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The Dying Days Of An Empire

The Dying Days Of An Empire

Caravaggio Conversion on the way to Damascus 1600-01

Something’s been nagging me for the past few days, and I’m not sure I’ve figured out why yet. It started when Donald Trump first called off the alleged planned strikes on targets in Iran because they would have cost 150 lives, and then the next day said the US would do sanctions instead. As they did on Monday, even directly targeting Trump’s equal, the “Supreme Leader Khameini”.

When Trump announced the sanctions, I thought: wait a minute, by presenting this the way you did, you effectively turned economic sanctions into a military tool: we chose not to do bombs but sanctions. Sounds the same as not doing a naval invasion but going for air attacks instead. The kind of decisions that were made in Vietnam a thousand times.

However, Vietnam was all out war (well, invasion is a better term). Which shamed the US, killed and maimed the sweet Lord only knows how many promising young Americans as well as millions of Vietnamese, and ended in humiliating defeat. But the US is not in an all out war in Iran, at least not yet. And if they would ever try to be, the outcome would be Vietnam squared.

Still, that’s not really my point here. It’s simply about the use of having the world reserve currency as a military weapon instead of an economic one. And I think that is highly significant. As well as an enormous threat to the US. The issue at hand is overreach.

While you could still argue that economic sanctions on North Korea, Venezuela and Russia are just that, economic and/or political ones, the way Trump phrased it, comparing sanctions one on one with military strikes, no longer leaves that opening when it comes to Iran.

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

Has China Finally Lifted its Thumb off of Gold?

Has China Finally Lifted its Thumb off of Gold?

There’s a lot of talk about the Yuan price of gold falling out of a price suppression channel.  Both Zerohedge and Nomura have weighed in on this.

The Yuan price of gold surged overnight to above CNY 8500 per ounce which is a major breakdown  But it’s also indicative of something that has long been suspected during this gold bear market.

China doesn’t want the price of gold to rise.  Those accumulating gold — China and Russia — have zero incentive to accumulate at higher prices.   And the gold chart of the last three years bears out that they have had to come in at higher prices on pullbacks because market bottoms keep coming in higher and higher.

The 2015 low was around $1050.  2016 at $1146.  2017 the low after a pullback in July couldn’t breach $1208 during a strong post-U.S. election rally.  This year the price was briefly pushed below $1200 in the longest downtrend of the seven year bear market but has since popped back over $1230 with its sights now set on  $1250.

China may have no choice here but to let the price of gold rise.  Because conditions in other markets are changing rapidly.  So, ultimately, what China wants really may not matter anymore.

Remember, the eurodollar markets broke in late May this year as Jeffrey Snider at Alhambra Partners reminds us daily.

The PBoC cut the reserve ratio again recently to free up liquidity in Chinese banks but it doesn’t seem to have stemmed the tide.  And that’s why it has continually loosened the Yuan fix rate, now approaching 7 vs. the U.S. dollar.

Offshore dollar markets are the pool of real savings in the global economy and it determines where we are headed.  And the offshore dollar hoarders are pulling out of China… and Europe… and Japan…. and South America.

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

Market crash? Another red card for the economy

Market crash? Another red card for the economy

A few months ago I wrote this article at the World Economic Forum called “A Yellow Card For The Global Economy“. It tried to serve as a warning on the rising imbalances of the emerging and leading economies. Unfortunately, since then, those imbalances have continued to rise and market complacency reached new highs.

This week, financial markets have been dyed red and the stock market reaction adds to concerns about a possible impending recession.

The first thing we must understand is that we are not facing a panic created by a black swan, that is, an unexpected event, but by three factors that few could deny were evident:

  1. Excessive valuations after $20 trillion of monetary expansion inflated most financial assets.
  2. Bond yields rising as the US 10-year reaches 3.2%
  3. The evidence of the Yuan devaluation, which is on its way to surpass 7 Yuan per US dollar.
  4. Global growth estimates trimmed for the sixth time in as many months.

Therefore, the US rate hikes – announced repeatedly and incessantly for years – are not the cause, nor the alleged trade war. These are just symptoms, excuses to disguise a much more worrying illness.

