The world is fraught with troubling news of assassinations, terrorist atrocities and confrontation between China and the U.S. But in the financial news it is all about the DOW PUSHING 20,000. To quote Mr. Natural: “What does the Dow 20,000 mean? It don’t mean SH*T.” We become enamored with numbers but in real financial terms 20,000 is meaningless on its own. The U.S. equity markets are enthralled with the possibilities that a Trump presidency will present. Three weeks ago Rick Santelli laid it out very well. He noted if trump was successful in reforming the ACA, realizing genuine corporate and personal tax simplification and reform, and rolling back some of the regulations burdening small and medium businesses the Trump administration would be an unmitigated success. If the Dow is the barometer, then Mr.Trump should declare victory and spend the next four years writing his autobiography.
Posts Tagged ‘China’
The question for the political uncertainty confronting global markets will be the rollback of the U.S. influence via the reduction of its presence in various regional treaty agreements. Trump’s “faux pas” over Taiwan should cause the entire NATO structure to be reviewed. The ONE CHINA issue was pledged by the Nixon/Kissinger framework forged during the détente with China. The People’s Republic of China maintained that Taiwan’s independence was a domestic affair and should be resolved by the Chinese people. But the bottom line for the U.S. was: Would Washington risk a thermonuclear war to maintain Taiwan’s independence? Well, a similar question is relevant today in regards to Turkey. Would the U.S. risk war with Russia if Vladimir the Magnificent attacked Turkey in an effort to further destabilize the Middle East, resulting in a greater Iranian presence and further strengthening the KURDS?
As we bid farewell to the dog days of summer, here are some issues that will set the agenda for the month ahead:
1. Friday’s employment data made the picture murkier for the FOMC meeting later this month. The nonfarm payrolls were on the weak side, and, as Art Cashin correctly pointed out on CNBC, the bigger issue was a drop in the hours of the work week, which when measured in terms of jobs gained/loss resulted in a loss of 300,000 jobs. The FED jaw flappers keep orally pushing for a rate hike on September 21 but this jobs report clouds the issue.
The talking heads report ad nauseam that several Fed members believe a rate hike possible but as I wrote last week, if the fed funds rate is not raised the critical component of the FOMC release will be the outcome of the vote. If Stanley Fischer doesn’t vote for a RATE HIKE then HE SHOULD RESIGN FROM THE FOMC. It is that simple for if Chair Yellen prevails in achieving another 9-1 vote then it is without question Yellen’s FOMC and all other ivory tower mouthpieces should remain silent. The Federal Reserve Board is under mounting criticism due the inconsistency of its members’ public pronouncements. The FED‘s credibility is being called into question, a potentially disastrous situation in a FIAT CURRENCY SYSTEM.
2. The G-20 meeting presented great selfies and photo-ops but little else. THIS MEETING REFLECTED THE STRAINS IN THE GLOBAL ORDER WHICH HAVE BEEN “PAPERED OVER” BY THE CENTRAL BANKS. Japan set the tone of the meeting by releasing a paper to the G-20 warning the world and especially Europe about the negative fallout from an acrimonious end to the BREXIT negotiations. Japanese corporations have massive investments in British capital projects and if British exports are to be penalized then Japan threatened to remove production and jobs from the U.K. and other European centers. I THINK THE JAPANESE WANTED TO SEND A MESSAGE TO ALL THE PARTIES IN THE BREXIT DISCUSSION, BUT MORE IMPORTANTLY, THIS WAS JAPANESE OFFICIALS RETALIATING FOR BEING SINGLED OUT AS A CURRENCY MANIPULATOR AT THE PREVIOUS G-20 MEETING. Japan prevented the Chinese from making them the focal point … yet again.
Before the release of the G-20 Communique, the U.S. and China held a bi-lateral meeting and one of the main issues discussed between Presidents Obama and XI was foreign currency movements. A fact sheet released after the meeting said, “China and U.S. Agree to Refrain From Competitive Currency Devaluations.” It may be a major political victory for the Chinese if the U.S. Treasury was deemed to be a serial currency manipulator in a similar vein of the PBOC. And this would be a serious blow to U.S. prestige. The actual language of the final communique was generic and sanitized: “We affirm our previous exchange rate commitments, including that we will refrain from competitive devaluations and we will not target our exchange rates for competitive purposes.” This is nonsense of the first order for as many critics of the Fed and ECB have argued over the previous six years: QE POLICY is a domestic monetary program with a weakened currency as a desired outcome. The G-20 reference is mere political posturing for the domestic constituency.
3. The Reserve Bank of Australia and the ECB have scheduled meetings this week. Tonight at 11:30 CDT the RBA will announce its interest rate intentions. The consensus is for no change from its current 1.5% overnight cash rate. The Aussie dollar is very weak against the Kiwi dollar, its main trading partner, so I’m in agreement with consensus. The important point is that it’s Governor Stevens’s last meeting and what he says about the Chinese economy should be of interest. THURSDAY will be an important day as Mario Draghi will hold a press conference following the ECB’s meeting. President Draghi has been very quiet of late and has allowed his underlings to speak about policy. Draghi didn’t even attend the Jackson Hole Conference. The European economy is sputtering. Italy is facing a November referendum. And, more importantly, German Chancellor Merkel’s CDU party suffered a miserable election result on Sunday with the anti-Euro AfD party garnering the largest increase in support.
