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Ideally, I would have written this on May 4th not 14th, but I am going to talk Star Wars.

I was a fan in 1977, kept the flame alive when only battered VHS cassettes of the original trilogy existed, and was delighted to get prequels. Until the opening crawl announced, “The taxation of trade routes to outlying star systems is in dispute.” I recall thinking, “This is my job – boring!” But the prequels were better than the sequels and all the TV shows I don’t watch. Indeed, the prequels’ clunky theme of democracy crumbling into autocracy, dispute over trade routes, then war, seems even more prescient than my 2016 ‘Thin Ice’ report, which underlined how the 21st century could echo the 20th, and our more detailed fragmented ‘World in 2030’ report in 2020.

In just the last week: the IMF warned the world risks splitting into walled-off FX/trade blocs; The Economist stated “The liberal international order is slowly coming apart,” with “a worrying number of triggers that could set off a descent into anarchy”; Germany flagged conscription for all 18-year olds and spending over 3% of GDP on defence; China introduced military training for all High School students; Biden raised tariffs on Chinese EVs to 102.5%, and Trump said he would make it 200%, with tariffs on used cooking oil likely next; Bloomberg warned “The US, China, Russia are in a spiral towards war”; the manager of the Hong Kong trade office in London was arrested for spying; and, as some underline Russia has shifted to a full war economy that incentivises the martial, my prediction that markets will serve national security going forwards came true in Putin firing his defence minister to appoint an economist to the role instead.

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

Currency Wars Have Entered the Next Phase, Gold and Silver Will Move Higher

August 11, 2019

Currency Wars Have Entered the Next Phase, Gold and Silver Will Move Higher

Gold is trading solidly above the $1500 mark at the time of writing, and I believe we are only just getting started. The currency wars are back in full swing, and they will be more intense than ever.

The United States government, ironically, labeled China a currency manipulator for the first time since 1994, marking a severe uptick in their rhetoric against the Chinese government, as the trade wars continue to spiral out of control with seemingly no end in sight.

Many simply waved this move off as nothing more than what it initially appeared to be: jawboning with no true ramifications behind it. However, others see it as a blatant threat by the U.S. administration against China, as the last time this language was used twenty-five years ago was when China was placed on a currency blacklist.

Some were surprised by this move, as they see it as an overreaction, fearing that we have now moved into another phase of the ongoing currency wars that have bubbled behind the scenes for years—currency wars that are now in plain sight for all to see.

Unfortunately, this should come as no surprise to anyone, as President Trump stated back in 2016 that he fully intended to label China a “currency manipulator”, a statement that was laughed off until now.

This move comes on the heels of a Fed interest rate cut in which the Fed Chief, Jerome Powell, lowered rates by 0.25%, citing fears of a weakening global economy and ongoing trade wars.

Of course, China is far from the only currency manipulator in the world, as countries are constantly “racing to the bottom” in an attempt to lower the value of their currencies. This increases their competitiveness on the international markets by artificially making the prices of their goods lower.

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

Currency War Begins: Chinese Yuan Crashes Past 7 To New Record Low; Global Markets Tumble After Beijing Suspends US Agri Imports

August 5, 2019

Currency War Begins: Chinese Yuan Crashes Past 7 To New Record Low; Global Markets Tumble After Beijing Suspends US Agri Imports

Update 3: The carnage from yuan volatility is starting to spread…

Chinese bond yields are tumbling…

Dow futures are down 300 points…

S&P futures below 2900…

UST yields are collapsing…

And the yield curve is cratering…

* * *

Update 2: – China’s central bank has confirmed that it is, indeed, on, saying that it is able to keep the yuan exchange rate at a reasonable and balanced level – whatever that means – while acknowledging that the Yuan plunging beyond 7 per dollar is due to market supply and demand, trade protectionism and expectations on additional tariffs on Chinese goods.

Meanwhile, resorting to its old, tired and worn out tricks, Dow Jones reports that the PBOC will crack down on short-term Yuan speculation, and anchor market expectations.

Which is great… if only the PBOC didn’t say exactly the same back in May, when it warned currenct traders that those “shorting the yuan will inevitably suffer from a huge loss.“

Three months later, it’s currency traders 1 – Beijing 0.

* * *

Update 1 – China is firing all the big guns tonight, because just an hour after Beijing effectively devalued the yuan, when it launched the latest currency war with the US, Bloomberg reported that the Chinese government has asked its state-owned enterprises “to suspend imports of U.S. agricultural products after President Donald Trump ratcheted up trade tensions with the Asian nation last week.”

China’s state-run agricultural firms have now stopped buying American farm goods, and are waiting to see how trade talks progress.

