It Ain't Priced In

Bruce Krasting's picture
A Thought on China

I had an e-mail exchange with an old fried who now works for a large macro hedge fund up in Greenwich. The broad topic was the very long list of signs that the global economy is hitting the skids. He had this to say:

…certainly does not point to robust job growth…manufacturing activity globally really falling sharply..think weakness in Europe spilling over to those who export to the region..retail sales in Europe plunging…China growth may now be down to 3% in our view…U.S. q2 may be sub 1.5%..Europe- contraction…Brazil sub 3%...Australia slowing sharply...

I almost fell of the chair reading this. Say this group is right about China. What does it mean if its growth rate falls to 3%? A very hard landing for all manner of things, is the answer.

There have been many China bears the past year or so, but against these bearish views there has been a widespread belief that China will muddle through. My point is that China GDP = 3% is absolutely not priced into today’s market.

On the Swiss Franc



Swiss reserves jumped an incredible CHF 59B ($61B) in June. The only question in my mind is, “How long can this last?” Switzerland can’t increase reserves on an unlimited basis; they can’t absorb Euro60B a month.

The current boss at the Swiss National Bank (SNB), Thomas Jordan is responsible for the Peg policy that is behind the unwanted reserve creation. It’s important to remember that Jordon is relatively new to the job. He stumbled into the hot seat when the former head of the SNB, Philippe Hildebrand’s wife got nailed trading currency when she shouldn’t have been.

Jordan is a well-educated technocrat who is also an old hand at the SNB. He inherited the currency peg policy from Hildebrand, but history will mark his name in the books if the policy fails. I’m sure that Jordon is aware of this. What’s his state of mind?

Jordan doesn't have the full support of the government behind him. The same domestic politics that successfully dumped Hildebrand are working against Jordon.

If Switzerland is to maintain the current 1.2000 peg to the Euro, there has to be something more in the offing. The endless intervention is not going to work. The FX market is much bigger than the capacity of the SNB. The only option left for Jordon is exchange controls and a complete shutdown of the Swiss border. Jordon has hinted that these steps are coming on several occasion in the past month.

When Switzerland adopts exchange controls, the rest of Europe will soon follow. What will be the global market response from these measures? It will scare the crap out of capital. I think exchange controls will bring a panic; there is no safe place to hide in a panic. The possibility of this happening is not in the price of assets today.


I jumped on the short EURUSD ship last Friday (link). A gain of nearly four big figures in a week would normally have me taking the quick leveraged profits. Actually, I doubled down.

To my old eyes there was something different in the Euro trading on the week. What was missing was a “bid”.

The relative stability of the FX market (particularly the EURUSD) has been a mystery for me the past year or so. It’s as if there has been an invisible hand in the market, quietly intervening at critical times. This type of “official guidance” would explain the range trading and low volatility. I have given credit to the BIS for this activity in the past, although there is no confirmation of that.

Last week the FX market appeared to be missing that support (from whomever). We raced down from Monday through Friday, and ending up at the lows of the year. To me, it looks like a run to 1.200 is in the cards.

The question is, "What happens when that magic number is achieved"? There is very little technical support under EURUSD 1.200. It looks like it is all “air” below that level:



While the idea of the EURUSD at parity is not news to my readers, I don’t think this possibility is in the "mind" of the market today.  A big down move EURUSD move would crush the S&P.

More EU Lies

Last Sunday there was some euphoria in the markets and press over the EU Summit. The source of that optimism was an agreement to recapitalize Spanish banks in a fashion that did not add to the debt burden of Spain. The deep thinkers in Brussels lead us to believe that the money for Spain’s banks was coming from the ESM or EFSF. That there would be a “true” transfer of risk out of the country.

Unfortunately, those technocrats lied to us a week ago. Seven days later we find that there is no transfer of risk at all.



Not only will Spain be on the hook for any investments made in Spanish banks by either the EFSF or ESM (via a state guarantee), but the actual guarantee has been structured such that the liability will not be recorded on Spain’s books as a debt.

