Let me begin by reiterating that this is NOT a political blog but a place for the exchange of ideas dedicated to those who desire to improve trading and investing in order to increase profits. My STRENGTH is bringing an in-depth knowledge of political economy and 40-plus years of trading my own funds (while also managing other people’s money via hedge funds).
My personal political views OUGHT not to be relevant for when it comes to generating ideas. I adhere to the wisdom of Deng Xiaoping: “I don’t care if the cat is black or white as long as it catches mice.” While I might criticize certain persons in any political administration it is merely to criticize actions as a way of comprehending policy outcomes. (For example, my disdain for Steven Mnuchin is solely based on what I deem to be his incompetence, a similar contempt that I held for Tim Geithner.)
When I deride the gathering of elites at Davos it is in regards to the notion that insiders with rendezvous in Switzerland as a way of gaining an advantage in information over the ordinary capitalist. For the last eight years I have written my battle cry, PEPPER SPRAY DAVOS. This is a nod to the ugly scene from the University of California–Davis in November 2011, when the campus police lathered pepper spray into the faces of belligerent student protesters. It is with the same malice that I wish global police to send the insiders home from Davos with tears in their eyes.
My view is supported by none other than Adam Smith, the father responsible for much of the thought on the positive results of globalization: “People of the same trade seldom meet together, even for merriment and diversion, but the conversation ends in a conspiracy against the public, OR IN SOME CONTRIVANCE TO RAISE PRICES.” We at Notes From Underground will continue to analyze events from the outside looking in, and pursue profitable trades with wisdom and integrity.
***In another affront to market integrity, the Wall Street Journal reported that China was willing to “eliminate US trade imbalance” in six years. The foundation of the Chinese effort was to buy U.S. products in such quantity that the U.S. trade deficit would disappear. This BIT of news was supposedly dated two weeks earlier when the U.S./China negotiations began in Beijing. This news provided a boost to U.S. equities as well as other global stock markets. It also helps explain the persistence of the New Year’s rally, regardless of the data. Will the Chinese really do this?
We have no idea but upon analysis it seems that certain elements failed to respond in similar fashion to the equity markets. The CHINESE YUAN OUGHT to experience a huge rally because a STRONG YUAN would enable an economy restructuring from exports to imports to aid its consumers by making imports CHEAPER. This has been the argument of Michael Pettis for many years. A strong currency is needed and acts as a tax cut to consumers.
Also, upon release of this news the MEXICAN PESO OUGHT to be a major beneficiary of Chinese demand because of the role of supply chains in ensuring competitive U.S. manufacturing. The YUAN/PESO has been a long-watched barometer at NOTES FROM UNDERGROUND as I have watched the CROSS since January 1,1994, the day NAFTA went into effect. It was also the day that the Chinese government depreciated the YUAN by 50 percent to 8.7 yuan/dollar from 5.8 to the dollar. The depreciation of the YUAN was the catalyst for so much global disruption as massive amounts of foreign investment was rendered superfluous in the Chinese efforts to create an export juggernaut. The Mexican peso was trading at 3.10 to the dollar.
Today the Mexican peso is 19.11/dollar while the Chinese yuan is 6.77. If U.S. firms are going to supply China with massive amounts of goods the ultimate beneficiary has to be MEXICO as companies will seek to enhance profits through utilizing cheap Mexican labor with an undervalued currency. This will be an important place to watch for the validity of any news headlines in regards to China-U.S. trade negotiations.
Now, pepper spray DAVOS and show Mnuchin the door. (Oh, yeah, I forgot the worst part of the China news blitz: Allegedly the White House was searching looking for a to staunch the selloff in equity markets.)
Tags: Chinese Yuan, Davos, Mexican peso, Treasury Secretary Mnuchin, U.S. Dollar, U.S.-China trade
January 20, 2019 at 9:47 pm |
Ceteris paribus, a huge increase in Chinese demand for US goods would increase the demand for dollars priced in yuan, weakening the yuan. If it is just switching from buying Treasuries to buying stuff, no change. If China starts wholesale dumping of dollars it already owns to buy real things from the US, well, run for the reserve currency exits before the dollar becomes obsolete.