Translation: trade talks, even the fake kind, is now over, dead and buried, and the only question is how Trump will react.

* * *

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

A Glimpse At 2019

January 12, 2019

A Glimpse At 2019

Markets In Critical Transformation, Chaotic Behaviour Has Just Began.

Our inability as market participants to properly frame market fragility and the inherent vulnerability of the financial system makes a market crash more likely, as it helps Systemic Risk go unattended and build further up. For the first time in a while, elusive economic narratives started to fail at blaming market weakness on secondary-order factors: Trade Wars, the FED, Oil prices. Attempts at dismissing market events as no more than a temporary turbulence miss the bigger picture and cast the fishing net on unaware investors looking for a dip to buy. In contrast, over the last month, conventional market and economic indicators (e.g. breaks of multi-year equity & home price trend-lines, freezing credit markets, softening global PMIs/orders) have all but confirmed what non-traditional measures of system-level fragility signalled all along: that a market crash is incubating, and the cliff is near. Nothing has happened yet.

1. Early Tremors, Not Market Bottoms

2. Elusive Narratives Fail, Unveiling a Deeper Malaise

3. Mainstream Investment Strategies Face a Tougher New Year

4. Triggers For Market Chaos: A Timeline For 2019

Early Tremors, Not Market Bottoms

After a slow start, the season of market chaos has taken off.

In the last few months, global markets have visibly entered the ‘phase transition zone’, a process of critical transformation that will eventually lead to a new equilibrium at significantly different levels, after severe ruptures and a possible full-cycle market crash.

Rather than ‘a short-term correction in a structural bull market’, or a ‘temporary turmoil in healthy economic conditions’, this is the beginning of a structural adjustment after a decade of liquidity abundance and market manipulation, which reflexively changed the structure itself of the market for private investors in hazardous ways, making it insensitive to fundamentals, passive or quasi-passive, overly-correlated and overly-concentrated.

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

World Finance Leaders Scramble For A Solution To Escalating Trade War, Rising Rates

October 16, 2018

World Finance Leaders Scramble For A Solution To Escalating Trade War, Rising Rates

The main takeaway from the IMF and World Bank Group annual meeting in Bali, which hosted financial ministers and central bank governors from around the world this weekend, was that global trade tensions were having a profound effect on global growth and need to be solved.

Most of the participants – save for China and Mexico – seemed united and in agreement that trade talks have to continue. Bank of Japan Governor Haruhiko Kuroda stated that it was essential to have dialogue on trade while at the same time, the president of Brazil’s central bank, Ilan Goldfajn, noted that the trade wars were one of the biggest threats to emerging markets. Indonesia’s president Jokowi Widodo said starkly that “winter is coming” for the global economy if there is no solution on trade.

However, not everybody was prepared to find a solution at any cost. Bank of China governor Yi Gang stated that he was preparing for the worst, despite still seeking a constructive resolution to the problem. Gang stated at the meeting: “You see a lot of people in China now preparing for this trade tension to be a prolonged situation. The downside risks from trade tensions are significant.”

Mexico also stepped in to voice its support for China. Former Mexican president Ernesto Zedillo told China that they should follow the example set by Mexico and Canada during their negotiations with the United States, because they both were able to secure the terms that they wanted, even though some may disagree violently with this hot take.

Zedillo said, “Mexico and Canada made clear that they’d rather not have Nafta than having the deal that the U.S. wanted. In the end, Mexico and Canada got their way in every single issue that had been drawn as a red line. So I hope China doesn’t blink.”

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

Trump’s Hand-Picked Winners and Losers: China vs Canada, NAFTA Threats, and P&G

September 22, 2018

Trump’s Hand-Picked Winners and Losers: China vs Canada, NAFTA Threats, and P&G

As a single country, China is the US’s largest trading partner but Canada is the largest export partner.

As Trump struggles to get a NAFTA deal going on account of Canada, the above chart puts things into perspective.

Canada is the US’s largest export partner. Moreover, when it comes to goods (as opposed to goods and services), the US consistently runs a trade surplus with Canada.

The US has had a goods surplus with Canada every month since 1985. Nonetheless, Trump is incredibly annoyed at Canada and threatens to put tariffs on Canadian cars.

Here’s the broad picture.

US Balance of Trade 2011-2017

I created the above chart from downloads of these three Census Department files.

Notes

Hong Kong, Singapore, and Taiwan were added in 2015.
The format of the reports changed in 2014, but that link has annual totals that date back to 2011.
Prior to 2014 there was no Exhibit 20 (selected countries).