What we are experiencing is the evidence of the saturation of excesses built around central banks’ loose policies and the famous “bubble of everything”. And therein lies the problem. After twenty trillion dollars of reckless monetary expansion, risk assets, from the safest to the most volatile, from the most liquid to the unquoted, have skyrocketed with disproportionate valuations.

(courtesy Incrementum AG)

Therefore, a dose of reality was needed. Monetary policy not only disguises the real risk of sovereign assets, but it also pushes the most cautious and prudent investor to take more risk for lower returns. It is no coincidence that this policy is called “financial repression“. Because that is what it does. It forces savers and investors to chase beta and some yield in the riskiest assets.

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

Beijing Eases Policy, Yuan Slides Towards 10-Year Low

On Sunday, the Bank of China cut the level of cash that banks must hold as reserves. The Yuan continued its slide.

Shares in Asia stumbled in early trade on Monday as investors waited with bated breath as China’s markets prepare to reopen following a week-long holiday and after its central bank cut banks’ reserve requirements in a bid to support growth.

Investors will be focused on markets in China, following a decision on Sunday by the People’s Bank of China (PBOC) to cut the level of cash that banks must hold as reserves in a bid to lower financing costs and spur growth amid concerns over the economic drag from an escalating trade dispute with the United States.

Reserve requirement ratios (RRRs) – currently 15.5 percent for large commercial lenders and 13.5 percent for smaller banks – would be cut by 100 basis points effective Oct. 15, the PBOC said, matching a similar-sized move in April.

Trade War

China said it would not devalue the yuan in response to a trade war. Actions speak louder that words.

The CNH is once again dangerously close to the PBOC’s redline of 7.00, with 3-month USD/CNH points, which have reached their highest this year, suggesting that a breach of that level is increasingly probably and implying a CNH yield of around 2% above equivalent USD 3-month rates. At the same time, the 1-year forward is also flirting with 1,000 pips, another signal that traders see a weaker yuan. The rate of appreciation in the forward curve this month is the quickest since June, when the U.S.-China trade war crossed the Rubicon.

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

“Something Has to Break” as China’s Onshore Defaults Hit a New Record

“Something Has to Break” as China’s Onshore Defaults Hit a New Record

Recent news from China has been really ugly.

But what can you expect? They’re trying to fight a trade war against the U.S. – deal with slowing growth – and survive against a stronger U.S. dollar.

And because of these problems – China’s major stock exchanges have really suffered this year.

But – contrary to what the mainstream says – I think things are going to get much worse. . .

For starters – the latest Chinese Manufacturing PMI (purchasing manager index) showed a continued downturn. Both in the NBS and Caixin Indexes.

Clearly the trade-war with the U.S. is being felt. And with little progress in negotiations between the U.S. and China – expect the near-and-midterm to continue being weak.

Now – Unfortunately – this slow down in the Chinese economy and the loss of sales and income are coming at a bad time. . .

Especially for their corporations.

The combination of a slowing economy, a stronger dollar, and a tightening Federal Reserve is putting pressure on indebted Chinese firms.

This is putting China’s elites between a rock and a hard place. . .

That’s because with the trade-war raging on and a tightening Fed – the Communist Party of China will want to ease and help their economy.

The Peoples Bank of China (the Chinese central bank) can cheapen the yuan to try and boost exports. And as I wrote before – the weaker yuan will offset Trump’s tariffs.

For example – if the U.S. places 20% tariffs on all Chinese goods – China simply must devalue the Yuan by 20%. This would offset the increased costs from the tariffs – keeping the price for U.S. consumers unchanged. Basically rendering the imposed tariff worthless.

But the problem with this is Chinese firms have significant dollar-denominated debts. So a stronger dollar makes their debt-burden much harder to service.

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

Is China Losing Control? Yuan More Volatile Than Euro For First Time Ever

For the first time, FX traders are grappling with wilder swings from China than Europe.

