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Why Mark Carney Thinks The Dollar Can No Longer Be The World’s Reserve Currency

Why Mark Carney Thinks The Dollar Can No Longer Be The World’s Reserve Currency

While Jerome Powell’s highly anticipated Jackson Hole speech was, in the words of Brean Capital’s Russ Certo “underwhelming and anti-climatic”, one couldn’t say the same for the shocking luncheon speech by Bank of England’s outgoing governor, Mark Carney, titled “The Growing Challenges for Monetary Policy in the current International Monetary and Financial System“, where he dedicated no less than 23 pages to a stunning – for a central banker – cause: to describe why the dollar’s  “destabilizing” reserve status role in the world economy has to end, and why central banks need to join together to create their own replacement reserve currency, one potentially tied to Facebook’s new “stablecoin” Libra, although in reality any “Synthetic Hegemonic Currency” as Carney defined it would do.

But first, a quick tangent: the reason we say Carney’s speech was shocking is not for what it proposes – after all, we have long argued that a world in which the dollar’s reserve currency status would be stripped away by the establishment and granted to some alternative – whether gold, or a basket of currencies like the IMF’s SDR, or a cryptocurrency like bitcoin – is coming in posts such as:

 The argument behind all these articles is simple and two-fold: i) in a fiat world, one can only devalue relative to some other currency, yet we have now reached a point where (as Pimco suggested two years ago when it said the Fed should buy gold to devalue the dollar against it) every currency needs to devalue relative to some hard index outside of the monetary system…

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

Beijing Enraged After US Navy Ship Sails Through Taiwan Strait

Beijing Enraged After US Navy Ship Sails Through Taiwan Strait

With the 70th anniversary of the founding of the CPC looming, and Beijing staking out a more aggressive trade stance Friday morning by threatening retaliatory tariffs, the US picked the best – or worst – time to provoke Beijing, when a Navy ship sailed through the Taiwan Strait in the Navy’s latest “freedom of navigation” operation, or ‘freeop’ on Friday.

As CNA points out, Washington has actually increased its antagonistic operations in the Taiwan Strait as tensions with Beijing have soared this year, and Friday’s mission risks stoking tensions even further, as Beijing has warned international powers not to interfere in its relationship with Taiwan, or risk provoking Beijing’s wrath.

Yet interfering is precisely what the US has done, and earlier this month, Beijing denounced the sale of $2.2 billion in weapons to Taiwan by the US. Beijing has been ramping up pressure to assert its sovereignty over the island, which it considers a wayward province.

Commander Reann Mommsen, a spokeswoman for the US Navy’s Seventh Fleet, said the operation in the 111-mile wide waterway separating Taiwan from China “demonstrates the US commitment to a free and open Indo-Pacific.”

Mommsen identified the ship as the Green Bay, an amphibious transport dock ship, hinting at a possible marine transport to the controversial island. Typically, these missions are carried out using destroyer-class ships.

Taiwan’s Defense Ministry said in a statement that the island’s military had a full grasp of the situation in the Strait and closely monitored it.Washington has no formal ties with Taiwan, but the US is bound by law to help defend the island nation should it be attacked. The US is also its primary source of arms.

US Officials Confirm Israel Behind Unprecedented Airstrikes On Iraq

US Officials Confirm Israel Behind Unprecedented Airstrikes On Iraq

In an unprecedented escalation which could reshape alliances in the Middle East, American officials have confirmed that Israel was behind an airstrike on an Iraqi ammunition depot operated by a pro-Iran militia last month, according to The Associated Press:

Two American officials said Israel carried out an attack on an Iranian weapons depot in July that killed two Iranian military commanders. The U.S. officials spoke on condition of anonymity because they were not authorized to discuss the matter with the media.

The admission comes after two more mystery explosions rocked paramilitary bases in and around Baghdad within the last two weeks, resulting in multiple paramilitary members killed, at least one civilian death, and dozens of injured, and which prompted Iraq’s Prime Minister Abdul-Mahdi to close the country’s airspace to all “unauthorized flights”.

Aftermath of the recent ‘mystery explosion’ at a military base southwest of Baghdad, Iraq. Image source: AP

Baghdad has threatened “strong response” if it is confirmed Israeli drones or jets are behind the attacks, and further the military is ready to shoot down any unauthorized aircraft over Iraqi soil. 

Amid the spate of ‘mystery explosions’ recently rocking the Iraqi capital, Israeli Prime Minister Benjamin Netanyahu on Monday of this week actually seemed to positively boast that the Israeli Air Force was behind airstrikes on pro-Iran militia bases in Iraq, saying that Israel will “continue to act militarily” to curtail Iranian expansion in the region, according to The Times of Israel.

