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Weekly Commentary: 'Periphery To Core Crisis Dynamics'

Doug Noland profile picture
Doug Noland

The renminbi traded at 6.8935 in early-Friday trading, with intensified selling pushing the Chinese currency to its lowest level (vs. the $) since May 26, 2017. The People's Bank of China (PBOC) was compelled to support their currency, imposing a 20% reserve requirement on foreign-exchange forward contracts (raising the cost of shorting the renminbi). The PBOC previously adopted this measure back during 2015 tumult, before removing it this past September.

The re-imposition of currency trading reserve requirements indicates heightened concern in Beijing. Officials likely viewed modest devaluation as a constructive counter to U.S. trade pressures. In no way, however, do they want to face disorderly trading and the risk of a full-fledged currency crisis.

The renminbi rallied 1% on the PBOC move, ending slightly positive for the day (but down for the eighth straight week). Trading strongly prior to the PBOC move, the dollar index reversed into negative territory. Many EM currencies moved sharply on the renminbi rally. The South African rand reversed course and posted a 1.2% gain. The Brazilian real also jumped 1%. Curiously, the Japanese yen gained about 0.5%.

Overnight S&P500 futures, having traded slightly negative, popped higher on the renminbi rally. But EM equities were the bigger beneficiary. Brazil Ibovespa index gained 2.3% Friday. It increasingly appears the fortunes of the renminbi and EM markets are tightly intertwined.

The unfolding trade war is turning more serious. Beyond Friday's currency move, China's Finance Ministry - in measures to "guard its interests" - announced plans for significantly broader retaliation tariffs on U.S. goods.

August 3 - CNBC (Michael Sheetz): "China is preparing to retaliate in the escalating trade war with tariffs on about $60 billion worth of U.S. goods. The import taxes would range in rates from 5% to 25%, China's Ministry of Commerce said… There are four lists of goods, one for each of the rates proposed. Many of

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Doug Noland profile picture
I'm at about 30 years persevering as a “professional bear.” My lucky break came in late-1989, when I was hired by Gordon Ringoen to be the trader for his short-biased hedge fund in San Francisco. Working as a short-side trader, analyst and portfolio manager during the great nineties bull market – for one of the most brilliant individuals I’ve met – was an exciting, demanding and, in the end, a grueling and absolutely invaluable learning experience. Later in the nineties, I had stints at Fleckenstein Capital and East Shore Partners. In January 1999, I began my 16 year run with PrudentBear (that concluded at the end of 2014), working as strategist and portfolio manager with David Tice in Dallas until the bear funds were sold in December 2008. In the early-nineties, I became an impassioned reader of The Richebacher Letter. The great Dr. Richebacher opened my eyes to Austrian economics and solidified my lifetime passion for economics and macro analysis. I had the good fortune to assist Dr. Richebacher with his publication from 1996 through 2001. Prior to my work in investments, I worked as a treasury analyst at Toyota’s U.S. headquarters. It was working at Toyota during the Japanese Bubble period and the 1987 stock market crash where I first recognized my love for macro analysis. Fresh out of college I worked as a Price Waterhouse CPA. I graduated summa cum laude from the University of Oregon (Accounting and Finance majors, 1984) and later received an MBA from Indiana University (1989). By late in the nineties, I was convinced that momentous developments were unfolding in finance, the markets and policymaking that were going unrecognized by conventional analysis and the media. I was inspired to start my blog, which became the Credit Bubble Bulletin, by the desire to shed light on these developments. I believe there is great value in contemporaneous analysis, and I’ll point to Benjamin Anderson’s brilliant writings in the “Chase Economic Bulletin” during the Roaring Twenties and Great Depression era. Ben Bernanke has referred to understanding the forces leading up to the Great Depression as the “Holy Grail of Economics.” I believe “The Grail” will instead be discovered through knowledge and understanding of the current extraordinary global Bubble period.

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Comments (4)

Really Enjoy your writing and agree completely.
Using weekly put options ( qqq iwm spy eem) Hope I can stay solvent longer than the market can stay irrational haha
China vs US; I think they'll hang on until the November elections. A lot hangs on the results. If Trump loses his majority (of which a good size is against the sanctions; see Koch brothers), the situation should be less tense. If Trump keeps his majority, the situation will become even more aggressive. In this war, China has an evident advantage; its grip on its population. And I fully concur with you that if they give up on trade, they can basically close shop because the US will not stop until Nicky Halley is the next President of the Chinese Communist Party.
Thanks for your excellent weekly review.
Thanks for your very thoughtful and well researched macro view - appreciate your efforts to preach to the deaf!

Was an evangelist in the same way from 2004 preaching about a bubble in subprime credits...it might take some time but we'll see this implode in a big way that will make 2007/8 look like kindergarden.
Meanwhile I share the austrian view that we will still see an asset inflation to even higher heights.

Keep up the good work!

I would be curious about your view on how much more funds we have invested in derivatives (of derivatives of derivatives) without a tangible underlying as compared to 2007 and how much liquidity was added to the system by now in the last 10 yrs.?
It's the derivatives of derivatives that really blow my mind now... Stuff like UVXY. (3x leveraged vs VIX). Talk about not knowing what you own!
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