Trade Deficit

The best headline to summarize what happened in the early part of the overnight session was the following from Bloomberg: "Asian stocks extend global rally on stimulus bets." And following the abysmal data releases from the past three days confirming that the latest centrally-planned attempt to kickstart the global economy has failed, overnight we got even more bad data, first in the form of Australia's trade deficit, and then Germany's factory orders which bombed, and which as Goldman said "seems to reflect genuine weakness in China and emerging markets in general and this will weigh on the German manufacturing sector."

For many years now, it’s been clear that China would soon be pull­ing the strings in the U.S. financial system. In 2015, the American people owe the Chinese government nearly $1.5 trillion. Of course, the Chinese aren’t stupid. They realize we are both trapped.China has recently put into place a covert plan to get back as much of its money as possible - by extracting colossal sums from both the United States government and ordinary citizens, like you and me.

The evening started with disappointing Japanese trade data cross the board - weakest imports, exports, and trade balance in 6 months - which follows the largest selling of Japanese stocks by foreigners ever. China opened with the first rise in margin debt in 6 days, stocks were lower  in the pre-open after last night's epic farce ramp. PBOC strengthened the Yuan fix modestly and also injected another CNY 40 billion.

There is no better way to describe the international monetary system today than through the statement made in 1971 by U.S. Treasury Secretary, John Connally. He said to his counterparts during a Rome G-10 meeting in November 1971, shortly after the Nixon administration ended the dollar’s convertibility into gold and shifted the international monetary system into a global floating exchange rate regime that, "The dollar is our currency, but your problem.” This remains the U.S. policy towards the international community even today. On several occasions both the past and present chairpersons of the Fed, Ben Bernanke and Janet Yellen, have indicated it still is the U.S. policy as it concerns the dollar. Is China saying to the world, but more particularly to the U.S., “The yuan is our currency but your problem”?

Divegence driver of the dollar was never predicated on a particular time frame for the Fed's lift-off.  Others are easing.  Trajectory is the key.  Here is my sense of the near-term dollar outlook, wiht a look at some other asset markets as well.  

While the market's attention overnight was focused on China's crumbling manufacturing and service PMI, data which was already hinted in the flash PMI reports earlier in August, the real stunner came not from China but from South Korea, which last night reported an unprecedented 14.7% collapse in exports, far worse than the -5.9% consensus estimate, and more than 4 times worse than July's 3.4%. The number is critical because not only do exports account for about half of South Korea's GDP but because it also happens to be the first major exporting country to report monthly trade data. That makes it the perfect barometer of global trade flows, or as the case may be, the canary in the global trade coalmine. It also confirms what we reported just one week ago when we said that "Global Trade Is In Freefall."

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Since the GFC, 'The Great Wall of Money' that Bretton Woods II has furnished via its vendor-financing relationship, has masked the deleveraging of our world economy. The Great Wall is about to collapse and fall.

With China's currency devaluation having shifted to the backburner if only for the time being, all attention was once again on the Chinese stock market roller coaster, which did not disappoint: starting off with yesterday's dramatic 6.2% plunge, the Shanghai Composite crashed in early trading, plunging as much as 5% in early trading and bringing the two-day drop to a correction-inducing 11%, and just 51.2 points away from the July 8 low (when China unleashed the biggest ad hoc market bailout in capital markets history) . And then the cavalry came in, and virtually the entire afternoon session was one big BTFD orgy, leading to a 1.2% gain in the Shanghai Composite closing price, while Shenzhen and ChiNext closed up 2.2% and 2.7%, respectively.

Anyone with any sense for global economic trends ought to be worried. The signs are everywhere of a serious deflationary crisis.

Scaremongery... or maybe the whole point, as Obama's former chief economist noted, is to lose reserve status. Take That China!!

Here is an overview of next week's events and data placed in the larger context.  

It has been more of the same in the latest quiet overnight session where many await tomorrow's NFP data for much needed guidance, and where Chinese markets opened weaker, rose during the day, then went through a mini rollercoaster, then sold off in the afternoon.  The Shanghai Composite and HS China Enterprises indices finished down .9% and .3%, respectively. Trading volume continued to be very subdued, running at half the thirty day average as some 20 million "investors" have pulled out of the market to be replaced with HFTs such as Virtu.  But while stock action has been muted, the story of the night so far is oil and the energy complex broke out of a tight overnight range early in the European session to continue yesterday's downward trend, seeing WTI Sep'15 futures fall below the USD 45.00 handle after yesterday's DoE crude oil inventories saw US crude output rise by 0.552%. As of this moment oil was trading at $44.72, just pennies above the low print of 2015.

Dear Fed: behold another example of why your ludicrous rate hike ideas will crush the economy. Moments ago the BEA reported that the June international trade deficit spiked by 7.1% from $40.9 billion in May (revised) to $43.8 billion in June, as exports decreased and imports increased.  The previously published May deficit was $41.9 billion. The goods deficit increased $2.9 billion from May to $63.5 billion in June. The services surplus decreased less than $0.1 billion from May to $19.7 billion in June.

Will the Japanese “monetary perpetuum mobile” ever get questioned by financial markets?