Tag Archives: money

Battlelines

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The battlelines are being drawn
On one side, the dollar is gone
‘Cause debt will explode
And once down that road
They claim folks would rather the yuan
 
But others are making the case
That dollar debt has much more space
To grow and expand
As it can withstand
More stress since it’s used everyplace
 
And finally, one thing left to note
Is Europe appears set to float
A digital euro
That ought to ensure-oh
The market, its price, will demote

 

Friday, I highlighted an idea which I had toyed with, but never explained eloquently, but that was done so by Michael Nicoletos (@mnicoletos on X).  While I offered a link to his work Friday, I know that many never click on links in notes like this, so I am copying his page showing this perspective.  It is clear, clean and asks the proper questions.

The reason I am doing this is because this weekend, I listened to a podcast with another very smart macro guy, Luke Gromen (@lukegromen) who has a very different take on the state of the world.  In short, Luke’s belief is that the US is already past the point of no return and that a potential downward spiral, caused by excessive US debt, is going to kick off soon.  The result is that we will see the dollar decline severely (as described by the DXY), gold, bitcoin, and equities rally, and that Treasury debt, especially long dated debt, will get killed.  In essence, he is explaining the inflation trade, higher US inflation will lead to those outcomes.

Let me start by saying, I agree with Luke on certain things, like the fact that we are likely to see higher inflation going forward as the government is in no mood to cut off the liquidity taps.  If you look at the below chart of M2 from the FRED database of the St Louis Fed, you can see that this measure has set a record high and risen 7.8% since its local nadir on October 30, 2023.

So, in a bit less than 2 years, it has grown about 8% after having shrunk that much in the prior 2 years during the first phases of the Fed’s QT program.  But now, despite the fact the Fed continues to slowly shrink their balance sheet, money supply is growing again, and my take is it will continue to do so for the foreseeable future as the government needs to essentially monetize the debt.  

Back to the argument, I believe that in this scenario of run it hot, gold and equities will do well while bonds will do poorly, but the question of the dollar on the FX markets is very different.  And this is where the Nicoletos’s theory comes into play.  If he is correct, and we adjust our idea about what constitutes excess leverage for the US, then expecting the dollar to fall in the FX markets may not be the best idea.  Rather, the news that the ECB is seeking to institute a digital euro, as per a speech by Madame Lagarde two weeks’ ago, and UK PM Starmer is claiming digital ID is necessary, to be followed by a digital pound, leads me to believe that institutions and individuals may decide they want more control over their own finances, rather than governments who have proven themselves exceptionally incompetent across numerous areas (energy, finance, and defense come to mind).  That implies that the dollar is likely to find a lot more support than those claiming it is set to collapse.

Again, I ask, will developing nations really want to keep their reserves in the CNY, or store their reserves of gold in Shanghai given the long history of capriciousness that the CCP has demonstrated.  People may hate the US; yet more people want to come here than go anyplace else because they have a higher degree of faith that their property will remain their property.  

This is not to say things are great, there are huge problems worldwide, just to say that my medium- and longer-term views are the dollar will be seen as TINA if other nations go down the road they are currently claiming they will follow.

The overnight narrative’s turned
To government shutdown concerns
As Trump and Dems meet
The word on the Street
Is too many bridges are burned

As to this morning’s market activity, the most noteworthy story is the question of whether the Senate will pass a continuing resolution (CR) to keep the government operating past midnight on Tuesday when the current spending authority runs out.  The House of Representatives have passed a ‘clean’ resolution which leaves the spending levels exactly where they are and lasts for 6 weeks allowing Congress time to pass the individual spending bills.  However, in the Senate, they need 60 votes to overcome the filibuster, and the Republicans only have 53 seats.  Minority Leader Schumer has promised to shut down the government unless he gets spending promises in the CR of upwards of $1 trillion over the next 10 years, and that feels unlikely.  Too, the House of Representatives is in recess, so no changes to their bill can be made on a timely basis.

My take is the Senate will cave in, but if not, they will not be able to withstand the pressure for very long as I believe that they will ultimately receive the blame for the outcome.  Turning to the market impact of this story, the most notable move overnight has been in precious metals where Gold (+1.3%), Silver (+1.8%) and platinum (+0.8%) are all continuing their recent runs and all at recent (and for gold all-time) highs.  However, it is difficult for me to understand this as a response to the potential shutdown in isolation.

Perhaps, if we turn to the dollar, which is lower, but only by -0.2% on the DXY, we can have a better understanding as at least it would make some sense that the dollar declines if the government does shut down.  And certainly, a weaker dollar manifests as stronger commodity prices, but the metals moves are so much larger, I have to believe there is another driver there.  Some talk focuses on the fact that Friday’s PCE data was not too hot thus keeping alive the hopes for further Fed rate cuts.  Personally, I lean toward the idea that the combination of concerns over increased military activity and the ensuing inflation are much more likely to be the drivers of precious metals’ rally.

