Notes From Underground: Flattening Curves — All Action and No Talk

In the political realm, the concern about tariffs has been lessened as Chinese President Xi took the high road with some silky conversation. It is not in the Chinese interest to raise the level of shouting/tweeting, nor to allow the YUAN to depreciate. The last blog post weighed the harm China would do to itself if the YUAN were to depreciate for it would then have to face the acrimony of many nations it is trying to placate. From a TECHNICAL perspective, it appears that the YUAN is going to test three-year lows between 6.11/6.20 to the dollar. As the Chinese tensions eased, the world now turns its eyes to Syria.

There’s possibility of direct conflict between U.S. and Russian forces over Assad’s use of chemical weapons against his own people (in contravention of all measures of moral rectitude). Will President Putin allow Syrian President Assad to have his “nose bloodied” in an effort to gain some reprieve from the pressure of economic sanctions imposed by Western economic powers?

This is the question for markets because if Putin fails to respond to any action by the newest coalition of the “willing” then he will certainly use back channels to get relief from the newest sanctions. It seems the French President Macron is pushing hardest for the Western powers to selectively bomb strategic military assets of the Syrian regime. Macron is coming to the U.S. soon on an official state visit and he has assumed the role of being Europe’s emissary to Trump. I caution all traders: When the bombs begin to fall be leery of the GOLD rally for the buying of the metal in times of conflict is a fool’s errand, especially if the markets realize the military action is a one-off event. Last year, the use of chemical weapons brought a barrage of 59 Tomahawk cruise missiles. The GOLD initially rallied to 1269 but dropped $20 and wound up closing lower on the day.

Yes, last year the Russians were not as steadfast as they appear now but be cautious and let the market be your guide. Gold did have a powerful rally today as the headlines /tweets were very provocative but the metal did have a $16 selloff from the highs. Syria is a more dangerous situation because Putin’s hand is much stronger now that Assad has subdues much of the rebel military power. It is now French president Macron now making chemical weapons use a redline. As Pete Seeger asked, “When Will They Ever Learn.”

Russian president Putin has the ability to raise the level of conflict  now that his military and allies control the situation on the ground. The operative question for the U.S. will be: Are the Russians willing to sacrifice Assad for the good of Mother Russia?

Today’s FOMC minutes were “deemed” hawkish as many saw a potential steeper rise in interest rates as the effects of the Trump fiscal stimulus in the time of full employment begin to increase the level of economic activity and with it inflationary forces. But the FOMC minutes in its sanitized form made one mention of the flattening yield curve. No big deal. So the 5/30 and 2/10 U.S. curves closed at the lowest levels since 2007. Are any of the policy makers concerned about the renewed action in the current movement of the CURVE?

Yes, Dallas Fed President Robert Kaplan raised the issue in a Bloomberg Television interview from Beijing on Tuesday. Kaplan noted that “the flattening yield curve and the muted rise in 10-year Treasury yields suggest that the outlook for GDP growth is sluggish and that warrants attention as the history of inverted curves is not positive. I, for one, am going to be watching the yield curve very carefully. I’m not going to say blindly we should be raising rates if the curve keeps flattening.” Kaplan is a lone voice in the wilderness but maybe some interlocutor will bother to ask Fed Chairman Powell if he has any concerns about the renewed flattening of the U.S. curves, especially as the curves of many of the European countries are moderately steep.

Despite all this activity by the FED, the U.S. dollar cannot rally … HMMM. I still lean on the idea that the market remains concerned that the Trump economic team remains under the influence of Ross/Navarro/Lighthizer/Mnuchin, who are all apparently willing to use the dollar as a tool to promote a rebalancing of global surpluses. Once the Syrian situation is resolved my sense is that Team Trump will turn its ire on the Germans and their massive trade and current account surpluses. This will be a difficult problem for the European policy makers as it will bring to the fore a question raised in NOTES: The euro, whose currency is it? A strong currency would be problematic for the weaker economies of the EU.

