Notes From Underground: Will Hong Kong Be the Gateway To Understanding China?

Last week I was engaged in a Q& A in the White Wave Trading discussion group when one of the participants inquired about the Hong Kong dollar PEG, which has held for almost 36 years.

The question referenced a piece by Kyle Bass, who said that the PEG against the U.S. dollar was under duress and there was an increased chance it would GIVE WAY. The Hong Kong authorities have beaten back the speculators many times and has created as “many widows as the infamous sellers of Japanese Government Bonds.” If you wish to see a successful effort by a central monetary authority look at a monthly chart of IUSDHKD (that’s based on CQG).

Bass had raised the issue that the effort for Hong Kong was becoming costly as the money leaving the Mainland was exacting a price through a need for even more intervention. There has not been much discussion about the HONG KONG DOLLAR, but on Tuesday Ambrose Evans-Pritchard wrote a piece for the London Telegraph titled, “Capital Flooding From China Is Red Alert For Hong Kong Dollar Peg.” In this article, Evans-Pritchard cites several possible areas of concern for the global financial system in regards to the currency.

First, the flows through the Shanghai/Hong Kong money pipeline reached a four-year high Tuesday. Foreign funds are searching for ways to move money to avoid full impact of tariffs. According to Evans-Pritchard, the recent drop in the YUAN is a result of Chinese companies “saddled with $840 of onshore dollar debt scrambling to raise money in US currency  to avert potential defaults.” The article goes on to suggest that the recent 40% increase in Bitcoin is due to Chinese capital flight as the cryptocurrency provides an electronic portal to move money.

2. The most serious issue for Hong Kong is that as an Asian financial center it has benefited from a robust real estate market because world bankers have used it as a base of operations. Being that Hong Kong is a very small enclave property prices are the most expensive in the world resulting in a very highly leveraged economy. As AEP noted, “Hong Kong has ample foreign exchange reserves but intervention ENTAILS MONETARY TIGHTENING [emphasis mine], a nasty side-effect at a time when the overheated property market is already buckling  and the Hong Kong economy has slowed to the weakest pace since 2008.” Any effort to sustain the PEG requires the Monetary Authority to intervene in the market, but if things really turn south the central bank would have to raise rates to a level to prevent money from fleeing. This is tough to do in an over leveraged financial system.

As Evans-Pritchard said, “FED RATE CUTS WOULD RELIEVE PRESSURE AND SERVE AS A SOOTHING TONIC FOR MUCH OF EAST ASIA AND THE EMERGING MARKET UNIVERSE.” As Trump pressures the FED maybe he is trying to help China in a quid-pro-quo on a tariff victory.

In thinking further about Hong Kong’s financial situation it is apparent that the HK Monetary Authority is already too tight because the 2/10 curve has inverted and is currently at -14.5 basis points. Bass highlighted this when the curve was only inverted a mere -6 basis points. An inverted curve in a highly leveraged economy is a signal that the situation is unsustainable. In the last blog post, reader Michael Aaron Temple has been pounding the table for a July FOMC cut.

If Vice Chair Richard Clarida steps up his argument for a third mandate a FED cut may well be in order. For as Evans-Pritchard said, “Any distress in Hong Kong could have systemic implications for Asia and global finance.” NOTES FROM UNDERGROUND is not gloom and doom but with all the DRY TINDER for potential prairie fires I would not be selling VOL as a way to generate a few extra percentage points to enhance my returns.

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35 Responses to “Notes From Underground: Will Hong Kong Be the Gateway To Understanding China?”

  1. Judd Hirschberg Says:

    Thanks for the acknowledgement! The group loves it when you drop in for a chat.

  2. Mike Temple Says:

    Yra
    Thank you for the “shout out”.

    I am mostly out of my element in discussing the HK$ peg. But, everything you note would seem to point to HK rates being too high, which is largely the result of a “too tight” Fed.

    I think the UST short term yield curve is SCREAMING that lower rates are coming, despite all the “experts” not being able to discern why the Fed needs to cut when things are so robust. There is a global “Eurodollar” market that seems to be short, which dovetails with a remarkably robust USD and equally subdued/limp price for gold. Both of those signs are deflationary despite the Fed’s recent dovishness.

