The Game Of Chicken Between The Fed & The PBOC Escalates
Submitted by Ben Hunt via Salient Partners' Epsilon Theory blog,
There’s more than a whiff of 2008 in the air. The sources of systemic financial sector risk are different this time (they always are), but China and the global industrial/commodity complex are even larger tectonic plates than the US housing market, and their shifts are no less destructive. There’s also more than a whiff of 1938 in the air (hat tip to Ray Dalio), as we have a Fed that is apparently hell-bent on raising rates even as a Category 5 deflationary hurricane heads our way, even as the yield curve continues to flatten.
What really stinks of 2008 to me is the dismissive, condescending manner of our market Missionaries (to use the game theory lingo), who insist that the US energy and manufacturing sectors are somehow a separate animal from the US economy, who proclaim that China and its monetary policy are “well contained” and pose little risk to US markets. Unfortunately, the role and influence of Missionaries is even greater today in this policy-driven market, and profoundly misleading media Narratives reverberate everywhere.
For example, we all know that it’s the overwhelming oil “glut” that’s driving oil prices down and wreaking havoc in capital markets, right? It’s all about OPEC versus US frackers, right?
Here’s a 5-year chart of the broad-weighted US dollar index (this is the index the Fed publishes, which – unlike the DXY index and its >50% Euro weighting – weights all US trading partners on a pro rata basis) versus the price of WTI crude oil. The blue line marks Yellen’s announcement of the Fed’s current tightening bias in the summer of 2014.
Ummm … this nearly perfect inverse relationship is not an accident. I’m not saying that supply and demand don’t matter. Of course they do. What I’m saying is that divergent monetary policy and its reflection in currency exchange rates matter even more. Where is the greatest monetary policy divergence in the world today? Between the US and China. What currency is the largest contributor to the Fed’s broad-weighted dollar index? The yuan (21.5%). THIS is what you need to pay attention to in order to understand what’s going on with oil. THIS is why the game of Chicken between the Fed and the PBOC is so much more relevant to markets than the game of Chicken between Saudi Arabia and Texas.
But wait, there’s more.
My belief is that a garden variety, inventory-led recession emanating from the energy and manufacturing sectors is already here. Maybe I’m wrong about that. Maybe I spend too much time in Houston. Maybe low wage, easily fired service sector jobs are the new engine for US GDP growth, replacing the prior two engines – housing/construction 2004-2008 and energy/manufacturing 2010-2014. But I don’t see how you can look at the high yield credit market today or projections of Q4 GDP or any number of credit cycle indicators and not conclude that we are rolling into some sort of “mild” recession.
My fear is that in addition to this inventory-led recession or near-recession, we are about to be walloped by a new financial sector crisis coming out of Asia.
What do I mean? I mean that Chinese banks are not healthy. At all. I mean that China’s attempt to recapitalize heavily indebted state-owned enterprises through the equity market was an utter failure. I mean that China is going to need every penny of its $3 trillion reserves to recapitalize its banks when the day of reckoning comes. I mean that China’s dollar reserves were $4 trillion a year ago, and they’ve spent a trillion dollars already trying to manage a slow devaluation of the yuan. I mean that the flight of capital out of China (and emerging markets in general) is an overwhelming force. I mean that we could wake up any morning to read that China has devalued the yuan by 10-15%.
Look … the people running Asian banks aren’t idiots. They can see where things are clearly headed, and they are going to do what smart bankers always do in these circumstances: TRUST NO ONE. I believe that there is going to be a polar vortex of a credit freeze coming out of Asia that will look a lot like 1997. Put this on top of the deflationary impact of China’s devaluation. Put this on top of an inventory-led recession or near recession in the US, together with high yield credit stress. Put this on top of massive market complacency driven by an ill-placed faith in central banks to save the day. Put this on top of a potentially realigning election in the US this November. Put this on top of a Fed that is tightening. Storm warning, indeed.
So what’s to be done? As Col. Kilgore said in “Apocalypse Now”, you can either surf or you can fight. You can adopt strategies that can make money in this sort of environment (historically speaking, longer-term US Treasuries and trend-following strategies that can go short), or you can slog it out with a traditional equity-heavy portfolio.