“Iran has no immunity, anywhere,” he told reporters while on a state visit to Kiev early this week. He was responding to a specific question about the mystery attacks on Iraq. “We will act — and currently are acting — against them, wherever it is necessary,” he declared.

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

US Slams China’s Escalating Oil & Gas ‘Interference’ In Vietnam Recognized Waters

US Slams China’s Escalating Oil & Gas ‘Interference’ In Vietnam Recognized Waters

Late this week, the US State Department accused China of escalating its coercive actions against Vietnam in the South China Sea. 

A spokesman said the US is “deeply concerned” China is continuing its interference with Vietnam’s longstanding oil and gas activities in the Vietnamese Exclusive Economic Zone (EEZ) claim.

“This calls into serious question China’s commitment, including in the ASEAN-China Declaration on the Conduct of Parties in the South China Sea, to the peaceful resolution of maritime disputes,” the statement said

Military officers of the Vietnamese Navy’s Second Regional Command signalling territorial claims. Source: Viet Nam News

This week the National Interest described in detail the worsening situation in a piece aptly titled South China Sea Showdown: China vs. Vietnam (Round 2).

The report described a Chinese survey vessel dispatched inside the Vietnam claimed EEZ accompanied by Chinese Coast Guard military vessels:

The Haiyang Dizhi 8, a survey vessel belonging to a Chinese government-run corporation, began surveying a large swath of seabed on 3 July northeast of Vanguard Bank, which falls within Vietnam’s exclusive economic zone. The ship has been escorted by other vessels, including from the China Coast Guard and maritime militia. At the same time, China Coast Guard ships have been harassing Vietnamese drilling operations to the south.

Western analysts see Beijing’s expansion in regional waters as part of a broader campaign of natural resource exploitation, with the ultimate goal of forcing rival countries into ‘joint exploration’ partnerships, even in undisputed waters. 

According to the report, the current crisis is the most serious tensions have been between China and US ally Vietnam in years

Chinese incursions into Vietnam’s EEZ are by no means a new phenomenon. The most serious recent incident occurred in 2014, when China deployed an oil rig into Vietnam’s EEZ, sparking a diplomatic crisis between the two neighbors. The current situation near Vanguard Bank, however, represents a more serious challenge on several levels.

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

The Ice Age Arrives: Average Sovereign Yield Outside The US Turns Negative For The First Time Ever

The Ice Age Arrives: Average Sovereign Yield Outside The US Turns Negative For The First Time Ever

Last Friday afternoon, when what few traders were not on vacation were planning the venue of their evening alcohol consumption, we showed a remarkable analysis by Bank of America, which found that yields on the $27.8 trillion non-USD global investment grade bond market had declined to just 16bps and that the US share of global investment grade yields has climbed to 94%. But the punchline is that, as we said, “non-USD sovereign yields had dropped to just 2bps, meaning that any day now foreign sovereign debt may have no yield at all on average.”

Fast forward to Monday, when following another surge in global bond prices, Bank of America refreshed its analysis, and foudn that the striking trends noted last week had become even more fascinating, to wit yields on the $27.8tn non-USD global IG fixed income market had declined to just 11bps (down from 16bps just one day earlier)…

… and the US share of global IG yields climbed to 95%…

Negative Yielding Arrives in Europe Credit

… meaning that any foreign investor who is desperate for even the smallest trace of positive yield has no choice but to come to the US, something Kyle Bass echoed earlier on CNBC: “US rates are going to zero because they are the only DM yields with an integer in front of them.”

.@Jkylebass on CNBC: “US rates are going to zero because they are the only DM yields with an integer in front of them”

– btw this echoes Pimco comment from earlier. In a race to negative/ zero what do you own?https://twitter.com/cnbcjou/status/1163698049597759488?s=21 …

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

12 Reasons Why Negative Rates Will Devastate The World

12 Reasons Why Negative Rates Will Devastate The World

It has been a thesis over 20 years in the making, but with every passing day, SocGen’s Albert Edwards – who first coined the term “Ice Age” to describe the state of the world in which every debt issue ends up with a negative yield as capital markets and economies collapse into a deflationary singularity – is that much closer to having the victory lap of a lifetime. Although, we doubt he is happy about it.

Commenting on the interest rate collapse he has been (correctly) predicting ever since he first observed Japan’s great bubble bust of the 1980s and which resulted in both NIRP and QE, and which he (correctly) expected would spread across the rest of the world, leading to a “Japanification” of every major bond market…

… Edwards said that what bond markets are telling us is “that the cycle is ending with the central banks having failed to drive core CPI inflation higher. So Japanese-style outright deflation lies ahead at a time when western economies have piled debt sky high.”

