China And Gold: As The Yuan Goes, So Goes Gold

By Antony B. Sanders

Trade War Effect?

Over the past year, Gold has been looking quite similar to China’s currency, the Yuan. Eerily so.


Bloomberg had this story back in July of this year:  “China’s Gold Mystery: Is Nation Slowly Increasing Reserves?”

The case for China raising its gold holdings seems compelling.

Continue reading China And Gold: As The Yuan Goes, So Goes Gold

‘It’s Got A Green Light To Weaken’: Yuan Dive Continues As PBoC Looks On

By Heisenberg Report

The yuan rout is deepening.

On Thursday, the offshore yuan weakened past 6.80 for the first time since July of last year, as the easing bias inherent in recent pronouncements from officials and other reports portends a widening policy divergence with the Fed, further undercutting the bull case and tipping a growing sense of consternation in Beijing about the prospect of trade frictions hitting the domestic economy.

Here’s a chart with notable policy actions/turns annotated for reference:


You’ll note that over there on the right side, 6.85-6.90 is flagged as a possible zone for intervention. That’s around levels where the PBoC adopted the counter-cyclical adjustment factor last summer on the way to engineering a historic rally in the currency against the dollar. It’s possible they could resort to leaning on the CCAF again to stanch the bleeding.

Continue reading ‘It’s Got A Green Light To Weaken’: Yuan Dive Continues As PBoC Looks On

No Currency Manipulation By China’s Government, Yet

By Steve Saville

[This is a brief excerpt from a commentary posted at TSI last week]

In the 2nd July Weekly Update we discussed the risk posed by the recent weakening of China’s currency (the Yuan), and commented: “We won’t know for sure until China’s central bank publishes its international currency reserve figure for June, but the recent weakening of the Yuan does not appear to be the result of a deliberate move by China’s government.” We now know for sure — the Yuan’s pronounced weakness during the month of June was NOT the result of government manipulation. In fact, it can be more aptly described as the result of an absence of manipulation.

We know that this is so because of what happened to China’s currency reserves in June. As indicated by the final column on the following chart, almost nothing happened (there was no significant change). This means that China’s government made no attempt to either strengthen or weaken its currency last month.

Continue reading No Currency Manipulation By China’s Government, Yet

Trade War Hysteria: Where’s The Beef?

By Anthony B. Sanders

VIX, TYVIX, Baltic Dry, Credit Spreads Calm

The news is constantly abuzz with scary “Trade War!” headlines. But it reminds me of Wendy’s hamburger ads from the early 1980s: “Where’s the beef?”

Let’s look at the VIX (S&P 500 volatility index).  It is showing no signs of stress.


How about the 10-year Treasury Note volatility index (TYVIX)? Nada.

Continue reading Trade War Hysteria: Where’s The Beef?

Fool Me 666 Times, Shame on Me…

By Tim Knight

Well, surely you heard the news that Trump has ratcheted up the Chinese Trade War again:

Look, I’ve seen this movie before. I know how the story goes:

  1. Bears are about to lose hope since the market keeps going higher infinitely;
  2. Trump announces another salvo in the trade war;
  3. Market instantly plunges;
  4. Trump slips on a pink skirt and 38C bra and backpedals his threats;
  5. Market swiftly recovers to new lifetime highs.

Make no mistake, I’m short – – 54 positions – – and would love the market to fall 500 points every day until it was at 0 and every bull had committed a painful seppuku. Honest, I’d love that to pieces, since my hatred of bulls almost certainly exceeds that of Jews against Nazis, but I’m past hope at this point. It’s all a rigged game with no hope and no decency left. It will only end with apocalypse.

Expect Dow 30,000 in the morning. This is a sham, and I’m not getting hopeful anymore. Amazon with a p/e of 300 is just too damned CHEAP to pass up for John Q. Public, because he’s SO freakin’ smart.

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The Art Of Currency And Trade War: Inside China’s Thinking On The Yuan

By Heisenberg

… there is no big problem with the yuan depreciation. It could be beneficial as the economy is slowing. We are able to control capital outflows. There is no need for aggressive intervention.

That’s from one of three anonymous sources Reuters spoke to for a story about the PBoC’s thinking when it comes to rapidly weakening Chinese yuan.

On Tuesday, hours after a sharp early decline in the yuan through 6.70, PBoC Governor Yi Gang attempted to calm things down by assuring everyone that he’s “paying close attention to that”. The yuan’s weakness, he said, is “mainly due to factors such as a stronger dollar and external uncertainties.”

Those comments followed remarks from PBoC deputy governor (and SAFE head)  Pan Gongsheng, who told a conference in Hong Kong that China has plenty of FX reserves and other FX “tools” and is “confident” that they can keep the currency stable.

Continue reading The Art Of Currency And Trade War: Inside China’s Thinking On The Yuan

There is Only One Global Trade War

By Jeffrey Snider

IHS Markit reported last week that its composite Purchasing Managers Index (PMI) rebounded slightly in its first reading for June 2018. In January, the index had managed nearly 59, the highest in a very long time. It was taken as a definitive sign that Europe’s economy was not only booming, that boom was sustainable.

Global liquidations struck at the end of January and now Europe’s economy doesn’t look so steady. In terms of IHS Markit’s PMI, it reached a low in May of 54.1 before picking back up to 54.8 this month. The small rebound was the work of the services sector alone.

European manufacturing may be entering a phase of even greater uncertainty. The manufacturing PMI for Europe came in at 55, the lowest in a year and a half. It’s not whether the number is above 50 or not, nor does it matter how far above, rather what these things tell us is the possible marginal direction as it may be changing (second derivative).

From IHS Markit’s press release:

Continue reading There is Only One Global Trade War

‘Stable Genius’ Trade Strategy Backfires Spectacularly As Harley-Davidson Moves Production To Europe

By Heisenberg

And here it is folks.

Remember “Trump Starts Trade War: Steel Tariffs Drag Jack Daniels, Hogs Into Absurd Transatlantic Tit-For-Tat“?

No? That’s ok. That post is from March and you’ve slept (and been drunk) since then, but the gist of it was that Harley-Davidson was about to get dented thanks to Trump’s trade bombast.

Fast forward nearly four months, and guess what? Harley is now moving production offshore. To wit, from a Monday morning filing:

The European Union has enacted tariffs on various U.S.-manufactured products, including Harley-Davidson motorcycles. These tariffs, which became effective June 22, 2018, were imposed in response to the tariffs the U.S. imposed on steel and aluminum exported from the EU to the U.S.

Consequently, EU tariffs on Harley-Davidson motorcycles exported from the U.S. have increased from 6% to 31%. Harley-Davidson expects these tariffs will result in an incremental cost of approximately $2,200 per average motorcycle exported from the U.S. to the EU.

Harley-Davidson believes the tremendous cost increase, if passed onto its dealers and retail customers, would have an immediate and lasting detrimental impact to its business in the region, reducing customer access to Harley-Davidson products and negatively impacting the sustainability of its dealers’ businesses. Therefore, Harley-Davidson will not raise its manufacturer’s suggested retail prices or wholesale prices to its dealers to cover the costs of the retaliatory tariffs. In the near-term, the company will bear the significant impact resulting from these tariffs, and the company estimates the incremental cost for the remainder of 2018 to be approximately $30 to $45 million. On a full-year basis, the company estimates the aggregate annual impact due to the EU tariffs to be approximately $90 to $100 million.

To address the substantial cost of this tariff burden long-term, Harley-Davidson will be implementing a plan to shift production of motorcycles for EU destinations from the U.S. to its international facilities to avoid the tariff burden. Harley-Davidson expects ramping-up production in international plants will require incremental investment and could take at least 9 to 18 months to be fully complete.

Shares are getting hit in the pre-market and what I would note is that this looks to me like the first major U.S. company to come out and quantify the negative impact the trade threat poses to financial results.


Continue reading ‘Stable Genius’ Trade Strategy Backfires Spectacularly As Harley-Davidson Moves Production To Europe

‘Blow For Blow’: U.S.-China Trade Spat Devolves Into Name-Calling…

By Heisenberg

…As Chocolate Cake Diplomacy Faces Biggest Test Yet

Well, it looks like Donald Trump’s “great friendship” with Xi Jinping (forged as it was, not in fire, but over “the most beautiful piece of chocolate cake you’ve ever seen”), is going to be put to the test over the next couple of weeks.

On Friday, in the official statement that accompanied the announcement of his decision to move ahead with tariffs on Chinese goods despite the trade truce Steve Mnuchin struck with Chinese Vice Premier Liu He last month, Trump said the following:

My great friendship with President Xi of China and our country’s relationship with China are both very important to me.

Kind words for one’s “rapist”:

Xi, according to Bloomberg, is now set to go “blow for blow” with Trump on trade – and hopefully that means something different than it means when Trump goes “blow for blow” with Russian hookers.

Continue reading ‘Blow For Blow’: U.S.-China Trade Spat Devolves Into Name-Calling…

Not Your Grandfather’s Trade War: The Revenge Of Bad Money, Part 2

By David Stockman

The effect of central banking’s bad money has been to preternaturally bulk up China’s industrial economy and hollow out America’s. It’s as if some accelerated form of economic plate tectonics had broken off large chunks of the US industrial midwest and southeast and implanted them in the Pearl River Delta (Guangzhou), the Yangtze River Delta (Shanghai) and the Bohai Economic Rim (Beijing, Tianjin, Hebei).

This historically abrupt transplantation happened after 1987 because in a world of virtually unlimited central bank credit, there is no settlement process. Deformations do not get culled out on a regular basis by the mechanisms of the free market. Instead, under the tutelage of the state and its central banking branch they metastasize indefinitely until they finally hit a politically-inspired wall of resistance.

At the present world historical moment that wall of resistance is bedecked with an Orange Comb-Over. That is to say, Donald Trump’s real mission has been to crush the 30-year old toxic symbiosis under which mercantilism in China and financialization in the US functioned as two mutually reinforcing peas in a pod.

In effect, bad money caused the substitution of massive household debt and drastically inflated financial assets for the wealth and output of America’s lost industrial provinces. At the same time, and in conjunction with the militant mercantilism of China’s all-powerful post-Maoist state, it generated today’s upside-down global economic order.

We are referring, of course, to the fact that as a relatively poor, developing economy, China became the de facto $4 trillion banker to the rich, developed world. Accordingly, the 21st century to date has risibly mocked the rules of 19th century gold standard capitalism: It’s as if economically backward India had been the banker and the booming industrially advanced regions around London had been the borrower.

The absurdity of this arrangement—–China’s reckless debt-besotted Ponzi functioning as the world’s putatively solvent and sober banker and capital exporter—is lost on the Wall Street/Washington ruling classes owing to the scourge of financialization. That is, they have become so addicted to measuring economic health through the S&P 500 that they are oblivious to the vast economic deformations that bad money has wrought.

In that respect, there is a certain flavor of free market ideologues who contribute—perhaps inadvertently—to the mainstream blindness. Their argument goes that America is such a wonderful place that global capital comes beating on its door.

So if you want to enjoy the fruits of vast capital inflows you need to run large trade deficits; and presumably forever, world without end. It’s just an accounting identity!

Then again, the laws of compound arithmetic do put a damper on the theory of eternal deficits. Since the last US surplus on its international investment account in 1988 ($21 billion), the balance has plunged southward on a virtually uninterrupted basis and now stands at negative $8 trillion.

A polite word for the orange bars in the graph below is “US international indebtedness”, and it has been rising at a 21.5% annual rate for 28 years. Another 28 years at that rate and the US would owe the world $2 quadrillion, and at just one-half that rate it would still be a $150 trillion debtor by 2045.

Obviously, Stein’s Law of unsustainability (it tends to stop) would come into play long before either eventuality, but our point involves more than just arithmetic.

To wit, the US economy’s (positive) +$300 billion net investment balance with the rest of the world in 1980 (you can see it by squinting) represented about 10% of GDP. That figure was not unusual or unreasonable for what had been the world’s leading export economy and creditor nation during the previous six decades (since 1914).

But America most surely did not become rich by plunging deep into debt with the rest of the world thereafter—-such that by 2017 its net investment position amounted to (negative) -42% of GDP. What the academic free traders forget is that bad money and free trade do not play well together; the former destroys price signals and blocs market clearing adjustments.

So doing, it attempts to violate Stein’s Law. But now we know in fact, rather than just in theory, that it’s impossible.

At length, you get Donald Trump instead, and you get his half-baked advisor, Peter Navarro, on bubblevision this morning explaining that protectionism is the new route to free trade!

Continue reading at Contra Corner →