The question of whether the Spanish bank bailout subordinates existing bond holders has now been answered. The bondholder are sitting in the back of the bus. And they wont like being there.

Do those technocrats think the markets are stupid, and won't notice this sham?

As it turns out, the much-touted Spanish bailout is more of the same crap we have been seeing from the EU leaders for the past two years. They are unable to realize a loss, their only response is to kick the same can a bit father down the road. I’m surprised that the change in terms for Spain's bank bailout has not gotten more attention in the press this weekend. I think it will be a topic of conversation next week.

If I’m right, the Europe story goes to Red Alert status for the balance of the month. Once again, I don’t think this is “priced in”.


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Gromit's picture

Mike Pettis has been predicting < 3% Chinese growth going forward for several months now.

Funny how he always turns out to be right.

silverdragon's picture

Not that America is fixable but a multi party system would be a good start.

ebworthen's picture

Nothing is "priced in".

The only thing priced in is the past with a warped perception of the present and a delusional perception of a not-so-possible future rescued from the abyss by happy thoughts, continuing greed, and perpetual stupidity of debt to solve a debt crisis and non-productive part time employment restoring housing and consupmtion.

Reality ain't priced in.

silverdragon's picture


Thanks for the good read but asking some buddy in Greenwich for comment on China and then listening to his opinion is hardly intelligent.

Anyone that believes they actually know China's growth rate is a fool.

Manufactures in China are taking a hit but the rest of the economy especially retail is exploding.

China has another decade of energizer bunny growth.

Bruce Krasting's picture

I understand your comment. And I agree that getting the true picture in China is hard to do.

The fellow I spoke with is much more informed than I (and probably you). He has boots on the ground, and is well connected. Like I said, I've know him for many years.

I write about things that strike me as important. This conversation did hit a nerve. The proof is in the pudding on this one. Let's measure this at the end of the year. If China is pushing 3%, then the world will be in a hell of a mess, and my friend will have done pretty well with his call.


BeetleBailey's picture

Bruce: I wonder if ANYONE has a true take on what the REALITY is of China's actual growth. I know several businessmen over there, and the Chinese are notorious for keeping two sets of books; one the "official" (read: FUDGED) and the other the REAL books (read: God-awful).

i-dog's picture


"I write about things that strike me as important."

And you do an outstanding job at it, Bruce!

For me, your posts are "must read". Though I rarely agree with your [statist] solutions, you are right on the money [pun intended] in flushing out the problems!

Mercury's picture

Orly: Does it really makes sense to treat the Euro as a going concern pre-2002...1999,...1995?

Orly's picture

People haven't changed in over 100,00 years, so yes, it makes perfect sense.


falak pema's picture

Salmon Rillettes, Rillettes aux Duex Saumons, French Salmon Spread, Salmon Recipes, Appetizer Recipes

Age old recipe. To be had with cool beaujolais wine or white, chilled  chardonnay burgundy on a nice evening. Makes perfect sense.

Orly's picture

Merci bien, falak.  Sounds lovely.

Oooh!  The recipe may include absinthe.  I have never tried this stuff but it is now obtainable where I live.  I have heard it makes you see green goblins, so I am a little afraid.

How do you think?  Should I?


falak pema's picture

We just made it. We had it for lunch. My other half  used canned Tuna fish, fresh white creamy cheese (Philadelphia or St Moret), mixed with fresh chives and mint, all chooped up fine. We had it as starters and followed with tomato and mozzarella salad. Its hot n sunny here today. Crème brulé ice cream to finish off. 

(variation to salmon theme).

PS: don't forget the fresh lemon on the rillettes.

Orly's picture

The EURUSD pair has pierced the long-term Fibonacci-level of historical support at the 1.2352-level.  This support zone has been in place since August of 1993 and will not go down easily.  This is the seventeenth time the pair has approached this DMZ.  Caution is in order here.

It would be my advice to close the short in EURUSD and await the inevitable pullback during earnings week.  You know they'll think of something...