Also, as some Epsilon Theory readers may know, I co-managed a long/short hedge fund that weathered the 2008 systemic storm successfully. There were trades available then that, in slightly different form, are just as available today. For example, it may surprise anyone who’s read or seen (or lived) “The Big Short” that the credit default swap (CDS) market is even larger today than it was in 2008. I’d welcome a conversation with anyone who’d like to discuss these systemic risk trades and how they might be implemented today.
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Unfortunately for the Chinese the USD isn't pegged to the Renminbi.
Wake up to "China has devalued the yuan by 10-15%." ?
Good Luck with getting a floor under that sack of shit.
whiff? yer jus' smellin' 'ol janet yellen
It's 3:30. Do you know where your PPT are?
I'm pretty sure the Fed isn't "hell bent on raising rates." In fact, an ease wouldn't be all that shocking if this market behaviour keeps up.
1937. The Fed has only halfway fucked up. They will wait until next year to fuck the new President with and in style. The Fed assumes the PBOC has a clue; they don't. Then everyone here assumes the Fed has a clue; bad fucking assumption.
Go short young man.
Or die.
"Then everyone here assumes the Fed has a clue; bad fucking assumption."
By "here" I assume you mean the US and not ZH.
I think Yellen has now seen what happens to prople who try to fuck Trump, and we know what happens to those who get on the wrong side of the Clintons.
She won't be waiting until 2017, even if she had sufficient control to do so, which the Fed doesn't.
"Gabriel Hament and David Kotok over at Cumberland Advisors shared with their clients a few theories about what’s been driving the recent bout of selling in global stock markets."
"They cite research from SentimenTrader’s Jason Goepfert. Goepfert demonstrates that the S&P 500 has now corrected 10% from a near 52-week high for the second time in a relatively short period” which has only happened three times in the last 100 years — 1929, 2000 and 2008.
All three events have one thing in common: serious deterioration in the credit market."
they apparently dont see 2016 as being similair to 2000 or 2008 because of low interest rates.
Whiff? It's a veritable hurricane around here!!!!
The owner the company asked why I haven't been making investments into our 401-k. Told him I stopped all in 2008 with the bank bailout. I also said I'm not putting a dime into the market until the SP is around 500.
Looking at year to date performance, I may have to consider putting money in by March 2017.
youre not sacrificing a company match are you?
seriously? Those that downvote me dont like free money? Its part of your benefits.... why else work a 9-5?
I agree. A company match is by far the best reason to have a 401k.
"adopt strategies to make money" --- LMFAO!!! Define "money".
What part of all fiat will DIE don't these fuckers understand?
Short it all!
How come its China on the way down, but not on the way up?
"How come its China on the way down, but not on the way up?"
Grasshopper, for asking questions, it's off to the woodshed for you.
Ask Walmart and Macys how much they are benefiting from low oil even though their buildings and trucks have benefited accordingly. It is simple demand and without rising wages, everything comes to a halt and the first whiff of job worry will have people close their wallets like a steel trap and that is exactly what is going on. People are exhausted buying shit that is poorly made and discarded within a year. December Holidays were the end of the spending spree
All that and 7 year loans on GM Tahoes. The people are broke.
If the FED was going to slather $11 Trillion of taxpayer gravy on Wall Street the least they could have done was to set rates at 6% and send us all a tax-free check for $3 Million.
That would just delay how long it takes the bankers to collect it.
To reference a line from the movie Twister, when everyone has taken a break and trying to catch their breath at the drive-in theater, someone senses the change in weather and notes that a tornado is on the way. To which Bill Paxton replies, "It's already here".
People, it is already here. That is, the credit crisis in China. It is upon us and to this point I offer the following tid bit of data. I work with a company that imports consumer products from China. For the six months, I've had no problem wiring funds from the US to a Chinese company via a HK bank. Same wire instructions, name, everything. Then in late December, the wire forwarded is now being "held" by the receiving bank because the name is exactly and 100% the same. This was never a problem in the past nor has any information changed for the receiving company over the past year. Countless wires through November, never once a problem. Now in December, the money is being held in limbo at the expense of our supplier in China.