As Bloomberg notes, the offshore yuan has been more volatile than the euro all month after first overtaking the shared currency in July, according to 30-day realized data. And while euro uncertainty remains relatively bracketed between 6 and 8 for the last two years, yuan volatility has soared from 2 to almost 9 – the highest since 2015’s devaluation.

The narrow spread (lower pane) shows China is moving to a more “flexible arrangement” when it comes to managing its currency, Bank of America analysts wrote in a note, predicting the yuan will weaken more this year.

For now it appears the temporary respite from Yuan’s freefall, that ‘mysteriously’ occurred right before the US-China trade talks, has begun to lose momentum.

But while Yuan has become increasingly volatile, the realized volatility of gold (when priced in yuan) has collapsed to record lows

Perhaps supporting the idea that the Chinese care more about the ‘stability’ of the yuan relative to gold then to the arbitrary US dollar fiat money.

So is China losing control? Or is this just as they planned?

“Virtually Everybody Knew This Was Coming”

Was it Turkey’s “executive presidency” and its unwillingness to hike rates in the face of soaring inflation? Or maybe the record global debt accumulated over the past decade? Maybe the artificially low interest rates? Or perhaps it was the pervasive current account deficits amid easy outside capital. How about the rapid slowdown in China, its escalating trade war with the US, and the Yuan devaluation? Or perhaps it’s just the rising US interest rates and global quantitative tightening soaking up billions in excess liquidity?

However one justifies the current emerging market crisis, one thing is clear “virtually everybody knew this was coming.

At least that’s the common theme according to SocGen’s Albert Edwards, who after an extended absence has returned, with a new note looking at the turmoil gripping the EM sector. It’s hardly new territory for the SocGen strategist, who prior to his current role, was most famous for his correct predictions and observations on the Asian Financial Crisis of 1997.

Fast forward some 21 years, when the veteran SocGen strategist believes the current turmoil boils down to two things: the Fed’s ongoing tightening – a point we discussed earlier this week in “Forget About Turkey: Asia Is The Elephant In The Room” – and China’s rapid devaluation. Turmoil, which as Nedbank noted previously, is about much more than just Turkey, which is merely the symptomatic “tip of the iceberg.”

Here’s Edwards’ take on where we stand:

Many commentators have thought for some time that Turkey was a macro-accident waiting to happen. But the key issue is not Turkey’s idiosyncratic macro problems. The unfolding crisis in EM is the direct result of Fed tightening and the strong dollar. The Fed always raises rates until something breaks.

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

Gold Yuan Crypto

George Caleb Bingham The verdict of the people 1854
It’s been a while since we last heard from Dr. D, but here he’s back explaining why neither gold nor the yuan nor cryptocurrencies can or will replace the dollar as the reserve currency, but together they just might:

Dr. D: “Some debts are fun when you are acquiring them, but none are fun when you set about retiring them.” –Ogden Nash

Over the last year or two there’s been discussion about the U.S. Federal spending moving beyond $4 TRILLION dollars, and whether a $1+ trillion dollar annual deficit, on top of a $20 Trillion national debt – Federal only – is sustainable. It isn’t.

“What can’t go on, doesn’t” is the famous quote of economist Herbert Stein. Since a spiraling deficit of $1 trillion deficit on a $20 trillion debt can’t go on, what will we replace it with when it very soon doesn’t? Historically gold. Whatever gold exists in the nation’s coffers, whether one coin or 8,000 tons, is used to as the national wealth, and fronted by paper to re-boot the currency. With some additions such as oil and real estate, this was the solution in Spain, France, Germany, and the Soviet Union among hundreds of fiat defaults. Why? Because at a time of broken promises — real goods, commodities that can be seen, touched, and used – are the tangible proof of wealth, requiring no trust, and from which the human trust system of paper and letters of credit can be rebuilt.

But in these complicated, digital times perhaps that’s too simplistic. Perhaps we have grown smarter than all our fathers and this time it will be different. Will it really be the same? Let’s look at how the system works now.

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

Has the PBoC deliberately weakened CNY as part of the trade war?

Has the PBoC deliberately weakened CNY as part of the trade war?

