2018-04-19

HKMA Intervention Finally Has An Effect

FT: HKMA notches 13th intervention to support Hong Kong dollar

ZH: Hong Kong Dollar Spikes Most In 3 Months As HKMA Chief Jawbones
In a press briefing, Hong Kong Monetary Authority Deputy Chief Executive Howard Lee said FX transactions are in line with expectations and sees no unusual HKD shorting activity. As Bloomberg notes, Lee said:

A lot of outflows are arbitrage activities, but probably of asset transfers.

HKD purchases operation is smooth and sound.

HKMA will carefully handle if unusual activity is seen.

HKD interbank rates are slowly increasing and HKMA expects this to continue.

Market confidence is strong on linked exchange system and the HKMA.

Exchange fund bills will be available for bank funding when needed.
Now we'll see if it holds or the arbitrageurs push it right back to the limit.

America's New Target: China

A funny thing happened when Trump targeted China on trade. There was widespread opposition at first, with lots of political enemies joining with free trade economists. Then came grudging acceptance that Trump had finally done something, even if it wasn't the best thing. He shifted the Overton Window and opened new areas of debate. Russia collusion is fading fast and in its place is the China threat.

Foreign Policy: The Chinese Communist Party Is Setting Up Cells at Universities Across America
One Chinese exchange student who studied at UIUC in the fall of 2017 says that before embarking on the study tour in Illinois, the students had to attend a lecture on the dangers of the Falun Gong, a strongly anti-party spiritual group banned in mainland China but active in the United States.

After the students’ arrival in Illinois, their home university asked the group to set up a temporary party branch and requested that the students hold a viewing party to watch the 19th party plenum in October, the major party planning conference held every five years. (The plenum was the subject of a major global propaganda push, with Chinese embassies and consulates reaching out to Chinese community organizations around the world, asking them to organize events for their members.)

The exchange students at UIUC were also asked to report on any potentially subversive opinions their classmates may have evinced while abroad, according to the student.

“After we went back to China, we had one-on-one meetings with our teachers. We talked about ourselves and others performance abroad,” the student says. “We had to talk about whether other students had some anti-party thought.”
The irony missed by the globalists is how this is pure globalism. The Chinese government doesn't respect borders, it respects the people. All Chinese people in the world will eventually be considered part of Greater China if they aren't today. In contrast, the idea that America is a political entity because of geographic borders is a throwback to a pre-nationalist era of monarchs who ruled over territory and all the different nations within them.
The party isn’t shy about the purpose of these new branches. “The rising number of overseas party branches is a new phenomenon, showing the growing influence of the [Chinese Communist Party] and China,” according to a November 2017 report in the party-aligned Global Times newspaper. “Overseas party cells are also responsible for promoting party and government policies.”
How is this different from other nations pushing their agenda in the United States? The only difference with China is its a bit more overt. It's not taking place through a network of NGOs, charities and cultural exchanges. It's not hiding behind the academic language, it's not peppered with buzzwords like diversity and inclusion. But what China is doing is very much in line with how America operates in 2018.
“We take the safety and security of all of our students seriously and work extremely hard to ensure that they have the opportunity to freely pursue the full educational experience we promised them when they chose to come to Illinois,” the university said in a statement to FP.
They are every bit as concerned with ideological conformity as the Chinese government. The pot is calling the kettle a container of color.
Grouping students into party cells while abroad sounds like a “downward extension” of a policy that has long been applied to high-ranking Chinese officials who travel overseas, says Andrew Chubb, a fellow at the Princeton-Harvard China and the World program. “This is important information that should be carefully considered by universities hosting exchanges. Host institutions need to make sure they are familiar with the kinds of situations their exchange students may be in,” he says.

The party cells popping up on campuses across the United States aren’t the Communist Party’s only expansion abroad. The U.S.-based party branches are part of a growing network of cells located on campuses in Canada, Mexico, Chile, Australia, France, Germany, the Netherlands, Spain, Italy, Portugal, Greece, South Korea, Thailand, and elsewhere.