    Either there is a YUGE sell off coming in ED futures and short term USTs, or the trillions at risk in these markets will ultimately help contribute to “break the Fed” by communicating to Powell et al thatsomething is truly broken in international funding markets.

    Again, 5 yr UST yields are 20 BPS through IOER.

    This is truly extraordinary.

    Good night

    Mike

  3. Michael Temple Says:

    Yeah
    Please explain to me in what universe (other than Alice in Wonderland), that a declared act of economic war aimed at Huawei ( described as the equivalent of Apple/Intel/Disney all rolled up as one) emboldens investors to “party on”?

    I did not expect stocks to tank. But to rally like this is beyond belief. The odds of a true Trade War with China has grown in just the past 24 hours, with huge knock oncontagion effects.

    USD strength continues while PMs got torched. Again, both are not good signs.

    Further CNY weakening further exacerbates the HK$ woes.
    I don’t want to short SP
    I don’t want to buy gold.
    I want to buy more RED EDs.

    This is bewildering price action in stocks today.

    Do folks simply think Trump is merely blustering concerning Huawei. Is this any way to run a stock market/casino.

    Flabbergasted does not begin to describe my reaction here today

    • yraharris Says:

      Michael—the trade is based on the low cost of money being the salve for all things.The ALGOs drive the flows by analyzing the headlines without context as the critical factor—you can only trade what market prices bring but your analysis is dead on–it won’t matter til it does.The sell VOL and pick up premiums from ignorant analysts is now a full time vocation but it becomes a trapof its own—everything is a derivative of a derivative

  4. Michael Aaron Temple Says:

    Yra
    Good Morning….Am still trying to understand how folks are not aghast at the economic implications of Trump’s attack on Huawei.
    Even today’s stock market sell off is nothing compared to China’s 2.5% drubbing overnight. Of course, it is still just 720 am.

    As for my good friend, Phoo, I simply highlight that whether you agree with Trump’s belligerence towards China or not, there is no denying that it is not conducive to global growth.

    Trump is backing Xi into a corner. Generally speaking, that is not how you get to “yes” in a negotiation.

    But, hey, I am sure there will be a tweet later that things are progressing…..Progressing to what is the question.

    • yraharris Says:

      Michael–as the SCMP writes this morning the Chinese are reticent to discuss when they are not being treated with respect –Mnuchin says he is going to Beijing and the Chinese say no he is not expected.And as you ointed out Wednesday–if tariffs are so beneficial why didn’t the White House enforce them on the European auto makers—think of the increased revenues to aid the farmers

      • David Richards Says:

        Michael / Yra – I see in that same SCMP cited by Yra an accompanying piece quoting Susan Thornton, the former 27-year State veteran and Assistant Secretary of State (chief State rep for Asia-Pacific and now senior fellow at Yale Law School) who resigned in protest/disgust (just 2.5 years shy of full pension!) along with former Secretary Rex Tillerson, states that “Trump will feel more pressure than Xi” and may fold first because in her view, “China can weather the trade war better than the Trump administration” as “trade discussions have now moved from an economic and commercial realm to a political realm”, giving Xi the upper hand as Trump faces re-election soon, also with a US economy that is markedly decelerating per the US economic data and in particular the leading indicators. “There is little motivation for China to return to the negotiating table. I think it [negotiating] is going to have to wait until either the Chinese side, because of economic performance issues, or the US, because of economic performance issues, get back to the table. It could take a while”.

        https://www.scmp.com/news/china/diplomacy/article/3010537/former-trump-official-hopes-us-china-deal-says-beijing-might

  5. Michael Temple Says:

    Yra
    The longer stocks levitate against a progressively deteriorating backdrop, the larger the chaos when the “oh shite” moment hits.

    Deere today announcing bad results as farm economy tumbled and China hits its bottom line.

    FANG stocks losing some luster as Goog sputtered on its earnings and now Apple caught in potential Chinese crosshairs.

    Finally, IPO market mania has peaked with UBER and LYFT.

    USD strength and gold getting monkey hammered continue the bad news as far as Powell is concerned.

    Perhaps the algos will drive another explosive Friday Opex close higher.

    But global bond yields continue to plumb new lows and while I am glad I am not shor5 SP, I continue to think RED EDs offer great risk/reward. Unless, I am dead wrong and Xi and Trump make a deal. Yet, China is now taking Tehran’s side against US.

