China Retaliates, Gold Nears 1300

Adam Button FXStreet May 13, 2019

A full-scale trade war between the US and China is closer than ever after Beijing hit back with retaliatory tariffs on Monday. The Chinese yuan fell by more than 1%, prompting a selloff in copper, while gold jumped $11 to 1299 and Bitcoin hits $7400. USD fell across the board on reports that some Chinese scholars have mentioned Beijing taking the "nuclear option" -- selling US treasuries. Risk trades have been hit hard to start the week with safe haven assets surging. CFTC positioning data continues to show crowded USD longs. The Premium short in USDJPY hit its final target of 109.40 from 111.30 entry.

Beijing announced it will hit $60 billion in US imports with 5-25% tariffs on June 1. The announcement worsened a sour mood in markets. It was also coupled with reports that China will cut purchases of US agriculture, energy and services along with the chatter about selling Treasuries.

The announcement came after Trump ramped up the rhetoric throughout the weekend, tweeting about tariffs more than 30 times.

The reaction in the FX market was to buy the yen. USD/JPY is down nearly a full cent to start the week with commodity currencies even lower against the yen. The euro is near the highs of the month as dollars are sold on USD-centric risk.

The talk of Treasury selling was overwhelmed by demand for safe haven assets with yields 4-8 bps lower across the curve. Gold is up nearly 1% and Bitcoin gapped 18% to $7430. US stocks sink more than 2%.

The escalation and rhetoric from both sides mean it will be difficult to engineer a quick climb-down. Trump has relentlessly emphasized the cash gains from tariffs and tied them to 3.2% GDP growth in Q1. However a sharp fall in US equities could have him quickly changing course.

Judy Shelton, Trump's Next Fed Choice, Favors a Gold Standard and Free Trade

Mish Talk  May 13, 2019

Economist Judy Shelton, a Trump economic advisor and a gold standard advocate is rumored to be Trump's next Fed pick.

Bloomberg reports White House Considers Economist Judy Shelton for Fed Board

The White House is considering conservative economist Judy Shelton to fill one of the two vacancies on the Federal Reserve Board of Governors that President Donald Trump has struggled to fill.

She’s currently U.S. executive director for the European Bank for Reconstruction and Development, and previously worked for the Sound Money Project, which was founded to promote awareness about monetary stability and financial privacy.

Case for Monetary Regime Change

On April 21, Judy Shelton had an ope-ed in the Wall Street Journal: The Case for Monetary Regime Change.

Since President Trump announced his intention to nominate Herman Cain and Stephen Moore to serve on the Federal Reserve’s board of governors, mainstream commentators have made a point of dismissing anyone sympathetic to a gold standard as crankish or unqualified.

But it is wholly legitimate, and entirely prudent, to question the infallibility of the Federal Reserve in calibrating the money supply to the needs of the economy. No other government institution had more influence over the creation of money and credit in the lead-up to the devastating 2008 global meltdown. And the Fed’s response to the meltdown may have exacerbated the damage by lowering the incentive for banks to fund private-sector growth.

What began as an emergency decision in the wake of the financial crisis to pay interest to commercial banks on excess reserves has become the Fed’s main mechanism for conducting monetary policy. To raise interest rates, the Fed increases the rate it pays banks to keep their $1.5 trillion in excess reserves—eight times what is required—parked in accounts at Federal Reserve district banks. Rewarding banks for holding excess reserves in sterile depository accounts at the Fed rather than making loans to the public does not help create business or spur job creation.

Meanwhile, for all the talk of a “rules-based” system for international trade, there are no rules when it comes to ensuring a level monetary playing field. The classical gold standard established an international benchmark for currency values, consistent with free-trade principles. Today’s arrangements permit governments to manipulate their currencies to gain an export advantage.

Money is meant to serve as a reliable unit of account and store of value across borders and through time. It’s entirely reasonable to ask whether this might be better assured by linking the supply of money and credit to gold or some other reference point as opposed to relying on the judgment of a dozen or so monetary officials meeting eight times a year to set interest rates. A linked system could allow currency convertibility by individuals (as under a gold standard) or foreign central banks (as under Bretton Woods). Either way, it could redress inflationary pressures.

Money Meltdown

Judy Shelton is author of the 1998 book Money Meltdown.

I just ordered the book to have a better idea where she is coming from.

Regardless, I am certain she would have been a better choice for Fed chair than Powell, Bernanke, Yellen, or Greenspan.

Bubbles of Increasing Amplitude

Shelton concluded "Central bankers, and their defenders, have proven less than omniscient."


The judgement of the Fed has produced three consecutive bubbles, each bigger than the one before it. The only reason the latest bubble is not acknowledged yet is that it hasn't yet burst.

It's not clear precisely what Shelton has in mind but at least she is headed in the right direction. What's clear is Trump is fighting the wrong battle when it comes to trade.