Once the retracement through 1.2352 has been breached, it may be possible for the pair to elevate on fumes to the 50% Fibo (meaning halfway between major Fibo-levels...) to about the 1.267-level.  Once complete, the "air" you talk about for the pair could become quite real, with nothing to stop it until about 1.07, maybe a little more.

The key tell is going to be the action in the AUDUSD, which should double-top along its Daily chart from about the 1.033-level to just about the 1.04-level.  Watch for an uspside "pin-bar" on the Daily to determine timing.  Once that pair has petered out at the top, resume the short in the EURUSD.

The Weekly chart in the AUDUSD clearly demonstrates that the next time the pair breaches parity to the downside, the floor (not just the rug...) will be pulled out from under all risk markets, leaving a rapid downside target on AUDUSD to the 0.805-level.  It would be advised for the global central banks not to catch the falling knife of the Euro and SPX but can they leave it alone?  Will they allow the market to retrace to the mean and beyond?  Only the Bernanke knows for sure.

Interesting time, indeed.

The "whoosh" we have all been expecting is nigh...just not rightnow.  Be patient.


disabledvet's picture

I'll tell you what wasn't priced in Anderson Cooper being gay. To which I have to say "Erin Burnett, I still love you and am straight as a wannabe father of twelve."

orangegeek's picture

Obama knows that if the markets tank, he is out of a job.  Keeping the markets up by any means possible is Obama's lone goal.


A look at the Dow weekly shows a "changing of the guard" when markets slide and no change when markets head higher.


The same held for Carter, Reagan, Bush and Clinton. 

jonjon831983's picture

Hmm how play a break in CHFEUR peg?  If there is a way, obviously a lot of people will be in on the bet as well.

world_debt_slave's picture

ain't,ain't a word /sarc

lotsoffun's picture

but i thought the brics were going to bail out europe, and then us???


malek's picture

Some yawns.

1. More doom prophecies for a Chinese hard landing.

2. The SNB can maintain its peg for exactly as long as it is willing to devalue the purchasing power of its CHF. No need for any sensationalism here.

Winston Smith 2009's picture

"think weakness in Europe spilling over to those who export to the region..retail sales in Europe plunging…China growth may now be down to 3% in our view…"

Considering the obvious issues in the EU, their certain effects on imports to there, and China's dependence upon exports to the UE, how could it have been anything else except in the clueless projections of the perpetual hopium smokers in the mainstream financial media?

"Do those technocrats think the markets are stupid, and won't notice this sham?"

Considering that "the markets" in the US are 75% composed of the criminals involved in the sham or dependent upon it doing their HFT thing, it's obviously worked thus far.

bobbydelgreco's picture

bruce is smart,ben is smart,i am not so smart but i think it means ben qe's big!

sessinpo's picture

It's priced in when the market rallies. At that point the retail is paying.

NoTTD's picture

Whenever I hear that something is "priced in" I think of the following exchange:


Kramer: Just right it off.  That's what all the big corporations do.  They just right it off!

Jerry:  You don't even know what that means, do you?

Kramer: No.  But they do.  And they're the ones writing it off!

NoTTD's picture

Obvious misspellings acknowledged.

q99x2's picture

Who's going to pay out all the money (billions trillions?)  in EUR/USD money if everyone is on the one side. They (those evil banksters) might just find a way to pop it up the other direction if it represents a golden opportunity for them. 

davidgdg's picture

"If Switzerland is to maintain the current 1.2000 peg to the Euro, there has to be something more in the offing. The endless intervention is not going to work. The FX market is much bigger than the capacity of the SNB."

I don't get it. Obviously if a national bank is trying to maintain the value of its currency then it will have to stop once it runs out of reserves. But the SNB is doing the opposite. It is reducing the value of its currency by buying foreign currency with newly printed SF. So the only limit is when Mr Jordan's finger gets tired of pressing the "print" button!


Roger Knights's picture

"When Switzerland adopts exchange controls, the rest of Europe will soon follow. What will be the global market response from these measures? It will scare the crap out of capital. I think exchange controls will bring a panic; there is no safe place to hide in a panic."


Except gold.