    Talk about a game of Chinese checkers. The chessboard is getting mightily scrambled. Am sure Trump has planned on all these contingencies.

  6. Trader1 Says:

    Yra,

    You have suggested German car exports to China could suffer.

    What do you think the EU could do to boost GDP in the entire region?? Or is the EU just going to be a “Rotten Heart of Europe”???

    (If Germany GDP falters will Merkel be more likely to give into some action?)

  7. Michael Temple Says:

    Yra
    You are right. The algos and day traders are perfectly happy still to collect nickels in front of the oncoming steam roller.

    I get it.
    But, when I look at the FACTS as presented by Jeffrey Snider, I shudder at what is coming our way.

    https://www.alhambrapartners.com/2019/05/16/from-tics-big-march-number-right-to-powells-future-rate-cuts/

    It is not just the UST yield curve that is frighteningly flat/inverted and with an “insanely” strong bid.

    German bunds are negative 10 bp, while the 2’s and 5’s are -65 and -51. JGB 10’s are neg 10 bp, too.

    The Fed heads et al really do not comprehend the message of the markets as highlighted by Snider. There is a shortage of “eurodollars” out there, which is specifically not the remit/care of the Fed…..Until something breaks and EVERYBODY needs US Dollars.

    The widening chasm between the deflationary signal of the bond market and the equity market is going to resolve itself in a very ugly fashion. For now, I guess you are right that stock jockeys interpret the “lower for longer” rates as a positive to own equities. When, in reality, the inversion of those rates is telling a far more damning and dangerous story. Iceberg fields lay straight ahead, if we are not already in those dangerous waters.

    I really did think this unexpected Huawei “declaration of war” would trigger a much bigger “risk off” sentiment, similar to the 2.5% drop in chinese markets earlier today.

    Enjoy your weekend.

    Mike

  8. Chicken Says:

    Delevitation Monday.

  9. Michael Temple Says:

    Chicken
    You might be right…Let’s see what Sunday night brings.
    I still don’t think most MSM financial analysts/commentators comprehend just how “pissed off” China is at Trump’s “nuclear” gambit to strangle Huawei into submission.

    This is the stuff of “war”, quite frankly, as it is a clear sign of Trump’s aim to “contain” China. This is DEFCON 3 behaviour, if you ask me.

    Some might say I am exaggerating. But, what do you call it when the martial invective of the Chinese national news broadcasts denouncing Trump/US draws over 3 BILLION “hits”.

    Delevitation, indeed. We shall see.

    • David Richards Says:

      Michael, if that’s true about the public reaction, then you nail it how “pissed off China is at Trump’s nuclear gambit to strangle Huawei”. And how it’s getting less attention elsewhere than deserved.

      But it’s more than Huawei because Trump also blacklisted 70 other companies in China (some not into 5G at all and others just lowly appliance manufacturers). So it’s broad and deep.

      Huawei claims it has a year’s supply of components already in inventory as they foresaw this possibility and exposure three years ago. But others will be less fortunate and will fail. Taiwanese semiconductor companies will continue to supply but haven’t the capacity to replace US sources by any means. Taiwan will be pressured by US to not increase shipments to China, while China will be pressuring Taiwan just the opposite for more. Pity Taiwan caught in the middle! Maybe some entrepreneur in Mexico will buy US supply, repackage and ship? (similar to how US fishers have continued selling to China via shipping/repacking in Canada, haha).

      Huawei is already partnered with a UK firm to design/develop rival chips to Qualcomm for cheaper in China, and these are expected to be in production within 2 years. Not soon enough though. But if it is, it could be the death of the US semiconductor industry, especially if they cede market share today (which can be hard to win back).

      US semiconductor companies reportedly depend on exports to China for 10% to 68% of their sales; so who compensates them for that loss, or instead will some go bankrupt like some US farmers?

      So watch the US semiconductor stocks and indices. Maybe a good short opportunity. We see the potential for a big tumble in those.

  10. Michael Temple Says:

    Yra
    Here is some grist for the mill

    https://www.zerohedge.com/news/2019-05-18/toyota-slams-trump-after-making-them-feel-not-welcomed-us

    By now, we KNOW that Trump has gone “all in” in his battle with China by not only scuppering talks for now, but by striking at Huawei using “national security” levers.

