August 12, 2019
Let's step through them, and then talk about which one matters most …
Today, Argentina had a 30% plunge in stocks, and as much as a 37% plunge in the currency (at the worst levels of the day). That was on prospects that the incumbent reform government will lose power in the election, sending an already bust economy off-the rails of the IMF reform plan.
Here's what that stock market crash today looks like on the chart …
 |
|
Next, the temperature is rising on the populist movement in Europe. The new UK leader has already put a hard deadline of October 31 for the UK to leave the EU – putting the EU under the gun to make concessions on a deal or take the risk of a "no-deal" Brexit, which could entice European Monetary Union constituents to leave. On that note, the Italian government (the second biggest debtor in Europe) is crumbling, with the prospects new anti-EU leadership could be coming. That would re-introduce the risk of Italy leaving the euro and inflating away its debt load.
As you can see in the chart below, Italian yields are decoupling from German yields (Italian yields rising, as German yields are on record lows). |
 |
|
Keep in mind, Italian yields were running around 7% (unsustainable debt service levels) back in 2012, when it looked like Italy and Spain might default and destroy the monetary union. Draghi (the ECB) stepped in and saved the euro by promising to buy unlimited sovereign debt. Now 10-year Italian yields are beginning to rise from under 1.5%.
Next, the most imminent risk (and therefore important risk) remains surrounding China. Will they come back to the table and negotiate in good faith to get a deal done on trade? Will they hold-out and devalue the yuan? Will China overtly intervene and enforce its own law on Hong Kong, breaking its multi-decade accord with the UK? This happens to be the time of year when China's communist party leadership (current and past) is gathering at a seaside summit in China to strategize for official policymaking meetings in October. With that, we probably don’t get any movement on the questions above in the next week (or more).
August 9, 2019 As we end the week, Trump continues to posture for some leverage to get China back to the table, sooner rather than later.
This morning he threatened to cancel the September talks. That may sound like a threat that will lead to the opposite outcome (a later return to talks, rather than sooner). But as we've discussed, Trump seems to be making the bet that ramping up the threats/penalties will thwart China's attempt to play "hold-out" through next year's election. With that, it does appear his formal "currency manipulator" complaint against China may have done the trick (to restore some leverage). We can see it in the steady fixings by the PBOC since Sunday night. The question is: Is the Trump administration willing to take the risk of a "no deal" into the election, which would likely leave the global economy deteriorating sharply as people sit on their hands awaiting an election outcome? I think the answer is a clear no. Consider the White House's China strategy is being highly influenced by Peter Navarro (Assistant to the President and Director of Manufacturing and Trade Policy). And his well documented viewpoint would suggest he and the White House believe the stakes are far too high, to risk turning it over to another administration (with no appetite to force structural reform). For perspective, here's how Amazon summarizes Navarro's 2011 book, Death By China … "The world's most populous nation and soon-to-be largest economy is rapidly turning into the planet's most efficient assassin. Unscrupulous Chinese entrepreneurs are flooding world markets with lethal products. China's perverse form of capitalism combines illegal mercantilist and protectionist weapons to pick off American industries, job by job. China's emboldened military is racing towards head-on confrontation with the U.S. Meanwhile, America's executives, politicians, and even academics remain silent about the looming threat…(more here)."
August 8, 2019 The yuan continues to be the signal for global markets, and for the past two days China has held it steady.
With that, we're getting some recovery in yields and stocks. As you can see in the chart below, stocks have fully recovered the losses that started Sunday night, triggered by the devaluation of the yuan through 7.0 (yuan per dollar). |
 |
|
While stocks have recovered those losses, the interest rate market has not fully recovered the losses. The 10-year yield is the key barometer of global financial market sentiment right now (and sentiment on prospects of a trade deal). And it's flashing red (negative).
|
 |
|
My view: We're at the stage where a full recovery in stocks, back to new record highs, isn't happening until a trade deal is done — even if the prospects for more Fed rate cuts are building, and even if the economic data comes in solid.
With that in mind, we run into a big technical area of resistance for stocks today (the 61.8% retracement of the recent correction). |
 |
|
But as we've discussed in recent days, I suspect Trump thinks he can get China back to the table this month (rather than next), by escalating the threats. His (currency manipulator) claim to the WTO does indeed increase his leverage. With that, I think the market is well under-estimating the chances that a deal could come in the coming weeks.
August 7, 2019 The global interest rate market continues to price in the worst-case scenario.
What's the worst-case scenario? An indefinite trade war, and one that likely ends up with China in the penalty box, not just with the U.S., but with global trading partners. And an isolation of the Chinese economy would likely lead to a global military war. That's what $15 trillion of negative yielding global sovereign debt is telling us. So the interest rate market is taking signals from the trade war. Global central banks are taking signals from the interest rate markets (not the other way around).
So who is sending the signals on the trade war? Trump. And with the confluence of recent moves (Trump's threat of additional tariffs, China's currency response, and Trump's charge of currency manipulation), those signals have looked more ominous. That triggers more global capital flows into sovereign bonds (namely Treasuries).