I want to end the discussion on the Chinese tariffs with a quote from a Project Syndicate article by Barry Eichengreen published April 10. Professor Eichengreen is one of the better economic historians is worthy of investors respect. He said:

“In fact, Chinese policymakers have broader motives. Because China has a higher export-to-GDP ratio than the US, they are more concerned with preserving the global trading system; by eschewing escalation, China avoids jeopardizing it. And by appealing to the WTO, it positions itself as a champion of free and open trade. It demonstrates constructive leadership of the multilateral system.”

Enough said.


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17 Responses to “Notes From Underground: Flattening Curves — All Action and No Talk”

  1. Stefan Jovanovich Says:

    Why would China want to avoid a decline in the dollar price of the Yuan? Trump has offered them a trade-off: they can maintain the unit volumes of exports (which assures continued employment in China) but they have to reduce their dollar costs to U.S. importers and the “trade deficit” (sic). The recent behavior of the Hong Kong currency suggests that this is more than a hypothetical possibility as far as the managers of the Chinese Nation-State enterprise are concerned.

  2. Chicken Says:

    Perhaps XI is vowing to open up due to he sees a global slowing?

  3. asherz Says:

    “The GOLD initially rallied to 1269 but dropped $20 and wound up closing lower on the day.”
    One observation that few recognize and most deny, is that there is market intervention in the precious metals markets. Has there been intervention in the bond market? Did global QE affect interest rates? Have currencies been manipulated? Was LIBOR a free market rate? Has the Working Group on Financial Markets (PPT) intervened when needed in the stock market?
    Gold with a 5000 year history of being the touchstone for currency values, is a force to be reckoned with. Kissinger after Thomas Enders, assistant under Secretary of State for economic affairs told him in 1974, ” It’s against our interest to have gold in the system because for it to remain there it would result in it being evaluated periodically… We’ve been trying to get away from that into a system in which we can control…”, understood this after the Nixon cut the dollar ties to gold.
    When you increase the Fed balance sheet by over three trillion dollars in a short time, having gold in a stable price range is imperative. If the price went from $1300 to $5000 , what would people think of the reserve currency? Would holding that piece of green paper have the same feeling of trust? They might Trust in God but not in the Federal Reserve I.O.U.
    Paper gold determines the price of the physical bullion until now. That will not remain this way forever. The Chinese and the Russians have been accumulating physical gold and the Chinese have been understating their holdings, Meanwhile we haven’t had an audit in Fort Knox since 1953.
    A conspiracy theory? I don’t think so. I know you disagree Yra as do most. But in the last years of asset inflation, the outstanding asset not to join the parade is gold. The reason to some is obvious.

    • yraharris Says:

      Asherz—the reasoning is well thought out but I disagree about the obvious.The Kissinger quote is relevant and it is probably all that Kissinger understood about macro economics because it had an essence in the world of power politics analysis of the world system.I am not doubting the possibility I just desire too see more as such a vast effort will be leaked by someone .Yes,JP MORGAN has been suspected as will wait for the Blythe Masters book after she makes her second fortune through blockchain.My market sense is this—Gundlach came out the other day with a bold gold on gold .This is from a fund manager controlling $100 ,000,000,000 in assets.If I ran that kind of money I would be building a massive SILVER position–the Hunts had a mere Billion and look what they were able to do.There are several people with enough financial power and acumen to take on the Grand Manipulators and break Jay Gould—where fore art thou Ulysses

    • David Richards (@djwrichards) Says:

      Actually most commodities are well off their highs from years ago, not just gold. In fact gold has bounced better than some of the ags. Commodities haven’t “joined the parade” much yet because they’re typically late cycle performers. So hang in there :).

  4. Bojo Says:

    I am astonished, Yra, that you so easily accept ‘’Assad carried out a chemical weapons attack’’. There is no logic for him to do it, whereas ISIS (moderate rebels) and their backers US/Israel had all the motivation… and the long history of doing false flags to start wars.

