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The Arrival Of The Credit Crisis

The Arrival Of The Credit Crisis

Those of us who closely follow the credit cycle should not be surprised by the current slide in equity markets. It was going to happen anyway. The timing had recently become apparent as well, and in early August I was able to write the following:

“The timing for the onset of the credit crisis looks like being any time from during the last quarter of 2018, only a few months away, to no later than mid-2019.” [i]

The crisis is arriving on cue and can be expected to evolve into something far nastier in the coming months. Corporate bond markets have seized up, giving us a signal it has indeed arrived. It is now time to consider how the credit crisis is likely to develop. It involves some guesswork, so we cannot do this with precision, but we can extrapolate from known basics to support some important conclusions.

If it was only down to America without further feed-back loops, we can now suggest the following developments are likely for the US economy. Warnings about an economic slowdown are persuading the Fed to soften monetary policy, a process recently set in motion and foreshadowed by US Treasury yields backing off. However, price inflation, which is being temporarily suppressed by falling oil prices, will probably begin to increase from Q2 in 2019. This is due to a combination of the legacy of earlier monetary expansion, and the consequences of President Trump’s tariffs on consumer prices.

After a brief pause, induced mainly by the threat of an unstoppable collapse in equity prices, the Fed will be forced to continue to raise interest rates to counter price inflation pressures, which will take the rise in the heavily suppressed CPI towards and then through 4%, probably by mid-year.

 …click on the above link to read the rest of the article…

G20 and the financial war

G20 and the financial war

This weekend, the G20 nations meet at Buenos Aires. The most important issue will be America’s use of trade policy, ostensibly to bring an end to China’s unfair trade practices. Rather, it could mark a significant milestone in the cold war against China and drive the global economy into a slump.

Introduction

President Trump initiated the trade war with China. There is a widespread assumption he is pursuing his “art of the deal”, coming into negotiations aggressively to get a satisfactory compromise. Therefore, the script goes, China will be forced to climb down on its restrictive practices, technology and patent theft, and modify its Made in China 2025 (MiC2025) initiative to open it to American corporations. Trade negotiators from both sides have been working in the background to achieve some sort of progress before Presidents Trump and Xi meet at the G20 this weekend, which buoys up hopes of a positive outcome.

If so, it will be the start of a more public process, perhaps with threatened trade tariffs deferred. Meanwhile, the rhetoric on tariffs has escalated in recent weeks, as is often the case in negotiations when President Trump is involved, and particularly when deadlines loom. But there are concerns the situation is more serious than this optimistic version of events would have us believe.

This article briefs readers about the bigger picture behind this trade spat, which is just one battle in an ongoing financial conflict between China and America. Worryingly, it takes place against a deteriorating economic outlook for the world’s largest trading bloc, the EU.

The trade tariff position

…click on the above link to read the rest of the article…

China Launches Personal Attack At “Arrogant, Deceitful” Trump: “We Are Prepared To Fight To The End”

China Launches Personal Attack At “Arrogant, Deceitful” Trump: “We Are Prepared To Fight To The End”

All hope abandon ye who think the trade war with China has any hope of ending soon.

One month ago, Beijing ordered China’s state media “not to use aggressive language” for Trump. As of Sunday, that directive has clearly expired, and after a weekend of bluster by President Trump in which he proclaimed that he has the upper hand in the trade war with China, Beijing finally responded angrily through state media, saying the nation is ready to endure the economic fallout, and launched an “unusually personal attack” against Trump’s trade policies on Monday, saying Trump’s trade “extortion” would not work according to Reuters.

An editorial in the nationalist Global Times on Sunday evening declared that China is prepared for a “protracted war” and doesn’t fear sacrificing short-term economic interests, “considering the unreasonable U.S. demands, a trade war is an act that aims to crush China’s economic sovereignty, trying to force China to be a U.S. economic vassal.”

Separately, in a front-page editorial on Monday, the overseas edition of People’s Daily said Trump was “starring in his own carefully orchestrated street fighter-style deceitful drama” in which diplomacy had been reduced to nothing but a “trading game in which everything should follow the rule of America first”.

“To realise the goal of reviving the American economy, Trump has chosen a simple but crude way. He has bypassed the multilateral trading system of the WTO and started trade conflicts, forcing countries, including its traditional allies, to cede their interests to those of the United States,” the People’s Daily said.