Needless to say that’s not good, not least of all because we now live in a world in which the bond universe with negative yields continued to grow at an exponential pace, rising rapidly over the past two weeks and reaching a record $16.4 trillion…

… rising  significantly above the previous mid-2016 record high of around $12.2tr. The expansion of the universe of negatively yielding bonds as a percentage of total is shown below: as of the last week, this proportion increased further to around 30.0%, above the mid-2016 record high of 25.8%.

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

Power Grid Chaos Jolts Texas On Friday, Energy Costs Triple Amid Heat Wave

Power Grid Chaos Jolts Texas On Friday, Energy Costs Triple Amid Heat Wave

The Electric Reliability Council of Texas (ERCOT) has been asking customers to conserve energy this week as spot power prices in Texas triple to a record on Friday.

The state’s power grid operator that serves most of Texas declared an energy conservation emergency for the second time this week, the first on Tuesday when temperatures exceeded 100 degrees, and customers cranked up their air conditioners to escape the heat.

ERCOT asked customers this week to reduce energy use between 3 and 7 p.m. Here is what they asked Texans to do:

  • Increase thermostats 2 to 3 degrees
  • Program thermostats at a higher temp when not at home
  • Use a fan, it can lower temperatures by 4 to 6 degrees
  • Use appliances less (dishwashers, washers, and dryers) or only in the morning hours.
  • Run pool pumps in the early morning or overnight hours and shut them off between 4 to 6 p.m.
  • Keep blinds and drapes closed during the hottest part of the day.

ERCOT reported no rotating power outages.

“High temperatures have resulted in record electricity demand over the last few days and may result in a new record today,” said ERCOT President and CEO Bill Magness. “Consumers can help lower energy consumption by taking some simple actions between the hours of 3 and 7 p.m.”

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

US Unveils Seizure Warrant For Iran’s Grace 1 Tanker

US Unveils Seizure Warrant For Iran’s Grace 1 Tanker

Apparently the month long saga of the Grace-1 is not at all over, and may now seriously escalate even after it was set free from custody. Just as the Iranian supertanker was released from custody off Gibraltar and is preparing to make its way into the Mediterranean, a seizure warrant filed by the US Department of Justice was unsealed in a US district court late Friday. 

Documents allege “a scheme to unlawfully access the U.S. financial system to support illicit shipments to Syria from Iran by the Islamic Revolutionary Guard Corps,” the DoJ said in a statement.

The seizure warrant and forfeiture complaint alleges the now Iranian-flagged tanker along with its over two million barrels of oil aboard it and $995,000 “are subject to forfeiture,” citing terrorism forfeiture statutes, and bank fraud and money laundering. 

The Grace-1, now renamed by Iran the Adrian Darya. Image source: Reuters

“The scheme involves multiple parties affiliated with the IRGC and furthered by the deceptive voyages of the Grace 1,” US Attorney for the District of Columbia Jessie Liu said in a press release. “A network of front companies allegedly laundered millions of dollars in support of such shipments.”

The warrant is addressed to “the United States Marshal’s Service and/or any other duly authorized law enforcement officer.”

According to Reuters, the Grace 1 – now renamed the Adrian Darya after Iran began flying its flag over the previously Panamanian-flagged tanker – may not have made it far though it was filmed moving on Friday. “The tanker shifted its position on Friday, but its anchor was still down off Gibraltar and it was unclear if it was ready to set sail soon,” the report said.

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

Plastic Apocalypse: Dangerous Microplastics Invade Alps To Artic, Found In Fresh Snow

Plastic Apocalypse: Dangerous Microplastics Invade Alps To Artic, Found In Fresh Snow

A new study has revealed that high levels of microplastics have been detected in some of the most remote regions of the world.

The discovery, published in the journal Science Advances, is the first international study on microplastics in snow, conducted by the Alfred Wegener Institute in Germany.

Melanie Bergmann, the lead scientist, and her team of researchers found microplastics from the Alps to the Arctic contained high levels of the plastic fragment, raises questions about the environmental and health implications of potential exposure to airborne plastics.

Watch: Farmers create natural straw intend to break plastic’s back

“I was really astonished concerning the high concentrations,” said co-author Gunnar Gerdts, a marine microbiologist at the Alfred Wegener Institute.

Bergmann explains that microplastics come from industrial economies where rubber and paints are used. The tiny fragments end up in the sea, where they’re broken down by waves and ultraviolet radiation, before absorbing into the atmosphere. From there, the plastic particles are captured from the air during cloud development, can drift across the Earth via jet streams. At some point, the particles act as a nucleus around supercooled droplets can condense, and travel to Earth as snow.