    • yraharris Says:

      Bojo–assad has done it before so history my guide but if it is a Gulf of Tonkin issue I will certainly acknowledge.But my point is more will putin throw Assad under the bus in order to get relief from sanctions but your point is well taken

      • David Richards (@djwrichards) Says:

        I thought the Syrian tensions were being fanned by: 1) a proposed gas pipeline to Europe through Syria that threatens Russia’s gas supply monopoly to Europe; 2) Israel using the US against its enemies in Syria, Lebanon and Iran; 3) the Shia-Sunni power struggle for middle east dominance.

        If it’s #1, Putin won’t throw Assad under the bus and risk a backlash from powerful Russian oligopolists who oppose the pipeline. Putin doesn’t strike me as one who bluffs or backs down. Consider Putin’s history as a KGB man in East Germany when he defended the Soviet consulate against German mobs by himself and one gun. Now he has a supporting cast with enough firepower to destroy the world. Whatever one may think of him, he has nerves of steel and is unlikely to blink even in the face of overwhelming intimidation.

  5. Ronald Ferrill Says:

    So, is Prez Trump, Homer and Putin, Big Dan? There really isn’t any treasure atall sir… However, an inverted yield curve or closing in on one is sure the devil’s work for equities. Gundlach is pretty in touch with things and I am hoping that his public musings are aligned with what he does.

    Has the boss from Bridgewater gone overboard? Reading his comments about trade discussions with China seemed like he was channeling george Harrison from India, or maybe just Timmy Leary.

    Of course what we minions of the minor world are supposed to do is not look behind the curtain at the puppet masters, and mssr. Trump aint one. He didn’t read the memo and it has angered the real ones. What to do? What to do?!

  6. asherz Says:

    Yra- Your logical questions need an explanation . If intervention in precious metals is so obvious, why haven’t the smartest money managers and traders acted on it?
    My answer is that most use technical analysis to pull the trigger. Seven years of failure (gold $1900 September 2011) will keep investors uninvolved. Investors are looking at quarterly results. The Chinese and Russians have decade horizons.

    The central banker’s trading agents (e.g. JPM) are super technicians. They play the managed money technical advisers like a yo-yo. Yesterday for example when prices were breaking out, the volume was over the moon and all men were on deck manning their battle stations and knocked the price down $13 by the close.
    As to why no leaks of this manipulation, everyone knew that interest rates were being controlled and those who were using technical analysis were stymied (remember the 73 basis point 2/10 spread). You can’t fight $200 billion monthly QE. My thesis explains the motive (keeping the dollar as the reserve currency requiring stability vs. gold) and the obvious phenomenon of the historical inflation hedge not working in the age of asset inflation.
    Jay Gould in his Gold Corner was not battling the Fed. Traders have an adage of “don’t fight the Fed”. When the breakout finally occurs they will all jump aboard. Gundlach is probably getting a starting position.
    As an aside, paper gold does not have enough bullion if all demanded delivery. Stick to physical.
    The risk is an FDR edict about ownership, but with China, Russia et al in the picture that won’t work this time around.

    • David Richards (@djwrichards) Says:

      I’m not Yra but I use & love TA, admiring Jim Simons. But what I see is that most big institutional money is managed using fundamental analysis, not TA. And they’ve decided that as long as equities are flat-to-positive and real dividend yields are higher than gold’s 0% yield, then gold is an inferior investment. IMHO this largely explains gold’s poor performance – zero yield, no price momentum, plus confidence in financial markets and policymakers. For now.

      As for the “smartest money managers”, you can see from info in the public domain that a couple of highly respected money managers like Ray Dalio and Gundlach are over-weighted and high on gold.

  7. Peter M Todebush Says:

    JP Morgan fears Fed “policy mistake” as US yield curve inverts

    By Ambrose Evans-Pritchard, The Telegraph
    April 9, 2018
    Originally published here

    The US credit markets are flashing a rare warning of economic trouble ahead, signalling that the Federal Reserve risks blundering into another recession without a deft change of course.

    A blizzard of surprisingly poor data across the world suggests that the Fed’s liquidity squeeze is taking a greater toll than widely assumed, and that the institution’s staff model has so far failed to pick up the danger signs.