John_Coltrane's picture

Only if the counterparty you want to trade your gold with agrees with you about the value of gold say relative to food or medicine or clean water.  Think about that concept long and hard.  Its always all about trust-and when it breaks-its chaos, not orderly transactions or even barter.  Remember the universe craves more entropy (disorder).  In the end its heat death for everything.  In the meantime, life is short, eat dessert first!


Judge Arrow's picture

What will be the most interesting part of this is how Boobus Americanus wakes up one day and 'out of nowhere' without a single main stream news outlet doing much more than mumble about it, suddenly realizes he can't get his ATM card to work. Or his credit card. Unlike the Depression of the 30's this will not unfold slowly on the Boobus - it will come on like a derecho  - a panic with a moron dictator Boobus put in the whitehouse at the helm. Priceless.

bigkahuna's picture

Ah yes, the fabled Boobus Americanus -- it is hard to catch them in their natural habitat because they dwell reclusively in their mom's basement--though you may attract one out in the open by mentioning topics like bachelorette or dancing with the stars...

newworldorder's picture

I disagree with you. The elusive creatures as you describe them are not hidden at all. They are our neighbors and co-workers sitting in a cubicle/office next to yours.

I dare you to try to engage any of them in a discussion of what is ailing this country. You will be very suprised at what you hear.

Divine Wind's picture



Hey Bruce !

Just a short note to express how grateful I am for your analysis and insights.

It is folks like you, Reggie, the Tyler Family (in all of their hidden splendor) who make Zero Hedge a powerful information tool.


Thank Manno.

oklaboy's picture

and I second that thought. well done and bravo, and I realllly like the wit!!!



theTribster's picture

Good post, I agree with your assessment including the timing. I've been saying since Decmber that the end of the summer would bring chaos to the Eurozone which will move eastward through Asia and then on to America. The contagion will impact the entire world obviously, I too up a short position on Friday morning in Brazil (BRIS) and was pleasently surprised at an over 7% gain by 2pm. Same was true for RUSS, YANG and even INDZ.

Basically, shorting almost anything euro reltaed is a good play, even with the bumpiness as can be see by the EURUSD trade over the last several weeks. Any strength in the Euro should be immediately shorted because there really isn't any strength in the currency at all. The Swiss realize they can't keep this going, especially now that it is clear the Eurozone will probably fall apart.

The Euro will survive this ultimately, I believe there is enough political willpower to keep it going. Too many people are making too much money to let it fall apart, in the end the resolve will be there in the form of a debt jubilee which would reduce the debt burdens dramatically. I think the Fed will use QE as a method of supporting both the Euro and the US economy, it becomes an effective tool for devaluaing the currency while at the same time stimulating most financial instruments. I think he will go too far and destroy the dollar permanently, helping to remove the dollar as the reserve currency (part of their plan).

In the race to the bottom our boy Bernanke will not let the Euro win, this is the primary reason that additional QE is coming - not really related to jobs but he'll use that as the cover for a massive liquidity injection. This is why I'm staying away from the US markets, much easier to trade the BRICS and the Euroazone (for me anyway). The risk of additional QE is real and likely to occur at the July 31st meeting. This move will help the Euro gain strength against most major currencies except maybe the Yen. The stimulus effect will only last a week or two and that's it, this means that when the shit really hits the fan in September the Fed will be out of bullets - well, they'll have blanks in the form of additional QE which will no longer work.

Its easy for Bernanke to justify using this tool again, he'll use employment, economic softness, European slowdown, China slowdown, he may even use the fiscal cliff as part of the reasoning in order to bring the politicians into the responsibility zone! It will definitely be an interesting few months as things move from crazy to chaotic starting in the Eurozone and moving eastward through Asia and then into America. Will it be enough for Obama and Congress to shut down (postpone, delay) the election process? I think it might be, since the Congress represents a single big team regardless of how they act, they are likely to go along with it.