“Although there is a huge surge of research into the environmental impact of plastics, there is still so much that we do not know,” said Bergmann.

Bergmann noted how the scientific community was only in its infancy of examining the process of how microplastics get sucked up into the atmosphere then scattered around the world in some form of precipitation. She said, there’s an “urgent need for research on human and animal health effects focusing on airborne microplastics.”

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

Chinese Paramilitary Troops, Tanks Hold Threatening Exercises At Shenzen Sports Stadium

Chinese Paramilitary Troops, Tanks Hold Threatening Exercises At Shenzen Sports Stadium

As we shared yesterday, satellite images confirmed President Trump’s warning that Chinese troops were massing on the Hong Kong border.

Now, the AFP has published photos showing more military buildup unfolding in Shenzen.

The photos show what Reuters reports are hundreds of members of the People’s Armed Police, a pro-regime paramilitary organization, carrying out military exercises in a stadium in Shenzen. They could be preparing to carry out demonstrations of its own in Hong Kong.

Not to mention the hundreds of carriers and what appear to be tanks driving toward the field.

And let’s not forget about those satellite images.

And let’s not forget the video of military vehicles clogging the streets of Shenzen.

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

Want To See What Stagflation Looks Like?

Want To See What Stagflation Looks Like?

Another undoubtedly firm inflation report as the tariff effect works its way through the pipeline. This means one thing; the stagflation narrative only strengthened today as the US economy slows in the face of supply side inflation.

Want to see what stagflation looks like?

  • 6m Avg. NFP = green
  • Non-Manufacturing PMI = black
  • Leading Index (YoY) = blue
  • CPI ex-food and energy = pink

In theory this puts the Fed in a quandary. In reality, you should recognize that:

1) The data today implies Core PCE (the Fed’s inflation metric which they derive policy from) at somewhere in the 1.60% to 1.65% range. Firmer than where we were in 2Q, but still below the Fed’s mandate. Therefore, today’s data does not hold the Fed back from easing.

2) The new core of the Fed has a completely new mindset when it comes to inflation where they intend to “make up” for the time core inflation remained below 2% by letting inflation run hot. For example:

  • Williams: “my view is any way that keeps the average inflation rate at 2%”
  • Evans: “ought to communicate comfort with 2.5% core inflation”
  • Brainard: “we make some pre-commitments to making up so that inflation gets to 2% on average over time in a more sustained basis”

So the Fed will not pivot policy by any means with their preferred measure of core inflation not only below their mandate on a one-off basis, but nowhere near their new Average Inflation Targeting mindset.

3) At this stage of the cycle (very late with some recession signals), is supply side inflation positive for the economy? It could actually add to the malaise especially with wages now off the highs as seen in AHE, ECI, and even the latest real AHE which is down to 1.3% from a high of 1.9% earlier this year.

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

Russia Initiates Civilian Evacuation Near Site Of “Mini Nuclear” Accident

Russia Initiates Civilian Evacuation Near Site Of “Mini Nuclear” Accident 

Russia is evacuating civilians in the area of Nyonoksa village in the far northern region where a nuclear-powered experimental rocket exploded during tests last Thursday, which had killed seven, Interfax reports.

So far it appears a “recommendation” and not an ordered evacuation, which officials advise should be accomplished by Wednesday, after radiation levels in the vicinity of  Severodvinsk spiked to 20 times normal last week in the blast’s aftermath. The local governor is insisting its not an “ordered” evacuation but is merely highly recommended.

Russian media reports say authorities are offering for a train to take Nyonoksa residents to safety, which might be due either to further clean-up and decontamination of the site or possibly to conduct some kind of new test. Work is still reportedly being carried out on the rocket engine that exploded.

Russia belatedly admitted on Monday that the mystery explosion which released radiation into the air last Thursday, triggering warning alerts across towns near the northern port cities of Arkhangelsk and Severodvinsk, involved a “small-scale nuclear reactor”.

Also on Monday President Trump tweeted concern over the radiation leakage, saying, “The United States is learning much from the failed missile explosion in Russia.” He added concern over the “air around the facility” which area residents have been exposed to and could possibly impact neighboring areas.

Local footage last week showed emergency personnel responding to the accident in full chemical/radiation protective suits.

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

Pakistan Mobilizing Forces At Kashmir Base Near Line Of Control: Report

Pakistan Mobilizing Forces At Kashmir Base Near Line Of Control: Report

India’s Business Standard is reporting a major mobilization of Pakistani military forces underway along the border with India, citing government sources which talked to Asia’s ANI news agency.

