By Michael Every of Rabobank
Trade War and Peace
I was tempted to title today’s Daily “Alles Clarida?” when it was announced last week that Fed Vice-Chair Clarida has been accused of de facto front-running/insider-trading, following Kaplan and Rosengren, and with similar allegations swirling around yet-to-be-reconfirmed Fed Chair Powell. Is this revelation new to key folks in DC? If it isn’t, why is it news now? Wouldn’t it be handy to have a Fed aligned with White House stimulus economics? I’m not saying, I’m asking: because speculating on what the Fed is going to do involves knowing who the Fed will be.
I was also tempted to title the Daily “Pandora’s Box” given the Guardian’s release of the Pandora Papers, which lay out the extreme levels of wealth and tax evasion of our global elite. Yet even if there may be recriminations in some countries, isn’t the overall public reaction going to be a resigned “We knew that already”? And is *this* release tied to any underlying political battle?
Another title I could have gone with was “A Bridge Too Far”, given Congress failed to vote on the US debt ceiling, the infrastructure bill, or the $3.5trn reconciliation bill. House Speaker Pelosi now says it’s the end of October that get the bills done. Except the Democrats’ Progressive caucus perhaps didn’t realise their threat of no infrastructure or reconciliation bill sits fine with Senators Manchin and, more so, Sinema. As such, the $3.5trn bill is now down to “$1.5 to $3.5trn”, by making some spending last 5 years not 10. The problem is not just that Manchin and Sinema may not budge: it is that the green provisions in the bill may prove unpalatable to them regardless of cost, and that is the one element the Progressives reportedly won’t drop. So what could a loosey-goosey Fed buy in bulk if there were no extra supply of Treasuries? Or would a de facto fiscal contraction mean a US downturn that sees higher public borrowing anyway?
I was then thinking of the title “The Tais that bind”, because at 10:00EST US Trade Representative Tai will make a key announcement about her review of the US-China trade relationship. Last week, the rumor was flying round that this will see Trump-era tariffs cut by 1/3; yet there was another rumor that Tai will announce a Section 301 investigation into Chinese SOE subsidies. One move implies a shift towards trade peace, or at least détente. The other implies a new front in the trade war, which while nobody in the financial press is talking about anymore, is still arguably raging, sight unseen.
After all, we have “Build Back Better” promises of jobs and on-shoring across the West: what is that but a promise of protectionism? And as far back as November 2020, Xi Jinping stated: “We should increase the dependence of international supply chains on China and establish powerful retaliatory and menacing capabilities against foreign powers that would try to cut supplies.” Now we also have a supply-chain breakdown that forces all involved to make a strategic decision to either change economic geography towards greater resilience; or, not wanting to face the pain (and reduced ‘Pandora Papers’ opportunities), to sign up to yet more “Too Big to Sail”.
The US seems divided on this. Commerce Secretary Raimondo recently pledged to take US CEOs to China, as if recent history didn’t happen: yet she also just stated that “protecting US steel is a national security issue.” National-security figures point out that historically, all economic production and supply chains are such issues. What use is steel in isolation, for example?
Europe is far more deeply confused. The talk is of strategic autonomy, as challenges to that grow exponentially day to day externally: even Algeria and Mali appear to perhaps be slipping out of France’s sphere of geopolitical influence, for example. Yet the challenge is also internal. EU Council President Charles Michel, citing recent geopolitical events, has just declared that "2022 will be the year of European defence." I am sure the EU’s enemies are trembling. At the same time, and despite the actions of, and against, Lithuania and the request for pan-EU solidarity from Slovenia, Michel “seeks face time with President Xi Jinping to help soothe ailing ties”. Perhaps to try to push through the CAI investment deal the partially-sanctioned EU parliament has frozen? Perhaps Michel could first work out how to count sofas before getting into deeper waters?
The UK is now talking the talk but has yet to prove it can actually walk the walk, let alone run. There is AUKUS. Trade Secretary Truss is also talking about trade deals with India and Japan linked to security pacts to protect tech and supply chains. (As the Sunday Times puts it, she “Seeks a world of new allies to take on the baddies”!) Yet Truss refuses to be drawn on whether the UK will be able to sign a US trade deal before 2030. On the latter, PM BoJo states the UK needs to adapt post-Brexit rather than relying on cheap EU labour to plug gaps – yet this involves sustained investment, and new supply chains. The left-wing Guardian decries the lack of said European labour, even in an article that points out that as a result some restaurants in Manchester have had to put up hourly rates from GBP9 to 14 an hour; the right-wing Daily Mail is even arguing for higher wages (“Give Britain a Pay Rise!”). The BOE’s inflation fan chart may need to spread much wider than usual given these shifting sands.
