Notes From Underground: If You Don’t 2+2=5, Then Read No Further

The tagline of this blog has always been “where 2+2=5 is also a wonderful thing.” If you believe that the world is balanced and rational in all things financial then this BLOG is not for you. Unlike Fyodor Dostoyevsky’s character, I am not a sick man, nor a spiteful man. I use my deep knowledge of political and economic history to analyze financial markets from myriad angles. This allows for a belief that context is supreme. In this context I posit that President Trump’s decision Monday to name China a “currency manipulator” is a way out for the U.S. from the dissension that has arisen within Trump’s team of advisers as reported over the weekend. If Bob Lighthizer was opposed then indeed President Trump is in a more difficult position than previously thought.

The president has accomplished in trapping Chairman Jerome Powell by elevating the tariff issue into a GREAT UNCERTAINTY for the global financial system. Powell and ECB President Mario Draghi have droned on about tariffs being the main reason for continuing the path to LOWER INTEREST RATES and more QE. The FED lowered rates by 25 basis points in a response to a possible slowdown due to the uncertainty tariffs bring to economic outlook. Even as the FED cut, Trump attacked the central bank because he was unsatisfied with FOMC’s meager offerings. This put Trump in the driver seat as he continues to criticize the FED as being the greatest drag of economic growth.

NOW IT’S TIME for Powell to slash rates by 50 basis points, say they are done and pledge to watch for more data in which to measure the fallout from a slowing global economy. If the Fed goes this route, I expect the president to back off from the proposed tariffs on $300 billion of Chinese goods as the move to name them a currency manipulator provides the political cover. As Mnuchin advised, the issue will now head to the IMF for resolution, which will get caught in the wheels of bureaucracy for an undetermined period of time.

If you look up the definition of a currency manipulator, China has not met the criterion for many years as its CURRENT ACCOUNT SURPLUS hasn’t been 3% of its GDP. Yes, they run a huge surplus with the U.S., but that is only part of the three-pronged definition. I believe this is a POLITICAL GAMBIT by President Trump to remove him from the trap he fell into by falling out from some of his key advisers. The Donald will now boast that he is the only one with the fortitude to name China a CURRENCY MANIPULATOR and let the IMF take the fall.

Trump didn’t have to go this route as he could merely have had the Commerce Department act to put on COUNTERVEILING TARIFFS to offset any currency manipulation. The slow movement of the IMF will provide the fog of tariff war to provide rationale for Powell to CUT bigger and for Draghi to pump ever more liquidity into the moribund European economy. Everybody is a winner in Mar-a- Lago land. Most importantly, this removes the FED from being the scapegoat for the U.S. slowdown.

***Things on the boil:
1. Last night the Reserve Bank of Australia (RBA) left rates unchanged at 1% even as risk to the global economy remain to the downside. The RBA went so far to note that “the Australian dollar is at its lowest level of recent times.” That, coupled with decent employment data, supported the unchanged interest rate policy.
On Tuesday night, the Reserve Bank of New Zealand (RBNZ) meets to announce its interest rate policy. The CONSENSUS is for a 25 BASIS POINT CUT to 1.25% from 1.5%, but I would not BE SURPRISED TO SEE A 50 BASIS POINT DROP as the RBNZ then would be at 1% like the RBA. The KIWI is at a three-year high against the Aussie dollar, which provides cover for the RBNZ to be a bit more aggressive, especially since currencies are now the concern of many central banks. On Monday, the AUD/KIWI cross made a low of 1.0263 but was trading around 1.0362 Tuesday. There was a lower level recorded on January 3, but that was due to the YEN flash crash.
2. The Canadian 2/10 curve reached NEGATIVE 11 BASIS POINTS Tuesday, which is close to the 2007 levels. This is important because the Bank of Canada has never engaged in QE or zero interest rates. This means the Canadian financial system is far more pristine and may provide a better barometer of the global financial system. It’s also possible it may just be another victim of the other central banks to corrupt the global financial edifice.
If the Canadian curve is correct it may be signalling that the entire system is slowing faster than many believe. Just trying to balance that 2+2=5. It’s easy to remain well but very difficult to not be spiteful.

