Notes From Underground: Is The East Wind Prevailing Over the West, Chairman Mao?

In following up on my thoughts on the move in SHIBOR, I always want my readers to follow along with my thoughts when it comes to China. In my opinion, China takes on added significance because of its huge impact on the GLOBAL MACRO scene. In June 1998, President Clinton was heading to China for a very important meeting with HU JINTAO. Prior to Clinton’s June 25 trip, the U.S. Treasury intervened in the foreign currency markets on June 17 and halted the rise of DOLLAR/YEN by selling DOLLARS and buying YEN. The Asian contagion debt crisis had seen the YEN weaken by 35% during the previous crisis and the Chinese leadership was concerned about the impact of the weakened YEN on Asian exporters.

The U.S. Treasury acted prior to the trip, a trip, by the way, in which President Clinton spent a week in China and did not stop in Japan. The Chinese were able to exert a great deal of influence upon Bill Clinton as the U.S. was seeking to improve relations with the burgeoning world political and economic power. My point is that the Chinese no longer have to “ask” for others to exert economic influence for they can move to impact global markets on their own. China can rattle global markets and importantly world natural resource prices by threatening to slow their economy and spread tremors throughout the global financial system. SHIBOR+BERNANKE= THE UNWINDING OF A HEAVILY LEVERAGED SYSTEM, casting shadows of doubt where only a month ago so much certainty supported global credit and equity markets.

In another example of China’s recent unhappiness with the developed world, I refer to a June 6, 2013 article in the Financial Times. The article, “China Says EU Must Recognize Its Decline Amid Trade War,” by Kathrin Hille. Three quotes from the article sum up the feelings of the Chinese toward the perceived status quo of the world’s established powers. These are all from an editorial in the People’s Daily that the author cites:

  1. “China doesn’t want a trade war, but trade protectionism cannot but trigger a counterattack.”;
  2. “The change of the times and the shifts of power have failed to change the condescending attitude of some Europeans.”; and
  3. “We have set the table for talks [yet] there are still plenty of cards we can play.”
The tone of the FT and People’s Daily editorial is certainly something of which to be aware. SHIBOR and a potential Chinese effort to slow its economy will send ripples throughout the global economy. FED actions and a world awash in political uncertainty will make the coming months extremely volatile. We will search for opportunities as investors move to the sidelines and divest assets that are not under duress. Tomorrow we will look at the global financial landscape and see if we can find some jewels in other people’s junk.

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6 Responses to “Notes From Underground: Is The East Wind Prevailing Over the West, Chairman Mao?”

  1. Chicken Says:

    Agreed.

  2. Ronald Ferrill Says:

    The cynical side of me says that Ben has used the opportunity he had last week to manufacture the downdraft we’ve seen as a point made to the president, that offhanded, personal remarks have consequences. Therefore he (Ben) is basking a bit of schadenfreud. Would that it were so. Words have consequences Mr. President. (what a vainglorious maroon!)

    I agree and so what if I do, that the actions being taken by governments with respect to their currencies and the more or less continuous punch – counter-punch, leads us to increased volatility and in this case real “fear” that the unnaturally low interest rates cannot be held, and China won’t be only one whose economy slows (even more). In fact, I think you, Yra, pointed this potentiality out back when Japan first mentioned their plan.

    In any case, we should see the opportunity in markets that always accompanies volatility and breakdowns of trends. I admit to being consistently early (started my plan to sell equities in March), and sold last tranche on the morning before Ben’s summary description of the meeting (admit that was sheer luck – otherwise I am a fool). Trying now to keep powder dry as I noted to my friends that the 2043 Apple Inc. bond lost over 14% since debut on May 4th, and cur yield up from coupon of 3.85% to 4.46% with YTM now 4.7% (don’t own and not buying – – yet)

    Grey skies are gonna clear up!

  3. yra harris Says:

    Ronald–good post and a tip of the hat on the stock trades—we will get to the jewels that may exist as the sell off continues—deleveraging is a powerful process–and the ETF have played a significant role as many investors failed to realize the risk involved

  4. Dustin L. Says:

    Yra- I know this is off topic but I thought it might spur a discussion. Upon reading the following article from FT I couldn’t help finding myself seriously considering what the impact of negative rates on deposits from the ECB would be. I still think there are many other “more conventional” paths policy can take first in Europe but it is interesting to think about. I thought you would have good insight on the topic and it’s unintended consequences.

    http://www.ft.com/intl/cms/s/0/a9d70384-dd80-11e2-892b-00144feab7de.html?ftcamp=crm/email/2013625/nbe/TradingRoom/product

  5. yra harris Says:

    Dustin–will get to that but have some unfinished events to try to get thru–the times are very difficult

  6. Dustin L. Says:

    Fair enough good sir, these are indeed tough and troubling markets. But it would seem turbulence is what creates the greatest opportunities for those who as much as possible see through the fog with a clear head. In seeing clear while others ride the emotional roller coaster is what makes your blog a must read. In light of last night’s post, let’s all keep our heads.

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