While all of this is playing out, we now have the first signs of a possible leveling off in insane shipping prices from Asia – but only because the power-cuts being seen in China have led to a shortage of goods. As such, Western importers pay less for shipping…but only because the imports are not available at any price! Recall my zhetons anecdote from 1994 Moscow? Recall what modern economics was all about at the very beginning, with the argument over the relative value of water and diamonds? Guess what has made things that should be common so scarce? Long supply chains, which don’t make sense if energy and shipping costs are high. Also recall that for far longer than modern economics has been with us, the world was all about *mercantilism*, because people understood that if you don’t control trade and money, they control you.
Meanwhile, as China flew dozens of jets through Taiwan’s air defense zone, the editor of the Global Times tweeted: “China moved its National Day military parade from Tiananmen Square to the Taiwan Straits. The PLA did an excellent job. It is only a matter of time before Taiwan’s separatist authorities fall.” In response, the US military urged China to halt “provocative” flybys, which could lead to “miscalculations”. To put what this could mean in a shipping context, see ‘What’s At Stake In The Indo-Pacific’, and note the conclusion that Western “political leaders will demand options other than capitulation or catastrophic escalation. Maritime blockade will be high on the list of possibilities.” Imagine what that would do to global supply chains!
And so back to Tai and either a US signal of détente and can-kicking, or of disengagement and ‘Yes, we can’ kicking. Politico suggests we should buckle up, with Tai telling them: “I would say that the 301 tariffs are a tool for creating the kind of effective policies, and [are] something for us to build on and to use in terms of defending to the hilt the interests of the American economy, the American worker and American businesses and our farmers, too.” She also challenges the notion that tariffs are ultimately paid by American consumers, saying it’s a more complicated calculation than many suggest. Now *there* is a kick to the guts of the neoclassical trade consensus!
So, in the end I went with “Trade war and peace”, or perhaps “Trade, war and peace”, for this Daily.
Beijing Is Trapped: China Producer Prices Surge At Fastest Pace In 26 Years
Beijing Is Trapped: China Producer Prices Surge At Fastest Pace In 26 Years
China’s factory-gate prices grew at the fastest pace in almost…
China’s factory-gate prices grew at the fastest pace in almost 26 years in September, adding to global inflation risks and putting pressure on local businesses to start passing on higher costs to consumers.
The producer price index climbed 10.7% from a year earlier, the highest since November 1995, data from the National Bureau of Statistics showed Thursday, far higher than the 9.5% gain in August and hotter than the 10.5% expected.
On the other hand, consumer prices rose 0.7% last month from a year earlier, lower than a 0.8% gain in the previous month., but Bloomberg notes that for now consumer inflation remains in check because of falling pork prices, even though the removal of most virus controls by the end of September may have helped to boost household spending.
“The widened gap between PPI and CPI means greater pressure for upstream sectors to pass on rising costs to the downstream,” said Bruce Pang, head of macro and strategy research at China Renaissance Securities Hong Kong.
And, as we previously warned, the situation is about to get much, much more serious. If the historical correlation between Coal prices and PPI holds, were may be soon looking at a tripling of China's PPI, which from 10.7% Y/Y in September, is about to soar to 30% or more.
Needless to say, if Chinese PPI does hit 30%+, even if CPI somehow stay in the single digits, the results would be catastrophic: profit margins would collapse, the plunge in already thin cash flows would lead to even more defaults and supply chain bottlenecks, even as the scramble to obtain commodities "at any price" keeps pushing costs - and PPI - even higher.
Meanwhile, if producers do try to pass on some of the costs and CPI spikes (the gap between CPI and PPI was already at record wide before the recent surge in coal prices) as it did in the early 90s...
... then Beijing will have social unrest on its hands.
There are early signs that producers are starting to pass on higher costs to consumers: the largest soy sauce maker in the country said this week it plans to raise retail prices of its products. At least 13 companies listed on China’s A-share market have announced price hikes this year to address rising costs and tight supply, China Securities Journal reported Thursday.
And all this is happening as China's property sector desperately needs a massive liquidity infusion which is - you guessed it - inflationary.