…click on the above link to read the rest of the article…

Canadians Begin Boycotting US Goods

With Trump’s trade war against China progressing and escalating seemingly every day, culminating for now with China’s Friday announcement of another $60 billion in tariffs on US imports in response to Trump’s threat to tax $200 billion of Chinese imports at a 25% rate, some China watchers expected that one of China’s qualitative responses would be to appeal to local nationalist sentiment, urging for a “soft boycott” of US products – in line with the country’s response to Japanese products during the 2013 East China Sea diplomatic clash. However, while China has so far resisted a US boycott, the same can not be said for another target of Trump’s tariffs: Canada.

Exposing the growing backlash against Trump’s trade policies, the WSJ writes that “ticked-off Canadians”, angered by U.S. metals tariffs and Trump’s harsh words for their prime minister, are boycotting American products and buying Canadian.

Take Garland Coulson, a 58-year-old Alberta entrepreneur, who admits that while usually he doesn’t pay much attention to where the goods he buys are coming from, saying that “you tend to buy the products that taste good or you buy the products that are low in price where taste isn’t an issue”, he believes the tariffs from Canada’s neighbor are a “slap in the face,” and added that in recent he has put more Canadian products into his shopping cart.

Or take Calgary resident Tracy Martell, who “replaced her Betty Crocker brownie mix with a homemade recipe and hasn’t visited the U.S. since shortly after President Trump’s inauguration.”

Or take Ontario resident Beth Mouratidis is trying out Strub’s pickles as a replacement for her longtime favorite, Bick’s.

…click on the above link to read the rest of the article…

Trade Tariffs Won’t Crash the World Economy, Monetary Policy Will

Trade Tariffs Won’t Crash the World Economy, Monetary Policy Will

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As the Trump administration announces 25% tariffs on over $50bn of Chinese goods, and Europe and China prepare retaliation measures, The Economist concludes that “Rising tariffs are the worst of many threats to the world economy”, because, among other things, “Tariffs temporarily push up inflation, making it harder for central banks to cushion the blow.” This statement displays a deeply entrenched confusion—if not utter misunderstanding—of some basic economic concepts. Most important, many people fail to correctly distinguish between the causes and effects of price inflation and those of monetary inflation.

Monetary inflation is the increase in the quantity of money in an economy. This inflation causes the purchasing power of money to fall, which brings about price effects—a general rise in prices of goods and services—which we can refer to as price inflation. However, this general rise in prices following monetary inflation is disproportionate and staggered: prices will rise at different times and to different extents as money reaches a lower purchasing power.

But monetary inflation also has non-price effects. One of these is the transfer of wealth between the last receivers of the new money toward the first receivers.

Another—and even more important—is the distortion of the pattern of investment and production, as the new money being created through credit expansion reaches stock markets and businesses—thus artificially reducing the interest rate. This latter effect explains the occurrence of production booms misaligned with consumer preferences, and the later, inevitable economic bust or crash. These price and non-price effects of monetary inflation are general and underline every possible economic activity.

…click on the above link to read the rest of the article…

China Eyes Yuan Devaluation in Trade Dispute

Finally, we have a story that makes retaliatory sense vs. the widely believed “nuclear” treasury dumping theory.

The widely-circulated “nuclear” theory suggests China would dump US treasuries in a trade war with the US. That theory never made any sense. Such a move would tend to strengthen the yuan, making Chinese exports more expensive. Thus, it would be precisely what the US would want.

The Real Nuclear Option

The real nuclear option would be a devaluation of the yuan, making Chinese goods less expensive to the US.

China is evaluating the potential impact of a gradual yuan depreciation, people familiar with the matter said, as the country’s leaders weigh their options in a trade spat with U.S. President Donald Trump that has roiled financial markets worldwide.

Senior Chinese officials are studying a two-pronged analysis of the yuan that was prepared by the government, the people said. One part looks at the effect of using the currency as a tool in trade negotiations with the U.S., while a second part examines what would happen if China devalues the yuan to offset the impact of any trade deal that curbs exports.

While a weaker yuan could help President Xi Jinping shore up China’s export industries in the event of widespread tariffs in the U.S., a devaluation comes with plenty of risks. It would encourage Trump to follow through on his threat to brand China a currency manipulator, make it more difficult for Chinese companies to service their mountain of offshore debt, and undermine recent efforts by the government to move toward a more market-oriented exchange rate system.

It would also expose China to the risk of heightened financial-market volatility, something authorities have worked hard to avoid in recent years. When China unexpectedly devalued the yuan by about 2 percent in August 2015, the move fueled capital outflows and sent shock-waves through global markets.

…click on the above link to read the rest of the article…

Trade Wars Lead to Shooting Wars and Depressions

Trade Wars Lead to Shooting Wars and Depressions

Trade wars were a principal factor in causing the Great Depression of the 1930s and World War II.

