As the markets approached the weekend, the computer algos that run trading sniffed out some more easy-money chatter from Federal Reserve mucky muck Jerome Powell at the 2019 Economic Policy Symposium in Jackson Hole, Wyoming.
Then, things got surreal.
CNBC host Lawrence Kudlow — who Trumpenstein chose to replace Goldman’s Gary Cohn’s as director of the National Economic Council and and serves as Trump’s chief adviser on China trade — set the markets into rally mode on Thursday by proclaiming a “productive call” on trade negotiations with China.
Then, 12 hours later, a Global Times news article announced “China will retaliate. US will feel the pain,” which caused a small overnight sell off.
China has been stating that it would be taking measures to retaliate in the trade wars. Up until now, it has been restrained, which has fueled the algos. But about mid-day Friday, China followed up on the rhetoric with tariffs on $75 billion.
Trump quickly respond with new rounds of tariffs. Starting Sept. 1, the 10% tariff on $300 billion of Chinese goods will rise to 15%. On Oct. 1, the existing 25% tariff on $250 billion of Chinese goods will rise to 30%.
And now, China has to retaliate, and so on.
The markets dropped 3%, which is quite modest in the greater scheme of things, especially when “hidden forces” may or may not appear over the weekend to interfere.
Monday pre-market opening update:
Trump Says China Wants To Restart Trade Talks; China Denies, Has No Idea What Trump Talking About https://t.co/qHlwJhexEZ
— zerohedge (@zerohedge) August 26, 2019
Futures 60 points higher from overnight lows because Trump said China did something that China said did not happen
— zerohedge (@zerohedge) August 26, 2019
However, my core theory is that the Crime Syndicate is ultimately interested in capitalizing on a big short, or a market crash. I say this with the caveat that I’m not privy to their memos on the timing.
According to Donald “The Chosen One” Trump, trade wars are “easy.” Major corporations doing business with China say otherwise.
Cisco Systems recently stated, “We’re being uninvited to bid,” and, “We’re not being allowed to even participate anymore.”
Another recurrent theme of the algos who game the market is the “2nd-half rebound.” There has been ample non-confirmation, this time from giant electronics and semiconductor distributor Avnet ($19B annual sales).
“Since April, companies across the industry have seen signs of slowing due to macroeconomic headwinds and tariffs,” AVT’s CEO said. “Avnet was no exception.”
Curiously, despite the rounds of fresh tariffs being implemented in September, major notebook ODMs saw sharp declines in shipments in July, as clients showed little intention of accelerating inventory buildups to capture lower prices.
Core inflation is now running 2.2% YoY, which is the “largest increase since Dec.” That’s too warm for more rate cuts. But the Fed can’t be more hawkish, otherwise investors would have a hissy fit.
In reality, the Fed’s only mandate is to support the grotesque bubbles it creates.
As a stunning tell of just how grossly distorted the “markets” are: $17 trillion in debt is priced at a negative yield. That’s right, you will pay the issuer for holding their bonds.
Many of the negative-yield countries, like Spain, are effectively insolvent. Even certain junk bonds in Europe are now trading with a negative yield. This shows that the risk-pricing system in Europe has been wrecked. This, in turn, badly damages banks.
It doesn’t take a deep analytical mind to see the massive losses that will be mete out from this insanity.
In terms of the real economy, negative interest rates have an even more profound and destructive impact. They distort or eliminate the single-most important factor in economic decision making: the pricing of risk.
When risks cannot be priced correctly anymore, there are a banquet of consequences. It means mal-investment and bad decision making. It means asset bubbles that load the entire financial system up with huge risks, because these assets are used as collateral, and their value has been inflated by negative yields. The best term for it is “fictitious capital.”
So you get these strange combinations — for example, massive housing bubbles in cities like Berlin, Munich and other places. And because capital is misallocated, the real economy in a dysfunctional central bank system doesn’t perform. Piling sanctions and tariffs on makes business planning impossible.
When the current global bubble bursts, it will be triggered by one specific event, even if that isn’t the actual reason but just the catalyst. For example, the fall of Lehman in 2008 was such an event, although it wasn’t the reason for the 2007-’09 financial crisis.
The underlying reason for the current bubble will of course be the $250 trillion debt plus the $1.5-plus quadrillion in derivatives, and global unfunded liabilities of at least $250 trillion. So a neat little sum of more than $2 quadrillion. Imagine the money printing required to stop that bubble from rupturing.
Almost all of Europe’s banks are zombies. The mucky mucks of the ECB believe the solution is pumping more toxins into the patients. They know full well that the end is here. So continuing their slapstick farce, the ECB has stated it has “big bazooka primed for September.” Even deeper negative interest rates.
Rehn said he “didn’t rule out a move to purchase equities under the QE program.”
Accounting Fraud is Rampant
During the final phase of a bubble era, many companies will cheat in their accounting. The fall of Enron, or Madoff, were examples of companies cooking the books on a major scale.
The whistleblower for Madoff was Harry Markopolos, but for years everyone ignored his warnings. Markopolos has now gone public on an alleged accounting scandal at GE. He claims that GE has taken $38 billion long-term deferred income upfront, and that this sum is only the tip of the iceberg.
We could soon see a situation like GE becoming the trigger for the bursting of the current financial bubble. But more likely is probably a bank failing.
We have discussed previously the precarious position of Deutsche Bank. The stock market has clearly identified Deutsche as a basket case. But the stock-price fall of Commerzbank, the second largest bank in Germany, is even worse. Whilst Deutsche is down only 94% since 2007, Commerzbank is down 98.4%.