Russell Napier Explains How The Decline Of The Yuan Destroys Belief In Central Banking
From Russell Napier of ERI-C
It’s Not a Pet, It’s a Falcon: How the decline of the RMB destroys belief in central banking and a successful reflation
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
- The Second Coming- W.B. Yeats
First catch your falcon, as the formidable Mrs Beeton might have said if she was in need of a method of catching her main course (see Mrs Beeton’s Book of Household Management 1861- ‘Recipe for Jugged Hare’).
Having caught your wild falcon, you can now begin the training process. You are attempting to impose your will upon a creature that, in its wild state, catches, kills and devours other birds. This is creative destruction in its rawest form as those acts of savagery provide the fuel to keep our falcon flying. Taming such wild forces is not easy, whether they be birds of prey or the desires, wishes, greed and fear of millions of people determining prices through their supply and also their demand.
Let’s get some advice from the field of falconry for our central bankers, and the other handmaidens of state control, as they seek to impose their wishes on the will and acts of millions-
‘Falconry is a great sport, but there is a lot of time involved. You will want to have enough time to train your bird. If you don't have the time, or the willingness, then you might as well not do it at all. If you are one of those people who is not patient, falconry may not be for you. You should not take up falconry if you want the falcon as a pet, or something to show off. Falcons can't just be put in the closet when you are done with them. It takes time and commitment, but the reward in the end is worth it.’
(Source: WikiHow- How to Train Your Falcon)
A ‘great sport’ indeed, given the alternative sports open to government officials! Well, they have demonstrated that they have the time and they seem to have been born with the willingness, or at least picked it up pretty early in life. Patience just comes with the territory when you work for the government--- there really isn’t much of an alternative. However, they do seem to have a problem when it comes to realizing that there is not much point in turning this wild thing, that exists to efficiently convert its kill into energy and life, into a pet ‘in the closet’.
The attempt to train the wild forces of supply and demand by the authorities has really ramped up since 2009. Just four trading days into 2016 the widening of the gyre makes it very obvious that they have failed to create a pet to do their bidding. The wild forces of supply and demand have sought to deliver deflation, at least since 2008, but the falconer has demanded the lift-off of inflation. In the first four trading days of January 2016 it has become even clearer that gravity wins and this bird will not fly.
Throughout 2015, in four quarterly reports for subscribers, this analyst explained that, no matter where you and might stand, this lever of nominal interest rates is simply insufficient to pivot the world into inflation. Those reports focused on what you should buy given that failure. The rest of this Fortnightly looks at the investment consequences of this failure and what investors should do when ‘the centre cannot hold’.
The key failure of control is in China because that failure will overwhelm other seeming successes. In 2012 this analyst labelled one chart “the most important chart in the world”. It was a chart of China’s foreign exchange reserves. It showed how they were declining and The Solid Ground postulated that this would produce a decline in real economic activity in China and higher real interest rates in the developed world. The result of these two forces would be deflation, despite the amount of wind puffed below the wings of the global economy in the form of QE.
Of course, no sooner had this report been issued than China’s grand falconer got to work by borrowing hundreds of billions of USD through its so-called commercial banking system! The alchemical process through which this mandated capital inflow supported the exchange rate while permitting money creation in China stabilized the global economy- for a while.
However, by 2014 it was ever more difficult to borrow more money than the people of China were desperate to export and the market began to win. Since then foreign reserves have been falling and the grand falconer has tried to support the exchange rate while simultaneously easing monetary policy to boost economic growth. I’m no falconer but isn’t this akin to trying to get a bird to fly while tying back its wings?
Some investors, well paid to believe six impossible things before breakfast, did not question the ability of the grand Chinese falconer to fly a falcon with tethered wings.
They changed their minds briefly as the bird plummeted earthwards in August 2015 but still the belief in the ability to reflate the economy and simultaneously support an overvalued exchange rate continued. In January 2016 this particular falcon, let’s call it the people’s falcon, was more ‘falling with attitude’ than flying.
