Mao, Deng and Xi, oh my! It seems whenever China releases economic data, the U.S. markets and its developed market cousins either go into an orgasmic paroxysm or a spasm of pain. Readers of Notes know that I have criticized the Chinese economic releases as fiction and my rational was simple. If the Politburo would not allow GOOGLE to operate without restraint within China why should I trust any “official data.” Many times I have referred to GDP and PMI figures hitting the predicted market consensus as a greater feat of financial engineering than Jack Welch’s record of beating Wall Street’s forecast’s for GE earnings by a penny every quarter while Jack was CEO.
Now I am left to wonder if the Chinese leadership relish their newfound ability to roil global equity markets by the mere hint of action: lower lending rates, get a rally. Depreciate the YUAN 4% and all hell breaks loose. Today the YEN had a rally of 4 percent and it failed to create any headlines, unlike when the YUAN moved 1.9% overnight last week. The U.S. dollar lost 2 percent of its value today sending the Chinese stock market 8 percent overnight. Wow, we have entered into financial bizarro world. I THINK THE REVOLUTIONARY REMNANT OF THE POLITBURO ENJOYS DISRUPTING THE MARKETS, FOR THE ROLE OF RADICALS IS TO CREATE CHAOS AND DISRUPT THE ESTABLISHED ORDER. I tip my hat to the Chinese leadership for a job well done. How much equity value has been lost in the wake of the YUAN depreciation?
***Question to Swiss National Bank (SNB) Chairman Thomas Jordan: When the SNB pulled the plug on the EUR/CHF peg, the Swiss decided to invest all the Swiss francs printed to intervene in the markets in global currencies and equities. The SNB has bought more than $100 billion of global equities, as well as purchased the sovereign bonds of many different nations. How are those Aussie, Canadian and Kiwi purchases performing? And the value of all that global equity? Just checking in to see how another central print with a printing press is so handily outperforming the world’s best investors. Germane to this point, I wish to lead readers to a great piece from Ben Hunt of Epsilon Theory dated June 30, 2013, “How Gold Lost Its Luster…” This is one of the great pieces written by a knowledgeable critic of contemporary central bank policy.
Mr. Hunt makes the point of referring to Fed, et al embarking upon the narrative of central bank omnipotence: “Central bank policy will determine market outcomes.” Further (emphasis mine), “IT Connotes that whatever the central bank policy might be, it will drive the market outcome; whatever the market outcome, it was driven by central bank policy.” This is an extremely powerful statement but it is the foundation of what global markets rely on and fills the airwaves and columns in the age of central bank cult of infallibility.
In referring to the relevance of GOLD, Ben Hunt states what I have been trying to communicate for many years but is much more succinct: The stronger the narrative of central banker OMNIPOTENCE, the more likely it is that the price of gold goes down. The weaker the narrative, the less established the common knowledge that central bank POLICY DETERMINES MARKET OUTCOMES–the more likely that the price of gold will go up.” It is from this vein of thought that I make the case that it is the fear of deflation that makes gold desirable for the onset of global deflation will because the end of the reign of central bank omnipotence in the eyes of all holders of fiat currency.
Again, GOLD was no longer desirable after the success the central bankers had in ending global liquidation through QE without igniting “hyper-inflation.” Equities rallied in relief that the world’s central bankers had prevailed against asset collapse. It was a lesson learned by ECB President Mario Draghi in his “whatever it takes and no taboos” when the European financial system was on the verge of implosion. How does central bank omnipotence perform in a world of zero and negative nominal interest rates. The Chinese leadership seems to be tabling the question.
***The news from North Korea going on war footing over the weekend seems to be from the book of Doctor Spock. Like the neglected child in search of any attention, the North Koreans remind the world that they are still on the scene by going into tantrum mode. The N.K. seem to have an affinity for this just when the world is trying to deal with another crisis because the payoff seems to be more immediate and greater in an effort to remove them from the discussion. I need food and energy and I need it now. Oh, and I do have Nukes. This is not an issue to roil the markets.