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22 Responses to “Notes From Underground: If You Don’t 2+2=5, Then Read No Further”

  1. ap Says:

    Thanks, Yra, with the focus on global yield curves, it appears the system is too tight, especially with the debt ceiling being lifted, this has typically caused drag on liquidity further – For me, this should place us on high alert for more volatility, and eq downside. Forcing JP hand as you eloquently put. Until then sell risk rallies? With regard to the CAD 2/10, does this have you on high alert for CAD weakness?

    • yraharris Says:

      Ap—I would say that usually an inverting curve is bullish for a currency as money rushes in to lock in short term high rates but in today’s world I am reassessing all that I once was so sure of–the realm of zero and negative rates has left me befuddled on many issues but the RBNZ did cut 50 basis points as I suspected

    • ShockedToFindGambling Says:

      AP, YRA….As you know CAD is probably being held down by weak energy prices.

      That said, they are in a better place to handle a recession than most countries.

      I’m looking for a spot to go long CAD/EUR.

  2. Michael Temple Says:

    Don’t look now, but gold is screaming to $1485.

    I think gold is doing the math,.and 2+2 might just equal 6 or more in the Brave New World Mr Trump
    has created.
    $1600 by October.

    And August stock market furies will lead to a Fed cut by Labor Day.

    Gold is calling BS on all the mindless levitation of stocks this summer. Timberrr!!!!!

    • TraderB Says:

      Do you think the Fed will cut 50 at the September meeting? Or do an emergency meeting soon?

      • yraharris Says:

        Trader B–let’s see what unfolds here especially as Trump is being very active in thin markets—the RBNZ action forces Trump to possibly add more pressure on the FED—I say go now and go away Jay Powell

    • yraharris Says:

      Mike T—aslong as the equation is beyond the rational dictates of the sophists –I can accept that

    • Joe M Says:

      A (surprise) cut by Powell followed by Trump putting tariffs on hold would make things interesting

    • Don H Says:

      A bid to 1600 would be quite Bullish; however, I’d anticipate Sellers to attempt a defense into that level 1585-90. IF so, Buyers will be challenged to hold their pullback above 1500.
      As I post this, a sustained bid above 1498 targets 1530.
      My .02

  3. Fred Kingery Says:

    Great call on the kiwi. The RBNZ did indeed go 50.

    • yraharris Says:

      Fred –thanks.By focusing on a myriad of assets sometimes you can see beyond the myopic nature of parochial narratives of those always selling ,selling,selling

  4. Michael Temple Says:

    When the sophists are Powell, Draghi and Lagarde, we may one day learn that 2+2 equals multiples of 5.

    And gold will be the one who ultimately decides how irrational this all becomes.

    For all the stock market cheerleaders who proclaim BTFD, it is cognitive dissonance writ large that bond yields COLLAPSE globally with all these rate cuts.

    The system is broken and the bond markets are beginning to run scared. EDM20, my favorite, may print “99” by October quite easily. Currently, 98.69

    Powell is so woefully behind the curve

    • The Bigman Says:

      In order to hear Rick Santelli for 2 minutes I have to listen to the talking heads’ dribble on CNBC they’re still making light of our good friend Mr Oro. This is good for us who still know 2+2=4. To the moon Alice!!

  5. raymack1999 Says:

    Yra, thanks for your insight as always. Spot on. Add in Brexit and we are setting the stage for a market rout on par with 2008. Gold is probably cheap at this price.

  6. Robert Zimmerman Says:

    Spoke with my partner who is in China last night. He said if the 10% tariff comes to play he expects wholesale business in the US will dry up starting in January.

  7. kevinwaspi Says:

    Speaking of “behind the curve”,

    QE coming in Q3?
    “Well, it appears that the Fed paid attention, because moments ago we received an email from a Federal Reserve researcher which should make everyone very, very nervous. Specifically, the “rather urgent request” from a Fed staffer (no, not Edward Quince) seeks the full Cabana report whose gist, as noted above, is that the Fed will have to launch QE4 in very short notice to offset the upcoming liquidity drain.”

  8. ap Says:

    Great call on the Kiwi Yra.

  9. Arthur Says:

    What about the Ruble? Undervalued?

    • yraharris Says:

      Arthur–yes but that is a testy phrase inthese markets—-valuations are difficult when the variables are more stable

  10. Judd Hirschberg Says:

    @shocked to find gambling. Best use a EUR/CAD cash chart.
    If you delineate the other way you will not see relevant historical data.

  11. Robert Zimmerman Says:

    You were right he did backoff!

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