Tariffs will not fix the alleged problems of currency manipulation. A gold standard would.

Morgan Stanley warns tariffs could 'likely lead to an economic recession'

Emily McCormick Reporter  Yahoo Finance May 13, 2019, 7:03 AM

The latest tit-for-tat tariffs on Chinese imports have already taken a wrecking ball to stocks’ gains. Now, some analysts are bracing for the impact to trickle out to the broader economy.

“The potential cost headwinds of 25% tariffs on on all Chinese exports to the U.S. could be in the range of 1.0-1.5% of the index’s net income,” Morgan Stanley analyst Michael Wilson wrote in a note Monday. “But demand destruction and ailing confidence increase the potential impacts well beyond just higher costs and would likely lead to an economic recession in our view.”

Late last week, the Trump administration raised the rate of tariffs on $200 billion worth of Chinese imports to 25%, and announced that further levies on another $300 billion in imports would be forthcoming. Trump has claimed repeatedly that China “broke the deal” the two sides had been working toward over the past several months, leading to the use of tariffs to try and extract further concessions.

On Monday, Beijing retaliated by announcing plans to set a tariff rate as high as 25% on a portion of $60 billion worth of U.S.-made goods, effective June 1. The news sent contracts on the Dow down more than 500 points in pre-market trading.

‘Volatility may not subside’

In the past, Wilson has repeatedly highlighted the likelihood of an “earnings recession,” or a contraction in S&P 500 companies’ bottom-line growth. With this thesis in mind, he’s maintained that the S&P 500, at its near-3,000 level approached earlier this year, was probably overvalued.

“While last week’s correction helped move the risk-reward closer to balance, we think there is likely more downside than upside based on our high conviction view that (next twelve month) earnings expectations remain too high by 5-10%,” Wilson said.

Last week, the S&P 500 posted a weekly loss of 2.18% as concerns about trade tensions simmered. However, the index was still up about 15% for the year-to-date.

But earnings recession aside, an increase in the prospect of increased trade tensions has also pulled up the probability of a full-blown economic recession, Wilson said.

“There are many signs that the risk of a recession in the next 12 months is rising,” Wilson said. He pointed to proprietary indicators Morgan Stanley’s Cross Assets team tracks, which last month “officially tipped over into the ‘downturn’ phase which has always preceded an economic recession.”

“While an economic recession doesn’t always ensue after the indicator signals downturn, on average equities tend to underperform treasuries over the next twelve months by about 6%, indicating we have little upside until either prices fall back to more reasonable levels or this indicator reverses,” Wilson said.

Other analysts have also recently begun to highlight the potential economic damage of a protracted U.S.-China trade war. According to an analysis by Societe Generale’s Klaus Baader, if the current tariffs remain in place, GDP “can be expected to be hit to the tune of 0.5% in China, 0.25% in the U.S., and 0.15% globally.”

“If the U.S. levies tariffs on all Chinese goods, and China retaliates, these losses could easily double,” Baader said. “Confident effects and financial market reactions also argue for a downside balance of risks.”

While the prospects of a near-term trade deal appear off the table for now amid a trade talk deadlock, a breakthrough would be unlikely to immediately reverse the choppiness in trading seen over the past several sessions. In a note last week, Wilson noted that “negative surprises” like the re-escalation of U.S.-China trade tensions can have greater negative price impacts than fundamentals might suggest, as such unexpected occurrences can leave a lasting impact on sentiment and outlooks.

“Volatility may not subside as quickly as some might think even if there is a proper de-escalation of these trade deal risks,” Wilson said.

Silver Prices Stabilizing; BoAML Looks For Prices To End 8% Higher In 2019

Neils Christensen  Monday May 13, 2019 10:34  Kitco

One international bank is not giving up on silver, despite its disappointing performance the last few years.

In a report Friday, commodity analysts at Bank of America Merrill Lynch (BoAML) said that they see silver prices stabilizing around $15 and rising to $15.90 by the end of the year. The bank’s silver forecast represents a nearly 8% rally from current prices. July silver futures last traded at $14.775 an ounce, down 0.10% on the day

The analysts’ comments come as gold-silver ratio trades at fresh multi-decade highs. The gold silver ratio on last traded at 88.02. This ratio measures how many ounces of silver it takes to buy an ounce of gold, with a rising number meaning underperformance by silver. The average ratio is around 60.

BoAML analysts remain positive on silver as mine supply continues to dwindle and investment demand remains stable.

“While fundamentals are still patchy, we are starting to see signs of stabilization, with mine production declining and photovoltaics adding demand that did not exist a decade ago,” the analysts said. “Our analysis shows that prices could stabilize around $15/oz, if investors held assets under management more or less stable.”

The analysts noted that silver-backed exchange-traded funds are an indication of underlying strength in the marketplace. They explained that despite the metal’s lackluster performance, investors are reluctant to sell their silver.

