various stimulus measures, in particular QE, have made sure of that.
A market cannot be said to function if and when central banks buy up stocks and bonds with impunity. One main reason is that this makes price discovery impossible, and without price discovery there is, per definition, no market. There may be something that looks like it, but that’s not the same. If you want to go full-frontal philosophical, you may even ponder whether a country like the US still has a functioning economy, for that matter.
• There are therefore no investors anymore either (they would need functioning markets). There are people who insist on calling themselves investors, but that’s not the same either. Definitions matter, lest we confuse them.
Today’s so-called ‘investors’ put to shame both the definition and the profession; I’ve called them grifters before, and we could go with gamblers, but that’s not really it: they’re sucking central bank’s udders. WHatever we would settle on, investors they’re not.
…click on the above link to read the rest of the article…
Devaluation has a negative consequence few mention: the cost of imports skyrockets.
When stagnation grabs exporting nations by the throat, the universal solution offered is devalue your currency to boost exports. As a currency loses purchasing power relative to the currencies of trading partners, exported goods and services become cheaper to those buying the products with competing currencies.
For example, a few years ago, before Japanese authorities moved to devalue the yen, the U.S. dollar bought 78 yen. Now it buys 123 yen–an astonishing 57% increase.
Devaluation is a bonanza for exporters’ bottom lines. Back in late 2012, when a Japanese corporation sold a product in the U.S. for $1, the company received 78 yen when the sale was reported in yen.
Now the same sale of $1 reaps 123 yen. Same product, same price in dollars, but a 57% increase in revenues when stated in yen.
No wonder depreciation is widely viewed as the magic panacea for stagnant revenues and profits. There’s just one tiny little problem with devaluation, which we’ll cover in a moment.
One exporter’s depreciation becomes an immediate problem for other exporters: when Japan devalued its currency, the yen, its products became cheaper to those buying Japanese goods with U.S. dollars, Chinese yuan, euros, etc.
That negatively impacts other exporters selling into the same markets–for example, South Korea.
To remain competitive, South Korea would have to devalue its currency, the won. This is known as competitive devaluation, a.k.a. currency war. As a result of currency wars, the advantages of devaluation are often temporary.
But as correspondent Mark G. recently observed, devaluation has a negative consequence few mention: the cost of imports skyrockets. When imports are essential, such as energy and food, the benefits of devaluation (boosting exports) may well be considerably less than the pain caused by rising import costs.
…click on the above link to read the rest of the article…
QUESTION: I want to share a true story with you.
My father as a young boy in Greece saw what gold did for his family.
My grandfather in Greece in the late 30′s and 40′s saw the rapid devaluation
happening to the drachma. English sovereigns were plentiful
there at the time as a sort of duo currency.
As you can probably figure out he was converting any of his cash to gold
sovereigns.
My question to you is why do you protect the American dollar
and not the people of the world from the rapid devaluation
of their savings.
ANSWER: This is the entire problem with currency – people do not truly understand it and attribute to a single object value that does not truly exist. You can “think: it was gold that rose, but was it simply that the Drachma declined? The difference is critical. If ONLY gold rose then what you say would be correct. But if EVERYTHING rose, you are wrong.
…click on the above link to read the rest of the article…
