Notes From Underground: Areas of Global Macro Concern

President Donald Trump’s continuous tweeting creates volatility in the markets but the impact lessens as participants become hardened to the vagaries of the tweets. An area that does concern me, though, is the amount of insider trading I suspect is taking place.

Before CNBC teased its exclusive interview with the president last Thursday, the GOLD and U.S. dollar was reversing from the morning price action. The strong Philadelphia Fed index and jobless claims pushed the DOLLAR to a one-year high, GOLD to a one-year low, and U.S. interest rates higher on the notion that the data will spur the Fed to hike two more times this year. The price action reversed again in the afternoon when CNBC released snippets of anchor Joe Kernen that was to AIR in full on Friday morning. I believe many people had access to the interview as it was being edited and also from those in attendance during taping.

There is a pattern to the Trump tweets and early release of significant economic data, especially as when the President hinted at unemployment numbers an hour early in June. The Trump statement about the FED was no surprise to my readers as I warned that the FED was going to be a target of Trump’s finger tips. What should be of greater concern for the markets is when the president said “he is letting the FED do its work.”

Mr. President, you are not LETTING Chairman Powell raise rates. That is his job and it is very disconcerting that Kernan failed to question the president about his choice of words, “LETTING” the obvious question go unasked. I wonder if the CFTC and SEC notice a similar pattern in regards to potential malfeasance by those in the know.

My suppositions may be wrong but I would like to see some challenge to the patterns of potential abuse of inside information. It was Secretary Wilbur Ross who proclaimed that the fall in soyabean prices and rise in steel prices was the result of speculators. Secretary Ross, not all speculation is based on the response to tariffs. To all the regulators I say investigate so as to end market suspicions!

Areas of Concern:
1. The recent weakness in the JGBs has been due to discussion about the BOJ tweaking its current QQE policy. JGBs are now trading below the 200-day moving average as Japanese 10-year yields in Japan have climbed to 9 BASIS POINTS. This is rather meaningless as volumes are microscopic since the BOJ has destroyed the trading activity of the second-most indebted nation (on a volume basis). The NIKKEI has held fairly well even as the YEN has strengthened. This is no accident for it may signal that the BOJ has given up buying debt (since there’s none to buy) and will focus on purchasing more stocks.
The Japanese embarked upon QQE  the plan was to pump liquidity into the financial system by purchasing a combination of equities and bonds.If there are NO BONDS then equity becomes the asset class of choice. Pay close attention to the breakdown in the negative correlation between the NIKKEI and YEN.
2. On Tuesday we heard from the White House that it was pushing for a FARM AID package of $12 billion to support to soybean farmers who have been hurt by China’s placing import tariffs on U.S. soyabeans. Months ago I discussed that the timing of U.S. tariffs was poorly conceived and would result in retaliation against U.S. farmers in an effort to hurt Trump in the November elections.

Many of the red states are ag-based so a beleaguered farm sector MAY turn away from supporting the President, which would have great implications for fiscal policy and potential Supreme Court appointments. The Chinese will certainly need to buy U.S. BEANS but for the near-term the record harvest in Brazil, coupled with a very weak real is proving a boon to Chinese importers. The premium price paid at Brazilian ports has soared while the discount on U.S. BEANS has widened as China cancels previous contracted shipments. The Ross/Navarro group have allowed politics to TRUMP their concerns over free markets. The ridiculous action to subsidize farmers in response to an increase TAX on imported goods is totally DOSTOYEVSKIAN as one hand takes while the other gives (The Grand Inquisitor).

As always, I stress that this is an apolitical view and my concern is merely a reflection on markets. The farm subsidies are a classic misuse of government funds and represents more the reflexivity of how tariffs and zero interest rate policy always has winners and losers in their outcomes. The question is always: What will be the financial repercussions?

3. On Thursday, the ECB will meet and consensus is for NO CHANGE. The significant event will be the MARIO DRAGHI press conference. The fears of global trade war will keep Draghi in a very cautious mode but he will assure the markets that the ECB will continue its plans to end QE in December. The ECB president will remain cautious as Trump protests a stronger dollar. Be aware that Draghi will stress that the ECB’s INDEPENDENCE will never be compromised (a direct criticism of the Trump White House).

