Notes From Underground: Do You Hear What I Hear?

First, the news on the coronavirus continues to be buffeted by media outlets’ urge to be the first to report. The need for speed creates a rash of questionable stories that later get retracted or certainly get less sensational when context is added. When trading around this, I urge caution as opportunity knocks for those traders who can remain patient. There seems to be scientific interest in the failure of the VIRUS to have impacted children. While it is in the early stages of a potential pandemic, according to my source on all things infectious diseases, it is an outcome to watch in an effort to measure the potential impact.

Second, Mexico joined Brazil in cutting rates last week. The Mexican Central Bank cut rates to 7% with the inflation level hovering at 3.10%. The Mexican economy has been growing at a very low rate keeping, which has kept inflation at bay — and resulting in a REAL YIELD of almost 3.5% in the past year. In terms of global interest rates, a positive yield of this level is enough to promote carry trade interest for global investors. Even in the recent selloff of emerging market currencies the Mexican peso has held up extremely well. It has recently fallen through the 200-week moving average versus the dollar (18.54 pesos versus it 200-week of 19.08).

However, the politics in Mexico remain burdened by corruption and cartel-induced violence but the recent issue of China and tariffs have given a boost to the Mexican manufacturing sector in. (Quick history lesson: The Chinese devalued the YUAN by 50% on January 1,1994, the same day that NAFTA took effect, stealing the thunder of the supply chain factories built along the northern border of Mexico, the maquiladoras. At the time the Chinese DEVALUED the YUAN to 8.7 from 5.8 against the dollar, the Mexican peso was trading 3.10 versus the dollar.)

The massive devaluation of the PESO over the last 25 years coupled with the trade frictions with China has once again made the Mexican factories interesting to global multinational corporations. This is something to watch and can readily be seen in the performance of Kansas Southern Railroad (KSU) over the past year. Just another indicator for our efforts to monitor global capital flows.

The third piece of significant news was that the Trump administration has announced that it’s raising tariffs on airplanes and air parts in retaliation for illegal subsidies provided to Airbus. The positive news is that the tariffs are only on aeronautical goods and not the previous threats of a wide array of products from the European Union. But what I hear in this measure is that TRUMP/ROSS/NAVARRO have Europe in its sights. One negative for Europe is that the Trump team did not move to rescind some of the tariffs already imposed on European products. This week at the Munich Security Conference the U.S. foreign policy and defense leaders warned the EU about embracing Huawei technology for the 5G rollout.



This seems to be a Trump wants to play in an effort to put pressure on his longing for lower rates. In an election year, the politics of tough tariffs combined with lower interest rates may be the elixir for a Trump reelection. Do the math but for me it continues to be that 2+2=5.

Fourth, there is a proliferation of stories about the equity market being nowhere overvalued relative to P/E ratios from 2000 and the DOTCOM era of money burns and absurd prices. As a result, the financial community has been downplaying concerns about the coronavirus as global stocks rallied. Meanwhile, the continuous drop in long-term sovereign yields kept the search for returns as driver of equity gains. (Full disclosure: I actually liquidated 25% of my stocks this week as I am waiting for a key indicator the Spoo/bond to make new highs after failing at all time highs twice recently.)

But for all those analysts stating that all is right in the world I ask this question: Why are gold prices at seven-year highs? More significantly, why are the GOLD/EUR, GOLD/YUAN, GOLD/YEN, GOLD/SWISS crosses at or close to making all-time highs? When the stock market rally of 1998-2000 was in full swing GOLD was being sold and trading around $280 an ounce. In fact, the BANK OF ENGLAND famously sold its GOLD between 1999 and 2002 because they were so sure of its demise as a haven/currency alternative.

Notes From Underground strives to find the differences in every financial situation. This time is different for the central banks have deemed it so. In this case, DEBT DOESN’T MATTER UNTIL IT DOES.

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15 Responses to “Notes From Underground: Do You Hear What I Hear?”

  1. ShockedToFindGambling Says:

    Yra- Good post.

    Worth looking at the credit spreads here.

    Junk has held up well, relative to Treasuries, but in Investment Grade has been gaining on Junk and Treasuries for about 14 months.

    Keep an eye on theses spreads, for a continuation of stock trends or early warning..

    • Michael Temple Says:

      Now we learn from WSJ that Trump may halt sales of chips and chip making technology to China.


      Also, Tokyo just cancelled its March 1 marathon and the first mention publicly that the Summer Olympics may now be at risk. Would be a huge physical and psychological blow.

      Finally, American Chamber of Commerce in China reports that 80% of US owned factories in China are operating at less than capacity, with approximately 50% entirely shuttered.

      Yes, stocks continue higher due to continued liquidity injections. But, with 700MM Chinese under some form of travel restriction. It is beyond doubt that Covid-19 is still flaring throughout China and that a reopening of commerce is months away, if you ask me.


