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Fading Memories: My Country, My Culture of Blame

As an American, I decided to write this essay out of love for my country. It feels like the ground is moving under my feet, and my home is becoming unrecognizable.

I have a distant memory of a time when Americans took responsibility for their own lives. Maybe that time never really existed. However, it’s clear in 2020 that we’ve become paralyzed by the childish need to place blame on someone or something for the cause of this pandemic. Our desire for retribution for China’s perceived wrong-doings overshadows our desire to resolve the real problems the United States faces.

The truth is this: America has been broken for a long time, and we’re not just seeking to blame someone for the pandemic, we are feebly grasping for a scapegoat for all the reasons we feel so lost. It pains me to say this, but we did all of this to ourselves, and we are the only ones responsible for picking up the pieces.

We built a political system where our election cycles reward the most polarizing candidates, so now we have a reality television personality for a president. Instead of owning up to this fact, we blame outside forces like Russia and China for manipulating our elections.

We broke our economy in 2008. Now, our financial system can only function with the support of trillions of dollars printed from thin air by the Federal Reserve. We claim to be a capitalist society, but for the last twelve years, we’ve refused to allow corporations to fail, thereby fueling a moral hazard that encourages reckless corporate behavior.

Our corporations are so deeply indebted that even an economic pause of a few weeks or months is enough to wipe out entire industries. But we seem to believe that there can’t be a problem with our companies. We blame China by pointing out how many fraudulent companies China lists on our public markets. I guess fraud and corruption don’t exist in America.

We’ve allowed cocaine/Adderall fueled sociopaths and computer algorithms to control our financial markets. We shredded and burned our social fabric and replaced it with social media platforms built by emotionally-stunted narcissists in Silicon Valley. But wait, isn’t Tik-Tok from China? Let’s blame that!

Globalism and the 2008 recession gutted our domestic labor market, leaving millions of young men and women without purpose or hope for the future. We’ve replaced dreams, hope, and ambition with prescription drugs and dopamine-fueled dissociation. The result is a “healthcare” system that incentivizes doctors to prescribe highly addictive and lethal narcotics. But that’s not our fault, right? I mean, China stole our jobs and is flooding our country with imported Fentanyl!

Even if China is part of the problem, what do we expect to happen if the west somehow “proves” that China is solely responsible for this global pandemic? Even if we manage to agree on the ludicrous notion that China is the sole cause of all our Earthly woes, will that really solve everything?

Will crucifying China pay off our credit card bills, medical bills, and student loans? Will crucifying China give us our job back and end homelessness and poverty? When China “gets what it deserves,” will that motivate you to get out of your bubble and start contributing to your community?

Will punishing China cure your friend/brother/sister’s opioid addiction? Will it cure your functional drug dependency? Will crucifying China bring back all the fathers, mothers, sons, daughters, and grandparents killed by COVID-19? Will punishing China absolve the United States of its criminally inept response to this pandemic?

Do I need to answer? The answer is obviously “no, China is not your root problem, bud.”

Many of us believe falsely, that once China finally admits to all of its “wrongdoings,” we can finally and immediately move forward and not feel worthless anymore, both as a value system and as a society.

The reality is the only way we can get out of this mess is to follow the example of the world’s heroes in the medical profession: assess the situation and take action accordingly. That’s it. That is the only way we can begin to find any self-respect. We broke our country, but that doesn’t mean we can’t fix it. Besides, we don’t have a choice.

Three Countries, Three Ways to Manage Coronavirus

Three regions, three distinct monetary authorities, three methods for managing political and economic risk surrounding a growing Coronavirus pandemic. Let us review the economic and political responses of three of the world’s largest economies set to be hit hardest by COVID-19: China, The United States, and The European Union.

Circumstances surrounding the Coronavirus, or COVID-19 as it is formally known, are still unclear. In the short-term, markets have felt a sharp decline in global equity prices. On March 3, 2020, the United States Federal Reserve, in response to a greater than 10% decline in US stock prices, reduced the short-term lending rate by 50 basis points to ease any pandemic-related concerns. Typically markets move higher after such rate cuts. However, this time around stocks continued to decline by nearly 3% during the March 3 trading session. The world has yet to price in the potential economic damage of a global pandemic.

