Notes From Underground: When China Shakes, the West Rattles and Rolls

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.

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11 Responses to “Notes From Underground: When China Shakes, the West Rattles and Rolls”

  1. arthur Says:

    China is sneezing. Will the world catch a cold?

  2. costaselgreco Says:

    Excellent words Yra. People or markets that believe in anyone’s omnipotence give me the impression of lacking in the self-confidence of good judgement. In the case of Wall Street it’s like the caricature of a man with too much money and not enough brains. Omnipotence surely has – at best – a limited shelf life.

  3. Mario D Says:

    What a great point Yra I could not agree enough. What the interesting figure to watch all day is the 10 Treasury stayed right in place which in my eyes means more cash holders. China has always been the silent “whale” that we take our eyes off of until we decide to look that direction. Hey but as we all know 2+2=5 right and it makes sense. Lastly have to get in my thoughts the S&P’s close was 11.1% below the May 21 all-time high, an official correction for the first time since 2011 (though I believe we hit a correction intra-day on Oct 15, 2014). That’s a drop of 7% in 2 sessions, 10% in 5. Will september and October reign true to their norm? Will the Fed’s keep face and look at the rates raising up now or in the first qt of 2016??? Much to ponder.

  4. yra Says:

    Mario–nice to hear from you and I am glad to see how much you have learned over the time we have been corresponding—good points all

  5. Mario D Says:

    Great to Yra hope all is going well, you only learn from the best. WhenI think of China that famous Lincoln comes to mind. “A drop of honey catches more flies than a gallon of gall.” No drops out in China these days and the past few years. Lets see what unfolds. Our housing market is but a speedboat compared to that titanic out there.

  6. Chicken Says:

    Gold – Yeah, I guess I just don’t get it and haven’t since noticing producers are bleeding cash?

  7. yra Says:

    Chicken–read the Ben Hunt piece and see why it is presently a trade until the shift takes place in the mineset of the world about its central banks—-the equity markets have serves the purpose of the haven in a world of central bank omnipotence—trade it asanything else and use compelling chart levels depending on your parameters of duration—-if you have respect for the planned outcomes of ECB,FED BOJ keep buying stocks as it has been the place to be and has been rewarding

  8. Dustin L. Says:

    Yra- The gold hate has reached such high proportions people neglect to even study the charateristics that have made gold a desirable instrument as an alternative asset to protect against currency events. I could not agree more that which will be gold supportive is the fear of deflation and the anticipation of Central Bankers reacting, to use your term, like the 37er’s they are and in doing so loosing their unwarranted credibility as masters of the universe. In such an outcome, yes equities will likely still go up in nominal terms, but at such rich valuations will they outperform some other more out of favour assets? On that I am skeptical. In such conditions many business’ often suffer in real terms. From my perspective equities could still outperform until we see the Dow/Gold ratio at higher levels but, as a risk-reward trade gold is certainly something to watch in the years ahead indeed as overconfidence and overreaction seems strong in the gold bears ranks.

    P.S. I have yet to read Ben Hunt’s piece but it’s on the reading list, thanks for sharing.

  9. yra Says:

    dustin as usual a nice add to a very complicated subject.Read Ben Hunt for it is very enlightening and part of the mission of NOTES is to enlighten

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