The cells aren’t always used for ideological purposes. In March 2011, as the Arab Spring protests devolved into a civil war in Libya, Beijing sent a warship to the region to evacuate all 35,000 Chinese nationals there. A small group of Chinese students on Crete, members of a party cell at the University of Athens, participated in the evacuation effort, according to an article in the People’s Daily, the Communist Party’s main newspaper.

Helping to evacuate compatriots from a war zone is the type of humanitarian work many university groups would want to promote, but the students’ mobilization demonstrates Beijing’s growing capacity to establish functional party cells in Western countries that can be activated if needed.
Most people reading the FP article see nothing wrong with flooding the West with millions upon millions of Muslims, or the United States with millions of Mexicans, or take issue with various minority populations pushing foreign agendas in Washington, D.C., but a few hundred party cells at universities are a threat.
For Chinese students abroad, there’s a clear message, according to Hoffman of the Mercator Institute.

“You know that the party’s there,” she says. “It’s integrated directly into your study abroad experience.”
If they're going to return to China, why wouldn't it?

Two takeaways. One, China is going to become the new target for American jingoists. Russia collusion was a joke, China's ascent is not.

More broadly, nationalism is rising. Even the globalists are falling victim to it and advancing nationalist agendas. They should be celebrating the diversity of viewpoints brought by CCP members. They should speak of inclusion, bringing the CCP's ideas on various issues to students. After all, it is such a large force in the world, you can't really understand a globalized world without understanding the Chinese Communist Party's view on things.

Socionomics Alert: Change in Energy

Mike Cernovich: The Energy has Shifted
Several high consciousness people I’ve spoken to independently told me they felt a shift in energy. Something is going on. This feeling happened 2-3 weeks ago, and it wasn’t about politics or elections. The feeling is much bigger. There has been an energy shift.

Whenever you talk about Energy, haters appear. “It’s woo-woo,” but this only shows they are morons. You see Energy measured every day, though it’s wrapped up in terms like consumer confidence, inflation, and bubbles.

Keynes called this Energy the “animal spirits,” or animating force of human behavior. We all know Energy when we see it.
What could he be talking about? People are talking about this post online (such as the Buzzfeed editor-in-chief), indicating they know what he's talking about even if they don't really "know."
At the start of the year I posted: 2018: The Pivot Year and after the first crack on February 5 I posted: 2018 Pivot Year: Here Comes the Pivot
On the other side, Chinese growth is slowing and they recently eliminated tariffs on steel exports. Tensions in North Korea aren't improving U.S.-China relations. One way or another, I expect action on trade in 2018.

Finally, the overall trend in social mood remains negative. I believe this is a higher order decline as in the 1930s, and thus dollar positive (deflation) rather than a correction and inflationary (1970s).

As I said above, I could be wrong. And the best case for my being wrong is still the commodities markets. Several funds such as steel, copper and coal (and related emerging market countries reliant on natural resource exports) are on the verge of breakouts. I expect China to slow, but FXI recently broke out above its resistance again and opened up 3 percent on Tuesday.
The big questions are still interest rates, inflation expectations, credit growth, China and commodities. There are some signs of an uptick in lending (see TOTLL and BUSLOANS at Fred), but still well growth rates in 2016, let alone during the pre-2008 expansion. The strongest argument for stagflation is the traders who are seeing a bearish move in bonds, not in the economic data. The commodities impulse appears to be ending. Tariffs and sacntions are bumping prices up, but it won't lead to a price spiral without rising credit growth or a decline in the dollar, both of which can accompany a recession/depression.

Some charts below have broken out, others are on the cusp or threatening reversals. A couple charts at the bottom show how technology looks stretched and do for some relative mean reversion, one way or another.