    Fine….So now we can look forward to further slowdown as uncertainty clouds sentiment and actual trade diminishes between China/US.

    But, feeling like he has such a winning hand, Trump has now turned his sights upon both Germany and Japan, despite the warm fuzzy feelings surrounding his 6 month extension not to impose auto tariffs on Europe.

    With Trump, there are always the details. While he has pushed back the tariff imposition, he is now trying to enact “de facto” tariffs by negotiating for voluntary production cuts by the same.

    Well, look at how Toyota has reacted in the story above.

    Trump’s is a 1950s/1960s mercantilist view. Trade deficits are bad and so anything that reduces them is good for the US of A. Tariffs that reduce trade are a GOOD thing.

    Here is what scares the bejesus out of me. As world trade slows, especially US trade with the world, fewer dollars circulate . Simple as that.

    And now our allies, such as Germany and Japan/Toyota, are exasperated by Trump’s myopic trade views.

    Meanwhile, how well has the Sec 232 tariffs worked out for US Steel. Stock is at a 52-week low. Yet, that action raised steel cuts for every auto maker, helping to dent their profits in the past year. But, Trump got his “victory”.

    I know Powell is far smarter than I. But, I do not believe that he nor his minions are focused on the international trade flows and the impact that the lessened amount of dollars circulating in the system are having. That is why USD has a bid despite his dovishness. That is why gold continues to soften, as the SYSTEM IS TOO TIGHT, and gold serves as a source of collateral/margin (just ask Venezuela).

    More importantly, the algos are not programmed to understand the “second order of consequence” of these diminished trade flows and their impact in driving UST short end yield curve inversions as Trillions of dollars are being wagered that the Fed is going to have to cut, and cut soon, in a BIG WAY.

    Honestly, what do you think the message is of the 5 Yr UST yielding
    2.17%, a full 8 bp BELOW the Fed’s 2.25-2.50% targeted overnight rate.

    Perhaps it is ordained that the Fed has to wait to slash as any move done before a stock market hiccup/crash will be a signal to the algo/stock jockeys to melt up the market.

    But, that Toyota story (written at 5 pm on Friday when everybody has gone for the weekend) brings home the point that Trump actually thinks he holds the “winning hand” and that he will wield his unfettered executive power to frame ALL trade relationships he does not like as “national security” issues.

    The continued slow down in trade means fewer dollars circulating abroad. For highly indebted/levered folks, that is why there is an ominous message in the collapse in global bond yields. The oxygen is being sucked out of the room. Not enough dollars to go around in the international system as Trump’s trade actions ensures just the opposite.

    Buckle up….It’s going to be a hot summer.

    4th of July rate cut, say I.

  11. Michael Temple Says:

    Yra
    A couple more quick observations about why I think things are setting up for a smash in equities, although I confess I am fuzzy on precisely when.

    1. Despite all the “happy talk” about the Fed’s dovishness, the reality is that Powell is still doing QT through September, if even at a reduced rate. Yes, less of a negative is positive…But, the Fed is still “destroying” dollars, not creating them.

    2. Tariffs….As most “real” economists will tell you
    Tariffs = Taxes…..If Trump tweeted that his raising of taxes were a good thing, it would go over as well as his proclamation that shutting down the Federal Govt was a good thing.

    Here is some choice food for thought

    There is a lot of talk on the price impact on US consumers coming from tariffs placed on China. And these impacts are real as companies such as Walmart have indicated that these tariffs will be passed onto consumers in form of price increases and, not counting for the new tariffs, the impact of the previous ones have already acted as a tax increase for consumers:

    “The combined $72 billion in revenue from all the president’s tariffs ranks as one of the biggest tax increases since 1993, according to CNBC analysis of data from the Treasury Department. The tariff revenue ranks as the largest increase as a percent of GDP since 1993 when compared with the first year of all the revenue measures enacted since then, according to the data.”

    So, the $72 BN in tariffs to date (not including any additional ones from China) is already the largest increase of GDP since 1993!!!

    On top of the above, companies in the “real economy” are announcing sales/revenues/earnings misses ALL OVER the place

    Intel/UPS/Deere/Fedex/Google.

    It only gets worse as China slowdown takes effect.