4. The bombastic rhetoric that Trump directed at Iran appears to have come in response to Iranian threats. I venture an alternate theory: It is a result of the private conversation between Trump and Putin in Helsinki. If Trump cares about his legacy, the MIDDLE EAST will remain a major issue for him. I have maintained that any peace plan has to involve Russia because of Putin’s strong hand in the Syrian situation.

The Russians can certainly scuttle any mischief by Iran and doing so will play well in Jerusalem, Riyadh and Washington. This is an area we will watch to ascertain the measure of Russia’s growing influence in the world. If Russia can be a conciliatory what will it want in return? It was of interest that in Steve Bannon’s CNBC interview on July 20 he called Turkish leader Erdogan the ” most dangerous man in the world.” If Trump believes so, some lessening of tensions in Syria and the Middle East is essential. This affects many markets as the year progresses.


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26 Responses to “Notes From Underground: Areas of Global Macro Concern”

  1. Gregg Slutsky Says:

    My July 16 comments on this being a lawless administration , you finally seeing what I’m talking about? Forget politics , the LAW! Chris Ruddy said on Tv, “ gdp could be 4.1, 4.4, 4.8 depending on how Larry kudlow fudges the numbers!” How is this different from China?

    • yraharris Says:

      greg–i saw what you were talking about but would say in China it is structural while in the U.S. tactical

  2. Guy Williams Says:

    Excellent insights Yra. Thank you for continuing to include me in your mails.  You help me help my family. Your friend, Guy

    • yraharris Says:

      Guy–you are one of the great ones this country has produced.Now go to the cabin and bring Graham Allison’s the Essence of Decision–and enjoy the fishing

  3. george_fx_trader Says:

    Great article! Thanks for sharing your insights!

  4. Publius Says:

    Cambridge Analytica owners rewards? Watch.

  5. asherz Says:

    Yra- There has not been free trade for decades with the US getting the short end of the stick. There are three primary, targets, China, NAFTA and the EU. Examples, Canada and dairy products, the EU and autos, China everything and IP theft besides.
    So strong measures are required to change the rules of the game. The farm belt is electorally important so allocating $12 billion farm subsidy is a pittance compared to the long term dividends. The soybean and pork farmers need this pacifier to keep smiling.
    With $500 billion in tariffs against China threatened, who will blink first? I know who I would bet on. The Yuan is reflecting the outcome as well.
    You need a businessman to take these unorthodox and aggressive methods to effect change. Not an academic or a politician who has never been in the marketplace.
    Patience and endurance are required for the next year.

    • Rob Syp Says:

      asherz: As a long time reader of this blog you have been the most consistent of all responders and everything you have ever wrote is right on money. We as readers are able to see Yra on CNBC once a month or so with Rick. I’ve always that it would be equally nice to see you speak or give your testimony beyond the words you share here at Notes.

      Enjoy the rest of your summer…

    • yraharris Says:

      asherz—it is a worthy discussion and I will promote it by utilizing the recent article by Graham Allison in Foreign Affairs.It is based on many things we have discussed in this BLOG about the end of Pax Ameicana–a blog will follow soon

      • Asherz Says:

        Yra- Allison’s Essence of Decision is a great recommendation for summer reading. It should be accompanied by Robert Kennedy’s Thirteen Days to get a different inside perspective of one of our government’s most difficult decisions in modern times.
        I also think the rumors of the death of Pax America is premature. Trump’s advisers Pompeo and Bolton will give lie to that assertion.

    • Publius Says:

      I know row croppers and livestock farmers. They understand markets, tariffs and the skewed prices due to ethanol scam. Many voted for Trump but don’t spout MAGA talking points.

      • yraharris Says:

        Publius–thanks for the view and keep the mood from the heartland part of the discussion

  6. Rob Syp Says:

    Just read Sergio Marchionne passed. What a guy!!! The interview he did was with 60 minutes was the best. He wore sweaters and was a peoples CEO. After they took control of Chrysler they never used the tower for the bloated executives in the previous company. He wanted to work right along side everyone at the company and set the tone. A friend of mine who was part of the transition team from Chrysler to Fiat told me he was (is) the best person he ever worked for. RIP Sergio

    • Chicken Says:

      RIP Sergio, what a surprise.

