In a “market” that rewards BTFD (buying the f’n dip) of reckless abandonment. I believe we are, once again, at that moment in time said none better than Harry Callahan (Clint Eastwood) in, “Dirty Harry” (1971, Warner Bros.™) “…you’ve got to ask yourself one question: Do I feel lucky?”
I’ll just add – “Still?”
I want to propose why you may just want to really reflect on the above, because there are happenings taking place on the other side of the globe that could have more impact to one’s business, never-mind portfolio, than if Harry still had one left. Hint: The Chinese Yuan.
There are many competing scenarios of what is taking place in China, in regards to “trade war” scenarios. The one that appears to be the most overlooked by the mainstream business/financial media is the happenings in the Yuan.
On July 3rd when the Yuan approached and briefly broke above the $6.70 level of the USD/CNY cross rate, the PBoC (China’s central bank) demonstrated that this level was a demarcation point that would be defended via the approval of the politburo. The result was clear – the currency strengthened and the cross rate fell by what many consider noteworthy points. i.e., Message – “Short it and we’ll decimate you into oblivion” – Love, The PBoC.
However, since that point there’s been some rather odd movements within for interpretation, because if they are defending, they seem to not be doing such a good job also, if they’re allowing it to devalue with their blessing, then they seem to be spending quite a bit of resources to accomplish the opposite.
Is there a third option? I believe there is, and if I’m correct – it’s may be one for the ages. So let’s look at what’s caught my eye, yet seems oblivious to most of the mainstream press. To wit:
The above chart is of the USD/CNY cross rate as of this writing for this month of July. I have annotated it with what clearly appears to be the PBoC intervening to slam the cross rate down keeping it “stable,” as they say.
However, with every intervention has come a response just as powerful – and it appears to be gaining strength.
If I’m correct, what the above may be showing is that the PBoC, along with the politburo, is desperately trying (i.e., not some grand plan) to control the Yuan from collapsing sending a wave of capital flight it will not be able to control, all while trying to use current gyrations as a way to insinuate that the reason for this devalue may be what the politburo has designed and implemented as to demonstrate it also has, under its control, its own weapon of financial mass-destruction should it want to implement it in response to tariffs and more.
I believe that is not the case. I’m of the opinion they are trying desperately to stay one step ahead of an already developing, unstable situation, and are using the current “trade war” narrative as something to help disguise what’s truly happening underneath. i.e., As far as the currency is concerned: It’s all coming apart.
Again, if the PBoC, with the blessing of the politburo, was allowing the Yuan to devalue – then why throw so much resources (as in intervention) to keep it down? If this was the original intent, then one would be reasonable to assume, that the reactions for falling would be muted, if not relatively flat, during such a short time frame. i.e., two and a half weeks.
But what has been the response? Looking at the above chart, if it’s to be believed, shows what is commonly known in trading as the “beach ball effect.” i.e., unless you forcefully keep it underwater, the moment you release it, it’s coming back up.
The above seems to be inferring just that. Yet, here’s the issue if that observation is correct: That means they’ve lost control. And if so, that means everything one now takes for granted, and by that I mean just that – everything changes.
So where does the above fit in to a bigger picture? Here’s a hint, again, to wit:
The only thing that portends things could get even worse should the above have any relative truth as to what is currently happening may be this:
It may end up that The Fed. may be the one who is out-of-bullets, just when they need them most. But make no mistake, the “market” is surely going to ask that other question should these markets begin roiling into chaos. That other question?
Heaven help these “markets” should Mr. Powell need to step up to a podium and all the “market” hears is a “click!”
© 2018 Mark St.Cyr