The current President of the U.S. has imposed tariffs on imported steel and aluminum effective March 23, 2018 and proposes tariffs on products imported from China. He has also proposed revoking U.S. participation in the North American Free Trade Agreement (NAFTA) which has enabled a large expansion of trade between the U.S., Canada and Mexico.

Mr. Trump says trade wars are easy to win. Wrong. Everybody loses in trade wars.

Trade Wars Hurt Everyone 

Mr. Trump’s trade war will have a bad effect on American trade and relations with important nations around the world, including Canada, Mexico, China and other Asian nations whose companies do business in the U.S., and European nations.

Prominent American companies whose business will be hurt by Trump’s trade war include Boeing and Union Pacific, to name only two.

Boeing currently sells nearly one-third of its airplanes to China. The Chinese earn U.S. dollars by exporting to the U.S. That is the source of the ability of Chinese airlines to buy Boeing aircraft.

Union Pacific is the largest U.S. railroad. It transports goods, both imported and of domestic origin through much of the U.S. The CEO of Union Pacific has warned that Trump’s trade war will hurt not only the business of the railroad, but many other businesses that transport goods via Union Pacific.

American companies hurt by Mr. Trump’s trade war will suffer shrinkage of their businesses and shrinkage in the number of people they employ.

…click on the above link to read the rest of the article…

Were Trade Wars Inevitable?

Were Trade Wars Inevitable?

Trade in which mobile capital is the comparative advantage is a system of Neocolonial exploitation of developing-world nations.

Were trade wars inevitable? The answer is yes, due to the imbalances and distortions generated by financialization and central bank stimulus. Gordon Long and I peel the trade-war onion in a new video program, Were Trade Wars Inevitable? (27:48)

Let’s stipulate right off the bat that trade is not necessarily win-win–the winners (corporations, financiers and the financial sector) have skimmed the majority of the gains, leaving the losers with a few pennies of dubious value.

Consumers’ got a nickel in savings and a disastrous decline in quality, while corporations reaped 95 cents of additional profits:

As I explained in Forget “Free Trade”–It’s All About Capital Flows (March 9, 2018), the comparative advantage into today’s global economy is mobile capital: i.e. access to low-cost credit in nearly unlimited sums.

Those with low-cost credit created by central banks issuing reserve currencies in nearly unlimited sums can outbid everyone else for productive assets.

In effect, trade in which mobile capital is the comparative advantage is a system of Neocolonial exploitation of developing-world nations which don’t have reserve currencies they can create out of thin air. Trade is exploitation via cheap credit.

The winners are the few at the top of the wealth-power pyramids in both exporting and importing nations. I discussed this recently in There is No “Free Trade”–There Is Only the Darwinian Game of Trade (March 12, 2018).

Central bank policies don’t just distort domestic economies, they distort global trade, which parallels domestic distributions of winners (a few at the top) and losers (everyone else).

Trade is intertwined with currencies. China has used its currency peg to the USD to avoid being exploited; China has followed a “Goldilocks” strategy that keeps its currency, the yuan/RMB, in a narrow range: not too costly, not too cheap.

…click on the above link to read the rest of the article…

Trump’s Dangerous Game of Chicken

Trump’s Dangerous Game of Chicken

As the “tit-for-tat” trade fight between the US and China escalates, Donald Trump is likely to find that he doesn’t “know China” the way he once thought. When he said that during the presidential campaign, he based his understanding of China on one thing: the high rent in Trump Tower that he had exacted from a Chinese bank. Today, he may still assume he can win a game of chicken by upping the ante until the Chinese eventually fold.

But Trump and his crew don’t understand Chinese thinking. The Chinese leadership does not respond well to being bullied, least of all now that they have a means of fighting back. China’s commerce ministry said as much in a statement right out of Chairman Mao’s playbook. Mao had often said when dealing with “US imperialism”: “We will not attack unless we are attacked,” Mao often said. “But if we are attacked, we will certainly counterattack.” A ministry spokesman said today (April 6): “The Chinese way of doing things is like this: We do not pick a fight, but if someone does pick a fight, we will fight resolutely. The Chinese have always been very serious in handling these matters. We mean what we say.” And the commerce ministry added in a formal statement: “On the issue of Sino-US trade, the Chinese position has been made very clear. We do not want to fight, but we are not afraid to fight a trade war.”

Trump and other US officials are saying the US isn’t engaged in a trade war with China. But China’s press is already using that term. Perhaps there won’t be a trade war; Trump may simply be employing his usual bluster to force more favorable terms of trade. He risks stepping over the line, however.