2018 Subtotals

Mid-year 2018, the US is still running an overall trade surplus with Canada, so this will likely be the fourth year the US records a trade surplus with Canada (total the first two highlighted columns).

Nonetheless, Trump is moaning. And the global chart shows it’s over very insignificant totals.

This is the true nature of the “worst trade deal in history” where Canada is now more important than Mexico.

NAFTA negotiations are at an impasse.

As President Trump threatens to ink a deal with Mexico by Sept. 30 and leave Canada behind, the New York Times asks Can Nafta Be Saved? These Two Negotiators Are Trying.

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

Meanwhile in China, Implosion of Stock-Market Double-Bubble

September 18, 2018

Meanwhile in China, Implosion of Stock-Market Double-Bubble

Bubbles don’t end well for those who don’t get out in time.

US tariffs and threats of more tariffs have not been particularly well received in China, which is already being rattled by corporate credit problems, quakes in the shadow banking system, a peculiar Enron-type phenomenon at provincial and municipal governments called “hidden debt,” and the implosion of nearly 5,000 P2P lenders that have sprung up since 2015. And so today, the Shanghai Composite Index dropped 1.1% to 2,651.79.

This is a big milestone:

Below the low of its last collapse on January 28, 2016 (2,655.66)
Down 25.5% from its recent peak on January 24, 2018, (3,559.47)
Down 49% from its bubble peak on June 12, 2015 (5,166)
Down 56% from its bubble peak on October 16, 2007 (6,092)
Below where it had been for the first time on December 29, 2006 (2,675), nearly 12 years ago. That’s quite an accomplishment.

This chart of the Shanghai Stock Exchange Composite Index shows the last bubble in Chinese stocks. Note the rise from the last low in January 2016. This rise has been endlessly touted in the US as the next big opportunity to lure US investors into the Chinese market, only to get crushed again:

But what makes Chinese stocks interesting is not the collapse of one bubble and then the collapse of the subsequent recovery, but the longer view that is now taking on Japanese proportions.

The chart below shows the double-bubble and the double-collapse, interspersed with collapsed recoveries and failed excitement:

It is not often that a major stock market goes through two majestic bubbles and then revisits levels first seen 12 years earlier – despite inflation in the currency in which these stocks are denominated.

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

Global Stocks, Futures Slide As China Shatters Trade Calm

September 11, 2018

Global Stocks, Futures Slide As China Shatters Trade Calm

Just when it seemed that the tenuous trade ceasefire between the US and China could result in more stable market sentiment, European stocks dropped -0.5% to session lows led by mining and autos, with S&P futures sliding as volume surged, joining Asia in the red after Reuters reported that China would ask the World Trade Organization for permission to impose trade sanctions on the U.S. rekindling fears over trade relations among the world’s two biggest economies.

The latest trade rumbling pushed the MSCI index of global stocks into the red, as Asian markets dropped for the ninth straight day. The MSCI index of Asia-Pacific shares ex-Japan eased 0.05 percent, but held just above last July’s lows.

There was a hint that China may do something earlier when the Shanghai Composite dipped 0.2 percent, with the index fading all gains set during the morning session. Chinese automakers were among the worst performers in Hong Kong after August sales dropped from a year earlier, adding to investor jitters about the vehicle market’s outlook. Local auto giant Geely Auto fell as much as 4.6% to lowest since June 2017.

After opening broadly higher, European shares were down on the day, with the Stoxx 600 sliding as much as 0.5%, while the Stoxx 600 basic resources index dropped 0.7%, entering a bear market down 20% from its June 6 peak, amid speculation that winter curbs on mills may be milder than had been expected, increasing the possibility of increased supply.

The pound initially rose to five-week highs against the dollar, hitting a high of $1.3087, after the European Union’s chief negotiator Michel Barnier said on Monday a Brexit deal was possible within weeks. Sterling had risen 0.8 percent on Monday.

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

Why The Saudis Are Still Dominating Oil Markets

August 23, 2018

Why The Saudis Are Still Dominating Oil Markets

Saudi Arabia is still clearly in control of the oil market.

The narrative that decisively took hold over the oil market in August was one of cracks in emerging market demand, concerns over the health of the global economy and fears over the fallout from the U.S.-China trade war. Turkey’s currency crisis set off a slide in emerging market currencies, which will likely undercut demand this year. The IMF warned earlier this summer that the downside risks to the economy were growing, a rather prescient prediction. On the supply side of the equation, outages from Iran loom large.