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)

Chart 1: Less global trade, lower long bond yields

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…

China Has Quietly Implemented A 6% Across The Board ‘Tariff’ On All US Imports

Trump and Xi have spent much of the last few weeks tossing tariff grenades across the Pacific Ocean as retaliatory retaliations grow ever stronger in rhetoric and potential escalations.

Then this week, Trump seemed to back away from his most serious threats (direct Chinese investment restrictions).

We wonder if this is why…

Since Trump started to rattle his trade war sabre, the last three months have seen the offshore Chinese Yuan tumble over 6% (crashing almost 4% in the last two weeks alone)…

Nothing happens by accident in China and this massive drop in the value of the Yuan mirrors the violent devaluation, snap in 2015…

All of which suddenly makes US imports to China 6% more expensive than they were in Q1 – a stealth tariff that no one is talking about.

And before this is dismissed as just the mirror of USD strength, we suggest the following chart shows very clearly the PBOC allowing the Yuan to weaken notably against just the dollar while – until the last few days – maintaining Yuan’s buying power against the rest of the world.

However, as Capital Economics points out, if the PBOC is using the exchange rate to fight back against the US, it is pulling its punches: the PBOC’s daily reference exchange rate has in the past few days been stronger than market rates might have suggested, not weaker.

It is of course still notable that the PBOC has done relatively little to stand in the way of the currency slide, even if it isn’t directly responsible for it. It always argues that the exchange rate is driven by market forces.

But its tolerance will probably only go so far, given the painful experiences of 2015 and 2016: any benefit to exporters would be swamped if depreciation triggered economic and financial instability.

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

China Cuts Reserve Ratio, Unlocks 700BN Yuan Amid Rising Trade War, Mass Defaults And Margin Calls

As widely expected, China’s central bank announced it would cut the Required Reserve Ratio (RRR) for some banks by 0.5% effective July 5, just over two months after the PBOC did a similar cut on April 17, the first such easing since the start of 2016.

The move is expected to unlock 700 billion yuan ($108 billion) in liquidity amid growing trade war tensions, a sharp slowdown in the Chinese economy, a tumbling stock market, rising forced margin call, and a spike in corporate defaults.

According to the central bank, the aim of the cut is” to support small and micro enterprises, and to further promote the debt-to-equity swap program.” The cut will apply to major state-run commercial banks, joint-stock commercial lenders, postal banks, city commercial lenders, rural banks and foreign banks, in other words: virtually everyone.

“The size of the liquidity being unleashed has beat expectations and it’s larger than the previous two cuts this year”, said Citic fixed income research head Ming Ming. “It’s almost a universal cut as it covers almost all lenders.”

The RRR cut was also widely expected following the publication of a central bank working paper on Tuesday calling for such a cut.


A cut in China’s RRR by the PBOC is imminent following central bank’s working paper released Tuesday arguing for such a cut.


According to Bloomberg, the cut is designed to achieve two things:

  • The 500 billion yuan unlocked for the nation’s five biggest state-run banks and 12 joint-stock commercial lenders will be channeled to debt-to-equity swaps, which can reduce companies’ debt burdens and help cleaning up banks’ balance sheets. It comes following no less than 20 corporate bond defaults in 2018, and ahead of a wave of corporate repayments that has prompted analysts to express fears about a default avalanche.

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

Trade End Game Scenarios: Boycott Treasuries vs Yuan Devaluation

Since there is no longer any reasonable debate about a trade war having started, let’s investigate how it ends.

End Game Analysis


The end-game retaliation comes via a global boycott of the Treasury auctions. Foreign entities fund half the US fiscal deficit, which is set to double. Imagine the locals funding their own budget gap!

This forces the savings rate up at the expense of spending. Recession follows.


Treasury Boycott Thesis

I am surprised that Rosenberg brings this up because in my mind, this hash has been settled long ago.

What exactly would China, Japan, and Germany do with their reserves and ongoing trade surplus? Mathematically they have to do something.

Historically, that something has been to buy treasuries. But I suppose China could buy could be gold or US equities. The latter would be smack in the middle of an obvious bubble.