This is complete and total bullshit and speaks to the type of simple events that individually mean nothing but when combined with other factors, spell out serious problems. My guess is that the receiving bank needs USDs and is using the funds dedicated to their client for other purposes (i.e., to stay afloat). I'm wondering just how severe the problems are in China's banking/financial markets right now and if we are not already at the point where internal credit flows are freezing. Just like in the US back in 2008, banks began to panic and limit overnight lending as nobody trusted one another. Enter the Fed and a massive loan/bailout to keep funds flowing.
Where this goes and how severe the fallout will be nobody really knows as we are truly in uncharted waters right now. But if credit/cash flows are restricted in China and their manufacturing sector is starved of cash/liquidity to produce goods and pay employees, the entire system is going to fail as nothing, not raw materials, finished goods, capital, etc. is going to flow.
So yes, I believe its already here and upon us. It's just going to take TPTB to accept this fact and finally act (which of course will be too late). FUBAR is the only phrase I can think about that explains this bleeping mess.
+100
That was some coherent writing until: "It's just going to take TPTB to accept this fact and finally act (which of course will be too late)." Sorry, but that's incorrect.
The TPTB is already acting in an intentional way to harm/hurt you. They are very much aware of the consequences of their actions. It was only a few years ago that they did this same thing, but we didn't get a backbone and stop them from doing it again.
I like water filters and freeze-dried bananas today.
You're correct as I was actually trying to be a little sarcastic with this statement (just didn't come across this way). My take on the TPTB is really straight forward. Either they are a bunch of fucktards (quote from the movie We're the Millers) and clearly have no idea what they are doing or they have a very specific plan as you noted to harm/hurt/destroy the masses. Not sure which is worse as either way, they scare the shit out of me.
But one thing is for sure here in the US. Decades ago, the US was a country that was a great wealth creator as evidenced by the industrial and technological revolutions. But over the past 25 to 30 years, the US has become nothing more than a master of transferring wealth (as it no longer creates real wealth) from the masses to the few. This coincides perfectly with the growth/expansion of the financial industry (expecially the Fed) and all of their weapons, tools, resources, corrupt relationships, etc. that have been fine tuned to suck the life out of the average American. When twin "W" axils of evil (i.e., Washington and Wall Street) figured out it was much easier to steal $1 from a million people than $1 million from one party, well the rest was/is history.
About the only advice I can provide at this stage is stay very liquid, mobile, and watch for even the slightest/simplest signs that the slow leaking drip has already turned into a torant. These three day weekends really worry me as it provides more time for events to take place/on fold. Not sure if the MLK three day weekend is when the Great China Shock ("GCS") occurs as I think there would be more poetic justice if it happened over the President's long weekend in February. Just saying.
So supply chain recession?
And on the 8th day, God created some tow missiles, and some depleted uranium bombs. F 16's created he him. And variley god said, force american christians, to gift these weapons of mass destruction to the Zionist leaders of Israel or the Rothschilds Bank of England saieth he him. Go forth ye zionists, kill, rape, slaughter, and pillage whom ever casteth stone on your people or pipe line. Expend the Depleted Uranium upon the innocent and needy and procure me more gold that I may return from heavens above and shower ye with my blessings, and that ye may walk upon the streets of gold you stole from those other guys who believe they are going to get 72 free virgins.
Delivered.
You are spot on. Holding up your payment at the Correspondent bank, gives them liquidity. Done all the time banks need cash.
Put the shoe on the other foot and be an exporter to China and learn that Irrevocable Letters of Credit are revocable.
The Fed, leading all other Central Banks, has destroyed price discovery for everything.
"I believe that there is going to be a polar vortex of a credit freeze coming out of Asia that will look a lot like 1997. Put this on top of the deflationary impact of China’s devaluation. Put this on top of an inventory-led recession or near recession in the US, together with high yield credit stress. Put this on top of massive market complacency driven by an ill-placed faith in central banks to save the day. Put this on top of a potentially realigning election in the US this November. Put this on top of a Fed that is tightening."
So, you're saying there's a chance?
Even a smart guy like this is too dumb to realize that if China sells more and more treasuries to replenish capital flight, that treasuries is not a place to hide
Not to mention, QE ramped the price of both equities and treasuries. The idea that both wouldn't be negatively affected by the removal of the punchbowl is kind of strange.