…click on the above link to read the rest of the article…

Trade Wars Just Beginning…The War Is a Fight Over an Indefinitely Shrinking Pie

Trade Wars Just Beginning…The War Is a Fight Over an Indefinitely Shrinking Pie

From a growth perspective, it doesn’t matter if the world is 7.5 million or 7.5 billion persons…it only matters how many more there are from one year to the next.  Economic growth (or the ability to consume more…not produce more) is about the annual growth of the population among those with the income, savings, and access to credit (or governmental social pass-through programs).  That’s what this trade war is all about and why it’s just beginning.  First it was a fight for decelerating growth…but now it’s about a shrinking pool of consumers.
Nowhere is this decline in potential consumers more acute than East Asia (China, Japan, N/S Korea, Taiwan, plus some minor others).  I have previously detailed China’s situation HERE but the chart below shows the broader East Asia total under 60 year old population (blue line) and annual change in red columns.  Peak growth in the under 60yr/old population (consumer base) took place way back in 1969, annually adding 22 million potential consumers.  As recently as 1988, an echo peak added 19 million annually but the deceleration of growth since ’88 has been inexorable.  Then in 2009, decelerating growth turned to decline and the decline will continue indefinitely.  What began as a gentle decline is about to turn into progressively larger tumult.  By 2030, the under 60yr/old population will be 9% smaller than present.  East Asia’s domestic consumer driven market is collapsing in real time and it’s reliance on exports greater than ever.

The chart below shows the total 0-65 year old global population (minus Africa and India…blue line) and the annual change in that population in the red columns.  Why excluding Africa/India?  Because they represent nearly all global population growth, consume less than 10% of the global exports, and haven’t the income, savings, or access to credit to consume relative to the rest of the world.  Growth (x-Africa/India) peaked in 1988, annually adding 52 million prime consumers.

…click on the above link to read the rest of the article…

Trade War Game On!

“Things sure are getting exciting again, ain’t they?”  The remark was made by a colleague on Tuesday morning, as we stepped off the elevator to grab a cup of coffee.

Ancient Chinese curse alert… [PT]

“One moment markets are gorging on financial slop like fat pigs in mud.  The next they’re collectively vomiting on themselves. I’ll tell you one thing.  President Trump’s trade war with China won’t end well.  I mean, come on.  China’s outplayed the U.S. at this game for over a quarter century.  They have the upper hand.

“Besides, what’s the point?  If we no longer buy stuff from China, then how will China buy Uncle Sam’s debt?  And the timing for all this couldn’t be worse.  Deficits are spiraling out of control.  We’re talking $1 trillion or more a year for the next decade.  I don’t see any way out of this quagmire, do you?

“Printing money to buy government debt is no solution at all.  And a trade war will just hasten America’s insolvency.  What is it that Trump thinks he’ll accomplish, anyway?

“I’ve also heard that China’s tickled the debt poodle way more than we have.  So they may be worse off at absorbing an economic shock than us.  But I wouldn’t bet my life on it.

“Obviously, like I said, this won’t end well.  Yet there’s no turning back now. The trade war genie’s already out of the bottle.  That’s easy enough to see.  And maybe President Trump is right, and a trade war with China is warranted.

A joint hanging venture… [PT]

 

“But in the end, something big – like a massive fighting war or worldwide depression – will need to happen before this genie can be put safely back inside the bottle.  How do I know this?

…click on the above link to read the rest of the article…

 

Currency Wars Erupt, We Have Reached the Point of No Return

Currency Wars Erupt, We Have Reached the Point of No Return

It is happening, and it cannot be stopped.

The Currency Wars that have been discussed at length by many precious metals experts for years are here, and there is now no turning back.

As I have previously discussed, these wars have been ongoing for much of the last decade, if not longer. However, it has remained largely a “gentleman’s” war, with neither side wishing to expose their hand too much.

Now, with the increased rhetoric coming from the Trump administration, things have turned red hot. Shots are being fired back and forth on an almost daily basis.

President Trump has imposed numerous tariffs on Chinese goods entering the United States. The first was $50 billion worth of tariffs, to which China swiftly responded in kind, imposing $50 billion worth of their own tariffs on American imports such as soybeans and small aircrafts.

As expected, President Trump would not let this stand, and he is now discussing an additional $100 billion worth of tariffs on Chinese goods. This action would, of course, be answered with a likewise response from China.

As we can already see, these actions will have a ripple effect through not only the Chinese and US economies, but the entirety of the West, as these countries are two of the largest importers / exporters in the world.

These increased hostilities show no sign of abating and are likely to increase from this point out. Neither side is willing to back down and show weakness. As a result, stock markets have corrected sharply, proving that they too prescribe to my assumption.