Economic policy is only as effective as the policymakers. From a strategic standpoint, how have governments fared in handling such a “black swan event”? Let us focus on the world’s three leading economic regions: China, The United States, and the European Union.

China

One of the few things we do know about COVID-19 is that China is undeniably the source country, and therefore we have more information about China’s handling of this pandemic than parts of the world where the contagion is less pronounced. Predictably, China initially attempted to cover up and downplay the severity of COVID-19. Oddly, Chinese president Xi Jinping did not even seem to be aware of the existence of a growing pandemic in Wuhan until days after the initial quarantines in Wuhan went into effect. We should not be surprised, as poor upward flow of information to senior leadership is a classic staple of authoritarian regimes. However, authoritarian regimes do have the advantage of being able to rapidly and unilaterally implement country-wide quarantines and travel restrictions.

United States

Despite having the opportunity to observe China’s struggles with the pandemic throughout January and February of 2020, The United States has been slow to acknowledge the severity of COVID-19. In the face of clear evidence that COVID-19 is spreading within the continental United States, the Federal government has yet to implement any form of quarantine or even the most basic testing protocols (as of March 3, 2020). The US government believes any pandemic can be fought with monetary policy, as evidenced by the Federal Reserve’s 50 basis point rate cut along with messaging from Treasury Secretary Steve Mnuchin with the not-so-subtle reminder of the existence “circuit breakers” designed to halt trading if stocks should drop too heavily. Monetary intervention will need to serve as the best treatment for now.

European Union

On an individual country basis, Italy has been hit hardest in the early stages of this pandemic. In terms of the broader economic policy of the European Union, European Central Bank President Christine Lagarde, on March 2, 2020, indicated the ECB’s willingness to take “appropriate and targeted measures” to counter the potential economic impact of Coronavirus on the EU economy. This interventionalist monetary policy statement falls in line with that of the United States. The EU’s response has been arguably the most predictable, rational, and disciplined of the three regimes we have discussed here.

Conclusion

China and the EU have behaved most predictably in managing domestic and political risks. China has centered its handling of the pandemic around bolstering the strength and control of the Chinese Communist Party. The European Central Bank is firmly committed to a policy of monetary intervention. Meanwhile, the United States is seeking to actively downplay the potential severity of a COVID-19 pandemic in order to avoid sparking a panic in the US stock market. The Federal Reserve has already intervened in cutting short-term lending rates, and we are likely to see expanded and unprecedented coordination between the US Federal government and the Fed.

Three regimes, three monetary authorities, three methods for managing political and economic risk surrounding a growing COVID-19 pandemic. Keep in mind, it is still far too early to make judgments on whether or not any of these regimes have handled the problem well. There is no way of knowing the true extent of the political and economic fallout of this pandemic until the dust settles, which could be months from now. For the time being, we can only objectively observe the policies enacted by Federal/Central governments and central monetary authorities. Let’s wait and see. (And wash our hands frequently.)

National Day, Shadow Banking, and Pork Prices

The start of a new month brings with it some new ideas.  Here’s what I’m thinking about:

The 70th Anniversary of the founding of the People’s Republic of China

Today marks the 70th anniversary of the founding of the people’s republic of China.  It’s interesting to note that western reporting of Hong Kong protests is overshadowing reporting of the National Day festivities underway in Beijing.

This has been an event the Chinese leadership has been focused on for quite some time.  Many China analysts speculated that the lead up to this significant event influenced top leadership’s decision making, particularly concerning the repeal of the profoundly unpopular Hong Kong extradition bill.

 

Shadow Banking in China

Over the past several weeks, I have focused my attention on domestic capital flows in Mainland China.  Nearly all lines of inquiry into the subject refer to the importance of shadow banking activity for China’s overall economy.

Andrew Collier, the author of “Shadow Banking and the Rise of Capitalism in China” and Managing Director of Orient Capital Research, presents four key metrics economists have used to understand the risks of China’s shadow banking sector.  Enumerated and summarized below are these metrics:

  • The private sector credit-to-GDP ratio
  • The growth of real credit per capita
  • The real credit growth gap
  • The debt service ratio

Most compelling is Mr. Collier’s assertion that “none of these measures of credit suggest China is in good shape.”