Weirdly, despite concerns over inflation, bond yields are not responding in the manner one might expect as Treasuries are lower by -3bps and we are seeing similar moves throughout all the European sovereigns this morning.  As well, there was a very interesting article in the WSJ this morning about the fact that credit markets are incredibly strong, meaning the spread between corporate and Treasury yields has shrunk to the lowest levels on record for investment grade, and near that for junk bonds.  

To sum this up, bond markets are completely unconcerned with future inflation while precious metals markets are screaming inflation is coming soon.  Of course, one possible explanation for this seemingly divergent behavior is that the amount of liquidity that continues to be pumped into markets globally by central banks is driving fixed income investors to seek investments within their remits, i.e. bonds, while others are watching and trying to prepare for the inevitable.  In a funny way, the fixed income folks may be doing the right thing because if YCC comes into play, and I am almost certain it will, then yields will be lower still!

As to the rest of markets, equities are all about more liquidity as Friday’s US rally, which is continuing this morning with futures higher by 0.5% at this hour (7:15) demonstrates.  In Asia overnight, Japan (-0.7%) did not follow suit as a BOJ member hinted that a rate hike was coming at the October meeting, and we all know how much equities hate rate hikes.  But China (+1.5%) and HK (+1.9%) both rocked as word of a new government plan to inject CNY 500 billion into local governments to spur investment made the news.  Korea also benefitted from the combination of those things although India was unchanged and Taiwan (-1.7%) seemed to respond to a story that President Xi is seeking to get President Trump to agree that Taiwan is part of China.

As to Europe, the UK (+0.55%) is the leading gainer amid stories about pharma giants there raising prices, while continental markets are +/-0.2%, really not showing much life at all.

Oil (-1.8%) is slipping on news that Kurdish oil in the amount of up to 180K bbl/day is going to start flowing to the market again, adding to supply as OPEC is also talking of increasing production.  There was, however, an interesting article in the WSJ about the fact that Russian production is starting to turn down as 3 years of war and sanctions has reduced their capability of producing absent Western technology.

Finally, the dollar, as mentioned above, is a bit softer this morning with JPY (+0.4%) and NZD (+0.4%) the G10 leaders although the rest of the bloc has seen gains on the order of 0.1% or 0.2% only.  In the EMG bloc, KRW (+0.6%) is top dog with CNY (+0.2%) actually the next best performer.  So, overall, movement here has not been that impressive despite the narrative.

I’ve gone on far too long and as there is no front-line data today, I will post it tomorrow.  Of course, payrolls come Friday and be aware of five Fed speakers today and a total of ten this week.

Good luck

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Naught But Dismay

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Ishiba’s fallen
Who’ll grab the poisoned chalice
For the next go round?

 

Well, it was inevitable after the LDP lost the Upper House election a few weeks ago, but now it is official, Japanese PM Shigeru Ishiba has resigned effective today and will only stay on until a new LDP leader is chosen.  You must admit, for a politician he was exceptionally ineffective.  He managed to lead the LDP to two major election losses in the span of 10 months, quite impressive if you think about it.  However, now that he has agreed a trade deal with the US, where ostensibly US tariffs on Japanese autos will be reduced from 25% to 15%, he felt he had done enough damage and is getting out of the way.  Frankly, I wouldn’t want to be the next man up here as the situation there remains fraught given still high inflation and a central bank that is so far behind the curve, it makes the Fed seem like it is Nostradamus!

The intricacies of Japanese politics are outside the bounds of this note, but the initial market response is a weaker yen (-0.7% as of 7:30pm Sunday night) and 1% gain in the Nikkei.  JGB yields have barely moved at all as it seems Japanese investors are not yet abandoning ship in hopes of a stronger PM.  However, my take is they have further to climb going forward as the BOJ’s ongoing unwillingness to tackle inflation will undermine their value.  Japan has a world of hurt and lacking an effective government is not going to help them address their problems.  It is hard to like Japanese assets or the yen in my view, at least until something or someone demonstrates competence in government.

The jobs report basically sucked
As companies smoothly conduct
More layoffs each week
While they try to tweak
Their staffing ere management’s f*cked

By now, I’m sure you’re all aware that the payroll report was pretty weak across the board.  NFP rose only 22K, well below expectations and although there was a marginal increase in last month’s results, just 6K, the overall picture was not bright.  The Unemployment Rate ticked up 0.1%, as expected with the labor force growing >400K, but only 288K of them getting jobs.  However, layoffs are down, and the real positive is that government jobs continue to fall, having declined 56K in the past three months with private hiring making up the slack.  In fact, if you look at the past three months, private job creation has been 144K or 48K/month.  That is the best news of the entire process.  Eliminating government employees will eventually result in lower government expenditures and let’s face it, if the government employees who leave become baristas at Starbucks, they are likely adding more value to the economy than their government roles!  The chart below from Wolfstreet.com does a great job of highlighting private sector jobs growth, which is slowing but still positive.  Maybe it is not yet the end of the world.