And while China may be facing its first "galloping inflation" PPI print since the early 90s, it's only downhill from there, because as Citigroup wrote over the weekend, power cuts (with over 20 provinces, making up >2/3 of China’s GDP, have rolled out electricity-rationing measures since August) and contractionary PMI "seem to suggest China could enter into at least a short period of stagflation."
“We think the risk of stagflation is rising in China as well as the rest of the world,” said Zhang Zhiwei, chief economist at Pinpoint Asset Management Ltd.
“Persistent inflationary pressure limits the potential scope of monetary policy easing.”
And so, Beijing is now trapped: if it eases, inflation - already at nosebleed levels - will soar further crushing margins and sparking a deep stagflationary recession; if it does not ease, the property market - already imploding - will crater.
Bitcoin to $500K
Jamie Dimon bashes bitcoin while profiting from bitcoin … the case for bitcoin at $500K … a potential price catalyst to keep on your radar … is gold…
Jamie Dimon bashes bitcoin while profiting from bitcoin … the case for bitcoin at $500K … a potential price catalyst to keep on your radar … is gold about to turn north?
Jamie Dimon is the CEO of JPMorgan.
He’s also a master marketer.
Earlier this week, he called bitcoin “worthless.” It’s far from the first time he’s slammed the cryptocurrency. Here’s a quick trip down memory lane featuring some of Dimon’s greatest hits:
2014: “terrible store of value”
2015: “will not survive” “will be stopped”
2016: “going nowhere”
2017: “a fraud”
2018: “don’t really give a shit”
2020: “not my cup of tea”
2021: “I have no interest in it” “fool’s gold” “worthless”
The press has pounced on Dimon’s latest “worthless” attack.
I’m seeing it covered by CNBC, Reuters, CNN, MarketWatch, Fortune, Bloomberg, Yahoo… Basically, everyone – not to mention all the social media talking heads.
So, why is Dimon a marketing genius?
Because the same articles/talk segments that trumpet Dimon’s disparaging remarks just happen to include the fact that JPMorgan now allows its customers to buy and sell bitcoin.
In other words, Dimon just racked up hundreds of millions of dollars’ worth of free advertising for JPMorgan’s crypto services…by being a crypto bear.
***At the same time Dimon has been slamming bitcoin, its price has been surging, pushing back toward its all-time-high
In April, bitcoin topped out at $64,863, then lost 53% over the next three months.Source: StockCharts.com
Since then, the crypto has surged 87%, putting its all-time-high back into play.
As I write Wednesday morning, Bitcoin is roughly 16% beneath its record. As you’re likely aware, that’s not a huge distance to cover for an asset this explosive.
***Given the crypto’s surging momentum, financial pundits are increasingly asking where bitcoin’s price will end the year
Many are suggesting $100,000.
You can count our crypto expert, Luke Lango, amongst that group. But yesterday, in Luke’s issue of Hypergrowth Investing, he included a longer-term forecast that caught me off-guard…
A lot of folks think that Bitcoin is going to end the year at $100,000.
I’m one of those folks. But the other day, when one of my analysts said, “Bitcoin is going to $100K,” I responded by sarcastically joking, “Stop being so bearish!“
Because while our year-end price target for Bitcoin is $100,000, we believe that Bitcoin prices will soar much, much higher in the long run.
Like 5X higher.
That’s right. We think Bitcoin is going to $500,000.
What’s the rationale behind this projection?
It has to do with a yellow rock that we recently profiled here in the Digest.
***Has bitcoin usurped gold as an inflation hedge? At least temporarily?
As we noted in our Monday Digest, gold’s price has been comatose over the last 14 months, despite jarring inflation numbers.
(It’s actually climbing today! We’ll touch on that shortly.)
But isn’t gold supposed to come alive in an inflationary environment?
Yes, it’s supposed to. But many things are “supposed” to happen that never do (I’m looking at you, “transitory” inflation).
Why isn’t gold responding to record inflation numbers?
It was back in April that our macro specialist, Eric Fry, provided a clue. From an interview Eric did with our CEO, Brian Hunt:
If you were to take past precedent and apply that to the current situation, you would have a current gold price that’s $4,000 an ounce, or at least something much higher than it is. That isn’t happening.
What is happening is bitcoin is going up…a lot…
Once that settles down, you might see a return to a more-traditional connection between monetary policy, fiscal policy, and the gold price…
I think gold still has a good shot at moving a lot higher over the next year or two. But if current trends continue, and bitcoin goes to $100,000 or $200,000, you probably won’t get a gold rally.