The punchbowl's not going anywhere, they just want a little scare so they can roll out the 55-gallon drum sized punchbowl, get some more free dough from Mr. Chump US Taxpayer, get some more free dough from Mr. Chump Bail-In Bank account holder, maybe a few more false flags so the Pentagon gets that shiny new electromagnetic space rail gun they've got a woody for, set those HFT spoofing machines to 11, and get a ginormous year-end bonus, Cristal all around!
"I mean that we could wake up any morning to read that China has devalued the yuan by 10-15%."
They could if they wanted or needed to. They could also do something with that well-north-of-10,000 tons of gold and growing, they have. I mean, what have they been buying the stuff hand over fist for since 2008 - to adorn Chinese wives...?
Jan is mad that the only thing that goes down on her is the markets.
QUESTIONS WE ALL NEED ANSWERED OH MIGHTY FEDERAL RESERVE:
So Janet, please answer these pressing questions:
1) if the gambling public loses everything in their 401ks, will they be able to depend on Social Security in a few years?
2) Does it matter that the National Debt is flying past $20 Trillion and doubled in 7 years?
3) Will the new trillions that you are printing be able to buy things?
4) Will you be able to print enough to keep-up with new debt that is piled on going forward?
5) Will your hubris run out before or after the dollar crashes?
6) Who will replace you when the gig is up and you are put behind bars where you belong?
The Fed decided that they wanted to cause a DEPRESSION when they put the rates up when everyone knows we are already in a RECESSION.
There must be a reason for this, but I surely cannot believe that sane people would wilfully do this to their own businesses and workers.
In conditions like this I hope you all have converted your "PET PAPER" & "PET DIGITS" into "PET ROCKS" which should hold their value during this coming FED CREATED DEPRESSION. _JOHNLGALT
This slightly edited post is from comments made several months ago.
These imbeci**s obviously don’t know sh** from cl*y. The last time the markets gave the FED data signals the ass fell out of the markets and they S*** themselves.
When the FED raises interest rates it will strengthen the already strong DOLLAR and strangle your exports, thus contracting your economy and sending it into a DEPRESSION. The U.S. has wonderful (read awesome) numbers, What is the score now, About 60% on food stamps, (whatever that is). My sympathies to all of you in the U.S.A. who believed in the “DREAM” of home ownership and independence.
To anyone who would like to get out of this World Wide Paper Ponzi Scheme (WWPPS) there must be a precious metals store nearby.
This (WWPPS) World Wide Paper Ponzi Scheme will only work well for "THEM" if the Mushrooms (people) of the world are kept in the dark and fed bullsh*t. "THEY" can't have the Mushrooms waking up and getting out of the Scheme and getting into "PET ROCKS". _JOHNLGALT.
I will have no sympathy for the people I've tried to explain this to, WTSHTF
There is a choice of keeping your life’s labour in airy fairy paper (“PET PAPER”) in which most of the thieves have told you they want to steal (through inflation) at least 2% of your wealth from you.
– If there is deflation you get to keep most of your work (value), If there is the thieves inflation, they get to skim the 2% or whatever off the top, DO NOT FORGET THAT “THEY” CAN TURN ON THE SPIGGOTS TO 10% OR 20% OR WHATEVER and just steal that amount of your life’s work from you.
Or you can convert your excess labour into HARD OBJECTS,
LAND, (can be taxed),
BUILDINGS, (can be taxed),
CARS, (can be taxed and subject to depreciated value),
ART OBJECTS, (subject to personal preferences),
BUSINESSES, (usually valued in “PET PAPER”) are subject to the honesty of management, ETC.) YEAH, RIGHT. We know all about that don’t we?
Getting back to the difference between “PET ROCKS” and “PET PAPER” and now – wait for it – “PET DIGITALS”. I nearly p****d myself when I heard you can give up your life’s work to (invest) in “PET DIGITALS” HEH, HEH, HEH. _YEAH RIGHT.
Give me a break. Do you think I’m a complete F*** W***.
As far as investing in “PET ROCKS” or “PET PAPER” or “PET DIGITALS”, maybe you should ask the Indians, Chinese, Russians, Germans (sorry you can have your GOLD back in ??? years) _because I am not licensed to give investment advice. Best to you all, and more PET ROCKS please. _JOHNLGALT
Bernarke started it. He said you're firing me Obama, I'm ended QE and Yellen couldn't just turn it back on and look like a failure. So here we are.
JOHNLGALT, well done.