  2. Michael Temple Says:

    So so much to say and too little time. But, here goes

    You make the point that we don’t yet know how virulent Covid-19 shall be. What we do know, however, is that this is already far more
    widespread than SARS, in which “only” 8000+ were infected with just
    790ish attributable deaths.

    While I am not an epidemiologist, it is frightening to see the large scale petri dish called the Diamond Princess cruise ship now claiming over 350 infections.

    In an enclosed environment, this virus is highly highly contagious. It seems rather self-evident that China cannot afford to go back to work any time soon as re-starting the gears of commerce requires millions
    of workers to cram into smaller petri dishes called subways, buses, and factory floors. Moreover, many large factories provide housing for their migrant workforce, another “non-starter” while the virus rages.

    And whatever else we may think about the ultimate pathway of this virus, the economic damage is already afoot despite Mr Market pooh-poohing it all as the Fed/PBOC will simply ride to the rescue.

    Wall Street thinks this is just a Q1 and maybe a Q2 disruption.
    Hence, the soaring stock markets as “all will be well”.

    Yet, consider these ACTUAL data points coming from companies that simply don’t square with this “happy talk” narrative.

    1. Hilton Hotel CEO
    Having closed 150 China hotels, the CEO said he is preparing for a 3-6 month closure and an ADDITIONAL 3-6 Month Restart

    2. From Reuters

    Wuhan is under military lockdown and nearly 70MM Chinese are under formal lockdown, with nearly another 400MM+ under some form of travel restrictions.

    Nearly 500MM people not fully back to work.

    3. Wuhan is home to 10% of Chinese auto manufacturing.
    City is totally locked down

    From WSJ, Wuhan auto companies out of commission until mid-March. We know Fiat in Serbia has already closed. GM now facing
    possible shortages/closure.

    Article further states that only 20% of all Chinese auto salesrooms/dealers are even open.

    Furthermore, we are now seeing reports of further outbreaks in Singapore and Viet Nam with rumors of travel restrictions soon to be placed on those two regions, along with HK.

    So, the economic damage to China Inc. is not reversing any time soon, regardless of one’s outlook for Covid-19

    SARS lasted approximately 75-80 days before it peaked/burnt itself out. We are nowhere close to 75 days yet in Wuhan, Ground Zero…So, the infections elsewhere will continue to fester for months to come as the virus is just now starting to take hold in other parts of China, not to mention the small clusters beginning to pop up elsewhere.

    So, a lot of blather by me, but what does it mean?

    It means the UST market and commodity markets are far better barometers of “facts on the ground” than stock markets that are looking past the “short term” valley of Covid-19 to the next ascent as PBOC/Fed liquidity trumps all.

    Yes, it will go on far longer than anybody can predict. But, the drop ahead will be momentous. Want to see a small example why I think this is almost assuredly so?

    AEM—Agnico Eagle Mining….Stock got DESTROYED last week because it sinned and reported a 4% drop in 2020 production guidance despite reporting record cash flow and an INCREASE in its dividend.

    Growth is down 4% and they killed the stock. Yet, the stubbing occurred because the ramp up of NEW PRODUCTION has stumbled..New production, not a cut in existing production.

    Yet, this will surely be just temporary. Meanwhile, in S&P and elsewhere, every company is allowed a one-time mulligan for Q1 and investors are excusing every company for foregoing guidance

    See Expedia’s big rise after suspending 2020 guidance.

    Why is it surging 10% while AEM is dropping 15%?

    So, stock markets may or may not be right about the ultimate virulence of Covid-19….But the actual economic damage has already been done and it is likely to grow far far worse.

    Again, Hilton CEO has basically written off its China operations for the ENTIRE 2020 year…..

    Other thoughts.

    1 Trump…..To the extend he actually thinks more than one step ahead on the checkerboard (certainly not chess), he should actually WANT a stock market drop/pullback sometime soon. Why?

    The longer this goes, especially if it ratchets higher all the way into summer, the harder the fall as we approach November election.

    Let stocks finally have a “mean reversion” sell off now….That will cement a Fed cut and/or QE and power the market even higher from a healthier, more sustainable base of S&P 3000ish, or perhaps even lower.

    2. What does gold know? You highlighted the incredibly quiet rise of gold in virtually all other currencies.

    While “everybody” loves to say that gold cannot rally much while the USD is ascendant, I say POPPYCOCK

    Here is long term chart of DXY

    Last peaked at 112 in March 2002…Gold was roughly $430
    DXY fell to 98 in Dec 2005…..Gold was roughly $700

    So, gold in USD is now twice as high as last time it was at 98.