This bird does not fly and if this bird does not fly the centre does not hold. A major devaluation of the RMB is just beginning and the faith in all the falconers will wane as deflation comes to the world almost seven years after the falconers first fanned the winds of QE supposed to levitate everything.
The failure to inflate is the failure to destroy debts to the benefit of equity. Investors should be underweight equity. Of course, the decline in corporate cash-flows, associated with deflation, is bad for interest cover and the price of corporate bonds. Some emerging markets (subscribers see Why Deflation Means Default 1Q 2015) will fail to repay their heavy foreign currency debt burdens. This is dreadful news for those running open-ended funds crammed full of illiquid credit instruments- some have closed and more will follow. The Solid Ground pointed out in 4Q last year that the US$34trn open-ended fund business is simply unfit for purpose in a world of waning liquidity. While this dreadful combination leads to a credit crunch that starts in the bond market it must inevitably also impact negatively upon banking systems. Banks, already de facto utilities for the financing of government, are very vulnerable to attack from thousands of bright kids in the fintech industry. Add to their structural demise the risk of credit quality issues and the growing fear of bail-ins by their bond holders (as subscribers know BRRD will be a huge Eurozone story in 2016) and this could get very messy.
If doctors swear each year to ‘first do no harm’, investors should begin 2016 by reciting ‘first own no banks’.
Investors who buy the bonds of governments that ultimately control the money-creation process should have an almost zero risk of not receiving their payments of principal and interest. These certain and fixed payments will grow in purchasing power during a deflation and thus their price will be bid up. This analyst remains sceptical as to whether this description of a fiat currency system applies to all those countries currently in the Eurozone.
‘Whatever it takes’ may ultimately be constitutionally impossible and the ECB may not be prepared to print sufficient Euros to ensure that every government of the Eurozone makes all payment of principal and interest. If that reality dawns then yield spreads widen in the Eurozone and ultimately your interest and principal may not be repaid in Euros.
For those investors who have to be in equities, North Asia is the only game in town. They, in the form of China, Japan and probably also South Korea, will win the currency wars. Their success in winning this game triggers the scale of deflation that generates the global credit crunch that is virtually inevitable as deflation takes hold. These jurisdictions may be somewhat alien to sound capital allocation, but they keep that capital humming at high rates of capacity, via devaluations, while more market-orientated systems see their assets under-utilized. This analyst prefers Japan (subscribers see Caught in a Trap 2Q 2015) where some shift to more efficient capital allocation is under way, but even the structurally anaemic corporate capital of China is likely to be bid up as the RMB declines in response to further and further economic stimulus- increasingly possible as the exchange rate is allowed to find its own level. This analyst has never invested in a Chinese equity as he is not sure that Chinese management know what equity is but bright stockpickers can find management in China that does. Hedging all North Asian currency exposure is essential.
If you had not noticed, 2016 has begun with gold and the USD rising simultaneously. This is different and important. This is very positive for gold and very bad for the world.
The rise of both together may signal that we have just entered that period when this inert non-yielding substance is preferred to those assets that promise a yield but where the scale of future payments is subject to considerable doubt. Also positive for gold, the advent of deflation, following the failure of the easy reflationary solutions promised by non-elected central bankers, will enfranchise aggressive acts of reflation by our elected representatives. When the tough get going then the going will really get tough- at least if you’re an owner of capital.
Any political fiat, when monetary fiat fails, will be tantamount, in some way or other, to an attempt to directly control the allocation of capital/savings. History shows that this commences a giant game of hide-and-seek, and while gold may shine brightly it is also moved freely in briefcases and is easily hidden. Paper assets are easily tracked, discovered, conscripted and ultimately denuded in value. For gold to rise while the USD also rises signals that investors are beginning to see through the terrible burden on the price of the shiny stuff from ever-rising real rates of interest extant since 2011. Real rates have further to rise but a few more days of a strong USD and a strong gold price means gold has probably entered a bull market that should last for decades rather than years; its value boosted initially by its ability to avoid conscription, but underpinned by the authorities’ mass mobilization of resources to ultimately generate inflation.
From 2009-2015 investors were well paid, at least in the developed world, to believe the most impossible of the six things before breakfast: that central bankers can subvert the desires, wishes, greed and fear of millions of people who set prices every day through their actions.
You now have two choices: keep believing the most impossible thing, or accept that the wild force that establishes market prices has not been tamed. It’s not a pet, it’s a falcon and ‘The falcon cannot hear the falconer’. The ‘people’s falcon’ may be the first to enter ‘a widening gyre’ but it won’t be the only wild force that refuses to be tamed in 2016.
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This isn't about the yuan, it's about falcons!
China is fine. They're fiiine!
Birds of a feather, (papered monies) tend to circle the bowl together...
China is currently experiencing a flash crash.....
Falcon nonsense aside.
Russell Napier: The Decline Of The Yuan Destroys Belief In Central Banking
Really? Your readers must be wondering why.
John Connally: “Dollar is our currency, but your problem."
Well, wonder no more.
it's sort of how a present of ugly winter school clothes destroys belief in Santa
This market's for the birds.
Whatever destroys faith in Central Banking the World over is great thing!
I wonder if this will also start the return of silver to the traditional 50-ounces-for-1-ounce ratio it used to have with gold... Hopefully these events will finally show the massive fraud that paper gold is.
The crustal ratio of silver to gold is 17.5:1
In 1792, the gold/silver price ratio was fixed by law in the United States at 15:1, which meant that one troy ounce of gold was worth 15 troy ounces of silver; a ratio of 15.5:1 was enacted in France in 1803. The average gold/silver price ratio during the 20th century, however, was 47:1.
Silver as an investment - Wikipedia, the free encyclopedia
https://en.wikipedia.org/wiki/Silver_as_an_investmentWikipedia
This article is a waste of time. It doesn't matter if people lose faith or not in central banking. Central banks exist - they're in charge and we're NOT. Got that?!?
it may not matter if you or i lose faith; we vote with our assets and i'm guessing they're not astronomical.
however when those that own or manage assets with values having zeroes in the double digits lose faith, things tend to shift around a bit.
The elites haver a lot of power, but a loss of faith by the great unwashed masses, always overwhelms even their seeming omnipotence.
If you want to write about Falcons post it on the National Geographic website!
we all need to know our falcon poem:
The Second Coming
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world,
The blood-dimmed tide is loosed, and everywhere
The ceremony of innocence is drowned;
The best lack all conviction, while the worst
Are full of passionate intensity.
Surely some revelation is at hand;
Surely the Second Coming is at hand.
The Second Coming! Hardly are those words out
When a vast image out of Spiritus Mundi
Troubles my sight: somewhere in sands of the desert
A shape with lion body and the head of a man,
A gaze blank and pitiless as the sun,
Is moving its slow thighs, while all about it
Reel shadows of the indignant desert birds.
The darkness drops again; but now I know
That twenty centuries of stony sleep
Were vexed to nightmare by a rocking cradle,
And what rough beast, its hour come round at last,
Slouches towards Bethlehem to be born?
w.b. yeats
True. Though the first few paragraphs were interesting as I envisioned myself as a "falconer"
And please inject some human-induced climate change nonsense in the article
Fortune cookie say: bank holiday perfect time to unwind and forget about your problems.
Well written, catchy hook (who here isn't into falconry?) and I can dance to it. I give it a 9.
I liked this observation the most:
"For those investors who have to be in equities, North Asia is the only game in town. They, in the form of China, Japan and probably also South Korea, will win the currency wars. Their success in winning this game triggers the scale of deflation that generates the global credit crunch that is virtually inevitable as deflation takes hold."
And he says he prefers Japan. Napier has been around a long time and is a smart guy. I wish I could understand the basis for his Japan call. I feel like maybe I've been bearish so long it has clouded my ability to see anything else.
I think his main point is "he who devalues the furthest and the fastest, wins" in an environment of ubiquitous unpayable debt. Either devalue your way to movement or sit still and watch the chilling fog of deflation set in.
he did say for those who must be in equities though.
Depends what the author means by his use of the term 'equities.' When talking heads refer to 'equities,' it's usually a reference to mainstream paper (shares, bonds, CDs) bundled up and pushed on passive investors. In that context, even with the near-term upheaval, eastern 'equities' look better than the broken mess ostensibly defended by neo-Keynesian central bankers in western countries. Follow the metal.
Viewed in aggregate, today's central-bank-manipulated 'equities' are a great big exercise in capital misallocation and destruction. Real value is contracting like nobody has seen in living memory, which explains in part why it's not being seen as such and its symptoms are misdiagnosed (e.g., persistent misapplication of the term 'deflation'). If the central bankers as a group really understood and cared about preserving national treasure, QE would never have been launched, much less repeated.
Western 'equities' from well capitalized companies in the real economy will survive the downdraft, assuming governments don't try to tax and regulate them out of existence. That will be a rising danger as things get really shitty: governments don't understand capital formation. They see only pockets to be picked and fabricate excuses like "ISIS" and "global warming." Well intentioned or not, all booms and busts are exacerbated by pathological interventionism.
If it hasn't hurt you to this point why wouldn't you just sit still on the hand you hold?
There will be some major bullshit flying in the coming days. Work on separting wheat from chaffe.
dow futures are up 150 points...l friggin ol
If you got Dollars, this is a FINE time to buy things cheap.
Moral: Diversify your assets, and to rational and limited shift per quarter. Avoid the day-trade gambling. If you want to gamble, go to casino, gamble, have nice dinner, order Room Service with Happy Ending. Sleep it off, go home.
a fine time to buy something overseas with your dollars, not at walmart.
I'm just so glad that my Social Security checks are in USD.
Keep those payments rollin' my way, all you young 'uns. Daddy needs a new pair of golf shoes.
What about IMF and SDR's. When EU states fail to print enough fiat to meet their debt obligations in bonds, will not the IMF then do their last chance liquidity dump of trillions of SDR's to any and all needing easy fiat? Thus the game goes on again for another cycle.
Hope those CRIMINALS, still have the peoples gold. maybe then, CRIMJINALS, won't have to seek what's been hid.
I'm sure China or Russia, will be willing to part with a few tons...and don't forget India
Aussie zero debt, profitable Gold miners looking a better and better place to be to ride this out..and yes I own some.
aussie loooks good because they will benefit from aweaker yuan, besides the entire commodity market looks to bottom any second now, hopefully, at the bottom of the current dliff dive. i suppose that includes gold miners.
I am a bit confused by that as well, China dependent on the US and EU markets is going to be fine as we struggle with deflation ( no buying chinese plastic, food only) just find a manager who knows what equities are? Wait.... what?? Did I miss his argument for monetizing Chinas gold horde?
The most urgent current issue is the condition of HSBC, the 'world's local bank'; critical for the UK, and the East, although it operates in all major markets including the USA, and minor ones.
HSBC blames a computer 'glitch' for customers denied access to their accounts in the UK for about 48 hours earlier this week, just as its Eastern markets broke.
I say it is a bank run, margin call or ... 2008 all over again for one reason or another. Soros says the China problem is now a 'crisis'. Check out HSBC.
Soros the Scythe is in the East whilst these events unfold in China, reverberating elsewhere.
Who fucking cares what the Yuan does?
China now has the Lion's share of gold.
What happens next should be nothing short of interesting.
Exactly. It's the Golden Rule--He who has the gold, makes the rules.
The gold is more important than any miniscule move in the RMB or markets.
For anybody who believes the Chinese market is crashing, look at this chart: https://search.yahoo.com/search?p=shanghai+composite+index&fr=uh3_financ...
Click on "Max" to get a long term view.
The Shanghai Composite is exactly where it should be, in a non-bubble world.
It's "The Man in the High Castle", but with the Chinese playing the Japanese, and the Russians the Germans.
We'll all enjoy the Victory Parades; you know - throwing flowers at the Liberators... and getting in on the ground floor.
King Dollar Bitchez.
For the time being... There;s going to be an massive export of Stag-Flation from Asia this summer.
I don't disagree Yen, however, I'm a bit more optimistic about the timing.
RE is about to peak here and I have two properties to unload, so I'm under the gun a bit.
In the interim cheap transportation costs are helpful, and I need more time for shiny essentials.
what if china is preparing the ground for a decoupling because the yuan is finally in the position to devalue as a market correction instead of the strengthening it faced a few years ago. i think china is only defending the peg to keep the decoupling orderly. what i am not clear about yet is what happens to the dollar if the yuan decouples and devalues? does it follow the yuan down? as strong dollars pour into china to buy cheap stuff? or does it devalue as it becomes apparent the dollar is not that necessary with a depegged free floating yuan, a yuan that prefers to do business in the local currency? and then the final death throes of the dollar create the wrong kind of inflation?
investing in anything is always predicated upon growth. with this scenario, asia will grow with china leading the way. that is where to invest.....and commodities including gold bought in dollars.
The way I read the article, I think he is saying that the country that hyperinflates its currency the soonest will be the winner in all this global capital destruction because they'll get rid of their debt first. They'll get a clean slate before anybody else and thus a leg up on the reset.
I think it interesting that he doesn't mention the $3 trillion in US Treasury debt denominated in U.S. dollars that China allegedly holds and what China can or will do with that. It would go against the point of the article if China dumped our debt, only to have us beat them in the currency destruction race to the bottom rung.
Here are some signs of a coming recession.
1. Investors in high-yield bonds are expecting to see their first negative return since the start of the credit crisis in 2008.
http://www.marketwatch.com/story/deteriorating-junk-bonds-flash-warning-signs-for-stocks-2015-12-07?dist=afterbell
2. Factory orders continue to drop
http://www.zerohedge.com/news/2015-10-02/us-factory-orders-flash-recession-warning-drop-yoy-10th-month-row
3. Default risk spikes
http://www.zerohedge.com/news/2015-10-02/us-financials-default-risk-spikes-2-year-high
4. M&A set record
http://michaelekelley.com/2015/05/29/mergers-and-acquisitions-set-record/
5. Iron ore prices tumble
http://www.marketwatch.com/story/iron-ore-prices-keep-crashing-adding-to-global-growth-fears-2015-11-30
6. Baltic dry shipping index tumbles
http://www.marketwatch.com/story/shipping-index-falls-to-all-time-low-stoking-fears-about-global-growth-2015-11-19
Here is how to prepare.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Here is how to get your mind off this stuff.
http://michaelekelley.com/category/humor/
Good luck!
Don't worry comrades, the Party has got you covered.
I read it cost over 500 billion USD to support the Yuan in December 2015 alone.
How long will it take to run thru all the Reserves to support the Yuan and the Shanghai Stock Exchange ?
In 6 months time.......................................
Comrade President, we just got a call from Hollywood, some American movie producer wants to buy our patch of sand in the South China Sea, he's going to make a movie called Fantasy Island.
I'm feeling more bullish this morning: the last time this guy called it, Munich had just yielded to the army of Gustavus Adolphus.
The problem with his thesis, as outlined here, is that the only people who have ever believed in Central banking were the bankers themselves. That their belief became part of the dominant discourse is hardly surprising.
Very good article. You can tell from comments most don't get it
So how would you summarize it?