    As I said, Trump can tweet “happy talk” at any moment and the algos will quick twitch and send stocks higher. But, I continue to believe that investors in this “manipulated” market are like those frogs sitting in warm water that keeps heating up. To believe that Trump is NOT going to carry through on his “national security” mantra to punish China and even our allies is taking one heckuva risk.

    Read the language of Toyota’s press release in my previous note.
    Abe is supposedly one of Trump’s BFFs. And, yet, that hasn’t stopped Trump from his actions.

    All this and a UST 5 yr that yields 8 bp less than the LOWER bound of the Fed’s 2.25-2.50% rate.

    My “money” is on Mr Market, not Mr Powell nor on the silly MSM analysts/economists who don’t comprehend the “writing on the wall”

    • David Richards Says:

      US economic data for the week printed at recessionary levels except for one, as we saw plunging US retail sales, manufacturing, industrial production, car sales, imports, exports, SIC, housing starts & permits & mortgage apps, etc.

      The only non-negative US number was strong Sentiment, which is just soft data unlike the other hard data (negative). Sentiment appears to be correlating with stocks?… indicating financialization of the US economy which is a bad place to be.

      We cannot have rising stocks, rising bonds (falling yields) and rising dollar together – except in an environment of price disinflation coupled with strong real growth, which is clearly not the case today. Thus, it’s a simple accounting fact that something must eventually give: stocks, bonds and/or dollar.

  12. David Richards Says:

    Remember during the first years of this decade, the famous Bill Ackman trade, which also bet the USD/HKD would break. Except the bet was in the opposite direction (USD breakdown below the peg). The peg hung on by a thread for several years, as HK accumulated (bought) massive dollar reserves during those years, which today sit at record-high levels.

    So it’s worth noting that today, HK has a huge, record-high war chest with which to defend the peg now in the opposite direction. I don’t know whether the peg breaks this time in the opposite direction (ultimately it becomes a political decision like the EUR-CHF peg was).

    But HK may need every dollar in their war chest, as China appears willing & wanting to devalue CNY in response to the Trump tariffs etc. As USD/CNY devaluation would send powerful waves of economic deflation & contraction around the world in time for the upcoming US election season, something Xi may now want to help get rid of Trump in 17 months, similar to the 2015-16 period prior to the Shanghai accord in early 2016 that rescued tanking global markets & economies worldwide.

  13. David Richards Says:

    Particularly germane to the primary topic of this post about the HKD peg, the Seattle-based UHNW money mgr (ultra high net worth investors) Evergreen Gavekal’s partner Louis Gave, long based in Hong Kong to monitor that region from on-the-ground, offered a view strongly at odds with Kyle Bass. I was disturbed at some factual inaccuracies in Mr Bass’s piece, which doesn’t mean he won’t be right, but if so, it might be for the wrong reason.

    Gave provided a rare, hour-long interview on this and the broader issues to his fellow HK permanent resident Erik Townsend, the private HK hedgefund manager and founder/owner of MacoVoices. You may access the audio here:
    https://www.macrovoices.com/112-macro-voices-hot-topic/554-hot-topic-louis-vincent-gave-rebuts-kyle-bass-investor-letter-questioning-hong-kong-s-relevance
    as well as a short chartbook:
    https://www.macrovoices.com/guest-content/list-guest-publications/2705-louis-vincent-gave-chartbook/file

    In essence, he argues that USD/HKD will eventually fall again because US productivity is a fraction of HK productivity, HK has a multi-decade record of strong budget surpluses and projects further surpluses for years to come in contrast to the large US budget deficits and massive debt loads, HK worker productivity is also rising at a faster pace than US worker productivity, the HK FX reserves are currently near record highs both in absolute terms and relative to its monetary base, HK real estate prices are in fact in an uptrend not falling, etc.

    Happy Vesak Day from Singapore et al… Part of the celebration of Buddha’s birthday by billions of ppl across East and South Asia.

  14. Michael Temple Says:

    David
    Your first comment is spot on. Various economic indicators are already flashing amber, if not red. Yet, the bull market backdrop has meant nothing as investors believed that the Fed has had their back.

    But, this trade war with Xi has now metastasized beyond Trump’s imagination, in my view. He is now dug in and while he may be more vulnerable than Xi, it is clear from Chinese rhetoric and actions that they are not about to back down, especially after the “war-like” actions against Huawei and other related Chinese companies.

