It has been three weeks since I have sat down to articulate my thoughts on the global macro financial system in an effort to profit from trade/investment potentials. A lot of the discourse with many readers the focus was on the situation in the Middle East.
In a podcast with Anthony Crudele the discussion was about the idea of global growth resulting in increased commodity prices, a lower dollar and a rally in emerging market currencies, especially against the dollar. The world’s focus has shifted from the Iran/U.S. confrontation to a microscopic adversary known as the CORONAVIRUS from WUHAN. Whatever we believed was going to be has now been cast aside as markets try to predict the global economic impact of a possible virulent virus creating a genuine pandemic.
In the world of algo-driven decisions sensationalism in news creates wild swings in a cacophony of asset prices. If readers of NOTES need further proof that 2+2=5 in the Dostoyevsky realm keep reading, and more importantly, join the regular conversations I have with the Whitewave Group in real time led by Matt and Judd. Go to their site to register and get involved.
Before the concerns about the Wuhan virus surfaced the global equity markets and commodities were in rally mode as the world was convinced that 2020 would result in a combination of continued central bank MONETARY STIMULUS because, when supercharged with FISCAL STIMULUS, the low cost of government borrowing was going to result in long delayed infrastructure projects, especially with the push for GREEN initiatives.
Copper prices, oil prices and overall commodity indexes were on rose in anticipation. But as the virus spread everything reversed in dramatic fashion. COPPER and OIL have both dropped around 14% since January 15 as other commodity prices experienced lesser declines. Equity markets have begun to experience sell-offs as investors become concerned about global stagnation as consumers retrench in fear of the spread of the virus.
More importantly, most emerging market currencies have experienced rapid declines due to the fear of a global demand shock. The BRAZILIAN REAL made all-time lows against the DOLLAR last week, the South African rand is down 6% since the New Year began and many other currencies with correlations are suffering declines as the fear of DEMAND SHOCK increases. The Canadian, New Zealand and Aussie dollars have all gone into decline as bullish positions in commodities have been unwound.The Aussie/KIWI DOLLARS are at 10-year lows.
The AUSSIE is important because on Monday night the Reserve Bank of Australia has an interest rate announcement. The consensus is for rates to remain unchanged at 0.75%, especially since the RBA is always citing the value of the Aussie currency as a key element in its decision making process. RBA Governor Phillip Lowe is a forthright policymaker so if in the face of a weak Aussie dollar the bank would choose to CUT RATES it would signal that the economy most closely tied to the Chinese economy believes that the Chinese situation is of an ever greater concern. If the Aussies believe this, coupled with the negative impact from the massive fires in Australia, pressure would build on other central banks. This would be the significance of the Aussies cutting rates.
***In Federal Reserve Chairman Jerome Powell’s press conference Wednesday he noted that the Coronavirus would be a drag on the Chinese economy. If the virus ramps up its global impact WOULD THE FED HAVE TO GET OUT AHEAD AND TAKE -OUT AN INSURANCE CUT? This is the question for the Fed. The central bank took out three insurance cuts last year to lessen the impact of the Chinese/U.S. trade tensions.
If the FED is worried about a global DEMAND SHOCK the FOMC would be forced into an emergency cut a la January 24, 2008 when then-Chairman Ben Bernanke held a video conference to cut rates into a market downturn on Martin Luther King Holiday. This was an issue raised by participants in Whitewave discussion on Friday. The problem with a sustained global slowdown is the vast amount of debt owed by global businesses.
The emerging market debt load priced in DOLLARS is a real concern for the financial system. This has been the theme of Vice Chairman Richard Clarida’s speeches for the past year. The reserve role of the DOLLAR makes the FED the key liquidity provider for the entire system, from exorbitant privilege to exorbitant burden. It is the debt load that worries all as the rapid deterioration in commodity prices coupled with the sharp rise in the dollar against emerging currencies sets off an alarm of global deflation.
In the press conference the major concern from the chairman was reaching the 2% inflation target, citing the failure to lift PCE prices above 1.5 %. The recent market actions should keep Powell deeply concerned. While Powell notes that leverage levels are comfortable in current conditions, what about a strengthening DOLLAR combined with rapidly falling raw material prices. When I do the math, 2+2=5 seems to be the correct answer.
The GOLD has certainly been responding to the difficult predicament confronting global central banks. The barbarous relic has sustained a 4% rally since the beginning of the year performing well against all currencies as markets remain concerned about central bank policies. Again, if equity markets decline Monday in response to increased virus cases watch the RBA for a clue to central bank concerns. Stay flexible into the face of God’s laughter.
Tags: Aussie Dollar, Aussie/Kiwi, China, copper, Coronavirus, emerging market currencies, Fed, Jerome Powell, oil, Reserve Bank of Australia, U.S. Dollar
February 2, 2020 at 4:47 pm |
Yra, are you aware of the Y1.2-trillion ($175-billion) money market cash injection for this week announced today by PBOC, along with numerous other measures? To put it into context, it’s the largest injection since 2004. Larger than during the US financial crisis of 2008-09. And this is just a “first step”.
This is a 180-degree policy shift as previously China was the only major nation and central bank not moving to stimulate, as they were concerned about price inflation as I previously discussed. Instead, they’re going to embark on massive stimulus after they come out from the other end of the contagion. Boosting infrastructure and consumption spending. It mightn’t be the right thing to do long-run, but I’m not arguing what should be, just what shall be… Massive stimulus.
The entire world appears to be preparing for huge, simultaneous stimulus. Spending on infrastructure and other. Because they say the last 11 years have proven deficits and money printing don’t matter, so we can ramp those to infinity and spend. It’s coming.