    My point? Much like yours, the breakout in gold to all time highs in such key currencies as Euro, Yen and the commodity currencies (Aussie/Canadian) and at 52 week highs for other currencies such
    as yuan/rubles/CHF is quite noteworthy.

    If USD should falter, I imagine gold gets some “giddy up” very quickly.

    I strongly believe the economic damage inflicted in China will easily
    sap her numbers for the entirety of 1H 2020. The severing of supply chains and the continued travel restrictions internationally spell big slowdown ahead for the global economy.

    Jerome will cut as soon as stocks have a big drop on such realizations….Again, I think stocks need to get hit over the head with more pronouncements like those of the Hilton CEO that the entirety of its 2020 China operations are going to be ZILCH, NADA.

    Again, the Expedia team suspended all 2020 guidance. What did stock do? It soared.

    Even the Tesla cheerleader, Elon, reversed course and raised $2 BN last week. Do you think he knows that his Shanghai plant is likely
    shuttered for many many months? And, for those who care to look under the hood, US sales are down, not up, as Tesla no longer qualifies for big US rebates for selling EVs, as they have used up their allotment.

    So, if Trump decides to play hardball with European tariffs, that will add even more drag to global economy as folks come to terms with the screeching halt of commerce in China.


  3. Michael Temple Says:

    One More Thing

    As global trade seriously slows, remember how this will put further strain on USDs in circulation. With less trade/commerce, fewer USDs will flow to those countries who need dollars to service their
    dollar liabilities.

    In short, dollars are growing scarcer as trade flows diminish. This screams for the Fed to open up swap lines (as you have previously suggested) and/or ease big time…Yet, Jerome is loathe to ease when S&P and FANGs jump from one new high to the next.

    Yet, the structural short in USD grows fiercer with each passing day of diminished international trade flows. Bulk of global commerce still gets invoiced in USD.

    So, financial conditions are tightening greatly with the Covid-19 induced halt to large swathes of trade in China as evidenced by force majeure declarations almost daily and the plummeting of cargo vessel rates

    So, what does this mean? Expect S&P futures to be up again tonight….Naturally, of course

  4. Pierre Chapuis Says:

    Wow! So much info to wrap ones mind around. I wonder how much this blog would be worth if it were priced in gold. 😀
    As Michael is mentioned wouldn’t less dollars mean less money flow into equities and Real estate prices. (I’m thinking the surplus from China). Feel free to correct me, I just started reading “The Bill From the China Shop”
    And a disruption in the supply chain will mean an increase in prices in consumer goods (car parts, roofing material, clothes etc.).
    Wouldn’t that be ironic. Powell gets his inflation and markets and Real estate go down.

    It does look to me like China is imploding. Even the people I work with (who never have discussions like these) are concerned. They worry about Amazon packages of things they bought from China. They’re asking if they should open them.
    One of my coworkers who’s had a trip booked to China, for over a year, has cancelled it and is expecting no refund.

    Tesla. I have a buddy who works at the city water plant. He and his coworkers day trade TSLA with their 401k money. He’s made thousands. I told him it works until it dont work. Lol

  5. Michael Temple Says:

    Besides your anecdotal story of a friend cancelling a long-planned China trip, consider the following news stories

    1. Wireless Industry cancelled its big annual conference in Barcelona this month due to Covid fears…Average attendance is 100,000+ ZAP. Gone

    2. Manchester United Football Club has announced it is reconsidering its previously planned summer tour in SE Asia

    3. China has already announced the cancellation of its APRIL Formula 1 Race in Shanghai….April, not March.

    Do you think Tokyo Olympic organizers are beginning to sweat whether or not the Games may need to be canceled? If Covid
    continues to rage in China and possibly get out of hand in other
    parts of the world (likely not in Western world where much better public health care systems exists, but certainly places like Africa, India and Indonesia number at least 2 BN+ people), does it make
    sense to think that holding the Games is the right thing to do.

    You would literally be asking hundreds of thousands of GLOBAL fans
    to converge on Tokyo and then fly back to the four corners of the Earth. Would public health officials actually encourage such a thing?

    So, we are already witnessing a pullback in global travel plans and yet, Covid-19 doesn’t seem to have come close to peaking, yet.

    Again, the HIlton CEO has basically said 2020 is probably a Goner for their 150 China hotels.

    As for the impact of severed supply chains, I won’t much dispute your belief that it may cause price spikes in key products. At the same time, however, if we fall into a global recession, prices for many goods might just plummet on falling demand.

    Already, luxury brands are seeing huge fall off in demand, especially as the Chinese consumer has been a traditional big spender. But, not at this time, to be sure.

    My more immediate concern is that the slowing of trade means far fewer dollars in circulation which causes an unnatural and relentless bid/scramble for dollars for those with dollar debts that need to be serviced…..

