The Japanese leave Washington with no support for alleviating one-sided currency moves. For China it is all about respect for growth, wherever it may be. The Chinese GDP was released on Thursday and it came out exactly as forecast at 6.7% (shocking, I know). There was virtually no criticism of the Chinese as the nations are watching closely while China commences its transition from an export-dominated economy to a more balanced growth model, where domestic consumption takes on increased importance. In contrast to the G-20 view on Japanese currency intervention, SNB President Thomas Jordan announced that the Swiss would increase its balance sheet through currency intervention “… to prevent an already ‘significantly overvalued’ franc from strengthening.”
So it seems the Swiss heard a different policy outcome then the Japanese. Yes, Japan has a far greater impact on the global economy than Switzerland but it seems there is a lack of consistency in policy. What will be important is this: If the Japanese were to actually intervene in the currency markets in direct fashion, it would signal that the “currency wars” are on, G-20 be damned. If Japan cuts interest rates further will it be deemed currency intervention? Does it call to question the ECB’s efforts? Will the same criticism apply to them? The IMF and G-20 expressed their concern about BREXIT and warned about the negative economic impact for the U.K., Europe and possibly the global financial system.
The Davos crowd is raising the fear of economic contraction to warn the Brits against leaving the EU but I will state emphatically: A NO VOTE will lead to the contagion of referenda across Europe if the Brits vote to exit. That is the greatest fear for the European elites. The outcome of a NO vote is conjecture and there can be no definitive measure of outcomes except a high probability of political turmoil. The best synopsis of a Brexit seems to be that of Olivier Blanchard’s view in the Ambrose Evans-Pritchard piece: “Professor Blanchard refuses to join the apocalyptic chorus on Brexit but advises the British people to enter these uncharted waters with open eyes. Divorce will not be a short shock followed by swift recovery.”
We will continue to hear the established elites raise the level of fear on the U.K. voting to leave. President Obama arrives in the U.K. this week, offering his support to Cameron and the YES to EU movement. This drama will play out over the next nine weeks causing volatility for currencies, debt and equity markets. Again, trade accordingly, but don’t invest in any long-term outlook.
***Two pieces of financial media to watch: Wall Street Week on Fox Business had a full half-hour with Kyle Bass.This is an enlightening interview as Bass lays out his views on China and the global equity markets. On Friday morning, me and Rick Santelli covered themes familiar to readers of Notes From Underground. We discussed the IMF and raised the issue of the IMF gold hoard was brought to light.
My view is consistent: The IMF does need increased funding but should be forced to monetize the GOLD by creating GOLD-BACKED IMF BONDS. This is becoming ever more relevant in light of James Rickards’ new book on gold. Rickards emphasizes gold is money so the IMF GOLD should be monetized by using it as collateral for debt. Watch the two pieces to generate important discussions for trading in the coming period of great political uncertainty.