As part of the interview, Brian added a great line. He wondered if gold has been watching market prices, wondering “have investors broken up with me?” Is bitcoin the better-looking version of me?”
What’s the case for bitcoin usurping gold as the new, younger and sexier inflation-hedge?
***Charting the relationship between yields, bitcoin, and gold
Let’s jump back to Luke. In his case for bitcoin at $500,000, he included the chart below.
I’ll let him describe it:
The blue line tracks Bitcoin prices.
The purple line tracks the 10-year Treasury yield, which is widely seen as the market’s dynamic proxy for inflation.
And the green line tracks the price of gold.Source: TradingView
The blue and purple lines correlate strongly to one another. The green line doesn’t correlate to either.
That’s super interesting.
To us, it means that the market has already confirmed Bitcoin as the digital version of gold – and, indeed, as a superior version of gold.
Let’s use this to dovetail into the case for bitcoin at $500,000.
If bitcoin is turning into the new gold, then we basically just compare overall market sizes to arrive at a loose price projection.
Back to Luke for the quick math:
The gold market is an $11 trillion market.
If Bitcoin gets that big, you’re talking an $11 trillion market on 21 million tokens, which implies a price per token of about $500,000.
Of course, that back-of-the-envelope math rests on the huge assumption that Bitcoin is, indeed, the digital version of gold.
But as Luke’s chart illustrates, it’s increasingly looking like that may already be the case.
***One quick bullish note on gold before we move on
We’ve beaten up on the precious metal this week. But there’s one thing gold has going for it that might spur a rally. And we could be seeing the beginning of that rally today, as gold is up nearly 2%.
In short, the pessimism has reached an extreme – and by one indicator, it’s turning.
Below, we look at the Gold Miners Bullish Percent Index (BPGDM). This measures the extent to which gold miners (a proxy for gold) might be overbought or oversold, based on technical analysis.
As you can see below, it just bounced off the fourth-lowest reading in five years (far right side of the chart).Source: StockCharts.com
The last three times BPGDM bounced from such deep, oversold levels, the price of gold ripped, as you can see below.
The top line is the BPGDM while the bottom line is the price of gold.Source: StockCharts.com
Even if bitcoin is replacing gold as an inflation hedge, that doesn’t mean gold can’t race higher from here.
For now, we’re long gold. Its long-term support level is $1,700. We’re above that and climbing. So, let’s give this turn in the BPGDM some time to play out.
If a rally doesn’t materialize and we drift back down toward $1,700, we’ll let you know.
***Back to bitcoin, keep your eye on this potential catalyst
The crypto community has been waiting for the SEC to approve – or not approve – a bitcoin ETF. And we’re getting close.
From Yahoo! Finance:
The U.S. Securities and Exchange Commission (SEC) is largely expected to approve a bitcoin ETF that invests in futures contracts later this month.
Applications from Proshares, Invesco, Vaneck and Valkyrie are primed to get the go ahead, according to a Bloomberg report.
The crypto market has long-awaited such an approval, believed to be behind bitcoin’s current bullish run.
Now, there’s no guarantee that SEC approval will send bitcoin’s price north. After all, many investors were expecting El Salvador’s official launch of bitcoin as legal currency to be a positive price catalyst for bitcoin, yet the opposite happened.
However, the bullish case is that an SEC approval would signal that regulators are willing to work with crypto investors, therein paving the way for broader adoption.
It’s all raising hopes in the $6.7 trillion U.S. ETF industry and beyond that after years of delays, the world’s largest market may finally be ready to join the party…
In a move that further raised hopes among crypto advocates, the regulator asked two issuers to withdraw their Ethereum-futures ETF filings over the U.S. summer, but made no such demands on similar Bitcoin-based applications.
Either way, we’re unequivocally long bitcoin. If an SEC ETF approval does lead to a sell-off, we’d see that as a buying opportunity.
Before we wrap up, when might we hit that $500,000 mark if bitcoin plays out as Luke anticipates?
No one really knows. Our best guess is about 10 years – and if so, you’re talking about an asset that will increase 10X in value in 10 years.
That’s an amazing return.
It truly is.
At the same time, Luke and his team of blockchain experts are targeting not 10X returns, but 50X returns with their altcoin recommendations. To learn more, click here.
