It is time to invoke one of the great war movies of the anti-war decade, Kelly’s Heroes. The theme is relevant in two ways. First, a ragtag group is trying to steal a hoard of German gold from a heavily guarded town and divide it up among themselves as booty from the war (similar to Chinese desire for Western-owned gold). Secondly, one of the key characters is Sargent Oddball, a tank commander played by Donald Sutherland,who will not tolerate the negative waves of people who doubt the success of the “mission.” Today, Nasdaq ran the article, “China Warns Economists to Brighten Outlooks.” Through various sources the Chinese authorities said, “Securities regulators, media censors and other government officials have issued verbal warnings to commentators whose public remarks on the economy are out of step with government upbeat statements …” The formal policy is “zhengnengliang,” translated as POSITIVE ENERGY or as Oddball would command, “don’t give me any negative waves.”
The financial media relies on the Chinese releases (think of August 24, 2015), but with a positive gloss demanded by the Politburo what value will there be to any data releases? The authorities have already put on notice those commentators issuing negative reports on the growth of Chinese debt. Coupled with decree against negative waves was a Financial Times article titled, “China Crackdown on Data Sales Opens Gaps in Economic Statistics.” My readers are well aware that I have never had much confidence in the Chinese official data releases and have mocked those talking heads that gush over every PMI or GDP report. The reporters note, “Much of the most detailed information is not published publicly by the National Bureau of Statistics but is SOLD (emphasis mine) to news agencies, banks, consultancies or other parties by departments within the bureau. In some cases, different departments will compete for revenue by issuing rival data sets.”
Part of the reason the Chinese are putting an end to this process is to slow the huge amount of speculative trading taking place in the Chinese commodity markets, which certainly has spillover effects around the globe. The ultimate aim seems to be in line with the effort by President Xi to clamp down on all types of “illicit” behavior as the Politburo is exerting a tightened fist over all types of financial behavior in an effort to insure against potential political unrest as the economy slows. Recently, it was reported that President Xi had taken control of the command centers of the People’s Liberation Army (PLA), which caused foreign observers to be concerned about potential Chinese unrest. The possibility of growing unrest is one more potential spark to start the global financial prairie fire. Only positive energy should be exported from Beijing.
***The ECB announced today that it will stop printing the EU500 banknote because of its use in illicit activities. The issuance of the banknote will be stopped around the end of 2018 when the banknotes of 100 and 200 euros of the Europa series are planned to be introduced. The Germans and Austrians are unhappy with this move by President Draghi as they perceive it to be the first efforts at creating electronic currency, which would make it difficult to hoard cash in times of negative interest rates. President Draghi seems to be in full battle mode in his war on German savers. Repress the savers, reward the debtors is the battle cry of the ECB. Spend it if you got it or even if you don’t. But the bottom line of the Chinese and ECB actions is that financial policy makers around the globe are very worried about something and yet the equity markets remain priced for POSITIVE ENERGY. The vast amount of uncertainty is tradeable but certainly not worth a long-term investment, except if GOLD becomes a better store of value with the demise of the 500 euro banknote.
***The Swiss National Bank (SNB) has been paying homage to Johannes Gutenberg by PRINTING BIBLICAL PORTIONS OF SWISS FRANCS. A BLOOMBERG reported that the SNB holdings of U.S. equities hit a record $54.5 billion. The SNB intervenes in the foreign exchange market to prevent the Swiss franc from appreciating by printing Swiss francs and selling them for other foreign assets. The types of foreign assets can be bonds, equities or just currencies but the activity of the SNB during the last five years has seen a massive buildup of its balance sheet. The current level of foreign reserves is now 650 billion francs. This is an enormous figure when you compare it to the Swiss GDP of 701 billion francs. The Swiss are printing paper and buying tangible assets, a true ALCHEMY of finance. The world is a ball of confusion riding many negative waves. Sorry Sgt. Oddball.