    • yraharris Says:

      Rob–all good points.As an under graduate I wrote a piece about the arrogance of GM as the oil crisis was unfolding .Prescient it was and taught me a great deal about the corporate suite at many U.S. corporations

  7. David Richards Says:

    Not really a “concern” but a consideration, perhaps slightly ahead of the curve… One of the next big events in macro should be the resumption of a collapsing dollar. Technically, it appears increasingly likely that the temporary counter-trend recovery in the dollar peaked late spring. There may or may not be one last dollar push higher later, but it won’t recover to its 2017 levels by any stretch, and the next big dollar move remains significantly lower.

    Based on the above and looking forward, an area of macro concern coming in the not-too-distant future is US capital outflows? Like it was half a year ago. The Fed shifted decidedly hawkish in Feb to stem that bleeding after it had reached a dangerous fever. But that hawkishness will prove unsustainable for the highly financialized, low productivity US economy. Any moderation on the part of the Fed will again incite capital flight out of the US and prove very problematic for the US to fund its huge, soaring fiscal deficit and the Fed’s need to taper its bloated balance sheet. he gutsy, smart move is possibly to fade Fed hikes & QT before long, especially as it seems likely Trump will fill the Fed vacancies with doves who should then have enough votes & sway to reverse Fed policy if they so desire.

  8. David Richards Says:

    Hedge fund manager and former CIBC lead prop prop trader Kevin Muir has an interesting new brief today with charts suggesting that CNY has been pegged to gold. (Recall that Yuan is now fully convertible to physical gold under the successful new Petroyuan regime). Mr Muir is now bullish Gold and Yuan against the Dollar.

    Mr Muir will be a keynote speaker at the MacroVoices conference next month (sold out), along with others including the brilliant Luke Gromen, who has an enviable dollar track record and is tactically bullish the buck (for another month) but structurally very bearish the Dollar and its reserve status.

    • David Richards Says:

      Some good dollar & macro stuff in an interview with Luke last month

    • yraharris Says:

      David–a couple of weeks i made the point using the views of Eric from Praxis about the tight correlation between GOLD and YUAN.It made no sense because a sharp drop in the YUAN would have historically resulted in a GOLD rally .Some others have noted that the securitization of Gold and Copper resulted in a feedback loop that the drop in metal prices leads to creditors to sell the metals to protect their collateral.Maybe correct?But i would also venture that the Chinese have been the largest buyers of GOLD and the symmetric price drop in the GOLD and Yuan may signify that the largest Gold buyer steps back until the YUAN equals the lower price –therefore not paying up for the metal even as the currency depreciates.Just conjecture

      • David Richards Says:

        Oh I missed your point weeks ago which is unusual because I religiously read the Notes posts. But who really knows why this Gold-Yuan correlation. Maybe it’s coincidence? USDJPY also had tight negative correlation with gold, until it didn’t.

        Rather than think too much about correlations, as interesting as they are, I’m watching key levels and themes like discussed here germane to each market. For USDCNH, I think it’s 7.0 – 6.9, which was its level near the end of 2016, and for gold $1180 has been a key horizontal level more than once. I doubt these break, but at least I have a level which says I’m wrong and makes for a good risk:reward setup from here.

  9. Chicken Says:

    Wonder if the FED still intends on increasing rates or if they just intend on increasing IOER?

  10. Richard H Papp Says:

    On 11/02/09 the IMF sold India 200 tons of gold at $1048. I have Yuan gold @ 7,147 that day.
    In 01/2016 as gold was bottoming the Yuan price was 6,700 to 6,800
    So, the record does agree with the 6,700 to 7,000 as good Yuan support.
    But with Yuan depreciating vs. $USD is that level too low??????
    If not, gold in $USD is going much lower??????????

    • yraharris Says:

      Richard—nice but i have to think through this as I have alluded often to that famous day as being critical—but the Chinese may have raised the level of intervention or gold buying as the world is now much different–but it is a good question/point

    • David Richards Says:

      Good point. Yuan gold is currently 8350. USD bought 7.0 CNY in 12/2016, currently 6.8, so if the dollar fully recovers its losses of 2017-18 back to 7.0, then there’s more room (~Y1000) for gold to fall to reach your IMF benchmark of Y7500… dampening China’s appetite to buy more gold (pressuring price) as Yra explained.

      But IMO those are big IF’s – as markets have a tendency to push to the limit and then make a swing reversal, possibly after a slight overthrow (ie., true breakouts are more rare than false breakouts). So first let’s see whether USD can close and hold a weekly above Y7.0 below 1180-1200 gold. Many pro traders & mgrs smarter than me say YES now, but the majority consensus leaves me skeptical.

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