We are back. This is the first blog post after a 10-week break. It has been a nice hiatus from writing as we took some time to reflect and respect the sanctity of motherhood.
I’m linking to an FRA PODCAST hosted by Richard Bonugli taped on Thursday featuring Barry Ritholtz, David Rosenberg and myself. This will be a solid starting point for NOTES FROM UNDERGROUND as it picks up where we left off on June 12: LONG EUROS, LONG GOLD and looking for some vigor in the commodity markets.
(NOTE: The following post is not political in any sense, but just a criticism of a major ill-conceived POLICY.)
This is a story of two pivots.
The first is Federal Reserve Chairman Jerome Powell in January 2019. The second is President Donald Trump in May 2020.
Powell’s pivot away from interest rate increases and balance sheet shrinking created a significant rally in equity and asset prices. Trump’s pivot on the DOLLAR will have disastrous results that are manifested in the GLOBAL DEFLATION that central banks have been trying to prevent. What is the reasoning behind the President’s recent shift away from a weak dollar to promoting the positive outcomes of a strong currency?
First off, I’d like to thank everyone who contributed to the Santa Mike/Covid relief at St. Vincent de Paul, a long-standing charity that gives every penny to those seeking help for hunger, clothing and medical assistance. Thanks to you, we have contributed more than $30,000 and for that Santa Mike is very grateful. As Mike keeps telling me, “Do you know how much $30,000 dollars of food is when bought in BULK?” This truly makes a difference for those struggling to get by in these extremely difficult times. SO THANK YOU ALL SO MUCH. Every donation matters and there are multiples because Peter at St. Vincent de Paul has procured some donors who are doing matches. That only makes NOTES FROM UNDERGROUND worth doing in even bigger ways.
Well, the apocalypse has fallen upon the financial markets much as we have discussed at NOTES FROM UNDERGROUND on February 2. The onset of the DEMAND SHOCK has unleashed the fears of a deflationary spiral. My readers have been WAY AHEAD of the CNBC crowd in analyzing the potential outcomes and predicting quality trades as the PANIC IN NEEDLE PARK fostered by the central banks was/is beginning to unfold. Any person who thinks any economic release has market value raise your hand but keep it six feet away as you are likely contagious.
This headline would have seemed ridiculous eight weeks ago but today it has great relevance. If I ran the PBOC (or rather had the totalitarian impulses of President Xi), the command from above would be trade in the overvalued U.S. debt instruments for a 3,000-year vehicle that’s a reliable store of VALUE. The world’s central banks have confirmed a central theme of NOTES FROM UNDERGROUND: It is not inflation they fear but the onset of a DEFLATIONARY SPIRAL.
There is no doubt little organisms can wreak havoc in ways that blowhards could never imagine. People are trying to assess the financial impact by looking at previous pandemics. This is flawed analysis because each pandemic is different depending on the global circumstances and the morass for incubation. During the Cold War people did not move freely so political containment acted as a drag on the spread of disease.
On July 2, 1997 the Thai baht entered crisis mode, kicking off what become known as 18 months of Asian Contagion. The so-called Asian Tigers experienced massive capital disruptions as the Chinese economic miracle undermined the capital expenditure projects that were creating the manufacturing capacity to lift the TIGERS out of poverty and into significance in the global supply chain. The emerging markets learned that as fast as capital flows in to support foreign direct investment it can hurriedly depart as it seeks alternative venues with a better competitive advantage .
On Tuesday global equities were down a very modest amount. The U.S. DOLLAR continued it move higher as the growth story and positive nominal yields is enough to push global investors into the U.S., the center of complacency. Commodity prices started off weak but OIL, grains and even COPPER found some buyers.
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.
On Monday, I had a chat with Anthony Crudele about the global macro impact on markets in 2020. As I always warn (in an effort to mimic MAO), there are many potential prairie fires in the world that COULD be ignited by a single spark. The Middle East is a potential prairie fire — every year. We were reminded of this over the last week as multiple events in IRAQ/IRAN brought the world to the precipice of cataclysmic outcomes. For now, the situation seems to be contained as GOLD, sovereign bonds and other tools of wealth protection.