As to my efforts to prognosticate on the market behavior based on a range of outcomes, I mostly got the direction right, although some of the movement was a bit more aggressive than I anticipated.  The one place I missed was equities, which started higher, but ultimately fell on the day.  Nostradamus I’m not.

The last thing to mention today
Is France, where a vote’s underway
When finally completed
And Bayrou’s unseated
Macron will have naught but dismay

The last key story to discuss is the vote today in France’s parliament where another snap election has been called by a minority government (see Japan for previous results) and in all likelihood will result in the government falling.  The problem here, as it is pretty much everywhere in the Western world is that the government’s budget deficit is exploding higher and legislators cannot agree to cut spending.  The result is rising bond yields (see below chart as I discussed this last week here), and growing concern as to how things will ultimately play out.  The prognosis is not positive.  

Source: tradingeconomics.com

While the US is in a similar situation, we have substantially more tools available and more runway given our status as the global hegemon and owning the global reserve currency.  But France, and the UK or Japan for that matter, have no such backstop and investors are growing leery of the increasing risk of a more substantial meltdown.  Apparently, the results of this vote ought to be known by 3:00pm Eastern time this afternoon.

The question is, if/when he loses, what happens next?  The choice is President Macron appoints a different PM to head another minority government, which will almost certainly be unable to achieve anything else, or there is another parliamentary election, which at least could result in a majority government with the ability to enact whatever fiscal policies they believe.  Remember, France is the second largest economy in the Eurozone, so if it remains under pressure, it is difficult to make the case that the euro will rally very much, especially given Germany’s many issues.

And that feels like enough for one day.  Let me recap the overnight session but since there is no data of note today and the Fed is in its quiet period, I will list data tomorrow.  While US equity markets sold off a bit at the end of the day, that was not the vibe this morning anywhere else in the world as green is the predominant color on screens.  In Japan, no PM is no problem as the Nikkei (+1.45%) rallied after much stronger than expected GDP data (2.2% in Q2) helped convince investors things would be fine.  Hong Kong (+0.85%) and China (+0.2%) also managed gains as hopes for a Fed rate cut spring eternal.  In fact, the bulk of Asia saw gains on that basis.

Europe, too, has embraced the weaker US payroll data and prospective Fed rate cut to rally this morning, although in fairness, German IP rose 1.4% for its first gain in four months, so that helped the cause.  But even French stocks are higher despite the imminent collapse of the government.  I am beginning to notice a pattern of equity investors embracing the removal of ineffective governments, but perhaps I am looking too hard.  US futures are also modestly higher at this hour (7:15) this morning, rising about 0.25%.

In the bond markets, after Friday’s rally, Treasury yields have edged higher by 1bp while European sovereign yields are largely unchanged, perhaps +/- 1bp on the day.  Surprisingly, even JGB yields have not risen despite the lack of fiscal rectitude there.  It certainly appears that bond investors are ignoring a lot of potential bad news.  Either that or someone is buying a lot of bonds on the sly.

In the commodity markets, oil (+2.0%) after a down day Friday ahead of expectations that OPEC+ would be increasing production again, has rallied back as those increases were less than feared by the market.  But net, oil is just not going anywhere these days, trading between $62/bbl and $66/bbl for the past month.  It feels like we will need a major demand story to change this narrative, either up or down.  As to metals, they continue to rally sharply (Au +0.7%, Ag +0.7%, Cu +0.5%, Pt +1.9%) as no matter the bond markets’ collective ennui over global fiscal profligacy, this segment of the market is paying attention.  If this week’s CPI data is cooler than expected, I suspect that 50bps is going to be the default expectation and metals will climb further.

Finally, the dollar is under modest pressure this morning, with the euro and pound both rising 0.2% although AUD (+0.6%) and NZD (+0.8%) are having far better sessions on the back of commodity price strength.  JPY (-0.3%) has recouped some of its early losses from the overnight session, though my money is still on weakness there.  In the EMG bloc, it is hard to get excited about much with ZAR (+0.25%) appreciating the rally in gold and platinum, but only just, while the rest of the bloc hasn’t even moved that much.  

And that’s really all for today.  The discussion will continue around the Fed and whether 50bps is coming with Thursday’s CPI the last big piece of data that may sway that conversation.  Personally, I am surprised that the government upheavals in Japan and France (with the UK also having major fiscal problems) have not had a bigger impact on markets.  My sense is that there is an opportunity for more fireworks in those places in the near future.  But apparently not today.  As investors whistle past those particular graveyards, I imagine we will see a risk-on session continue with the dollar remaining under modest pressure.

Good luck

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