“We note that ETF holdings have been virtually unchanged YTD [year to date], falling only marginally by 0.1%. This is an indication that prices should be supported around $15/oz,” the analysts said.

Although investment demand is holding steady, the bank does see headwinds for the precious metal’s industrial demand, which makes up roughly half the silver market.

In the U.S., the firm said that weaker auto sales, which have declined 3.9% so far this year, will reduce a significant portion of North American industrial silver demand. However, this is a trend that could be short-lived, the analysts added.

“The continued electrification of transportation should increasingly support metal consumption in the coming years,” the analysts said.

Looking at Asia, BoAML said that limited growth in Japan’s electronics industry will also limit silver’s global demand outlook. In China, a growing domestic supply and falling manufacturing and investor demand for silver will also limit the metal’s global potential.

World Economy Rebound Thrown Into Doubt by Escalating Trade War

Enda Curran, Rich Miller and Xiaoqing Pi  May 15, 2019, 8:11 AM PDT Bloomberg 

  •  April readings on Chinese, U.S. economies come in weaker

  •  German economy recovers but remains vulnerable to tensions

Fears that companies will shelve investment, consumers will cut spending and stocks will slide have been revived after Donald Trump and Xi Jinping’s fragile trade truce was shattered with both sides slapping fresh tariffs on the other’s goods. Reflecting the worries, stocks fell this week and two-year U.S. Treasury yields dropped to the lowest since February 2018.

World growth has already slowed and further weakness would reinforce the reluctance at the Federal Reserve and fellow central banks to raise interest rates, and perhaps even force them into fresh stimulus. Morgan Stanley, which still expects a U.S.-China deal, is warning of a global recession -- growth below 2.5% by 2020 -- if the two sides remain at odds.

“Just as tentative signs appeared that a recovery is taking hold, trade tensions have re-emerged as a credible and significant threat to the business cycle,” Chetan Ahya, chief economist at the bank, said in a report. He highlighted a “serious impact on corporate confidence” from the tariff slug fest.

Reasons for concern were evident Wednesday, with China reporting that industrial output, retail sales and investment all slowed in April by more than economists forecast. In the U.S., retail sales unexpectedly declined in April while factory production fell for the third time in four months.

Although Germany’s economy emerged from stagnation to grow by 0.4% in the first quarter, the outlook remains fragile amid a manufacturing slump that will be challenged anew by the trade war. Investor confidence in Europe’s largest economy unexpectedly weakened this month for the first time since October.

IMF Forecast

Such softness even before the conflict between the U.S. and China reached new lows reinforces the concerns. Warnings about the fallout from protectionism were already behind the International Monetary Fund’s April forecast for global growth this year to be the weakest since the financial crisis.

The Organization for Economic Cooperation and Development’s Composite Leading Indicator, designed to anticipate turning points six to nine months before they happen, fell for a 12th straight month in March, hitting its lowest level since 2009.

In a new study, Bloomberg Economics calculated about 1% of global economic activity is at stake in goods and services traded between the two countries. Almost 4% of Chinese output is exported to the U.S. and any hit to its manufacturers would reverberate through regional supply chains with Taiwan and South Korea among those at risk.

U.S. shipments to China are more limited, though 5.1% of its agricultural production heads there as does 3.3% of its manufactured goods.

What Bloomberg’s Economists Say

“Higher tariffs would mean lower margins for producers and higher prices for consumers and, in turn, reduced demand. This would create widespread disruption along the supply chain.”-- Maeva Cousin, economist

To be sure, many economists are still betting that the U.S. and China will eventually strike a deal, perhaps at the Group of 20 summit at the end of June, when Trump and Xi are expected to meet.

But they acknowledge that they’ve been surprised by the latest flare-up in tensions and say the odds of a breakdown have risen.

A trade war would compound an existing softening in global growth, and add to a mix of issues, such as a cooling technology boom and weaker demand for cars, particularly in China. For companies, it means visibility about the broader global backdrop is low.

U.S. chip giant Intel Corp. is taking a “more cautious view of the year,” and Italian drinks maker Davide Campari-Milano SpA this month notedthe “uncertain geopolitical and macro economic environment.”

“The world economy has been in a significant slowdown for a period,’’ said James Bevan, chief investment officer at CCLA Investment Management. “People just have to wake up and look at the trade data.’’

For central banks, the darkening outlook will likely propel them deeper into dovish territory after the Fed led the way in indicating it will keep rates on hold for a while.

In a worst-case scenario in which tensions persist for another three months and more tariffs are imposed, Morgan Stanley’s economists reckon China would ease fiscal policy by the equivalent of 0.5 percentage point of gross domestic product and try to boost credit growth.


As for the Fed, it would cut its benchmark by an initial 50 basis points, they said.