I'll post a lot of charts below, but for the short-term I want to show the BofA high-yield option adjusted spread. The collapse in the spread over the past three weeks was extremely fast, at least in high-yield credit investors quickly returned to total complacency.
What follows are a lot of charts that I posted earlier this year. The stock market topping chart I posted on February 3: End of Rally or End of Bull: Is It 1987, 1994, 1997, 1998, 2000, 2007 or 2014? If you believe the stock market is topping and you expect interest rates will breakout to the upside, then the decline in stocks will be far larger than a normal bear market. If the 30-year yield rises to around 4 percent and the Dow Industrials/30-year Treasury falls to 130, the Dow would be at 15,600, 37 percent below today's price. A move to 5 percent on the 30-year would give a downside target of 50 percent for the DJIA.

Digital Secession: Catch the Wave!

Alvin Toffler predicted much of this in his book the Third Wave, and it's finally coming to fruition.
The rolling back of the Industrial-Era creed of "standardization", as exemplified in the one-size-fits-all approach typical of institutions of this era, such as the education system, factories, governments, mass media, high volume mass production and distribution, etc.

The attack on the nation-state from above and below and progressive obsolescence of the nation-state itself.

The assault on the nation-state from below would include both the gradual loss of consensus, such as has characterized the politics of the United States in the 21st century, as well as political turmoil in China (largely split amongst urban-rural lines), Israel (orthodox vs. secular), the Islamic world (fundamentalist or traditional vs. secular) and elsewhere. It would include the rise of regional interests and the progressive devolution of the nation-state itself; e.g. the autonomization of Wales and Scotland in Britain; of Nunavut and Canada; the frequent incidence of separatist movements, the dissolution of Yugoslavia, Czechoslovakia, the USSR, Ethiopia, the emergence of microstates, such as East Timor.

The assault on the nation-state from above would include the rise of powerful non-national entities: IGO's, multinational corporations, religions with global reach, and even terrorist organizations or cartels. It would include the progressive hemming-in of national economies and of nation-states under a growing network of super-national organizations and affiliations; e.g. the European Union, the North American Union, the newly formed African Union, as well as organizations such as the WTO, NAFTA or International Criminal Court.

The eclipsing of monetary wealth by knowledge and information as the primary determinant of power and its distribution. This was also discussed more fully in the sequel Powershift.

The eclipsing of manufacturing and manufacturing goods by knowledge-production and information-processing as the primary economic activity.

Buzzfeed: What Comes After The Social Media Empires
Nobody thinks Facebook, YouTube, and the like are going away. But now, it’s becoming clear that they can’t replace the whole internet either, as once seemed their destiny — and, indeed, that no executive in their right mind would want to swallow it whole.

And so for the first time in years, there are viable new social networks being born on the margins, and the great questions have to do with what comes next.
Declining social mood and the inevitable logic of the technology. Being a one-size fits all platform on the Internet makes sense if it is a very neutral product, but any site based on advertising will run into trouble because someone will be offended by something in this day and age. Platforms could ignore various outrage cycles and survive, but for whatever reason they seem very prone to infiltration and political subversion, eventually turning off a massive portion of their audience.
When a dreamer alienated by the big social networks would start a new one, the internet would make fun of them for a while and then let the thing die in peace. In my own case, I’d occasionally get tricked into having a cup of coffee with someone who thought BuzzFeed should see itself as a competitor to Facebook or Twitter, and I’d feel like the politician whose constituent concern turns out to be chemtrails, and would politely extricate myself from a conversation with the lunatic.

But Switter, Gab, and the guntubes are green shoots and leaves. There are big forces pushing us toward fragmentation. These are not attempts to take over but instead to carve out an independent territory. And, as Mike Cernovich wrote recently, “several high consciousness people I’ve spoken to independently told me they felt a shift in energy.”

...In all seriousness, the times have changed, mostly because the platforms’ advertising business forces have changed. Massive scale turns out to have special disadvantages. Bad actors take advantage of that scale, bringing associated bad optics and regulatory scrutiny. And when that crosses over into, for instance, Sinhalese or child exploitation videos — forget about it.

