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Sunday, December 4, 2022


It Takes Two To Tango, But Almost Everybody Likes Dancing

Courtesy of Tyler Durden

Submitted by Nic Lenoir Of ICAP

The bell ringed a little louder today at 4PM with a nice 5-digit print for the Dow. People were no doubt clapping and smiling on the floor of the NYSE, far detached from the emails going around pointing out how much higher most commodities are compared to the last time we crossed 10,000, or how the dollar lost 25% in the meantime. Why wouldn’t they clap? It’s working! Printing cash in the end will make almost every asset go up. The only asset class that should not be going up is Treasury Bonds, but since part of the printing scheme consists of supporting that market… well everything is up other than the USD!

What I thought was very concerning when the clapping settled is reading the FOMC minutes released today in detail and find a cheerful comment that “International trade in emerging market economies picked up, supported by Chinese demand”. I expected that from CNBC, but not from an official release by the Fed. Let’s recap a little bit what China’s economic policy has been: buy and store large amounts of commodities, to a point where recent reports indicate the country is freezing steel production capacity for 3 years because of fears of price collapse, peg the Yuan to the USD, buy EURUSD everytime the uptrend is threatened in order to de-facto devalue their currency, while being hedged by the stockpiles of commodities purchased prior to that, and make the most of the explosion in monetary growth (28% annually) necessary to keep the peg going to further buy commodities and stimulate the economy because 14% of GDP in stimulus might not just be enough. About China buying EURUSD by the way, if anybody has doubts talk to your nearest FX dealer and you will see: the PBOC supported the market at 1.4480 when we threatened the uptrend, and at 1.47 when we tried to reverse after hitting 1.48 the other day. These actions are not only visible by anybody in the market, they are also market-timed and clearly part of a plan a lot more elaborate than just diversifying currency reserves. I forgot to mention the talks of side deals with Russia to settle energy purchases in Ruble and Yuan. This has nothing to do with paranoia or conspiracy theory, in fact if I were the Chinese government I would probably do the same thing. After all China is simply trying to run a policy that maximizes the country’s economic power. It’s a perfect set-up for a bubble and implosion, but when it comes to the intentions behind the policies it’s hard to blame China.

On the other end, it is absolutely unbelievable that anybody in the US government would be cheering about this. The game plan for the demise of the US economy might is being laid out in front of our eyes, and officials cheer about it? Are we that worried about European competition that we are actually winking at other countries in Asia organizing the USD devaluation for us so we gain a competitive advantage? Certainly concerns are rising in Europe that there is a secret handshake agreement between the US and China regarding an organized and controlled currency devaluation. Hard not to wonder about it at the very least looking at the facts. This past weekend the Chinese government raised the ceiling that foreign institutions can invest in the domestic A-share Chinese stock market. That comes at a time when China is concerned about excess liquidity in its own market and on the heels of a 22% drop in August. That would certainly help China support stocks without encouraging any more frenzy by local speculators considering the notional in equities exchanged in China on July 28 was already greater than that exchanged in NY, Europe, and Tokyo combined. Better than printing yourself: get someone to do it for you, and return the favor by devaluing their currency!

Despite much better export numbers last night the Shanghai composite gave back some of its advance to close below the 50 and 100 daily moving averages. As those two averages are in fact threatening to post a bearish cross if the market sells a little bit more from here, we can expect intervention out of Beijing. I also pointed out the Nikkei the past couple days because it has been relatively resilient to advances elsewhere the past few weeks. If you want to know where all the liquidity is going the answer is not Japan, as the JPY is levelling after appreciating against the USD. A chart of the Bovespa gives us a hint along with the recent decision to host the Olympics in Rio. It takes a world traveller to chase bubbles these days, thank god for ETFs as you can enjoy the frenzy from the comfort of your couch!

The sad thing is that all this is done at the expense of future generations and when the bubble bursts nobody will be better off… I am at a loss of words, and I can only recommend carry traders to buy Gold against Copper and ride that wave until the ratio hits 10. It is probably the most sensible trade since Copper is in over-supply, and has rallied considerably proportionally from the lows compared to gold. Since world trade is not about to explode to the upside, the liquidity is much more likely to pile up in gold and demand in copper faces plenty of supply to handle it. Also if there is a relapse in the markets copper should get hurt just as much as gold would on a flight to quality towards USD, so it is a fundamentally very sound trade. Ideal entry is around 3 but nothing tells us we will retest these levels so at 3.7 the ratio is still very much in the lower part of the historical range. I will not recommend carry trades outright because I think there will be a short covering in USD in the next few weeks or months, and when that happens I think it will be very violent.

Good luck trading,


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