    Commerce is simply going to slow down even more. And, as you point out, if Xi decides to counter this with further devaluation of the yuan, then watch that deflationary impulse fan out across the globe.

    As for the HK peg, I remain agnostic about it. But, I cannot reiterate my belief that global yields are set to plummet further as so many stock investors “don’t get it”. When they do “get it”, any such market sell off/chaos will only further strengthen the narrative of a Recession heading our way.

    Very cogent analysis.

  15. Michael Temple Says:

    David
    It is the “second and third order” of unintended consequences that will play havoc with so many companies and the markets.

    You lay out a cogent argument for very tough times ahead for US semiconductor manufacturers.

    And, yes, who will “bail them out” if they crash. Certainly not Trump.

    I have read multiple profiles of Trump, as I am sure many here have. Trade and immigration are truly his two great “boogeymen”.

    He has literally “gone to the wall” over immigration, and I think too many market players believe that Trump will negotiate with Xi using Nash-like game theory. In reality, however, he may treat this issue
    in the same blustering way he has the immigration issue.

    Again, note how he has even turned his sights on the EU and Japanese automakers, prompting a FURIOUS reply from Toyota.

    Not exactly the strategy of somebody who is trying to “get to yes” with his negotiating partners.

    Already, the Chinese are apparently “itching for a fight”. Again, Trump sacrificed the welfare of over one million government employees/contractors and their families when he petulantly closed government for 35ish days.

    Anybody who thinks that Trump is going to kiss and make up with Xi on terms acceptable to the Chinese by the G-20 meeting in one month is being mighty cavalier.

    Meanwhile, stocks such as Deere and Intel have already slipped badly BEFORE any further China sanctions. NOT hard to imagine even more significant downside.

  16. Julian Says:

    Yra,
    I heard on your recent Convergent Trader interview that you like to trade the grains. Any chance of a blog post on the Agriculturals?

    • yraharris Says:

      Julian–I have done many over the years so if profit potential we will have some coming soon

  17. Michael Temple Says:

    Did I say by the 4th of July or by Memorial Day?

    Fed is so far behind the curve.

    5Yr UST at 2.11%, nearly 14 bp below the low end of the Fed’s 2.25-2.50% level.

    And EFF is still “technically” above IOER.

    Keeping Phoo in mind, I have no opinion on Mr Trump.
    Factually, however, it appears the Chinese are pushing back against him and a trade kerfuffle, if not war, has commenced.

    Should do further wonders for growth? NOT

    Mike

    • David Richards Says:

      Indeed the Fed is behind the curve. Cut(s) could also weaken the greenback, which I stubbornly still expect to breakdown sometime, possibly after this final little push, with DXY targetting dwn in the 80’s instead of new highs above 104 per the consensus.

      More bad US data today with both the manufacturing and services PMI crashing. That does not help the dollar or the case for the Fed to sit tight (pun intended).

      You nailed the Huawei blacklist as a “nuclear” event. It appears to have been pivotal and they’ve now added security monitors & flatscreens. Huawei is just telecomm-phones; albeit the only true 5G solution available in the world today and a bargain price to boot, so let ’em sell it – even several EU nations have officially opined it’s no security threat. But I don’t see China doing anything to retaliate as they have the weaker hand it seems; we’ve only seen Xi walk around a REM mine/plant, which I think is their only trump card (pun intended again). I usually don’t read zerohedge much, but its coverage has been interesting. If China sanctions US on those REM exports, it’ll also be a “nuclear” event as modern life in the US and much of its industry, power grid & military will go dark before long, depending on how much is stored. US could hit back hard by banning China from the usd/swift system. There must be a better way to get along than such lose-lose scenarios.

      Anyway, it looks like you may finally have your stock correction. Let’s see whether it’ll go deep enough to break S&P 2700. The bond market action would suggest yes, but Fed rate cuts might hold the market to a shallow correction – provided those “nuclear” trade options get walked back without being exercised. Circumvent the lose-lose scenarios.