And if China were to dump US treasuries, the alleged nuclear option, it would serve to strengthen the Yuan. Recall that China sold US treasuries to support the Yuan and stop capital flight. In a trade war, China would not want an appreciating currency!

I think Rosenberg proposes nonsense, but given the nonsensical actions of Trump, I cannot rule out nonsensical or illogical responses.

This leads us to the most logical real threat.

Yuan Devaluation Thesis

China cannot retaliate with enough tariffs on its own to combat tariffs imposed by the US. Hower, the yuan does not float. China could devalue the yuan enough to counteract the value of US tariffs.

Of course, Trump could ban Chinese imports in response, but prices at Walmart, Costco, Target, everywhere, would skyrocket.

This scenario is nearly the opposite of what Rosenberg suggests. It is also far more credible.

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

De-Dollarization Escalates: “African Economy Needs More Usage Of Chinese Yuan”

The world’s push towards de-dollarization continues to accelerate as Americans go about their daily lives worrying more about blasphemous comedians, participation trophies, and Kim and Kanye’s traitorous behavior.

From yuan-denominated oil futures (and soon to be yuan-denominated metals contracts) to Europe’s decision to use Yuan to pay for Iranian oil; and from non-dollar settlement systems for Russia/Chinese trade to Turkey’s call for citizens to dump the dollar, it appears each action of the Trump administration deepens the distrust in the dollar hegemony, coalescing the world against Washington’s reserve currency unipolar order.

All of which leads to this…

In a well-placed interview in China’s Xinhua news – the official press agency of the People’s Republic of China – officials from Africa are seen calling for more yuanification of the massive continent’s economies.

There has been a general consensus among some eastern and southern African countries that there should be more usage of the Chinese yuan in the region because of China’s growing influence in business and trade, a financial expert said Thursday.

Executive director of the Macroeconomic and Financial Management Institute of Eastern and Southern Africa (MEFMI) Caleb Fundanga said a forum for financial experts earlier in the week had agreed that there was need to use the Chinese yuan as a reserve currency because China was playing an active role in their economies.

The forum was attended by deputy central bank governors and deputy permanent secretaries of finance from 14 countries that fall under MEFMI.

“The general conclusion is that we should use the yuan more because its time has come. We are doing more business (with China) so it’s natural that we use the currency of the country with which we are trading.

…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…

In Unprecedented Move, China Plans To Pay For Oil Imports With Yuan Instead Of Dollars

Just days after Beijing officially launched  Yuan-denominated crude oil futures (with a bang, as shown in the chart below, surpassing Brent trading volume) which are expected to quickly become the third global price benchmark along Brent and WTI, China took the next major step in the challenging the Dollar’s supremacy as global reserve currency (and internationalizing the Yuan) when on Thursday Reuters reported that China took the first steps to paying for crude oil imports in its own currency instead of the US Dollars.

A pilot program for yuan payment could be launched as soon as the second half of the year and regulators have already asked some financial institutions to “prepare for pricing crude imports in the yuan“, Reuters sourcesreveal.

According to the proposed plan, Beijing would start with purchases from Russia and Angola, two nations which, like China, are keen to break the dollar’s global dominance. They are also two of the top suppliers of crude oil to China, along with Saudi Arabia.

A change in the default crude oil transactional currency – which for decades has been the “Petrodollar”, blessing the US with global reserve currency status – would have monumental consequences for capital allocations and trade flows, not to mention geopolitics: as Reuters notes, a shift in just a small part of global oil trade into the yuan is potentially huge. “Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s gross domestic product last year.” Currently, virtually all global crude oil trading is in dollars, barring an estimated 1 per cent in other currencies. This is the basis of US dominance in the world economy.

However, as shown in the chart below which follows the first few days of Chinese oil futures trading, this status quo may be changing fast.

Superficially, for China it would be a matter of nationalistic pride to see oil trade transact in Yuan: “Being the biggest buyer of oil, it’s only natural for China to push for the usage of yuan for payment settlement. This will also improve the yuan liquidity in the global market,” said one of the people briefed on the matter by Chinese authorities.

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

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