…click on the above link to read the rest of the article…

Here Are China’s Five Options For “Nuclear” Trade War

After Trump ordered the USTR to consider an additional $100BN in tariffs, something we said on Wednesday would happen if the market was dumb enough to allow Trump to think he had a trade war victory by closing green…


S&P 500 EXTENDS GAIN ABOVE FRIDAY’S CLOSE, UP AS MUCH AS 1.15%
Seeing favorable market response, Trump next raises China tariffs to $100BN


…China has suddenly found itself in a quandary: as we showed first thing this morning, if Beijing were to continue responding to the US in a “tit-for-tat”, it would be unable to retaliate to the latest Trump salvo of a total $150 billion in tariffs for the simple reason that the US does not export $150 billion in products to China.

Which doesn’t mean that China is out of options; quite the contrary. The problem is that virtually everything and anything else that Beijing can do, would be a significant escalation. In fact, the five most frequently cited options are all considered “nuclear” and would promptly lead to an even more aggressive response from Washington.

Here are the five “nuclear” options that China is currently contemplating:

  1. A Currency Depreciation. A sharp, one-time yuan devaluation, like the one Beijing unexpectedly carried out in August 2015, could be used to offset some of the effect of tariffs.
  2. Sales of US Treasurys. Chinese authorities could sell some of its large official-sector holdings of US Treasuries, which would lead to a tightening of US financial conditions.
  3. Block US services. Chinese authorities could limit access for US companies to the Chinese domestic market, particularly in the services sector, where the US exports $56 billion in services annually and runs a $38 billion surplus.

…click on the above link to read the rest of the article…

 

Central Banks Have Killed Free Trade

Central Banks Have Killed Free Trade

Defenders and critics of “free trade” and globalization tend to present the issue as either/or:

It’s inherently good or bad. In the real world, it’s not that simple. The confusion starts with defining free trade (and by extension, globalization).

In the classical definition of free trade espoused by 18th century British economist David Ricardo, trade is generally thought of as goods being shipped from one nation to another to take advantage of what Ricardo termed comparative advantage:

Nations would benefit by exporting whatever they produced efficiently and importing what they did not produce efficiently.

While Ricardo’s concept of free trade is intuitively appealing because it is win-win for importer and exporter, it doesn’t describe the consequences of the mobility of capital.

Capital — cash, credit, tools and the intangible capital of expertise — moves freely around the globe seeking the highest possible return, pursuing the prime directive of capital: expand or die.

Capital that fails to expand will stagnate or shrink. If the contraction continues unchecked, the capital eventually vanishes.

The mobility of capital radically alters the simplistic 18th century view of free trade.

In today’s world, trade can not be coherently measured as goods moving between nations, because capital from the importing nation owns the productive assets in the exporting nation. If Apple owns a factory (or joint venture) in China and collects virtually all the profits from the iGadgets produced there, this reality cannot be captured by the models of simple trade described by Ricardo.

In today’s globalized version of “free trade,” mobile capital can skim labor, currencies, interest rates, regulatory burdens and political favors by shifting between nations and assets.

…click on the above link to read the rest of the article…

 

Hidden No More, The Currency Wars Take Center Stage

Hidden No More, The Currency Wars Take Center Stage

The market stands on a sinkhole, waiting for the next feather to drop. A feather that will bring down the system and send us into another economic crisis that will make the 2008 crash look like an opening act.

For years, I and many others within the precious metals space have written about a hidden war unfolding behind the scenes. To those with wide open eyes, you can see it, you can feel it. I am speaking of the currency and trade wars that Jim Rickards has written extensively about in many of his books—and now, things have ratcheted up to a whole new level.

Over the course of the past week, the jawboning from the US government has turned into action, and they have placed a number of trade tariffs on China . This is part of a campaign promise that President Trump made, and it appears he intends to keep it, no matter how much it might “rock the boat.”

These steps caught many investors off guard, including seasoned market veterans, as they have been so used to the government making bold statements but never following through with any real action.

Not this time. And the stock market is reflecting this new reality.

Chinese markets were sent for a roller coaster of a ride yesterday, dropping by 3-5% throughout the day, with key stocks dropping over 10% alone. A sea of red could be seen across the charts as the once-cold trade war turned hot.

Today, it is the US markets’ turn, as China fired back overnight, sending Western markets plummeting.

These actions sent the plunge protection team into full swing, resulting in this morning’s pre-open bounce . Unfortunately, I don’t see them being able to hold back the floodgates for too long, as this trade war will only accelerate from this point on. Neither side looks willing to back down.

…click on the above link to read the rest of the article…

 

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