      • yraharris Says:

        David and Michael—-been on the road driving across America–let us be lovers we will marry our fortunes together—your commentary has been phenomenal and spot on especially Michael’s view on HUAWEI and its impact on globalization.The unintended outcomes from an aggressive White House can cause even more financial pain because of the MASSIVE short vol positions.The FED may suffer a SOC GEN Jerome Kerviel moment with the financial risk that exists.The problem for MOST analysts is that heir analysis is based on static models where the world is far more dynamic.Neither of you have delved into the European elections which as far as the European Parliament is concerned will not result in a change of power but can go along way to shake the Franco/German entente as Ambrose Evans Pritchard’s latest piece explains.The present market prices point to a fear of price collapse across the globe being aided by the weakening YUAN—this is the scenario that the FED fears most as outlined by Bernanke’s extensive work about 1937 in the US and mistakes made.An onset of deflation provides the greatest fear for Powell and the Fed–the world has huge capacity and a global price war is the ultimate fear for all the central banks.

      • Michael Templw Says:

        Yeah
        Just think, you did not even mention the teetering house of cards that is Deutsche Bank.

        We are witnessing in REAL TIME nothing less than a re-ordering of the global trade system in a Cold War-esque Us v Them with China as the new Boogeyman ( and, perhaps rightly so)

        The scrapping of the liberal trading rules of the Pax Americana era, which accelerated after the fall of the Soviet Union, is going to introduce more friction, more costs, and lower trade (for now) as the SYSTEM deals with a major reset of global supply chain

        China will export their further slowdown/deflation and markets are now beginning to “get it”.

        Algos we’re programmed by”idiots” who only looked at the positive message of lower rates as a buy signal for stocks…Whereas Luddites like us scratched our heads and dared to say “BS”….Emperor has no clothes and bond market has been TRUMPETING this problem for many months now both here and abroad esp with 2 yr bunds at -65 bp and 10 yr at -11bp.

        Seriously, I think the first 50 BP cut (not 25) comes as SP plumbs 2700-2750. Trump will browbeat Powell to join Patriotic forces to combat the Chinese.

        Jack Nicholson wickedly repeated “Red Rum” in The Shining.

        Stealing from him, I proclaim, “RED EDs”

        Love your Simon and Garfunkel reference.

        Next time, throw some Kerouac our way.

        Best

        Mike

  18. Chicken Says:

    One cannot simply look into the looking glass, he must look through it to observe the subject.

  19. A.M. look 5/16/19 | Says:

    […] https://yragharris.com/2019/05/15/gateway/ […]

  20. Arthur Says:

    https://pbs.twimg.com/media/D7WhYxMW4AQ5K7L?format=jpg&name=large

  21. Michael Temple Says:

    Yra
    So, do you think the stock market is finally waking up to the MEGAPHONE SCREAMS of the bond market.

    What an extraordinary performance by USTs. Powell must be plotzing to see 3M/10yr inverted by 7 bp while the 5-yr is yielding 2.07%, a cool 18 bp BELOW the low end of the 2.25-2.50 Fed funds rate.

    Powell is so helplessly behind the curve. Cutting now would be tantamount to crying “Uncle”, something the Fed never likes to do.

    So, unless/until something truly breaks, I expect an inter-meeting announcement very soon that QT will be halted IMMEDIATELY as some kind of salve/genuflection towards the MARKET GODS who are driving this race car and leaving Jerome and his buddies behind.

    As you say, maybe it is going to take a Jerome Curveil moment to break the Fed.

    But, it is absurd to see the front end out to 5 years so wildly inverted to Fed Funds.

    SOMETHING IS BROKEN!!!

    Even the meteoric rise of Bitcoin can be interpreted negatively as market chatter indicates that Chinese money is flooding into btc and out of yuan.

    I am reminded of Yeats…..”The Centre Cannot Hold”

    Politically, chaos reigns in Europe and Britain. Italy heating up
    And, just for yucks, the Dems may just impeach Trump, which is precisely what he wants.