But when it comes to physical barrels on the market, Saudi Arabia is still in the driver’s seat. “While fears of trade wars will continue to influence sentiment and shape price outcomes, it is the recent shifts in OPEC, and particularly its dominant player Saudi Arabia’s, output policy which has had the biggest impact on physical balances, prices and the term structure to date,” The Oxford Institute for Energy Studies (OIES) wrote in a new report.

For the first few months of this year, Saudi Arabia maintained that the oil market was moving towards “rebalancing” with inventories in steady decline, but that there was more work to do. Saudi officials repeatedly stuck with the line that the OPEC+ agreement would not be altered before the end of the year and that they would continue to focus on bringing down inventories.

But the Trump administration’s withdrawal from the Iran nuclear deal and the return of sanctions raised fears of a huge disruption in Iranian supply. Suddenly, the market looked very tight. Coming just a few weeks before the June OPEC+ meeting, the U.S.’ policy change was decisive.

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

Sanctions, Sanctions, Sanctions – the Final Demise of the Dollar Hegemony?

August 19, 2018

Sanctions, Sanctions, Sanctions – the Final Demise of the Dollar Hegemony?

Sanctions left and sanctions right. Financial mostly, taxes, tariffs, visas, travel bans – confiscation of foreign assets, import and export prohibitions and limitations; and also punishing those who do not respect sanctions dished out by Trump, alias the US of A, against friends of their enemies. The absurdity seems endless and escalating – exponentially, as if there was a deadline to collapse the world. Looks like a last-ditch effort to bring down international trade in favor of — what? – Make America Great Again? – Prepare for US mid-term elections? – Rally the people behind an illusion? – Or what?

All looks arbitrary and destructive. All is of course totally illegal by any international law or, forget law, which is not respected anyway by the empire and its vassals, but not even by human moral standards. Sanctions are destructive. They are interfering in other countries sovereignty. They are made to punish countries, nations, that refuse to bend to a world dictatorship.

Looks like everybody accepts this new economic warfare as the new normal. Nobody objects. And the United Nations, the body created to maintain Peace, to protect our globe from other wars, to uphold human rights – this very body is silent – out of fear? Out of fear that it might be ‘sanctioned’ into oblivion by the dying empire? – Why cannot the vast majority of countries – often it is a ratio of 191 to 2 (Israel and the US) – reign-in the criminals?

magine Turkey – sudden massive tariffs on aluminum (20%) and steel (50%) imposed by Trump, plus central bank currency interference had the Turkish Lira drop by 40%, and that ‘only’ because Erdogan is not freeing US pastor Andrew Brunson, who faces in Turkey a jail sentence of 35 years for “terror and espionage”.

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

Canadians Begin Boycotting US Goods

August 4, 2018

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…

Global Housing Bubble Is Popping. Here Comes The “Reverse Wealth Effect”

August 4, 2018

Global Housing Bubble Is Popping. Here Comes The “Reverse Wealth Effect”

Just a few months ago, real estate was on fire. Prices were blowing past records set during the previous decade’s housing bubble as desperate buyers bought whatever was available at above the asking price while homeowners, confident that prices would keep rising, held out for the next big pop to sell. Notice on the following chart how the ascent steepens at the beginning of this year.

Then, as if someone flipped a switch, the trend shifted into reverse. Not just in the US but nearly everywhere. This list of recent headlines tells the tale:

Housing demand sees biggest drop in more than 2 years

Hamptons property sales slow as caution spreads to the wealthy

Home Prices Are Falling in One of America’s Richest Suburbs

First Time Ever, More Chinese sellers than buyers

Vancouver Suffers Its Worst July for Home Sales Since 2000

Record Drop in Foreigners Buying U.S. Homes

Australian home prices take biggest dip since 2011

The End of the Global Housing Boom

Manhattan Real Estate: Prices Plummet, Sales Tank

What’s happening and why is it happening now?
Several things came together pretty much simultaneously to turn houses from must-have-at-any-price necessities into completely optional and maybe not even desirable: First, prices rose beyond the reach of all but the seriously affluent. The gap between the price of the average home and the size of the mortgage the average local buyer can afford has been rising for years, but recently in the hottest markets it has become a chasm. Meanwhile, mortgage rates have started to rise, increasing the monthly payment on a given house dramatically.

If you live in San Francisco or Sydney or Vancouver, chances are you can’t afford to buy a decent house – not even close. And if you can’t you don’t.

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

Stocks Drop As Trade War Returns; Japanese Bond Rout Leads To Emergency Margin Call

August 1, 2018

Stocks Drop As Trade War Returns; Japanese Bond Rout Leads To Emergency Margin Call

The latest trade war truce lasted less than a day, and after stocks jumped yesterday following an early report that Mnuchin had resumed trade talks with his Chinese counterpart, a late Tuesday report that the Trump admin is planning to increase the tariff rate on some $200BN of Chinese imports from 10% to 25% led to an immediate slide in risk assets around the globe, and this morning global stocks and futures were a sea of red despite Apple’s stellar results which helped lift the Nasdaq.