 

Pork Prices in China

Unrelated to the story surrounding the senior UBS economist and his controversial remarks in June, over the past few weeks pork prices in China have been the Wholesale pork prices in China have nearly doubled since the end of last year due to a proliferation of African swine flu.

 

CNPORKWH Index (China Agricultur 2019-09-03 08-33-50_cropped_2
China wholesale pork spot price (RMB/kg) Source: Bloomberg

 

Why does this matter?

Unstable commodity prices breed unstable societies. Especially when you consider that China is the largest consumer of pork in the world.  Officials in all levels of government are openly acknowledging a slowing of China’s economy for reasons distinct to consumer commodity prices.  If we start to see too downward economic forces converging then, this could lead to Hong Kong-style unrest in Mainland cities.  Food for thought.

Five Hundred Words 12/20/2018

Thursday, December 20, 2018

Daily Writing

 

Housekeeping

As I mentioned in a previous post I will be in China from December 25th to January 15th.  My intent is to continue updating the blog while I am there, but I cannot guarantee that I will be able to post every day.  One factor I cannot control is the quality of the internet connection.  I don’t plan on using a VPN, so if WordPress doesn’t function well in China, I’m going to be forced to deal with the consequences of that.  Even if I can’t post while I’m away I will continue writing and I’m sure I will have many stories to share by January 15th when I return.

 

 

Things I am thinking about today

  • Find software I can use to analyze my writing empirically (e.g., word usage rates, typing speed, etc.)
  • How can I keep track of major announcements made by the Chinese communist party?
  • What is the best way to map historical events into a framework?
  • For example, when Xi Jinping gives a new speech, how can I readily incorporate that information into my central China framework?

 

 

Things I was thinking about yesterday

  • What key economic metrics am I overlooking?  Especially regarding China?
  • Chinese internal crisis of confidence.  Are Chinese elites losing faith in Xi?
  • The empty promises of Xi Jinping.  What promises specifically?  “Reform”?
  • The Federal reserve is scheduled to raise interest rates 0.25% today.  How will the market respond?
  • Where can we find opportunities in this environment?
  • What is ‘open interest’?
  • Why is it significant if LIBOR moves higher (or lower)?
  • How to improve my technical analysis?
  • How can I improve the structure of my days?

 

Trading Log

9:48 AM

Today I spent most of the day casually observing the market and listening to an audiobook by George Magnus titled Red Flags: Why Xi’s China is in Jeopardy.  It is an interesting book focused on understanding China’s current problems in 2018 while also examining the historical context behind China’s interests as a modern superpower.

Market Observations

I find it quite interesting how briefly the yield on the US 10-year stayed above 3.00%.  The idea that the Chinese were actively selling US treasuries in October and November doesn’t really seem that ridiculous.  I don’t understand bonds quite as well as I would like, but I’m having trouble understanding most asset classes in this market environment.

I’m also drawn to the rapidly declining yields of the Brazilian Government Bond.  What is the reason behind this?  In October the yield on the BGB was almost 11.00%, now it sits at 9.41% as accelerating downward.

Market Data

Resource Commodities

 

December 20, 2018

December 19, 2018

December 18, 2018

December 17, 2018

Gold Spot

NA

1249.00

1245.20

1238.10

Silver

NA

14.600

14.65

14.535

Platinum

NA

789.00

792.00

785.00

Copper

NA

2.6825

2.7040

2.7200

Crude (WTI)

NA

47.00

48.64

50.53

Global Government Bond Yields

 

December 20, 2018

December 19, 2018

December 18, 2018

December 17, 2018

US 10 year

2.79%

2.82%

2.85%

2.86%

US 30 Year

3.02%

3.06%

3.10%

3.12%

UK

1.26%

1.28%

1.28%

1.27%

Germany

0.23%

0.25%

0.24%

0.26%

Brazil

9.41%

9.56%

9.67%

9.67%

Italy

2.73%

2.78%

2.93%

2.95%

Japan

0.02%

0.02%

0.01%

0.02%

Major U.S. Indices

 