The question is, has Trump lost his leverage to do a deal (even with concessions) with China? The markets have voted 'yes,' he has lost leverage, especially after taking the charge of currency manipulator to the WTO. But contrary to most of the viewpoints we heard yesterday, China does have more to lose under the charge of 'currency manipulator.' The WTO is forced to make a judgement on the charge, which means China's other global trading partners are forced into the China-trade-war fray. That has given Trump leverage. In the meantime, we have two paths that are positive for stocks: 1) Global rates going even lower, forces capital that requires return into stocks (as we saw in the post-financial crisis environment). 2) Trump withdraws his charge against China and does a deal, stocks boom.
August 6, 2019 In my note yesterday, we talked about the two big charts to watch overnight: 1) the yuan, and 2) U.S. stocks.
We closed yesterday with stocks hovering a little more than one percent away from big technical support (the 200-day moving average) in the S&P futures. A test and hold of that line would give us about an 8% correction in seven days. That big support level (the purple line) did indeed test overnight, and we had a huge bounce as you can see in the chart below … |
 |
|
The test of the 200-day moving average came early Monday evening, after news hit the wires that the U.S. had officially labeled China a currency manipulator.
So what did China do with the yuan last night? The risk heading into the night was that they would continue the devaluation (maybe something much bigger). Instead, they eased the tension, moving the yuan back below 7. And PBOC officials were out reassuring companies the currency would be stable.
That was fuel for stocks today. From the lows overnight, S&P 500 futures rose almost 4% by the New York close. But it was far from "risk on." Gold continues to make new highs. And treasury yields continued to make new lows (closing closer to the lows of the days on the 10-year). Now, the consensus opinion going around today, on this step to label China a currency manipulator, is that it's futile/ ineffective. What does it do? It draws global trading partners into the fray, via the IMF and WTO membership. The WTO will be forced to make a judgement on China. That ups the stakes for China, with the prospect of being put into the global penalty box.
Here’s an excerpt from a Congressional Research Service white paper, Currency Manipulation: The IMF and WTO…
"Unique among the major international trade and finance organizations, the WTO has a mechanism for enforcing its rules. If a country believes another country has violated WTO rules, to its detriment, it may request the appointment of a dispute settlement panel to hear its complaint. The other country cannot veto the establishment of a panel or adoption of a WTO decision by WTO members. The panel reviews the arguments in the case and renders judgment based on the facts and WTO rules. If the losing party does not comply with the ruling within a reasonable period of time, the WTO may, if requested by the complaining party, authorize it to impose retaliatory measures (usually increased customs duties) against the offending country or to take other appropriate retaliatory measures against that country’s trade."
Can the U.S. withdraw this claim? It appears so, rather easily. Which could be a bargaining chip to get back to the negotiating table.
August 5, 2019 China made an important move in it's currency overnight. It was clearly a political response to Trump's threat of tariff escalations.
That has sent some shock waves through global markets. Let's talk about why it matters and how it may play out. It's nothing new to see China walking down the value of the yuan. Managing a weak yuan has been the centerpiece of the economic plan that has driven their ascent from relative insignificance, to the second largest economy in the world (over the past twenty-five years or so). So, predictably they've turned to their trusted economic tool, a weak currency, to offset tariffs. Since Trump's bark turned into bite early last year, China has devalued the currency by 13% against the dollar in response to tariffs. This has been expected, and it has happened, but it becomes concerning for global market stability when the prospects of a big one-off devaluation increase. And that's what happened overnight. That's why global markets have been shaken. Remember, back in August of 2015, the Chinese surprised markets with a devaluation of the yuan. It was (also) a modest adjustment in the currency, but global markets fell sharply on the prospects that a big one-off devaluation may follow, to support their flagging economy. It didn't happen then and shouldn't happen now. It would be a deadly move for China. It would be an affront to, not just the U.S, but to all global trading partners. And that would likely induce a more global response against China's trade advantage. China would be put in the global penalty box. That would be damaging for the global economy, but the biggest loser would be China. With that, I suspect this will prove to be a warning shot. And perhaps it will bring both parties (the U.S. and China) back to the negotiating table this month (i.e. sooner rather than later). In the meantime, as we've discussed in my daily notes, Bitcoin continues to be among the big winners when the yuan is weakening. Bitcoin was up 13% today. As I've said, the rise in Bitcoin has everything to do with money moving out of China, and less to do with Silicon Valley genius/ global monetary system disruption. Bitcoin futures and off-exchange (peer-to-peer) trading are liquidity sources for Chinese citizens, allowing them to circumvent government capital controls (which restrict individuals from moving more than $50,000 out of the country a year). With that, as we've discussed, the Bitcoin bubble may not deflate until/unless Trump makes concessions to do a deal. In addition to the yuan, the chart to watch tomorrow (and overnight) will be U.S. stocks. |
 |
|
August 2, 2019 We have global monetary policy now pointing south (including the Fed). And the perception of an indefinite trade war, feeds the market's belief that global central banks will do more (maybe a lot more).
That puts gold back into the crosshairs. Gold was among the biggest movers yesterday. |
 |
|
As you can see in the chart, gold has broken out of this sideways range of the past six years.