So the toxic politics, the controversy, the edge are all bad for business. And meanwhile, the forces of fragmentation in tech and the culture have opened new doors for small new rivals.

2018-04-18

IMF Recommends Global Depression

The headline warns of the risk. But the IMF draws the wrong conclusion.

ZH: IMF Sounds The Alarm On Global Debt, Warns "United States Stands Out"
So what should policymakers - having gotten used to flooding the world in debt - do? Why the opposite, of course: as the FT summarizes, with the global economy growing strongly, the IMF recommended countries stop using lower taxes or higher public spending to stimulate growth and instead try to reduce the burden of public sector debts so that countries have more leeway to act in the next recession.

Translation: no tax cuts, no increases to deficit spending, i.e. another dig at everything that Trump is doing.

In fact, the IMF singled out the Trump administration’s tax cuts for criticism, since they left the US with a deficit of 5% of national income into the medium term and a persistently rising level of debt in GDP. It also explains why the IMF forecasts the US is the only nation whose debt load will rise in the next 5 years.
The next recession is already coming.

FT: IMF sounds alarm on excessive global borrowing
Half of the $164tn was accounted for by three countries: the US, Japan and China. The latter’s borrowing surged from $1.7tn in 2001 to $25.5tn in 2016, accounting for three-quarters of the increase in private sector debt in the past decade.

The fund was concerned that “an abrupt deleveraging process” in the private sector could trigger another financial crisis as borrowers tightened their belts simultaneously.
Zero Hedge reads between the lines and reaches the correct conclusion:
Here, the Keynesian would probably go nuts, and say that such a policy promotes saving, and is tantamount to austerity, which for some reason, is equivalent to economic death in a world where total debt/GDP is either 225% or 316% depending on whose methodology one uses.

Actually, come to think of it, it all makes sense when one considers that it is the very policies that define modern finance and economics, that have led the world to this precipice. In fact, reading the IMF report between the lines, it is nothign more than advance scapegoating for the inevitable global debt crisis that is coming, and which not even the IMF is hiding any more. What is most comical - if completely expected - is that the IMF is now blaming it all on Trump: not on generations of economists who steered the world to the point where there is more than $3 of debt for every $1 of GDP, and not on central bankers who flooded the world with debt so that the richest 0.01% can be richer than their wildest dream. Nope: it's all Trump's fault.

Somehow we doubt this advance damage control will work after the next, and likely final, crash.
The era of central bankers and economists "managing" the economy is coming to an end.

Silver Miner ETF Tries Another Breakout

Whistling Past the Crisis: Dollar Pressure Breaks PBoC In 3 Months

Back in September the PBoC announced a targeted RRR cut that took effect on January 25, 2018.

Reuters: China makes targeted reserve requirement cut to boost lending to small firms
China’s central bank on Saturday cut the amount of cash that some banks must hold as reserves for the first time since February 2016 in a bid to encourage more lending to struggling smaller firms and energize its lacklustre private sector.

The People’s Bank of China (PBOC) said on its website that it would cut the reserve requirement ratio (RRR) for some banks that meet certain requirements for lending to small business and the agricultural sector.
That date is important. China cuts the RRR because liquidity in the financial system is tightening amid deleveraging efforts and global disinflationary forces. The pressure became extreme back in 2015-2016 when U.S. dollars were flowing out of China. February 2016 was the bottom of the 2014-2016 deflationary wave. The best explanation for the end of that wave is China's decision to flood its financial system with new credit, increasing risk with every increase in leverage. Now that credit wave is over.

China may have hoped their targeted RRR cut would be the boost needed amid the "deleveraging" effort, thanks to "synchronized global growth." Global growth isn't so hot though, and neither is the Chinese economy. And so three months later, China makes a big 100 basis point cut in the RRR.

Reuters: China central bank announces surprise cut in bank reserve requirements
Reserve requirement ratios (RRRs) — currently 17 percent for large institutions and 15 percent for smaller banks — will be cut by 100 basis points (bps), the People’s Bank of China (PBOC) said.