    US jobs growth fizzled to stall-speed levels of 103,000 in March. The worldwide PMI gauge of manufacturing and services has dropped to a 14-month low. The average “Nowcast” tracker of global growth has slid suddenly to a quarterly rate of 3.2pc from 4.1pc as recently as early February.

    Analysts at JP Morgan say the forward curve for the one-month Overnight Index Swap rate (OIS) – a market proxy for the Fed policy rate – has flattened and “inverted” two years ahead. This is a collective bet by big institutional investors and fund managers that interest rates may be falling by then.

    It is a market verdict that Fed officials have lost touch with reality in thinking that they can safely raise rates another seven times to 3.5pc by late 2019, as implied by the “dot plot” forecast. It is tantamount to a recession warning.

    “An inversion at the front end of the US curve is a significant market development, not least because it occurs rather rarely. It is generally perceived as a bad omen for risky markets,” said Nikolaos Panigirtzoglou, JP Morgan’s market strategist.

    “Markets have started pricing in a Fed policy mistake or have started pricing in end-of-cycle dynamics,” he said. Both possibilities are disturbing.

    The OIS yield curve has inverted three times over the last two decades. In 1998 it proved to be a false alarm because the Greenspan Fed did a pirouette and flooded the system with liquidity. In 2000 it was a clear precursor of recession. In 2005 it signaled that the US housing boom was already starting to deflate.

    Fed officials tend to watch a different signal – the moment when the 10-year US Treasury yield drops below the two-year yield – deeming this the best single predictor of recessions in a study last month by the San Francisco Fed.

    This has not yet been triggered. The problem is that this tends to happen several months after the OIS rate curve has already inverted. By then it is often too late. Trouble is already baked into the pie.

    “We think that the current expansion will begin to fizzle out before long. US equities are likely to suffer once the US economy stalls, and a weaker US stock market would almost certainly be contagious, especially if growth in the rest of the world also faltered,” said Finn McLaughlin from Capital Economics.

    The Fed’s monetary tightening is now biting hard. Growth of the “broad” M3 money supply in the US has slowed to a 2pc rate over the last three months (annualised) as the Fed shrinks its $4.4 trillion (£3.1 trillion) balance sheet, close to stall speed and pointing to a “growth recession” by early 2019. Narrow real M1 money has actually contracted slightly since November.

    This suggests that the reversal of quantitative easing may matter more than generally appreciated. The Fed’s bond sales have been running at a pace of $20bn a month. This rises to $30bn this month, reaching $50bn by the fourth quarter. RBC Capital Markets says this will drain M3 money by roughly $300bn a year, ceteris paribus.

    What worries monetarists is that the Fed intends to step up the pace of quantitative tightening (QT) regardless of the monetary slowdown. The institution adheres closely to a New Keynesian “creditist” model and pays little attention to monetary aggregates. This proved a costly mistake in 2008.

    US rate rises are having a parallel effect, but through a different mechanism. Three-month Libor rates – used to set the cost of borrowing on $9 trillion of US and global loans, and $200 trillion of derivatives – have surged 60 basis points since January.

    There is no sign yet that the Fed is having second thoughts about the wisdom of charging ahead with sabers drawn. The new chairman, Jay Powell, was strikingly hawkish in a recent speech, making it clear that he has no intention of bailing out Wall Street if equities tumble or credit spreads widen. He dismissed short-term shifts in the economy as meaningless noise.

    The Fed view is that Donald Trump’s unwarranted fiscal stimulus – lifting the budget deficit to 5pc of GDP at the top of the cycle – is inflationary and increases the risk of over-heating.

    The signs of a slowdown are even clearer in Europe where the low-hanging fruit of post-depression recovery has largely been picked and the boom is fizzling out, exposing the underlying fragilities of a banking system with €1 trillion of lingering bad debts.