We're still about 35% away from the 2011 highs. Those highs were, of course, induced by fears that QE would lead to runaway inflation. Inflation didn’t materialize. And the price of gold was nearly cut in half over the next few years. Following massive global QE, deflation remains the bigger risk. But now money is moving into gold as a general store of value in a time of heightened global tensions and economic risk. As I've said, gold is sold as a hedge against inflation, but it's really a hedge against the worst-case scenario.
If you haven't signed up for my Billionaire's Portfolio, join now — get your risk free access here.
August 2, 2019 We've discussed for some time, the idea that Trump has used his position of strength in trade negotiations with China to wield influence over the Fed.
He's badgered the Fed for a rate cut for more than a year. By driving a harder line on negotiations with China, he ultimately soured business confidence to the point that the Fed was forced into a “defensive” cut. With that in mind, yesterday I thought we should expect Trump, with a rate cut now under his belt, to get a deal done with China. As we know, trade talks were restarted this week, starting a timeline that would get the ball rolling on a deal coming out of the expected rate cut. But China seems to be extending the timeline, pushing off further meetings until September. With that, today, instead of an announcement that a trade deal is getting close, Trump came with even more aggressive posturing – a threat to ramp UP tariffs beginning September 1. The market took this as a message that a deal was nowhere near a consummation. I think we have Trump turning UP the heat to get a deal done — sooner, rather than later. The September 1 deadline would target getting China back to the table sooner, and a trade deal this month! Trump has had the upper hand in these negotiations (working with the backdrop of strong economy, relative to a weakening Chinese economy). But as we get closer to the 2020 elections, China finds itself with building leverage. My view: The worst case-scenario for Trump is China turning its back altogether on a deal. That would likely spiral global financial markets, global confidence, and the global economy. And that would be a deadly recipe for the prospects of a second term for Trump. Regardless of your political views, that's a scenario no one should want. The erosion in global confidence would overwhelm (global) fiscal stimulus and monetary stimulus, leaving both with no ammunition into what would likely be a global depression (as we were flirting with in mid-2016), not recession. Alternatively, if Trump does a deal (any deal), into a solid economy, with global central banks in an easing direction, global markets and economies will boom. That gets Trump re-elected. If he wants to press China on more demands, he can do it in the second term. If you haven't signed up for my Billionaire's Portfolio, join now — get your risk free access here.
July 31, 2019 We got the quarter point cut by the Fed today. For those that have been looking for more, they also ended their balance sheet run-off two months early. This means the bonds that mature, they will be reinvesting the proceeds (i.e. buying bonds — that halts the tightening of money via the Fed balance sheet).
Remember, as we've discussed, the direction is more important than the magnitude at this point. The Fed has just done an about face, from a tightening cycle, to easing. The direction is now facing south, instead of north. And it was the indiscriminate (tone-deaf) mechanical tightening by the Fed that represented a big risk in markets. Not only did it appear that the Fed might continue plodding along a pre-determined rate hiking path, at the expense of the economic recovery, but that monetary policy direction was sucking capital out of the emerging market world, and into the U.S. (dollar and dollar-denominated assets). With that, the biggest winners in this direction change by the Fed should be foreign currencies and emerging market stocks (and economies). Trump now has his rate cut. I suspect we'll see him 'claim a victory' on China negotiations (i.e. make a deal) very soon. That puts global central banks in an easing direction, as the weight of a global trade war gets lifted. Global markets and economies will boom. If you haven't signed up for my Billionaire's Portfolio, join now — get your risk free access here.
July 30, 2019 With tomorrow's big Fed decision looming, we heard from the Bank of Japan overnight.
As the ECB did last week, the BOJ held the line on current policy, but stepped up the rhetoric on doing more.
But as I've said, I suspect neither (the ECB nor the BOJ) will have to execute on the "doing more" rhetoric.
Why? A direction change from the Fed tomorrow (moving from tightening to easing) will likely be enough to turn the tide of global sentiment. If a U.S./China trade deal follows, the next moves by the ECB and BOJ will be exiting emergency level policy, not plowing deeper into it.
We will enter the Fed tomorrow with the 10-year yield hovering just above 2%. That means banks are paying an annualized rate of about 50 basis points more to borrow money overnight (between banks) than the government is paying to borrow money for 10 years.
For perspective, in October of last year, the 10-year yield was 3.25% (125 basis points higher). Two months later, the Fed hiked one last time — and the global financial markets clearly signaled that it was a mistake. Stocks plunged. Yields plunged.
Immediately following the December move by the Fed, we started looking at the similarities between 1994-1995 and 2018-2019. And that script has played out perfectly.
Remember, last year (2018) was the first year since 1994 that cash was the best producing major asset class (among stocks, real estate, bonds, gold). And the culprit (in both 1994 and 2018) was an overly aggressive Fed tightening cycle in a low inflation recovering economy.
The Fed ended up cutting rates in July of 1995 and spurring a huge run up in stocks (up 36%). Here we are in July of 2019, and the Fed, again, is set to reverse course on rates. We enter tomorrow's Fed meeting with stocks already up 20%. If you haven't signed up for my Billionaire's Portfolio, join now — get your risk free access here.
|