In response, China again warned the U.S. against “blackmailing and pressuring” it over trade. China’s Ministry of Foreign Affairs said it will fight back if the U.S. further increases tariffs as it now contemplated. “If the U.S. takes measures to further escalate the situation, we will surely take countermeasures to uphold our legitimate rights and interests,” spokesman Geng Shuang said at a regular press conference on Wednesday.

The return of trade war tensions initially sent the dollar higher across the board, while the Yuan tumbled, with the offshore Yuan tumbling to a one year low of 6.8642 against the dollar, before the PBOC intervened again, and the onshore Yuan reversed losses mid-afternoon after a large Chinese bank was seen selling dollars. According to Bloomberg, at least one big Chinese bank started to sell dollars aggressively around 6.83 yuan per USD, and those flows disappeared after rate went to 6.82. A large Chinese bank also sold dollars onshore earlier in the day, spurring other banks to follow.

The big overnight move, however, wasn’t in China but in Japan, where one day after the BOJ tweaked its monetary policy while leaving its YCC largely intact, bond traders tried to find the new tolerance breaking point for 10Y JGB.

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

Canary in the Coal-MIne–Emerging Market Contagion

July 17, 2018

CANARY IN THE COAL-MINE – EMERGING MARKET CONTAGION

Emerging market currencies, bonds and stocks have weakened
Fears about the impact of US tariffs have been felt here most clearly
The risk to Europe and Japan is significant
Turkey may be the key market to watch

As US interest rates continue to normalise and US tariffs begin to bite, a number of emerging markets (EM’s) have come under pressure. Of course, the largest market to exhibit signs of stress is China, the MSCI China Index is down 7% since mid-June, whilst the RMB has also weakened against the US$ by more than 6% since its April low. Will contagion spread to developed markets and, if so, which country might be the ‘carrier’?

To begin to answer these questions we need to investigate this year’s casualties. Argentina is an obvious candidate. Other troubled countries include Brazil, Egypt and Turkey. In each case, government debt has exacerbated instability, as each country’s currency came under pressure. Other measures of instability include budget and trade deficits.

In an effort to narrow the breadth of this Macro Letter, I will confine my analysis to those countries with twin government and current account deficits. In the table which follow, the countries are sorted by percentage of world GDP. The colour coding reflects the latest MSCI categorisation; yellow, denotes a fully-fledged EM, white, equals a standard EM, green, is on the secondary list and blue is reserved for those countries which are so ‘frontier’ in nature as not to be currently assessed by MSCI: –

EM Debt and GDP

Source: Trading Economics, Investing.com, IMF, World Bank

For the purposes of this analysis, the larger the EM as a percentage of world GDP and the higher its investment rating, the more likely it is to act as a catalyst for contagion. Whilst this is a simplistic approach, it represents a useful the starting point.

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

World’s Largest Shipping Company Collapses As Trade War Reality Strikes

July 15, 2018

World’s Largest Shipping Company Collapses As Trade War Reality Strikes

While US equity markets (well a few mega-cap tech stocks anyway) have remained resilient in the context of rising protectionist fears, theworld’s largest shipping company is seeing its stock eviscerated as investor anxiety over trade wars finds an outlet that makes rational sense.

A.P. Moeller-Maersk A/S may struggle to make a profit this year after the U.S. and China descended into a trade war that is already showing stress in sentiment surveys.

As Bloomberg reports, Maersk, which is based in Copenhagen, has already lost almost a third of its market value this year as investors gird for more bad news, and it is losing value in line with the collapse in the US Treasury yield curve.

Trade protectionism means less demand, and history suggests the shipping industry will struggle to make the necessary supply cuts. What’s more, Maersk is now more exposed to shipping as the former conglomerate divests its energy business.

Per Hansen, an investment economist at Nordnet in Copenhagen, says Maersk is currently “in the eye of the hurricane” when it comes to the damage that will be inflicted by a trade war.

The company said earlier in the week it will need to temporarily scale back its service between Asia and North Europe as a result.

“It’s highly likely that Maersk’s valuations could sink to its trough valuations in the coming months as investors avoid shipping stocks until more excess capacity is being removed,” said Corrine Png, chief executive officer and founder of Crucial Perspective, a Singapore-based research provider focusing on transport.

So just keep buying Amazon and Netflix, oh and for good measure, keep buying bonds.

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

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