December 20, 2018

December 19, 2018

December 18, 2018

December 17, 2018

VIX

NA

25.15

24.68

22.36

DOW

NA

236.93

237.70

239.86

S&P 500

NA

255.18

257.19

259.39

NASDAQ

NA

6741.80

6812.51

6864.23

Currency Cross Rates

 

December 20, 2018

December 19, 2018

December 18, 2018

December 17, 2018

USD/JPY

NA

112.450

112.500

112.9200

EUR/USD

NA

1.1392

1.1369

1.1344

GBP/USD

NA

1.2628

1.2650

NA

AUD/USD

NA

0.7141

0.7175

0.7181

USD/MXN

NA

20.068

20.066

20.223

USD/CNY

NA

6.894

6.896

6.905

USD Index

NA

97.03

97.02

97.15

Five Hundred Words 12/19/2018

Wednesday, December 19, 2018

Daily Writing

 

Things I’m thinking about

  • What key economic metrics am I overlooking?  Especially regarding China?
  • Chinese internal crisis of confidence.  Are Chinese elites losing faith in Xi?
  • The empty promises of Xi Jinping.  What promises specifically?  “Reform”?
  • The Federal reserve is scheduled to raise interest rates 0.25% today.  How will the market respond?
  • Where can we find opportunities in this environment?
  • What is ‘open interest’?
  • Why is it significant if LIBOR moves higher?
  • How to improve my technical analysis?
  • How can I improve the structure of my days?

 

Trading Log

9:48 AM

From a trading standpoint, shorting S&P Futures has been an effective strategy since the beginning of the month of December.  Today’s FOMC meeting will shed light on the Federal Reserve’s stance on interest rates moving into 2019.  Will the Fed hold off on raising rates next year if they feel global slowdown is becoming increasingly imminent?  We currently sit on 100% cash headed into the FOMC meeting today.

In yesterday’s letter we noted that it would be an historical aberration for the Fed to raise rates when the probability of a rate hike falls below 75.00%.

The entire trading day is being dictated by the outcome of the FOMC meeting.  We will know the Fed’s guidance for 2019 by 2:00 PM today.  At that time, we will also learn whether the Fed has opted to raise its overnight rate by another 0.25%.

2:13 PM

After the fed announced its rate hike at precisely 2:00 PM the market started to drop considerably.  The adage “buy the rumor, sell the news” seems especially appropriate in this case.  The SPY fell more than 1.00% following the release of the fed announcement.  The Fed also outlined its plans for 2019, and the message I took away from it was that they are just going to observe the market on a quarterly basis and make their decisions from there.  I can’t reiterate this enough that the Fed absolutely needs to get rates back up to at least 4.00% or 5.00% to have baseline ammunition to counter ever a moderate economic slowdown.

Market Observations

Why is the price of copper falling so drastically?

US Treasury yields continue to move lower, which is surprising considering how many bond bears there are out there.  The yields on the 10-year and 30-year US Treasuries are 2.82% and 3.06%, respectively.  Overall treasuries were stuck in a holding pattern today.

The major news today is the Fed’s 0.25% rate hike that many pundits view as dovish.  I find it unusual that the market is paying so much attention to this bit of news.  That fact alone tells me that the market may not be healthy.  The market is desperately struggling to eke out whatever good news they can find.  Our view is that the Fed must find a way to bring rates back to a normal level that can sustain the next downturn.  If we are currently in the next downturn then we could be in big trouble.

Market Data

Resource Commodities

 

December 19, 2018

December 18, 2018

December 17, 2018

December 14, 2018

Gold Spot

1249.00

1245.20

1238.10

1241.70

Silver

14.600

14.65

14.535

14.715

Platinum

789.00

792.00

785.00

794.00

Copper

2.6825

2.7040

2.7200

2.7590

Crude (WTI)

47.00

48.64

50.53

51.10

Global Government Bond Yields

 

December 19, 2018

December 18, 2018

December 17, 2018

December 14, 2018

US 10 year

2.82%

2.85%

2.86%

2.89%

US 30 Year

3.06%

3.10%

3.12%

3.14%

UK

1.28%

1.28%

1.27%

1.24%

Germany

0.25%

0.24%

0.26%

0.25%

Brazil

9.56%

9.67%

9.67%

9.61%

Italy

2.78%

2.93%

2.95%

2.93%

Japan

0.02%

0.01%

0.02%

0.02%

Major U.S. Indices

 

