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

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Five Hundred Words 12/18/2018

Tuesday, December 18, 2018

Daily Writing

 

 Things I’m thinking about

  • It seems like we could be in a bear market, but what statistics can we use to back up this kind of claim?
  • Xi Jinping speaks on 40th anniversary of reform.[1]
  • What will the world start to look like in the event of a liquidity crisis?

 

Market Observations

Major indexes traded higher at the start of the day.  S&P and NASDAQ are both up 1.00%.  However, the VIX [2], which is a gauge of fear in the market and trades inversely to the market, is only down 1.84% at the time of writing.

US Treasury yields continue to plummet.  The yield on the 10-year Note sits at 2.85% while the yield on the long-dated 30-year Treasury Bill is 3.10%.  WTI crude is down another 2.61% after dropping more than 3.50% yesterday.

The yield on the 10-year Japanese Government Bond (JGB) is threatening to move negative.  The yield on 10-year JGB is now 0.01%.  The Yen has also strengthened over the past few days.  The USD/JPY cross-pair now trades at 112.500, 100 basis points off the highs a few weeks ago.

Despite heavy criticism from President Donald Trump, the Fed still intends to raise interest rates tomorrow (December 19).  There are two key things to note here:

1)       It is not normal for the US President to openly attempt to influence the interest rate policy of the Federal Reserve.  The Fed is intended to exist as an independent body immune from political sway.

2)      It is unusual for the Fed to raise rates in an environment where global growth appears to be slowing

 

China: Forty Years After Economic Reforms

Today Xi Jinping spoke on 40th anniversary of reform.[3]

Why is this significant?

Confidence in Xi, the regime, and the principles of “socialism with Chinese characteristics” are under threat.  Chinese elites are really the only ones aware of this.

China’s leadership tends to be extremely cautious when making any public statements, so whenever a Chinese President makes an address like this, it tends to be big news.

The 40th-anniversary speech is especially significant because Xi Jinping revealed some revisions to his core position on two fronts:

  1. Internal Chinese Communist Party politics and Chinese domestic policy
  2. Foreign policy, especially regarding its stance toward the United States and on-going trade tensions between the two superpowers.

 

Internal Communist Party Politics and Chinese Domestic Policy

Xi Jinping has been transparent in his intention to consolidate both his power as General Secretary of the CCP along with his place in the history of communist China post-1949.  In October of 2017, President Xi eliminated Presidential term limits and pushed to include his own version of Chinese socialism into the official party canon.  Now he’s looking to overtake the legacy of revolutionary hero Deng Xiaoping.  Deng Xiaoping is widely regarded as the father of modern China, as his reforms in the late 1970s and early 1980s are the catalysts behind China’s massive economic expansion over the past forty years.

 

Foreign Policy

Because the 40th anniversary of reform speech is one of Xi’s most high-profile public addresses since his meeting with President Trump at the G20 Summit in Buenos Ares at the beginning of the month, China watchers and analysts are following Xi’s speech closely, seeking clues into potential shifts in China policy.

One thing that’s clear is that China intends to maintain its bottom line regarding its domestic sovereignty.  “No one is in the position to dictate to the Chinese people what should and should not be done,” he said in apparent reference to demands from Washington and other capitals that China undo some of its protectionist economic policies (even as Chinese negotiators have quietly offered concessions).[4]

 

Summarizing China

Our view is that China doesn’t have as much flexibility as it seems.  China is dead-set on a shift toward re-orienting its economy to one based on consumption instead of investment.  This means China would experience substantial growing pains even within an ideal economic climate.

Now, in the face of what could be a severe global economic slowdown, China has no choice but to capitulate to the demands of the Trump administration on trade in the short term.  It’s doing this because it doesn’t want global attention toward the real problem, the fact that China is currently operating on an economic model that is no longer sustainable; namely, a model driven by export-led growth, infrastructure development, and massive imports of raw materials from developed neighbors such as Australia.

Can China fix its domestic problems before the next global slowdown really begins to take hold?  According to my sources in China, the central government is facing a true crisis of confidence.

 

Market Data

Resource Commodities

 

December 18, 2018

December 17, 2018

December 14, 2018

December 13, 2018

Gold Spot

1245.20

1238.10

1241.70

1245.00

Silver

14.65

14.535

14.715

14.720

Platinum

792.00

785.00

794.00

802.00

Copper

2.7040

2.7200

2.7590

2.780

Crude(WTI)

48.64

50.53

51.10

51.41

 

Global Government Bond Yields

 

December 18, 2018

December 17, 2018

December 14, 2018

December 13, 2018

US 10 year

2.85%

2.86%

2.89%

2.91%

US 30 Year

3.10%

3.12%

3.14%

3.16%

UK

1.28%

1.27%

1.24%

1.26%

Germany

0.24%

0.26%

0.25%

0.27%

Brazil

9.67%

9.67%

9.61%

9.86%

Italy

2.93%

2.95%

2.93%

2.93%

Japan

0.01%

0.02%

0.02%

0.05%

 

 

Major U.S. Indices

 

December 18, 2018

December 17, 2018

December 14, 2018

December 13, 2018

VIX

24.68

22.36

21.57

21.00

DOW

237.70

239.86

244.08

245.76

S&P 500

257.19

259.39

262.92

266.45

NASDAQ

6812.51

6864.23

6961.86

7096.00

 

Currency Cross Rates

 

December 18, 2018

December 17, 2018

December 14, 2018

December 13, 2018

USD/JPY

112.500

112.9200

113.2900

113.6700

EUR/USD

1.1369

1.1344

1.1306

1.1355

GBP/USD

1.2650

NA

NA

NA

AUD/USD

0.7175

0.7181

0.7178

0.7223

USD/MXN

20.066

20.223

20.2528

20.069

USD/CNY

6.896

6.905

6.9049

6.878

USD Index

97.02

97.15

97.42

97.15

[2] https://en.wikipedia.org/wiki/VIX

[3] https://www.bloomberg.com/news/videos/2018-12-18/key-takeaways-from-xi-jinping-s-speech-video

[4] https://www.nytimes.com/2018/12/18/world/asia/xi-china-speech-takeaways.html