To help remind readers of what happens when the entire world engages in wholesale currency war, here is a complete list of all the recent FX interventions, courtesy of Stone McCarthy.
As we first warned in March, and as became abundantly clear over the weekend Beijing had no choice but to join the global currency wars, as the yuan's dollar peg will ultimately prove to be too painful going forward. And sure enough this evening the PBOC weakens the Yuan fix by the most on record.
The up and coming generations have plenty to blame on the "baby boomer" generation and the scores of bad fiscal and monetary policy decisions that has robbed them of their future. The job of each generation is to leave the world in a better place than they found it. It is clear, we failed.
It appears - according to the narrative assigned by the mainstream media - that any weakness in asset prices should be bought because China will inevitably have to unleash pure QE (as opposed to the modestly watered down version currently underway) or some combination of RRR cuts. This is 'western' thinking as the go to policy of the rest of the world's central banks has been - put on pants, print money, paper over cracks, proclaim victory. However, in China there is one big problem with this... stoking inflation... and most crucially the social unrest concerns when suddenly a nation of newly minted equity losers can no longer afford their pork (which is facing record shortages)...
Hedgies are the most short ever... and Commercials are the least hedged in 14 years... and it appears rumors of PBOC buying along with dismal data from around the world has sparked a renewed awareness of another looming QE sending gold well north of $1100 and silver back above $15.
"In any event, waiting to normalize monetary policy may defer, but cannot avoid, a market collapse that is already baked in the cake."
Here is an overview of next week's events and data placed in the larger context.
A rising interest rate trend would, according to Gibson, encourage prices to rise towards and likely through the Fed's 2% target inflation rate. This is not how financial traders see it, nor does the Fed. They expect the exact opposite, believing that rising interest rates are bad for demand and commodity prices, which is why the decision has been deferred for so long. The evidence tells us this view is mistaken and that rising interest rates will be accompanied by rising commodity prices.
If GDP growth only averages 2.0% in the Second Half (which I think is likely), then 2015 growth will only be about 1.7% annually. Given that the Fed didn't raise rates in 2012, 2013, and 2014, when growth was well north of 2%, why would they do so now? Yet Wall Street and the media stubbornly cling to the notion that 3% growth and rate hikes are just around the corner. Old notions die hard, and this one has taken on a life of its own.
"But an increase in the quantity of money and fiduciary media will not enrich the world... Expansion of circulation credit does lead to a boom at first, it is true, but sooner or later this boom is bound to crash and bring about a new depression. Only apparent and temporary relief can be won by tricks of banking and currency. In the long run they must lead to an all the more profound catastrophe."
The demise of the dollar has been greatly exaggerated. Here is how I see the near-term outlook.
We would like to believe that a period of peace and prosperity lies ahead of us. Unfortunately, the facts do not support this panglossian assertion. If history repeats it is more likely that we see hyperinflation and the sharp devaluation of paper and digital currencies in the coming years, given that no experiment with money printing has ever had a positive outcome.
Here comes today's main event, the July non-farm payrolls - once again the "most important ever" as the number will cement whether the Fed hikes this year or punts once again to the next year, and which consensus expects to print +225K although the whisper range is very wide: based on this week's ADP report, NFP may easily slide under 200K, while if using the non-mfg PMI as an indicator, a 300K+ print is in the cards. At the end of the day, it will be all in the hands of the BLS' Arima X 12 seasonal adjusters, and whatever goalseeked print the labor department has been strongly urged is the right one.
The #1 question we get after we review correlations every month is “Why are they so high relative to long term historical norms?” Our answer is that Federal Reserve policy has been an unusually important factor in asset prices since 2009. The unusually easy monetary policy since that time (and its planning, implementation, and effect on the economy) has been a powerful unifying story in capital markets. Now, as the Federal Reserve moves to return the economy to a more “Normal” policy stance, correlations should drop. That they have not yet moved convincingly lower is a sign that equity markets may want to see the Fed actually pull the trigger.
Things are getting downright scary in emerging markets as a "triple unwind" in credit, Chinese leverage, and loose US monetary policy wreaks havoc across the space. Between a prolonged slump in commodity prices and a structural shift towards weaker global trade, the situation could worsen materially going forward.