    Such “tightening” is the exact opposite of liquidity actions by PBOC. Fed may have to remember it is the Central Banker to the world and prepare swap lines, as Yra has outlined.

    The longer the Fed does NOT undertake such measures, the tighter the dollar squeeze, in my view.

    Yet, Powell is in a box….How can he ease when S&P keeps jumping ever higher on continued easing.

    Heck, look at the overnight recessionary numbers coming out of Japan with its Q4 2019 numbers….Big slowdown and that is BEFORE Covid-19…..Only going to be worse in Q1 2020.

    So, more QE out of the BOJ, but that does nothing to create more
    trade with China if quarantines/lockdowns continue, as seems the case.


  6. Michael Temple Says:

    I heard a hilarious joke/fake story headline tonight in reaction to
    Apple’s suspension of forward guidance after admitting its March
    numbers will be lower due to Covid/Chinese developments.

    Here goes

    “In light of Apple’s lowered revenue forecast for the March quarter, the Fed has announced that effective immediately, it will ramp up
    NOT QE purchases of Iphones”

    I assume Apple stock will be eagerly bought by the close of tomorrow as everybody will want to “buy in” ahead of the June rebound quarter to come.

    I will make a “bold” prediction. Apple sales in China will be down for quite some time….Apple products, priced at $1000, are vanity/luxury goods. Nobody really needs a $1000 Gucci handbag or a new $800 camel hair sports coat.

    And right now, luxury brands are reporting frightening drop offs in sales in China and in other top markets where Chinese tourists used to buy when traveling (they’re not traveling now).

    Ergo, I believe Apple sales in China will take a bigger hit than many might presume.

    Do you think Jerome might start buying some NOT QE Teslas to assist Elon once it becomes clear that Tesla sales in China fall to ZERO this quarter…..WSJ ran an article that nearly 80% of all
    Chinese car dealers/show rooms are currently closed, in addition to all the idled car manufacturers.



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  9. Pierre Chapuis Says:

    What seems to me that needs to be bought up is clean air and water. Or as the old credit card commercial refered to somethings are “Priceless”
    This virus has all countries circling the wagons.
    What I’m (and probably everyone else) watching is the CDC. Especially now that they have been invited to China to help.

  10. Trading Perspectives from Yra - February 18, 2020 - The Cedar Portfolio Says:

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  11. Michael Temple Says:


    Of particular note today, several of the gold miners made new 52 week highs, in tandem with gold’s highest closing price since 2013.


    Not far behind are names such as

    Quite impressive. Many folks watching GDX for a breakout signal above 30-31. Yet, that may be a false fig as the index suffered a fallback when AEM plummeted 15% on Friday on lowered 2020 guidance.

    Strip out that whopper of a loss, and I daresay GDX might have come close to $30 today, as AEM is 4% of GDX and just suffered 60 bp of collapse, or roughly 60 cts, to add onto today’s $29.23 close.

    Gold rallied today on “no news”. Generally speaking, that is a very good sign as “somebody” wanted in a big way.

    Methinks gold is finally catching up to the deflationary impulse raging through the UST market, and more importantly, reacting to the once again inverting yield curve, which would portend rate cuts in the not too distant future.

    Chalk it all up to Covid 19…..As discussed, the big slowdown in Chinese commerce is causing agita in FX markets where dollar debtors are scrambling for USD because of the HUGE INTERRUPTION in the circulation of USD tied to global trade.

    So much of international trade is still invoiced in dollars. But, if cargoes cannot move due to China Inc shutdown/force majeure conditions, US dollars are also not circulating.

    The Fed and US Treasury are going to have to come to the rescue with the rollout of huge dollar swap lines and possible QE (much more necessary than merely cutting the rate of interest on dollar deposits) to provide GARGANTUAN LIQUIDITY to counter the seizure currently rippling through FX markets as USD keeps rising as relentlessly as the FANGs and Tesla. (OK, maybe not as much as TSLA). But, you catch my drift.

    Tonight, reports emanating from Tokyo that authorities are now asking workers to telecommute from home and to take public transit at non-rush hour times to avoid large crowds congregating as now 50+ cases have been detected, exclusive of the Princess Diamond Cruise ship.

    Lord help us (and the markets) if a significant outbreak should befall
    new places such as Tokyo/Singapore.

    Supply chains in China are probably months away from being re-constituted fully, especially as over 700MM Chinese still remain under some form of travel restriction, 70MM of whom in Hubei Province are living under martial law/quarantine.

    I think somebody awakened today to realize that in a world of negative yielding debt and CBs poised to do whatever it takes to
    fight off a Covid Recession, gold in USD looks awfully cheap, especially when it is trading at ALL TIME HIGHS in so many other key currencies. And, best of all, the mining stocks joined in the party, as well. Always nice confirmation.


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