We’ll keep you up to speed on the SEC and its decision on a bitcoin ETF here in the Digest.
Have a good evening,
Jeff Remsburggold inflation monetary policy monetary policy inflationary store of value
Lira Crashes To Record Low After Turkey’s Erdogan Fires Three More Central Bankers
Lira Crashes To Record Low After Turkey’s Erdogan Fires Three More Central Bankers
At this point, we’ve lost count of how many central bankers…
At this point, we've lost count of how many central bankers Turkey's authoritarian head Erdogan has fired, so a quick stroll down memory lane helped us remember:
- July 2019: Lira Crashes After Erdogan Unexpectedly Fires Turkey's Central Bank Governor
- Nov 2020: Erdogan Fires Turkish Central Bank Governor, Launching Full-Blown Currency Crisis
- March 2021: Turkey In Turmoil Again: Erdogan Fires Second Central Bank Chief In 4 Months, Sparking Foreign Capital Panic
- May 2021: Erdogan fires deputy governor of Turkey’s central bank
One look at the headlines above reveals that Erdogan, who himself is technically the head of the central bank as he can replace any current central bank governor that does not do his bidding and swap in some figurehead, tends to have a short fuse when it comes to heads of TCMB when they don't follow the crackpot economic "theory" known as Erdoganomics according to which cutting interest rates is the way to lower inflation, not vice versa. It's also why back in June when the Turkish central bank kept rates unchanged despite Erdogan's prodding for a rate cut (even as Turkish inflation was well in the double digits), we predicted - jokingly - that Erdogan was about to fire everyone.
Turkish Central Bank Keeps Benchmark Rate Unchanged at 19%— zerohedge (@zerohedge) June 17, 2021
Erdogan is about to fire everyone
Well, he didn't "fire everyone", but he definitely sent a message and back in September, the central bank shocked the market when it cut rates by 100bps to 18% with consensus again expecting an unchanged decision. The move sent the lira plunging to an all time low.
Alas, it turns out that the pace of cuts was not to Erdogan's liking and earlier today when we noted a Bloomberg headline that Erdogan was meeting with his central bank puppet, Kavcioglu, we said it was "game over" as more heads were about to roll.
*TURKISH PRESIDENT ERDOGAN MEETS CENBANK GOVERNOR: PRESIDENCY— zerohedge (@zerohedge) October 13, 2021
And... game over
This time we were correct, and late on Wednesday evening, President Erdogan fired three members of the central bank’s interest-rate setting committee in a midnight decree after meeting with Governor Sahap Kavcioglu who was appointed by Erdogan to lead the central bank in March, replacing his hawkish predecessor Naci Agbal.
Erdogan removed deputy governors Semih Tumen and Ugur Namik Kucuk, along with Monetary Policy Committee member Abdullah Yavas, according to the decree. He appointed Taha Cakmak as deputy governor and Yusuf Tuna as an MPC member.
According to Bloomberg, the changes followed a meeting between Erdogan and Kavcioglu on Wednesday evening, where the two discussed changes to the committee. Kucuk was the only member of the committee who voted against Kavcioglu’s interest-rate cut last month, thus committing professional career suicide. Yavas didn’t vote because he had contracted Covid-19 in the U.S., where he lives, but that was enough to prompt Erdogan's ire and to get him sacked.
Erdogan probably wanted to fire the head as well, but just last week, Erdogan’s office refuted a Reuters report that said Erdogan is “cooling” on Kavcioglu in the job even though the central banker had cut rates just over a month ago - a move sure to make Erdogan happy - despite explosive inflation crushing Turkey's economy. The inflation rate was 19.6% in September, when Kavcioglu lowered the benchmark interest rate by 100 basis points to 18%.
Predictably, the lira - which has been hitting new all time lows almost daily - dropped to a record low against the dollar, and extended its losses to nearly 5% against the dollar since the governor delivered his surprise interest-rate cut on Sept. 23.
The Turkish presidency posted a picture of the two men together on Twitter after the meeting, and Erdogan’s office described the conversation as “positive.” The presidency also said the two men discussed the general economic situation.
The lira fell 1% to a fresh record low of 9.1883 per dollar...
... and by now it should have become clear to even the most die-hard EM fanatic desperate for carry that any long position in the lira is career suicide. Which is why very soon we may see a wholesale capital flight out of Turkey which leads to total economic catastrophe, not to mention hyperinflation, for the NATO member state.
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