The change will be made on April 25 and will apply to most banks with the exception of policy lenders such as China Development Bank.

But the banks must use most of the freed-up liquidity to pay back relatively costly loans obtained via the central bank’s medium-term lending facility (MLF). Based on first-quarter data, the PBOC said the MLF loans due to be repaid on April 25 will be about 900 billion yuan ($143 billion).

Whatever funds the banks have left after repaying their MLF loans must be used to provide loans to small businesses. The PBOC said there will be 400 billion yuan in excess funds after the MLF loan repayments.
Heisenberg Report: China Bails Out Flagging Stock Market As Bonds Stage Enormous Rally After RRR Cut
This is clearly a dovish move. The central bank has been avoiding using RRR and benchmark rate changes as both are widely viewed as tools with strong signaling effects. A RRR cut does not necessarily lead to lower interbank rates as the central bank might use other tools to make any changes rate neutral. However, it is likely that the interbank rate will be relatively lower because the RRR reflects a mild loosening bias.
PBoC turning dovish as the Federal Reserve turns hawkish.
Bloomberg: Down $1 Trillion, World’s Worst Stocks Near Make-or-Break Level
In a Chinese stock market infatuated with round numbers, 3,000 has emerged as the latest fixation for investors trying to gauge the government’s commitment to ending a nearly $1 trillion selloff.

That’s the next big line in the sand for the Shanghai Composite Index, whose 13 percent slump since Jan. 24 has been the steepest worldwide. The benchmark equity gauge came within 1.4 percent of the 3,000 threshold on Wednesday, before rallying in the afternoon amid speculation state-run funds had stepped in to support the market.
Jeffrey Snider connects the dots for us: China’s Monetary Shell Game
If the PBOC had been serious about tightening, it would have done a whole lot more than raise its reverse repo 5 bps at a time. I also wrote in December, “If economic and financial conditions were really improving, [RRR] is where monetary policy would respond (you know, like every other time in the past).” Today, they did – only not tightening.

Starting next week, the RRR for large firms will be cut by 100 bps. This isn’t going to be an isolated maneuver, however, as the PBOC is ordering those banks to use reserves freed up by the reduction to repay MLF borrowings!
The PBoC is caught between Scylla and Charybdis: the USD and the CNY.
We’ve seen this before, in the middle of 2015. This is different, though, and in several important ways.

At root, I continue to believe, is CNY. Beginning early last year, there was a clear choice made to prioritize the currency over every other consideration. Unlike the media, Chinese officials very early on realized the overriding factor in everything (globally) – the “dollar.” Thus, they knew CNY DOWN = BAD.

But how does one reverse that devastating equation? It’s not an easy thing, as it turns out. Authorities tried several times throughout the “rising dollar” period with little success (as noted last week). As a result, they blew through a huge chunk of so-called reserves and the currency dropped anyway as it became self-reinforcing (a run).
If CNY goes up, deflation, economy slows, capital flows out of China, CNY goes down. "All roads" point to CNY going down amid dollar deflation.
That would mean great(er) attention to the asset side of the PBOC balance sheet which continues to bleed forex “reserves.” In other words, increases in RMB lending to the market via the MLF or anything else absent an actual increase in forex leaves Chinese RMB more and more unbacked on the money side. Unless forex starts to rise again, which appears very unlikely (CNY rose for months, and they still bled), there is only so much the PBOC can do through these RMB windows without breaking what sure looks like an imposed (policy?) limit (shown above).
This is the most important chart in the world. It doesn't matter today and it may never matter, but if it ever matters, watch out. China's forex reserves only cover 11.4 percent of M2 money supply. Put another way, at current exchange rates there are 55 RMB circulating in M2 for every USD of reserves. The claims on reserves are rising faster than China can add reserves in a slow-growth world. There are periods of relief such as the reflationary wave kicked off in February 2016, but that month reserves backed 14.7 percent of M2 and there were 44 RMB for every dollar of reserves. Today, even if USDCNY moved back to 6.9, reserves would only cover 12.5 percent of M2. China can't risk rapid credit growth because capital controls can only do so much. Increased credit growth increases the claims on reserves and intensifies any outflow pressure.
So, you don’t want to destabilize CNY by leaving RMB (bank reserves) more and more unbacked, so why not then make big banks pay down the MLF? That would create more margin for the central bank to deal with the prospects for further forex drawdowns in the months ahead.