The media paints the AfD success as a response to an anti-immigrant agenda. There may be an element of fact in that but the German middle class is raising its voice against the FINANCIAL REPRESSION foisted upon German savers as a product of ECB policies. If President Draghi is threatened by German domestic politics look for an increase in the ECB QE program to 90/100 billion euros a month from 80 billion in an effort to build the ECB balance sheet, weakening the euro and simultaneously pushing borrowing costs lower. Draghi is a man in a hurry as the political winds turn against the ECB. The problem for Draghi is that the massive QE programs promoted by Bernanke and the BOJ have failed to have the desired effects. Bloated balance sheets for the sake of bailing out debt-stressed nations provide political fodder for the anti-euro political tide rising across the EU. Mario Draghi has grabbed unlimited power for the ECB, BUT FOR HOW LONG? Yes, our work has just begun.
It’s that time of the month: first Friday and the jobs data is front and center. Consensus is for 152,000 nonfarm payrolls. In my humble opinion it will take a number above 200,000 to put pressure on the FOMC to actually raise rates at its June meeting, or, more importantly, a headline jobless rate of 4.8%. As always, I am highlighting the AVERAGE HOURLY EARNINGS (AHE) as the most important number because it plays to Chair Yellen’s concern about 20 years of stagnant wages. The market is anticipating a tepid rate of 0.2% following April’s gain of 0.3%. A flat wage number would keep the FOMC on hold.
As I begin my further analysis of the unfolding political/economic factors facing the global markets I seek your indulgence and set the table by quoting from what I believe is one of the most significant chapters in western literature. Notes From Underground takes its title from the essay of the same name of by Fyodor Dostoyevsky. The tagline, 2+2=5, is a summation by Dostoyevsky to poke at the Rationalists of his day. But the chapter of note is from the novel The Brothers Karamazov titled, “The Grand Inquisitor.” The scene is set as the Grand Inquisitor has arrested the Christ figure for daring to upset the social order that the Church has created. The entire chapter is so moving but allow me to quote a small part:
In the past I have criticized the CNBC tagline, “Live From The Most Powerful City In the World, New York.” I find it arrogant and devoid of any perspective. What makes a city powerful? In some sense I suppose it’s the ability to make and shape events around the globe. Wall Street may be a powerful money center but so is London and from a political and monetary sense Beijing has catapulted itself a spot among the most influential. Friday morning I did an interview with Gordon Long of the Financial Repression Authority, a must visit site for its archive of discussions on global macro issues. We were discussing the role of China in affecting U.S. monetary policy. Gordon Long has discussed the idea of an agreement reached in February at the G-20 meeting in Shanghai about an ACCORD to keep the U.S. dollar stable to weak in an effort to prevent the Chinese from actively pursuing a weaker YUAN for when the DOLLAR RALLIES THE YUAN IS ALSO PUSHED HIGHER AGAINST A BASKET OF DEVELOPED MARKET CURRENCIES AND CERTAINLY AGAINST OTHER EMERGING MARKET FX.
Notes From Underground: Chinese Economic Policy Is Modeled on Kelly’s Heroes Paradigm of Sgt OddballMay 4, 2016
It is time to invoke one of the great war movies of the anti-war decade, Kelly’s Heroes. The theme is relevant in two ways. First, a ragtag group is trying to steal a hoard of German gold from a heavily guarded town and divide it up among themselves as booty from the war (similar to Chinese desire for Western-owned gold). Secondly, one of the key characters is Sargent Oddball, a tank commander played by Donald Sutherland,who will not tolerate the negative waves of people who doubt the success of the “mission.” Today, Nasdaq ran the article, “China Warns Economists to Brighten Outlooks.” Through various sources the Chinese authorities said, “Securities regulators, media censors and other government officials have issued verbal warnings to commentators whose public remarks on the economy are out of step with government upbeat statements …” The formal policy is “zhengnengliang,” translated as POSITIVE ENERGY or as Oddball would command, “don’t give me any negative waves.”
The Japanese leave Washington with no support for alleviating one-sided currency moves. For China it is all about respect for growth, wherever it may be. The Chinese GDP was released on Thursday and it came out exactly as forecast at 6.7% (shocking, I know). There was virtually no criticism of the Chinese as the nations are watching closely while China commences its transition from an export-dominated economy to a more balanced growth model, where domestic consumption takes on increased importance. In contrast to the G-20 view on Japanese currency intervention, SNB President Thomas Jordan announced that the Swiss would increase its balance sheet through currency intervention “… to prevent an already ‘significantly overvalued’ franc from strengthening.”
Here we go again. Bank of Japan Governor Kuroda “shocked and awed” the markets by taking BOJ deposit rates into negative territory in a HYBRID sort of way as it is a three-tiered methodology that does not apply to money already being held at the BOJ in reserve. Also, money that is deemed regulatory-type capital will receive ZERO interest and won’t be punished with a surcharge, but any new funds making it onto the reserve balance sheet of the BOJ will receive NEGATIVE INTEREST RATES. Kuroda-san delivered this shock after promising last week that the BOJ would not go negative on its deposit rate. Kuroda will learn hat if you keep intentionally pumping the markets with disinformation the markets will have their time when the BOJ needs it the most, like maybe selling off the massive JGB portfolio on its balance sheet. But through the power of negative compounding of interest earnings Kuroda has brought Stevie “Guitar” Miller’s words to life: