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From China: Dollar, Deflation, And The RRRest

It’s not necessarily a discrepancy so much as maybe looking at the same thing from a different point of view. China’s State Administration of Foreign…

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This article was originally published by Alhambra Investment Market Research

It’s not necessarily a discrepancy so much as maybe looking at the same thing from a different point of view. China’s State Administration of Foreign Exchange (SAFE) reports on, among other things, the widest definition of foreign assets being under its whole national umbrella. Yet, the agency publishes balances denominated not in CNY, either US$’s or SDR’s (hey, they can dream!) instead.

The country’s central bank, the People’s Bank of China (PROC), owns, holds, and manages (a comprehensive term of art) a big chunk of those reserves. In fact, contrary to what seems popular perception, these foreign assets (largely US$ denominated) form the basis of the Chinese domestic monetary system (RMB).

Because of this fact, China really, really needs dollars (see: below).


SAFE indicated that during the last half of 2020 a small few might have trickled in – alarmingly, though, in the same way and at close to the same suspiciously low rate as had been experienced in 2017. Since the end of last year, though, sideways; no more than December.

In reporting in US$ valuations, however, SAFE’s total is influenced to some degree by the market value of all those foreign instruments. As the media kept reminding everyone, there was that “historic” selloff in many if not the vast majority of those (foreign reserves are most often held in the form of foreign government debt like UST’s). Meaning, there still might have been a trickle of inflows into China that had been reinvested in UST’s and the like which then declined in value.


The PBOC, on the other hand, is openly trolling at this point (see: above). For several years, China’s central bank had clearly engineered (through various likely nefarious unknown perhaps unknowable means) a targeted range (and a very narrow one) for its foreign reserve balance sheet basis. Such absurdity was taken to ridiculous heights beginning in August 2019 (a very strong clue) and lasting all the way to the end of 2020.

For the month of February 2021, the PBOC said it had finally gained some inflows; the central bank reported the highest level of foreign reserves on its balance sheet since August 2018. Hurray, reflation! This anodyne description makes it sound consistent with the narrative as well as what was then running global bond markets during that month (though somewhat inconsistent with the behavior in CNY; another clue).

Technically true, though the rise in reported foreign assets was the equivalent of a rounding error and not really anything like actual reflationary inflows.

Not to be outdone, for the month of June 2021 yet another of the same. Following March, April, and May when foreign reserves didn’t move at all in either direction (again, the obviousness of targets/engineering), suddenly the PBOC reports the highest level of foreign reserves since January 2018. Another milestone comeback!

Once more, technically true yet almost surely purposefully empty. For anyone paying attention (which, Chinese authorities know, won’t be many), the question is why go through such a patently obvious charade?

The answer, I believe, was given to us this month, the one immediately following this latest chapter in the ongoing make-believe. Suddenly, July 2021, RRR cut.


The RRR (as noted in some detail here with relevant background) shares a causal space with not just Chinese monetary policy but more importantly eurodollars as they are rather than eurodollars as the PBOC pretends to present them back to the world. For one thing, there’s the potential discrepancy between its own published figures and those from SAFE. Maybe that’s just US$ values, or there were small inflows for the PBOC which were washed out by small but slightly larger outflows at some other agency, still none of this adds up to what it is “supposed” to.

And what is supposed to be happening is actual, legit reflationary inflows. Like 2017, this dancing around in minute quantities obscures a very different reality which is quite missing in real dollars. Where the hell are they?

Unable to present an answer to that frank question, you can, I hope, appreciate the monetary dilemma for China.

Furthermore, if you know, as a Chinese monetary authority, that you’ve been playing a game before then suddenly suspecting you won’t be able to play the same way much longer, then this external make-believe shortly becomes an internal monetary contraction issue and thus the RRR. The same type of policy choice (or lack thereof) practiced in only the worst eurodollar, global economy circumstances.


It’s not like we haven’t seen this kind of thing unravel before. We need go back only a few years, to 2018, when reflation and inflation had likewise been accepted by the masses (the public doesn’t know any better thanks to Economics being so wrong about money, leaving people all over the world in a perpetual a state of illiteracy) only to have been undermined the entire time in effective (euro)dollars.

Once that farce became untenable, around January/February 2018, it was only a matter of time before it quickly unwound – CNY fell sharply as the actual dollar shortage “outflows” rather than reflation inflows left it in a precarious situation not just externally here but also internally with respect to RMB. The RRR cuts quickly manifested beginning in April 2018 (more would follow).


CNY in 2021 has been acting rather un-reflation, too; no longer so easily “strong”, meaning moving upward against the dollar, but more rolling over in much the same way (though taking longer this time) as it had in those early months of 2018.

And now one RRR.

So far as the rest of the PBOC’s balance sheet is concerned, there is pretty good reason for any rising negative and deflationary potential. No matter how poorly China’s economy has performed (every honest bit of data analysis indicates conclusively that it has, in fact, performed exceptionally poorly) real money monetary policy refused to budge. As you might surmise, I don’t count RRR adjustments as real money policy (for consistently good and recently historic reasons).



In other words, currency growth of 4.9% year-over-year in June was half of the emergency rate of 2020 (which itself had been half the rate of what used to be normal) and pretty much the same low level as had been the forced on China during those other bad years of RRR cuts and PBOC eurodollar problems.

Bank reserves are up compared to 2020, but only by a few percent even after several years of declines leading up to 2020 and that whole huge recession last year. Since the end of last year, though, like the downshift in currency growth, bank reserve growth has also downshifted to about zero in 2021.



So, what does all this really mean?

A ton of reasons, consistent and universally coherent reasons, to be betting global deflationary where China’s economy, its government stance on that economy, and, behind both, the actual state of the eurodollar are all concerned. Pretty much everything that’s important. And, as noted, we’ve seen this before not all that long ago.

No one remembers even a few years ago because no one was really paying attention, or knew they should pay attention, the last time (or the time before; etc.) Therefore, deflationary bond markets worldwide are some big mystery when for the public and the media when, in truth, the answers are all on the PBOC’s balance sheet. Even its inconsistencies are evidence.




Economics

How Science Becomes Religion

How Science Becomes Religion

Authored by Sheldon Richman via The Libertarian Insititute, 

The popular slogan today is "Believe in science."…

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How Science Becomes Religion

Authored by Sheldon Richman via The Libertarian Insititute, 

The popular slogan today is "Believe in science." It’s often used as a weapon against people who reject not science in principle but rather one or another prominent scientific proposition, whether it be about the COVID-19 vaccine, climate change, nutrition (low-fat versus low-carb eating), to mention a few. My purpose here is not to defend or deny any particular scientific position but to question the model of science that the loudest self-declared believers in science seem to work from. Their model makes science seem almost identical to what they mean by, and attack as, religion. If that’s the case, we ought not to listen to them when they lecture the rest of us about heeding science.

The clearest problem with the admonition to "believe in science" is that it is of no help whatsoever when well-credentialed scientists–that is, bona fide experts–are found on both (or all) sides of a given empirical question. Dominant parts of the intelligentsia may prefer we not know this, but dissenting experts exist on many scientific questions that some blithely pronounce as "settled" by a "consensus," that is, beyond debate. This is true regarding the precise nature and likely consequences of climate change and aspects of the coronavirus and its vaccine. Without real evidence, credentialed mavericks are often maligned as having been corrupted by industry, with the tacit faith that scientists who voice the established position are pure and incorruptible. It’s as though the quest for government money could not in themselves bias scientific research. Moreover, no one, not even scientists, are immune from group-think and confirmation bias.

So the "believe the science" chorus gives the credentialed mavericks no notice unless it’s to defame them. Apparently, under the believers' model of science, truth comes down from a secular Mount Sinai (Mount Science?) thanks to a set of anointed scientists, and those declarations are not to be questioned. The dissenters can be ignored because they are outside the elect. How did the elect achieve its exalted station? Often, but not always, it was through the political process: for example, appointment to a government agency or the awarding of prestigious grants. It may be that a scientist simply has won the adoration of the progressive intelligentsia because his or her views align easily with a particular policy agenda.

But that’s not science; it’s religion, or at least it’s the stereotype of religion that the "science believers" oppose in the name of enlightenment. What it yields is dogma and, in effect, accusations of heresy.

In real science no elect and no Mount Science exists. Real science is a rough-and-tumble process of hypothesizing, public testing, attempted replication, theory formation, dissent and rebuttal, refutation (perhaps), revision (perhaps), and confirmation (perhaps). It’s an unending process, as it obviously must be. Who knows what’s around the next corner? No empirical question can be declared settled by consensus once and for all, even if with time a theory has withstood enough competent challenges to warrant a high degree of confidence. (In a world of scarce resources, including time, not all questions can be pursued, so choices must be made.) The institutional power to declare matters settled by consensus opens the door to all kinds of mischief that violate the spirit of science and potentially harm the public financially and otherwise.

The weird thing is that "believers in science" sometimes show that they understand science correctly. Some celebrity atheists, for example, use a correct model of science when they insist to religious people that we can never achieve "absolute truth," by which they mean infallibility is beyond reach. But they soon forget this principle when it comes to their pet scientific propositions. Then suddenly they sound like the people they were attacking in the previous hour.

Another problem with the dogmatic "believers in science" is that they assume that proper government policy, which is a normative matter, flows seamlessly from "the science," which is a positive matter. If one knows the science, then one knows what everyone ought to do–or so the scientific dogmatists think. It’s as though scientists were uniquely qualified by virtue of their expertise to prescribe the best public-policy response.

But that is utterly false. Public policy is about moral judgment, trade-offs, and the justifiable use of coercion. Natural scientists are neither uniquely knowledgeable about those matters nor uniquely capable of making the right decisions for everyone. When medical scientists advised a lockdown of economic activity because of the pandemic, they were not speaking as scientists but as moralists (in scientists’ clothing). What are their special qualifications for that role? How could those scientists possibly have taken into account all of the serious consequences of a lockdown–psychological, domestic, social, economic, etc.–for the diverse individual human beings who would be subject to the policy? What qualifies natural scientists to decide that people who need screening for cancer or heart disease must wait indefinitely while people with an officially designated disease need not? (Politicians issue the formal prohibitions, but their scientific advisers provide apparent credibility.)

Here’s the relevant distinction: while we ought to favor science, we ought to reject scientism, the mistaken belief that the only questions worth asking are those amenable to the methods of the natural sciences and therefore all questions must either be recast appropriately or dismissed as gibberish. F. A. Hayek, in The Counter-Revolution of Science, defined scientism as the "slavish imitation of the method and language of Science."

I like how the philosopher Gilbert Ryle put it in The Concept of Mind: "Physicists may one day have found the answers to all physical questions, but not all questions are physical questions. The laws they have found and will find may, in one sense of the metaphorical verb, govern everything that happens, but they do not ordain everything that happens. Indeed they do not ordain anything that happens. Laws of nature are not fiats."

"How should we live?" is not one of those questions which natural scientists are specially qualified to answer, but it is certainly worth asking. Likewise, "What risks should you or I take or avoid?" There is a world of difference between a medical expert’s saying, "Vaccine X is generally safe and effective" and "Vaccination should be mandatory." (One of the great critics of scientism was Thomas Szasz, M.D., who devoted his life to battling the medical profession’s, and especially psychiatry’s, crusade to recast moral issues as medical issues and thereby control people in the name of disinterested science.)

Most people are unqualified to judge most scientific conclusions, but they are qualified to live their lives reasonably. I’m highly confident the earth is a sphere and that a water molecule is two parts hydrogen and one part oxygen. But I do not know how to confirm those propositions. So we all need to rely on scientific and medical authorities–not in the sense of power but in the sense of expertise and reputation. (Even authorities in one area rely on authorities in others.)

But we must also remember that those authorities’ empirical claims are defeasible; that is, they are in principle open to rebuttal and perhaps refutation, that is, the scientific process. Aside from the indispensable and self-validating axioms of logic, all claims are open in this sense. That process is what gets us to the truth. As John Stuart Mill pointed out in On Liberty, even a dissenter who holds a demonstrably wrong view on a question might know something important on that very question that has been overlooked. To our peril do we shut people up or shout them down as heretics. That’s dogma, not science.

Tyler Durden Sat, 07/31/2021 - 13:00
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Precious Metals

Constant Inflation Doubletalk from Fed Erodes Confidence

The summer doldrums in precious metals markets have tested the patience of bulls. The silver market has been hit especially hard…

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Welcome to this week’s Market Wrap Podcast, I’m Mike Gleason.

The summer doldrums in precious metals markets have tested the patience of bulls. The silver market has been hit especially hard in recent weeks, but price stayed above the $24 level and avoided dipping to new lows for the year.

Nervous and frustrated investors who bailed out this summer may have made a huge mistake. Gold and silver markets appear to now be catching a break on the upside.

On Thursday, gold gained 2% to record its best close since mid-June. As of this Friday recording, the monetary metal trades at $1,830 an ounce and is up 1.1% for the week.

Turning to silver, prices are advancing by 1.4% this week to check in at $25.62 per ounce. Platinum, which was basically flat through Thursday, now shows a weekly loss of 1.8% to trade at $1,056. And finally, palladium is drifting slightly lower by 0.9% to come in at $2,682 per ounce.

Metals markets stand to benefit from renewed weakness in the dollar.

Since late May, U.S. dollar strength versus foreign currencies had put downward pressure on hard assets. The U.S. Dollar Index rallied from about 89.50 to just over 93 before momentum waned in recent days.

The Index failed to make a new high for the year on its summer rally, setting the stage for a potential bearish reversal. That reversal appears to have taken place this week, with the Dollar Index breaking down below 92 yesterday.

Currency traders were unimpressed by the Federal Reserve’s latest policy briefing. On Wednesday, the Fed announced it would leave its benchmark Funds rate unchanged and continue its $120 billion in monthly asset purchases.

No tapering was on the table, though there was some taper talk. It amounted to vague indications of future tightening after the U.S. economy attains "substantial further progress."

Fed Chairman Jerome Powell tried to quell inflation concerns. He reverted again to his “transitory” claims, but in remarks to the media he seemed confused about what his own definition of transitory inflation means.

Jerome Powell: The increases will happen. We're not saying they will reverse. That's not what transitory means. It means that the increases in prices will happen. So, there will be inflation, but that the process of inflation will stop, so that there won't be ...

When we think of inflation, we really think of inflation going up year, upon year, upon year, upon year. That's inflation. When you have inflation for 12 months, or whatever it might be, I'm just taking an example, I'm not making an estimate, then you have a price increase but you don't have an inflation process. And so, part of that just is that if it doesn't affect longer term inflation expectations, then it's very likely not to affect the process of inflation going forward.

So, what I mean by transitory is just something that doesn't leave a permanent mark on the inflation process. Again, I don't mean that producers are going to take those price increases back; that's not the idea. It's just that they won't go on indefinitely. We have two mandates, maximum employment and price stability. Price stability for us means inflation average of 2% over time. And so, we've got to be very careful about that, but I think it's a good point that it's a term, what it really means is "temporary." But then you've got to understand that it doesn't mean that the increases will be taken back. Some of them will be, but that's not really what it means.

Well, anyone wants to make sense out of all that would need a degree in Fedspeak. We are supposed to believe that stable prices actually means prices rising at a 2% average rate – except when the Fed wants inflation to run higher. But when it does, it’s only transitory – except when it affects the inflation process, which happens when long-term inflation expectations rise, which the Fed says won’t happen but at the same time doesn’t really know what will happen in the future.

Maybe what the Fed says matters less than what economic realities say. Investors would be better served focusing on fundamentals than trying to decipher central bankers’ forecasts.

Unfortunately, investors can’t ignore the Fed entirely. Since its monetary policy decisions can and do drive financial markets, it is necessary to pay attention to what the Fed is actually doing.

Right now it is still stimulating rather than fighting inflation, still holding interest rates artificially low, and still offloading negative real yields upon savers and investors.

That puts both the bond and stock markets in precarious positions. If inflation expectations were to shift to rising prices being a long-term rather than a transitory problem, a dramatic downside readjustment in interest-rate sensitive financial assets would commence.

There would also likely be a dramatic upside revaluation of hard assets including precious metals.

Whether investor psychology shifts suddenly or gradually toward an inflation-protection mindset remains to be seen. Metals markets tend to move slowly at the beginning of bull markets, then rapidly and even violently toward the end.

Market timing is an impossible task given the unpredictable nature of people and circumstances. What is possible is to capitalize on opportunities when markets are over-pricing financial assets and under-pricing hard assets.

The opportunity exists now, but it won’t last forever. There may even come a day when the opposite is true – hard assets are overpriced with inflation expectations running way ahead of actual inflation realities and financial assets offering tremendous value as a result.

Yes, that could happen. It did in the early 1980s.

But the early 2020s look more like the start of a new inflationary cycle rather than the unwinding of one.

Well, that will do it for this week. Be sure to check back next week for our next Weekly Market Wrap Podcast. Until then this has been Mike Gleason with Money Metals Exchange, thanks for listening and have a weekend everybody.

      

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Economics

Michael “Big Short” Burry: This Is The Greatest Bubble Of All Time In All Things “By Two Orders Of Magnitude”

Michael "Big Short" Burry: This Is The Greatest Bubble Of All Time In All Things "By Two Orders Of Magnitude"

Earlier this year, none other…

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Michael "Big Short" Burry: This Is The Greatest Bubble Of All Time In All Things "By Two Orders Of Magnitude"

Earlier this year, none other than Michael 'Big Short' Burry confirmed BofA's greatest fears, as he picked up on the theme of Weimar Germany and specifically its hyperinflation, as the blueprint for what comes next in a lengthy tweetstorm cribbing generously from Parsson's seminal work, warning that:

"The US government is inviting inflation with its MMT-tinged policies. Brisk Debt/GDP, M2 increases while retail sales, PMI stage V recovery. Trillions more stimulus & re-opening to boost demand as employee and supply chain costs skyrocket."

#ParadigmShift

 "The life of the inflation in its ripening stage was a paradox which had its own unmistakable characteristics. One was the great wealth, at least of those favored by the boom..Many great fortunes sprang up overnight...The cities, had an aimless and wanton youth"

"Prices in Germany were steady, and both business and the stock market were booming. The exchange rate of the mark against the dollar and other currencies actually rose for a time, and the mark was momentarily the strongest currency in the world" on inflation's eve.

"Side by side with the wealth were the pockets of poverty. Greater numbers of people remained on the outside of the easy money, looking in but not able to enter. The crime rate soared."

"Accounts of the time tell of a progressive demoralization which crept over the common people, compounded of their weariness with the breakneck pace, to no visible purpose, and their fears from watching their own precarious positions slip while others grew so conspicuously rich."

"Almost any kind of business could make money. Business failures and bankruptcies became few. The boom suspended the normal processes of natural selection by which the nonessential and ineffective otherwise would have been culled out."

"Speculation alone, while adding nothing to Germany's wealth, became one of its largest activities. The fever to join in turning a quick mark infected nearly all classes..Everyone from the elevator operator up was playing the market."

"The volumes of turnover in securities on the Berlin Bourse became so high that the financial industry could not keep up with the paperwork...and the Bourse was obliged to close several days a week to work off the backlog" #robinhooddown

"all the marks that existed in the world in the summer of 1922 were not worth enough, by November of 1923, to buy a single  newspaper or a tram ticket. That was the spectacular part of the collapse, but most of the real loss in money wealth had been suffered much earlier."

 "Throughout these years the structure was quietly building itself up for the blow. Germany's #inflationcycle ran not for a year but for nine years, representing eight years of gestation and only one year of #collapse."

His punchline: the above was "written in 1974 re: 1914-1923" and then makes the ominous extrapolation that "2010-2021: Gestation" adding that "when dollars might as well be falling from the sky...management teams get creative and ultimately take more risk.. paying out debt-financed dividends to investors or investing in risky growth opportunities has beaten a frugal mentality hands down."

And, as if reading from the same playbook, Paul Tudor Jones warned yesterday that things are "bat shit crazy" and if Jay Powell

“The idea that inflation is transitory, to me ... that one just doesn’t work the way I see the world."

All of which led to Burry's latest tweet warning this morning...

"People always ask me what is going on in the markets. It is simple. Greatest Speculative Bubble of All Time in All Things. By two orders of magnitude. #FlyingPigs360"

In other words: "Brace!"

So what are you going to do about it?

Tudor Jones had some simple advice: "buy commodities, buy crypto, buy gold."

Tyler Durden Tue, 06/15/2021 - 11:10

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