The obvious downside to withdrawing bank reserves is immediate liquidity. To address what would otherwise be an acute shortfall, shift the burden onto large bank private balance sheets by cutting the RRR. They’ve been hoarding it anyway. The central bank reduces its RMB footprint to better align with “dollar” levels, leaving the private banking system to pick up the liquidity slack in a way that doesn’t endanger CNY. Since you just hiked the reverse repo rate for a fourth time last month, it will leave the “experts” wholly confused.

I believe that’s the theory, anyway. It’s a further lesson in how to continue to loosen RMB while making the rest of the world think you’re doing something else (at worst neutral). China has a sustained money problem it cannot by definition fix. Next best thing? Hide it. Why?

There is no recovery coming.
China had lots of time to reform over the past decade. Instead, they went in the opposite direction, increasing the risk in the existing economic model and monetary system.

I have been writing for years that the yuan will devalue because China is running out of room. Not only financial and economic room, but political room as the odds of a trade conflict increased amid negative social mood and a weak global economy. In May 2016 I wrote: SocGen Estimates Bank Losses 60 pc of Capital
If China is successful, it will take much longer than expected. If it takes upwards of a decade, the country is going to be slamming headfirst into the demographic wall. By 2025, the 20-24 age cohort will be almost 30% smaller than the 35-39 cohort, which is the cohort currently engaged in family formation. In markets such as housing, China will have turned Japanese.

...Finally, while China could use a white swan, the world is creating new problems, such as a potential trade conflict with the United States.
Back in 2011 I wrote: Chinese yuan depreciation coming soon?
I don't expect yuan depreciation will be slight because it will happen when hot money flows out of the renminbi and economic indicators, most importantly the trade surplus, reverse. It seems like every time there is a bubble, there are people explaining how it will be limited, the impact will be concentrated in housing/stocks/Greece and so on, and this is almost always wrong. Also important to watch is the political angle. If the renminbi doesn't continue to appreciate, U.S. politicians will become more open to the idea of retaliatory tariffs. This is why China's policy makers are in a bind. What happens if the yuan needs to depreciate in the midst of a crisis? U.S. politicians will be open to extreme policy choices during a crisis, such as the TARP plan that many were cajoled into voting for. Conversely, if the Chinese do not depreciate the yuan in a deflationary crisis, the economy will experience crushing deflation. This is why Liu Jun Luo warns that hyperinflation may be on the way if the Chinese do not inflate now.
I was wrong to expect something much earlier (although I don't think I was wrong from a policy perspective, they should have realized by 2011 that something was wrong), but not in the analysis. Here we are 8 years later and China is in a far worse position with respect to leverage, outstanding credit, reserves, trade relations, economic growth and the U.S. dollar bull/bear cycle (still bullish).

Even if China avoids a trade conflict with the U.S., that will mean a smaller trade balance. If global growth remains slow, that could be enough to swing reserve accumulation back to depletion, ceteris paribus. It would also mean slowed GDP growth in China that would have to be offset with bigger reforms or faster credit growth. The latter would weaken CNY and increase outflow/depreciation pressure. The policy options are fading fast and only hope remains. Hope for a global economic recovery and a restart of the U.S. dollar (eurodollar) system. Right now, I don't see a restart. I see another bear market peak as in 2011 and 2014. The yuan depreciation in both of those previous deflationary waves. The next one will be larger and China will be starting from a weaker position.