So in my view, a once-a-decade opportunity is being set up as plunging infrastructure-related commodity prices will be a gift that subsequently rockets higher with intense global infrastructure spending financed by debt and the monetary printing press. I don’t know whether prices start to turn next week, next month or next quarter but it’s coming.
And the flip side of that in my view should be a drop in the dollar. Which as I see it, remains rather weak as it’s getting only subdued “flight to safety” bids in the context of the high level of fear. Fewer bids than some other FX. Losing ground against European FX and even Asian EM FX since autumn. The dollar index needs to rise and stay above at least 99.7 to negate its primary bearish posture, and to ideally top 104. Failing that, dxy instead goes into the 80’s, maybe not next week or month or quarter, but starting sometime this year for a large multi-month and possibly multi-year drop.
Let’s watch.
February 2, 2020 at 5:39 pm |
I think the issues and questions net out to one. Do you believe in the deflation or reflation narrative? There exist compelling arguments for both reflation and deflation. Regardless of the final outcome, there’ll likely be back and forth. In the end, I have a hard time believing that, in this era of unbacked fiat currency throughout the world, governments and central banks will find it impossible to arrest deflation and spur inflation no matter how much more fiat “money” they create at the push of a button.
February 2, 2020 at 4:58 pm |
It looks as though articles are starting to surface that individuals are recovering from the virus. The Chinese cash infusion will slow and maybe stop the virus scare. We are more concerned that the people are getting food to eat. Financially, we believe Richard’s forecast, but have little idea when the Helicopter Money begins, but most will grease the hands of the corporatists before it hits the streets.
February 2, 2020 at 8:03 pm |
China produces the World’s drug & food supply. I find it hard to buy risk at this time.
February 3, 2020 at 3:13 am |
Yeah, few people including me realized that China makes over 90% of the world’s pharmaceutical ingredients and per Patrick Cox, it’s now on par with the US in many aspects of biotech. Not to spread fear, but a disruption in China’s supply of same would be devastating to the health and lives of tens of millions worldwide.
I understand that at least 4 cures have now been developed for nCoV, in each of Hk, China, US and Thailand. But they need testing and for the US, FDA approval, nuff said. Thailand, which has the 2nd-most infection, reports they’ve successfully reversed two real nCoV-positive ppl to nCoV-negative with 48-hours of treatment of their new drug cocktail. The challenge is ramping up production to the level required. It’ll take months to do so.
Agree it’s hard to buy risk as nobody knows where this will land. But natural disasters are usually accompanied with sharp but not prolonged market reactions… unless this is black plague 2.0 (it probably isn’t?) or this contagion is merely a catalyst/excuse to trigger a deeper selloff that’s perpetuated by a deeper structural problem, if there are any?…but no, Clarida says the US is “in a good place” and Yellen said there’ll “not be another financial crisis in our lifetime”. So buy, buy, buy as they print, print, print?…lol.
February 2, 2020 at 9:58 pm |
As for your last sentence….
https://m.youtube.com/watch?v=Kqw0Gz9GahM
February 3, 2020 at 5:05 am |
Does anybody on this blog know if this is spread through airborne or droplets?
This in my view is the important question
Droplet precautions would be easy to manage, just a regular mask and you’re done.
Airborne precautions require the special n95 mask and negative pressure rooms in the hospital
Just to clarify droplets beware people sneezing around you. Airborne beware people breathing around you.
February 3, 2020 at 5:42 am |
Well, I just answered my own question. The dept of health in Florida just posted a memo to healthcare workers for anyone suspected of the coronavirus (they have a checklist). Suspected individuals should be interviewed in a negative pressure room. This thing is spread through airborne and contract. Not good. This is part of the pdf:
Health Care Infection Prevention and Control Recommendations
CDC currently recommends a cautious approach to patients under investigation for 2019-nCoV. Such patients should be asked to wear a surgical mask as soon as they are identified. They should be evaluated in a private room with the door closed, ideally an airborne infection isolation room if available. Health care personnel entering the room should use contact and airborne precautions, including use eye protection (e.g., goggles or a face shield)
If anyone is interested in reading the whole thing they can go to Florida Dept of Health and look up “Detection and Reporting of 2019 Novel Coranavirus. Jan 29th 2020
Be safe.
February 3, 2020 at 1:00 pm |
PPT actions clearly at work in Chinese equities, which has seemingly calmed US markets.
And the TSLA short squeeze adds to the fun of equity holders.
Yet, the authorities can’t keep oil from sliding and UST yields continue to hug their Friday lows.
As long as markets believe that Uncle Xi has tamed the devil CVirus, stocks have the “all clear” to rally because, well, because nothing
can keep stocks down.
NOT increased shooting tensions with Iran.
NOT a pesky new flu virus.
Certainly NOT something as banal as impeachment.
To Infinity and Beyond
February 3, 2020 at 2:38 pm |
Hi Yra,
I’m really interested in getting a copy of the Rotten Heart of Europe. I heard you mention in Judd’s room that you have copies and are willing to send them out. Can we arrange this?
Thank you Chris Duhanci
Sent from my iPhone
>
February 3, 2020 at 5:46 pm |
chris —go to rotten heart of europe.com —put in your order going to chicago this week and will pick up many copies to send out—-will be done over the next two weeks
February 3, 2020 at 5:20 pm |
Chris,
Both E-Bay and Amazon have the book for sale and well worth your time.
As to God’s Laughter: Man proposes and God disposes!
February 3, 2020 at 11:39 pm |
It appears PBOC is taking the initiative?