December 19, 2018

December 18, 2018

December 17, 2018

December 14, 2018

VIX

25.15

24.68

22.36

21.57

DOW

236.93

237.70

239.86

244.08

S&P 500

255.18

257.19

259.39

262.92

NASDAQ

6741.80

6812.51

6864.23

6961.86

Currency Cross Rates

 

December 19, 2018

December 18, 2018

December 17, 2018

December 14, 2018

USD/JPY

112.450

112.500

112.9200

113.2900

EUR/USD

1.1392

1.1369

1.1344

1.1306

GBP/USD

1.2628

1.2650

NA

NA

AUD/USD

0.7141

0.7175

0.7181

0.7178

USD/MXN

20.068

20.066

20.223

20.2528

USD/CNY

6.894

6.896

6.905

6.9049

USD Index

97.03

97.02

97.15

97.42

Five Hundred Words 12/11/2018

Tuesday, December 11, 2018

Daily Writing

Things I’m thinking about

  • How do the best traders structure their days?
  • What are the routines of the top traders?
  • What factors determine bond prices and yields?
  • After the point where the yield curve inverts, how do markets typically behave until recession arrives?
  • What does full conviction feel like?
  • What is the current state of global liquidity?  What are the arguments for global liquidity drying up?
  • What would happen to the UK economy under a ‘hard Brexit’?

Market Overview

Global bond yields continue to tick steadily lower.

China to cut tariffs on imported US cars.

 

What are the causes of the current global slowdown?

What are the causes of the current global slowdown?[1]

A) Much tighter dollar liquidity

  1. US dollar has served as the world’s reserve currency since World War II
  2. All major international transactions are settled in US dollars
  3. Because central banks main reserves are held in US dollars rather than local currency
  4. The Fed is the world’s de facto central bank
  5. When the Fed floods domestic banks with reserves (QE) it increases the domestic monetary base
  6. Increasing US monetary base causes US demand to start growing faster than the rest of the world
  7. This causes the US current account to swell
  8. The result is that the Fed doesn’t only increase the monetary base domestically, but it also increases the monetary base abroad and generally the global monetary base increases
  9. The Fed’s quantitative tightening (QT) policy means global dollar liquidity stopped accelerating earlier this year

B) China

  1. China’s shift began following the 19th party congress is October 2017 when the central government signaled its intent to shift from an economic model heavily reliant on exports to one driven by the services sector and domestic consumption.

Book recommendation

Beyond Blockchain: The Death of the Dollar and the Rise of Digital Currency

By Erik Townsend

 

Market Data

Resource Commodities

 

  December 11, 2018 December 10, 2018 December 7, 2018 December 6, 2018

Gold Spot

1243.10
1245.00
1237.20
NA

Silver

14.495
14.545
14.440
NA

Platinum

783.00
782.00
788.00
NA

Copper

2.7575
2.80
2.7530
NA

Crude(WTI)

51.52
51.58
53.73
NA

 

Global Government Bond Yields

 

  December 11, 2018 December 10, 2018 December 7, 2018 December 6, 2018

US 10 year

2.85%
2.85%
2.89%
2.87%

US 30 Year

3.13%
3.13%
3.17%
3.13

UK

1.21%
1.21%
1.26%
1.24%

Germany

0.23%
0.25%
0.26%
0.23%

Brazil

10.12%
10.12%
9.99%
10.00%

Italy

3.09%
3.09%
3.14%
3.20%

Japan

0.03%
0.03%
0.05%
0.05%

 

 

 

Major U.S. Indices

 

  December 11, 2018 December 10, 2018 December 7, 2018 December 6, 2018

VIX

21.91
23.95
22.42
23.53

DOW

245.09
243.61
24918.82
247.27

S&P 500

267.45
263.37
269.45
265.97

NASDAQ

7041.83
7041.83
6994.39
7114.10

EM USD

NA
1062.41
1059.54
1060.39

 

Currency Cross Rates

 