Get the popcorn ready, it starts again tonight with China's release of CPI and PPI. YANG should do really well tomorrow and for the next several weeks, months as China slows to a pace that cannot keep the population happy - bad things in store for China AND they know it. Bad things are in store for all of us after its clear to the world that we have been robbed, things will get real ugly at that point. It will not be a good Christmas this year, anywhere!


Mr.Kowalski's picture

Any such chaos in the EuroZone would be fatal to the banking system of the entire globe. You do understand that tens of trillions of credit default swaps would be triggered and would instantly destroy our biggest banks, right ? 

The Euro would not survive any such implosion. They would have to hit The Big Reset Button on a global scale:


bigkahuna's picture

CDS are a scam. They only exist in name.

bugs_'s picture

+3% is wishful thinking IMHO.  the hard landing means contraction.  US exports will not fall as much because there are going to be product availability issues from collapsed neo-mercantilist economies.  If what you want is only available from a "lesser collapsed" supplier you will go there.

hedgehog9999's picture

Markets are extremely vulnerable, scotch tape and band aids have been great to move it up to here. All that's needed is a catastrophic event of a worldwide nature to tip it over on its way to S and P 450. It is 2012 and it will happen, maybe not quite as the Mayans predicted but the masses will perceive it that way. It could be a major war with Iran, a North Korea invasion of the South, India - Pakistan engaging in a nuclear exchange, or Turkey vs Siria, lots of potential here.

It could also be a natural disaster like another major Tsunami, or hypervolcanic eruption, we already had 2 major ones in the last 5 years , it is not outside of the realm of possibility given the spikes of major earthquakes over the last year or two.

Or it could be a major dam flooding a huge area, Katrina comes to mind, this will be a strong Hurricane season, but let's not forget the Gorges Dam in Chiina.

There is also other less likely possibilities such as Solar Flares that knock down infrastructure, The La Palma collapse which would not be good or an asteroid of a decent size landing somewhere. Lots of possibilities.......

And then we haven't even talked about a Financial collapse which will either be a Super inflation and I don't mean 300%, 20% will do to collapse the Treasury market and everything else as rates would tick up immediately. Or a super deflation if China implodes and Europe goes into a controlled implosion if you could call it that.

There is also other black swans out there as you could also have a Mexican economy collapse or a SARS type disease spreading around the globe.

And last but not least we haven't even talked about major terrorist attacks of the scale of 9/11 or bigger, there are still major grudges out there from certain segments of the population and the technological means to wrec havoc.

Stay in cash, Wheat, Water, Gold and Silver, be safe!!

Escapeclaws's picture

I bet there are just as many good things that could happen, too.

BenwaBall's picture

I think your tin foil hat has cut off circulation to your brain.

knightowl77's picture

tin foil hats shield your brain from UV-A and UV-B rays....something you might wish to avoid

Rainman's picture

I'm looking at recent spot gold pricing volatility as the proxy for anticipated deflation and future dollar strength. Am I partially or completely correct....? ....or is pricing more a function of growing liquidity pressures...?? ....or all 3 ??

scratching a hole in my head.

Pool Shark's picture



Exactly what I've been wondering for the last 6 months or so.

I guess if we knew the answer to this; we'd both be very rich...


Rainman's picture

There really is no answer thanks to the a fuckin joker he's always there to pop out of the deck guns blazin'.  

Arnold Ziffel's picture

When EUR = USD;




US Exports = Zero


The strong dollar will crsuh exports (which is anathema to larry summers who said "the only way out of this recession is thru exports"). The weak euro may actually help them although food prices, energy, etc will rise considerably.

What do you think?

BenwaBall's picture

So we complain when the dollar is strong and we complain when the FED tries to decrease the value of the dollar....I didn't realize you all were fence riders.

JohnKozac's picture

I'm glad someone brought this up about the "strong dollar' ....that's the way I see it too....everyone clamors for a stronger dollar but this will hurt exports pretty badly especially since buyers in other countries are hurting too and less likely to buy our "stuff." Some middle ground FX is desirebale but I think Bruce is right with the worrisome forecast.

Escapeclaws's picture

If it hurts exports does that mean the pornography industry, representing 20% of our exports, will suffer?