    Citigroup’s economic surprise index for the region has seen the worst four-month deterioration since 2008. A reduction in the pace of QE from $80bn to $30bn a month has removed a key prop. The European Central Bank’s bond purchase programme expiresaltogether in September.

    What is surprising is that Germany is slowing hard despite a seriously undervalued currency (for Germany, not for France or Italy). Industrial output has contracted over the last three months and exports suffered the steepest dive for three years in February.

    Germany is highly leveraged to the Chinese industrial cycle so this may be a sign that Chinese growth has slowed more than the authorities admit – as indicated by plummeting yields on Chinese bonds, and rates on three-month Shibor and certificates of deposit.

    The world economy was coming off the boil even before President Trump launched an escalating trade war against China. The global money supply has been slowing since last September. The Baltic Dry Index measuring freight rates for dry goods peaked in mid-December and has since dropped 45pc.

    The Fed, the ECB, and the global authorities insist that this is a temporary “air pocket”, and that synchronized world growth is alive and well. The bond markets do not entirely believe them.

    • yraharris Says:

      Peter–thanks another good piece from the premiere financial journalist in the world—sorry for all the journalists who seek access rather then real discourse based on some modicum of the facts

  8. pgrommit Says:

    I learn so much from this blog (both posts and comments) that I rarely feel the need to comment, but I would appreciate other perspectives on the following.

    On cash gold and its technicals, a simple observation…..
    In both weekly AND monthly charts, virtually (if not literally) ALL shorter moving averages are above the next shortest m.a.’s (plot any you want–simple, exponential, etc.). I would expect this in something that’s flying higher, yet gold hasn’t taken out its high from last Sept., which itself is below the mid 2016 high.

    Would anyone care to make sense of this as anything less than a “constructive” picture? I get the whole manipulation meme. If the big boys can rig LIBOR and FX, and just pay a few weeks of profits in fines, why not gold? There’s not exactly a “deterrence to crime”, but I digress.

  9. Mike Temple Says:

    With regard to manipulation/suppression of gold (and silver), here is what I find so intriguing.

    The long term charts clearly show that gold and silver are carving out bottoms. With gold, on balance volume in Q1 2018 shows record figures. Gold and silver look like they are itching to break out. If the “manipulators” try to cap gold from breaking through key resistance of $1360/70ish, they are going to have to continue throw a lot more shrapnel to do so. If $1370 gives way convincingly, I think we could see some air pockets above.

    I saw a very interesting histogram chart of gold since it’s 2011 peak at $1900ish.

    From Aug 2011 through Aug 2017, this chart showed the number of days that gold has traded in the various $100 increments.

    For example, gold closed just one day in the $1900s (No surprise as Aug 2011 was a spike high). Here is where it gets interesting.

    Gold has traded in the $1100s/1200s/1300s for well over half of the time set (a little more than 1000 Trading Days).

    Care to guess the number of days gold traded/closed in the $1400s? A mere 28 Days, as gold dropped nearly $200 from low $1500s to $1325ish back in April 2013.

    My point? The manipulators May have a hard time throwing enough “paper” at gold if a 5-year breakout soon begins.

    And I wholeheartedly concur with Yra about silver. At 1:80 ratio to gold, it is historically cheap, just at the same time that gold’s long-term charts look enticingly ready to break out, even if Syrian warfare is not the likely catalyst for a meaningful breakout

    • yraharris Says:

      Mike–nice ,well thought out post and i will reiterate pgrommit by saying how great the discourse is in this blog—I am always learning and enjoy being stretched by the many comments that frequently appear here

  10. asherz Says:

    The comments are interesting and deserve responses but I want to focus on the forest and not the smaller details. Do the central bankers who have created trillions in their QE programs care where gold and silver sell? If the prices ran up in price like some other assets ( they are not just another commodity throughout history but a measurement of value and their lack of yield or profit return is not the sole way of measuring their value.) From the devaluation of the drachma to Gresham’s law, governments have been concerned with the price of precious metals.
    I wish the great minds in the investment business would begin to address that observation and possibly draw some conclusions. All this requires a long perspective and not looking at quarterly performance.

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