“If the tariff battle escalates, it’s going to be a fairly meaningful drag on the global economy and threaten the life of the expansion,” said JPMorgan Chase & Co. global economist Joseph Lupton.

— With assistance by Piotr Skolimowski, Jie Ma, Debby Wu, and Paul Gordon

The Price Of Gold Will Rise As Trade Wars Weigh On USD – Morgan Stanley

Neils Christensen  Wednesday May 15, 2019 

Gold will be an attractive safe-haven asset as rising trade tensions weaken the U.S. economy and drag down the U.S. dollar, according to a recent report from Morgan Stanley.

But it's not the current trade dispute with China that investors should be paying attention to; the banks said that a potential trade war with the European Union is the most significant risk to the economy.

U.S. President Donald Trump has until May 18 to decide whether he will impose a 25% tariff on car imports from the European Union. The deadline comes 90 days after the U.S. Commerce Department said in a study that auto imports pose a threat to American national security.

However, there are some reports that Trump could postpone the decision for another six months -- avoiding a two-front trade war -- while the U.S. continues to negotiate with China.

"The eurozone's countermeasures may turn out to be more impactful compared to China's, which may help explain why last week's U.S. equity sell-off has especially affected companies with significant non-U.S. revenue streams," the analysts at Morgan Stanley said in their report released earlier in the week.

The analysts added that a trade war with Europe could force the Federal Reserve to cut rates. According to the CME FedWatch Tool, markets are pricing in a more than 70% chance that the U.S. central bank will cut interest rates by the end of the year. Market expectations have risen significantly in compared to the previous week.

"This is why the USD does not benefit from trade tensions to the extent experienced in August/September last year," the analysts said.

The analysts said that a further inversion of the yield curve and growing investor pessimism will undermine the U.S. dollar, which in turn will push gold prices higher.

"We believe it is only a question of time before we see liquidity pushing gold prices higher and the USD lower," the analysts said.

June gold futures last traded at $1,297.60 an ounce, up 0.10% on the day.

Gold could also benefit if the U.S. government does postpone the European auto tariffs as Morgan Stanley sees this helping the euro against the greenback.

Even if the U.S. avoids a trade war with Europe, its ongoing dispute with China still poses a significant risk to the global economy.

In a separate report published this week, economists at Morgan Stanley said that a global recession would be "imminent" if the

U.S. and China can't resolve their trade differences.

"Trade tensions and the resultant hit to growth could accelerate corporate defaults, particularly in the U.S.," the economists said.

Animation: How Billionaires are Preparing for the Next Bear Market

Published 17 hours ago on May 16, 2019 By  Jeff Desjardins

How Billionaires are Preparing for the Next Bear Market

No one likes to lose money, even if you have billions to spare.

It’s why the prospect of a bear market – a prolonged downturn which sees stock prices fall by at least 20% over two months or more – is something that keeps even the world’s most elite investors awake at night.

To hedge against this concern, the world’s billionaires use a variety of strategies and tactics to protect their wealth, including setting up their portfolios with specific asset allocations that can help soften any blow caused by an extended market downturn.

Protecting Wealth

Today’s animation comes to us from Sprott Physical Bullion Trusts and it highlights a strategy being used by billionaires ranging from Ray Dalio to John Tudor Jones II.

Because market sentiment can change so quickly in the market, these elite investors protect themselves by having diverse portfolios that include uncorrelated assets.

While this sounds complicated, uncorrelated assets are simply investments that don’t move up or down in the same direction as the other asset classes in the portfolio. A small allocation to these uncorrelated items can help protect the value of a portfolio when market sentiment changes.

The King of Uncorrelated Assets

What kind of asset classes can be used for this kind of purpose?

While options like real estate, commodities, and cash can contribute to a more diversified portfolio beyond traditional stocks and bonds, many experts say that gold is the undisputed king of uncorrelated assets.

The price of gold doesn’t usually doesn’t move with the wider stock market – and often, because of its history, the yellow metal can even increase in price during the course of a bear market.

Here are some of the reasons billionaires turn towards an allocation in gold:

  • Gold has acted as a store of value for thousands of years

  • Gold can lower the volatility of a portfolio

  • Gold can act as a hedge against inflation in some scenarios

  • Gold is a traditional safe haven asset that investors flock to when the market goes astray

Billionaire Actions

To kick off 2019, a new billionaire jumped onto the gold bandwagon – along with previous advocates such as Ray Dalio, David Einhorn, John Paulson, and John Tudor Jones II.

The newest entry to the club is Sam Zell, the pioneer behind real estate investment trusts (REITs). He bought gold for the first time in January, citing that it is “a good hedge” and that “supply is shrinking” as new mine discoveries dries up.

With market volatility back in the fray, it’ll be interesting to see how many more of the world’s elite investors also jump on the bandwagon.


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