  December 11, 2018 December 10, 2018 December 7, 2018 December 6, 2018

USD/JPY

NA
113.1800
112.6900
112.4800

EUR/USD

NA
1.1358
1.1384
1.1389

AUD/USD

NA
0.7188
0.7227
0.7224

USD/MXN

NA
6.8730
20.338
20.494

USD/CNY

NA
6.9127
6.882
6.8815

USD Index

NA
97.18
96.80
97.00

[1] Juliette DeClercq, JDI Research, as featured in Macrovoices

Five Hundred Words 12/10/2018

Monday, December 10, 2018

Daily Writing

9:25 AM

Things I’m thinking about

  • Do option holders receive dividends?
  • How do the best traders structure their days?
  • What are the routines of the top traders?
  • What factors determine bond prices and yields?
  • After the point where the yield curve inverts, how do markets typically behave until recession arrives?
  • What does full conviction feel like?
  • What is the current state of global liquidity?  What are the arguments for global liquidity drying up?
  • What would happen to the UK economy under a ‘hard Brexit’?

Market Overview

Brexit

The major news today revolves around Theresa May’s aborted Brexit vote upon the realization that her Brexit proposal would fail miserably.

 

How are markets reacting?

The GBP/USD currency pair dropped 67 basis points and is sitting on 0.90280 at time of writing.  The EUR/GBP currency pair is trading 92 basis points higher at 0.90261.

Our view is Theresa May is merely delaying the inevitable.

 

The Chinese Yuan has started weakening again

 

USDCNY_12_10_2018

 

Trading Log

Moving forward I will include a trading log as part of my writing.  The purpose of this activity is to gain a better sense of the price action of the market as it relates to my emotions in the market.  My to gain a better understanding of the impact of markets on my emotions.

Why do I have such strong impulses to sell when the correct decision would be to buy and vice versa?  It’s quite easy to lose track of your emotions while trading.

A lesson I learned recently is that I don’t always need to be trading.  I’ve found that 90% of my time is better spent observing the market, researching, and doing pretty much nothing.  I’ve discovered that I make my biggest mistakes when entering trades at the wrong time, mostly early.  For example,  after I conduct my research and open a position, I find I have difficulty maintaining my original reason for entering the trade initially, so when the trade starts to go in the wrong direction I begin to allow new ideas to pop into my head that eventually convinces me I’m wrong, even if I’m still right.  It’s quite confusing.

Market Data

 

Resource Commodities

 

December 10, 2018

December 7, 2018

December 6, 2018

December 5, 2018

Gold Spot

1245.00

1237.20

NA

1238.00

Silver

14.545

14.440

NA

14.505

Platinum

782.00

788.00

NA

802.00

Copper

2.80

2.7530

NA

2.7555

Crude(WTI)

51.58

53.73

NA

52.12

 

Global Government Bond Yields

 

December 10, 2018

December 7, 2018

December 6, 2018

December 5, 2018

US 10 year

2.85%

2.89%

2.87%

2.91%

US 30 Year

3.13%

3.17%

3.13

3.17%

UK

1.21%

1.26%

1.24%

1.31%

Germany

0.25%

0.26%

0.23%

0.27%

Brazil

10.12%

9.99%

10.00%

10.09%

Italy

3.09%

3.14%

3.20%

3.05%

Japan

0.03%

0.05%

0.05%

0.06%

 

 

Major U.S. Indices

 

December 10, 2018

December 7, 2018

December 6, 2018

December 5, 2018

VIX

23.95

22.42

23.53

CLOSED

DOW

243.61

24918.82

247.27

CLOSED

S&P 500

263.37

269.45

265.97

CLOSED

NASDAQ

7041.83

6994.39

7114.10

CLOSED

EM USD

1062.41

1059.54

1060.39

CLOSED

 

Currency Cross Rates

 

December 10, 2018

December 7, 2018

December 6, 2018

December 5, 2018

USD/JPY

113.1800

112.6900

112.4800

113.2100

EUR/USD

1.1358

1.1384

1.1389

1.1344

AUD/USD

0.7188

0.7227

0.7224

0.7268

USD/MXN

6.8730

20.338

20.494

20.5130

USD/CNY

6.9127

6.882

6.8815

6.8545

USD Index

97.18

96.80

97.00

97.08