The contested Kashmir region is on edge following India last week taking the unprecedented step of revoking Muslim-majority Jammu and Kashmir’s (J&K) autonomous status amid a military crackdown involving deployment of tens of thousands of Indian troops to the region. 

“Three C-130 transport aircraft of the Pakistan Air Force were used on Saturday to ferry equipment to their Skardu air base opposite the Union Territory of Ladakh. The Indian agencies concerned are keeping a close eye on the movement of Pakistanis along the border areas,” sources told ANI. 

Skardu Airport, Gilgit-Baltistan in Pakistan, file image via Pinterest.

The report describes that the significant uptick in military logistical activity along the border is likely in support of fighter aircraft operations involving Islamabad moving its China-made advanced JF-17 fighter jets to the Skardu air field. 

Though the report was neither confirmed nor denied by Pakistan’s military, it could indicate preparations for a military exercise along the border involving the Air Force and Army designed as a show of strength amid PM Imran Khan condemning Indian troop build-up across the border and removal of J&K’s special status. 

The day after on Monday a week ago India revoked Article 370, which is legally and historically what assured a high degree autonomy for the Indian administered Muslim-majority state, Pakistan’s army vowed to “go to any extent” to support Kashmiris amid an Indian military crackdown. “Pakistan Army firmly stands by the Kashmiris in their just struggle to the very end,” said General Qamar Javed Bajwa after an initial meeting of Pakistan’s leadership in response to the crisis.

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

Chinese Banks No Longer Trust One Another As Repo Rates Skyrocket

Chinese Banks No Longer Trust One Another As Repo Rates Skyrocket

For those who have grown bored with the ongoing US-China trade war whose escalation was obvious to all but the dumbest BTFD algos, the biggest news of the past week was that yet another Chinese bank was bailed out by the Chinese government – the third in the past three months – and a substantial one at that: with over 1.4 trillion yuan in assets ($200BN), Hang Feng Bank’s nationalization was certainly large enough to make a dent on the Chinese financial system and on the Chinese Sovereign Wealth Fund, which drew the short straw and was told to bailout the troubled Chinese bank (more here).

Hang Feng’s bailout followed those of Baoshang and Bank of Jinzhou, which means that 3 of the top 4 most troubled banks have now been either nationalized by an SOE or seized by the government, which is effectively the same thing.

Of course, to regular readers this development was hardly surprising, especially after our post in mid-July when we saw the $40 trillion Chinese banking system approach its closest encounter with the proverbial “Lehman moment” yet, when inexplicably the four-day repo rate on China’s government bonds (i.e., the cost for investors to pledge their Chinese government bond holdings for short-term funding) on the Shanghai exchange briefly spiked to 1,000% in afternoon trading.

While some attributed the surge to a fat finger, far more ominous signs were already present, and in the aftermath of the Baoshang failure, which has sent Chinese banking stocks tumbling, one-day and seven-day weighted average borrowing rates had remained low thanks to huge central bank cash injections – such as the 250BN yuan we described back in May  – longer tenors such as the 1 month repo have marched sharply higher.

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

David Rosenberg: “These Are Truly Historic And Dangerous Times”

David Rosenberg: “These Are Truly Historic And Dangerous Times”

We are living in dangerous times.

Mostly, everyone I speak to lives in the here and now. They seem more interested in telling people how crazy cheap the stock market is and how crazy expensive the ‎Treasury market is, rather than trying to look at the current environment in a historical perspective. We are living through a period of history that will be written about in textbooks in years and decades to come, and the undertones are none too good.

Instead of telling people there is no recession, these bulls should be discussing why the markets are busy pricing one in. What do these pundits know that the markets don’t know? We have a bond market in which a quarter of the universe trades at a negative yield. The long bond yield has gone negative in Germany. More than half of the world’s bond market is trading below the Fed funds rate. Investment grade yields, on average, are below zero in the euro area.

This is completely abnormal because it reflects an abnormal economic, financial and political backdrop. Those who point to the stock market’s performance with glee, because of its V-shaped recovery, don’t bother telling you that in the past 12 months the total return is marginal in real terms and the best performing sectors are the ones you can only typically rely on in a deflationary recession – real estate, utilities and consumer staples.

One of the problems coming out of the most recent recession is that the global debt load is infinitely larger now than it was at the peak of that prior credit-bubble cycle. The world is awash in debt. Years of monetary intervention among the world’s central banks created artificial asset-price inflation and exacerbated wealth inequalities at the same time. Fiscal policy failed to arrest the increasingly wide income disparity, a global dilemma that has become acute in the United States.

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