    Bond market is SCREAMING TROUBLE AHEAD

    Mike

    • yraharris Says:

      Mike–another good post and you pose good questions and strong points.Why did Simon Potter leave the NY FRB today along with another Richard Dzina—highly unusual.The FED is suffering from the double barrel approach that was criticized by Stan Druckenmiller.Peter Bocckvar and others warned about the possible mal-effects of QT coupled with the raising of the Fed Funds rate–the renewed strength of the DOLLAR is yet again causing other concerns

    • David Richards Says:

      Re MEGAPHONE screams, actually the $SPX is drawing a big MEGAPHONE pattern: https://www.zerohedge.com/s3/files/inline-images/SPXd.png?itok=q58xls1G

      This portends rising volatility. While there’s potential for SPX 3100 in the megaphone before the next big drop, you also see that on the other hand, $SPX has now broken another rising wedge pattern as it did in 2018 after making slight new highs (so has $NDX again).

      In 2018 after the high and wedge break, price loudly chopped around the 200dma before collapsing, so that’s an area to watch again, between there and ~2720 ( the low of the last mini-correction ending early March), as technically there’s little support below those and a move down toward the lower trend line of the megaphone pattern could then be in play, especially if earnings estimates are lowered and the bad US economic data this month (excl consumer sentiment & employment which are laggards) continues on (as I suspect it will).

      The megaphone is consolidation pattern, albeit with rising volatility in contrast to the common, tightening triangle consolidation pattern. The symmetrical variation, like this one, usually breaks in the end in the same direction it began, but not always; thus in this case $SPX is favoured to break higher in the end after a volatile ride.

  22. Michael Temple Says:

    David
    I will not dispute any of your technical analysis of stocks at this time.
    However, the REAL economy is showing signs of deceleration, and this is BEFORE the onset of China Trade War concerns which only hit in May.
    So, while stocks may not yet hit the skids ala Q4 2018 just yet, I don’t quite see how to reconcile USTs knocking on the door of 1% handle yields (my God, 5 yr right now is 2.02%) with SP breaking to new highs of 3000+.

    As I have said ad nauseum….
    I don’t want to short stocks
    I don’t want to buy gold
    I continue to want to own RED EDs

    Something is broken in the system and 10 yr bunds at neg 17 bp along with the myriad mileposts in USTs points to the Fed soon caving to reality.

    I simply think it is inevitable that stocks trade MUCH lower this/next year. When this occurs, not only will Fed cut rates dramatically, but QE will re-enter. As that plays out, then I will begin to get more interested in gold, even if it is much higher prices than this.

    Nice analysis

    Mike

    • David Richards Says:

      Hi Mike. I don’t deserve credit as that megaphone chart isn’t mine. But the implication of it is that the next big wave in $SPX is down, as you suggested, toward the bottom trendline of the megaphone (thus somewhat exceeding the December low).

      However, I noted that breaking the lower threshold I described (below the 2720 to 200dma area) is required to make that big wave down a high probability and until that happens, there remains a possibility that the current wave up isn’t finished, toward the upper trendline circa 3100, isn’t yet finished (i.e., beware a possible bounce off that aforementioned 2720 to 200dma area).

      You can imagine catalysts that might cause either scenario up or down from that critical area. Probably better than I can being an old guy now with less imagination than before. After decades of this, I’ve come to prefer, or rather I should say trust, the charts to the fundamentals which are far too numerous and complex for my old brain to process. Especially for a short-intermediate horizon.

      The breakout to the much higher $SPX levels is a long way off, after the megaphone consolidation ends. I suspect it’ll be accompanied by a much weaker USD much later too, but that’s another story. So I’d accumulate gold and silver on weakness for the long run, and crypto too. That latter because it makes this old dog feel young again, and because it has been working. Charts have been saying so all year (and I think there’s a lot more to BTC than some Chinese converting yuan or moving capital out; I don’t believe all I read… on the contrary the Chinese are hoarding crypto (and gold), not just using it to convert currency or move capital). You see, in Asian culture they mostly hate stocks and bonds, except for some ppl as a form of legal gambling, but not as a means to save or build wealth. For one thing, history has taught Asians to distrust banks, government and financial institutions. Instead they like property, jewels, precious metals and crypto. They also like to own business, but instead of owning business stocks they prefer to own their own business, family business or friends’ business. Kinda like private equity. Few here would care much if the stock market drops 60%. The crypto move matters more and the property market matters most. So an amusing East-West cultural difference is how in Asian papers they say the economy in the US looks bad because home sales & prices have dropped, ignoring the rising stock prices, whilst Western financial media says, things look bad in Asia because stocks are down, ignoring the rising real estate values… Funny, those kinda differences :).

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