January 21, 2019 at 6:49 am |
Huzzahs to your introductory statement and the boundaries set for this blog.
Davos has primarily been an elite club for reaffirming global economic policies and giving inside information to some of its participants. Many of these policies have been inimical to allowing Mr. Market to operate. Adam Smith from his eternal resting place has deplored the very VISIBLE hands that have been guiding our markets in recent decades, especially the last one. As a young security analyst I had thought that the creation of the Federal Reserve Bank in 1913, that resulted from the Panic of 1907, was a good thing. But as I got older, I came to realize that the machinations of these “experts” achieve short term palliatives but at the expense of much more severe long term economic calamities.
We no longer have truly free markets. All we are left with are interventions. The Davos participants are just part of these insidious moves that ultimately is destroying Capitalism, that has been the most efficient and best economic system for the greater good.
Politically the sway towards Socialism, a proven failure for over a century, is now captivating an emerging segment of our population. Big centralized government is evolving and tearing down the wonderful edifice that came into being by our founding fathers, the generation that followed the theories of Adam Smith.
January 21, 2019 at 7:08 am |
The Dow Industrial :Gold ratio keeps improving in favor of equities. Overnight gold broke a little below its 3 week trading range. Failure to recapture 1280 by the end of the day will confirm the bearish action of the daily and weekly slow stochastics of the gold.
The Long Bond on the CBOT was in a 3 point trading range and closed below that last week by 1/2 point. Can this range be reclaimed and move to higher prices? I know what the Fed wants especially after a 21/2 year Bear!
Both the S&P and the Dow are between their 50 and 200 day. In a Secular Bear I consider the 200 day sort of the “Investment Line” and the ability of equities to say above or below that will tell the tale!
Thanks Yra for your continued work
January 21, 2019 at 8:06 am |
Richard–good analysis as usual but as I have maintained it is the gold/currency crosses that have performed best–the dollar end of it will be the the time we press forward and take out the 1330-50 massive overhead resistance–when ,I don’t know.But the catalyst will be when the market narrative switches to the concern raised in this blog and certainly in the Baron’s roundtable by Gundlach and the newest member Rupal Bhansali.Again, a trillion dollar deficit in the time of full employment is a major concern and I care not a lick what emanates from the supply siders within this administration.China attracts the stock buyers but debt is the catalyst that causes agita moving forward.The market made much of certain new players in the Gold arena—Cramer and of course one I actually respect because of his deep knowledge of debt markets–Sam Zell.The wall street herd continues the mantra of gold a poor investment because of the low inflationary environment–but it is not inflation but central banks fear of deflation that provides the overall support to the gold market—as Jay Powell said to me directly–the ECB cannot default because they have a printing press—-oh,I have a dream
January 21, 2019 at 8:59 am |
Hi Yra-
Excellent observations on the ridiculous Davos get-together, and the degree to which the public understands this is not for their benefit.
Yet even more so the Chinese commitment being reported as serious news is a farce. It doesn’t matter if the trade imbalance heads toward zero: whether they are also ready to give up the advantage of the forced technology sharing for JV participation is the real key. That’s where your rightful question “Will the Chinese really do this?” becomes more critical.
It looks like the major challenge to the profitability of all of those PLA and Party-insider owned enterprises, and the acquiescence of the lap dog Chinese judicial system (such as it may be insofar as it is a subset of the Party.)
Do we really think Xi will remain President for Life if he goes to all his cronies and tells them they need to stop ripping off the West?
Looking forward to your further thoughts.
Best-
AR
January 21, 2019 at 9:10 am |
Regarding the U.S./China trade numbers, here’s an innocent question.
How much of that trade involves products with American brand names that have “made in China” written on them? I have a hard time believing the amount is not significant.
January 22, 2019 at 1:32 pm |
pgrommit—yes that is true but it is not a doable proposition anyway except in the minds of kool-aid drinkers imbibing the headlines of algorythmic profits