No drunken sailors

America musters the world’s biggest naval exercise

The drills come as America and China are locking horns across Asia

THE REAL draw of the biennial “Rim of the Pacific” exercise, or RIMPAC, is the cocktail party. The world’s largest naval drills, hosted by America in Hawaii, offer sailors an opportunity not only to hone their skills with friendly navies from across the world—including the chance to sink a clapped-out American warship as target practice—but also to cement alliances in a more bibulous and convivial fashion aboard one another’s destroyers, perhaps followed by after-parties in the insalubrious corners of Honolulu.

This year’s exercise, which runs from August 17th to 31st, will be a more abstemious affair.

With Hawaii’s covid-count rising, social events ashore are cancelled and fewer countries are scheduled to attend.

Though the drills may be pared down, the stakes are higher than ever. With the relationship between America and China in apparent freefall, military tensions between the two rivals are growing across the so-called first island chain in the western Pacific, stretching from Malaysia in the south to Japan in the North. In the South China Sea, for instance, China has tangled with the Philippines, Vietnam and Malaysia in recent months by harassing fishing boats, stalking others’ oil-exploration vessels and sending its own survey ships into disputed waters.

America has also entered the fray more enthusiastically. In July it formally repudiated China’s claim to offshore resources in the South China Sea as “completely unlawful”, dispatched a pair of aircraft-carriers to the area for the first time in almost six years and held joint exercises with Australia and Japan.

China’s reply was to conduct live-fire drills, peppering naval targets with what state media claimed were more than 3,000 projectiles. The mood remains febrile. Last week the Philippines’ navy chief complained that China’s navy was trying to provoke his ships into “firing the first shot”, and on August 14th an American carrier returned.

The temperature is also rising around Taiwan, the democratic island that China claims as its territory. In July, Taiwan’s envoy to America was allowed to enter the State Department for an official meeting—something virtually unheard of since America cut formal diplomatic ties with the island in 1979.

That was a “a big deal”, noted Drew Thompson, a former Pentagon official “and a change in longstanding US policy”. Then on August 10th Alex Azar, America’s health secretary, visited Taiwan and met President Tsai Ing-wen, becoming the most senior American official to conduct a formal visit in decades.

Almost immediately, Chinese fighter-jets crossed the so-called median line of the narrow strait which divides Taiwan from the mainland. That is thought to be only the third occasion on which they have done so intentionally in the past two decades. On August 13th the People’s Liberation Army upped the pressure by announcing military exercises off the northern and southern ends of Taiwan in response to what it called America’s “serious wrong signals to ‘Taiwan independence’ forces”.

As those drills unfolded, Taiwan’s government said that it planned to boost defence spending by $1.4bn, an increase of over 10% on current levels. The purchase of 66 new F-16 aircraft for $8bn, America’s largest sale of warplanes to Taiwan since 1992, was finalised on August 14th. Taiwan also hopes to buy American drones, anti-ship missiles and naval mines to help deter an invasion.

If that were not enough, trouble is also brewing a short distance to the north-east of Taiwan over the Japanese-controlled, but Chinese-claimed, Senkaku islands (known by China as the Diaoyu islands). Japan alleges that Chinese ships have increasingly sailed into the islands’ territorial waters. Japanese officials now fear a surge in the number of Chinese fishing boats, many of which are thought to be paramilitary vessels in civilian guise, after a self-imposed ban by China expires on August 16th.

The islands are covered by the mutual-defence treaty between America and Japan. On July 29th Lieutenant-General Kevin Schneider, commander of American forces in Japan, said that America was “100%, absolutely steadfast in its commitment to help the government of Japan with the situation in the Senkakus”, promising to help with surveillance of the area.

With so many bones of contention, and with its military edge over China eroding over the past decade, America is understandably keen on cultivating old and new friends alike. That is part of the point of gatherings like RIMPAC. James Stavridis, a former American admiral, has noted that the exercise serves as a “visible signal of the most important militaries of the vast Pacific Basin being willing to share training, tactics and technology”.

It also serves to highlight an enduring American advantage in its competition with China: the idea that China could persuade so many diverse and friendly countries to gather for meaningful war games is implausible.

Although the pandemic means that only about ten countries and 20 ships will take part this year, RIMPAC has grown steadily in size over the past decade. Attendees in 2018 included not only America’s stalwart treaty allies, like Australia, Japan and South Korea, but also old enemies, like Vietnam, embryonic friends, like India, and outside powers deepening their involvement in Asia, like France and Britain. (China, which had been invited to the 2014 and 2016 iterations of RIMPAC as a gesture of goodwill, was disinvited from the 2018 drills because of its perceived aggression in the South China Sea.)

That reflects a widespread and growing concern over China’s increasingly assertive behaviour, such as its incursions on the India-China border this year and its economic arm-twisting of Australia. “Beijing knows full well that it currently faces numerous challenges, both internally with its economy having taken a hit from the pandemic, as well as externally with countries—particularly in the West—expressing uncertainty over Beijing’s trajectory,” says Veerle Nouwens of the Royal United Services Institute, a think-tank in London.

But even as countries reassess their ties to China, the air is heavy with a sense of doubt over America’s staying-power and dependability in the region, particularly as the military balance continues to tilt in China’s favour.

Consider the case of Australia, which on July 1st published a gloomy update to its defence strategy. “The prospect of high-intensity military conflict in the Indo-Pacific is less remote than in the past,” it warned; Australia could no longer count on having ten years’ warning of an attack. The paper acknowledged that only America could offer protection against nuclear weapons.

But for other contingencies, Australia would have to hedge its bets by deepening ties with new partners, like Japan, India and Indonesia, “tak[ing] greater responsibility for [its] own security”; and enhancing its “self-reliant ability to deliver deterrent effects”. Even America's staunchest friends are not certain that it will be around when things get rough.

The decoupling of the US and China has only just begun

Business logic has been displaced by strategic rivalry

Gideon Rachman

© James Ferguson

When a familiar and comfortable situation changes dramatically, the human instinct is to believe that things will soon get back to normal. The idea that life may have changed permanently is too unsettling to deal with. We are seeing this mentality with Covid-19. We are also witnessing it as business responds to the downward spiral in US-Chinese relations.

After 40 years of ever deeper economic integration between the US and China, it is hard to imagine a real severance of ties. Many executives believe that politicians in Washington and Beijing will patch up their differences when they realise the true implications of “decoupling” the world’s two largest economies. The hope is that a trade deal will stabilise things, even if it has to wait until after the US presidential election.

But that is too complacent. The reality is that decoupling has much further to go. It is already spreading beyond technology and into finance. In time, it will affect every large industry, from manufacturing to consumer goods. And all multinationals — even those based in Europe — will be affected, as they navigate disrupted supply chains and changes in American and Chinese law.

This process is being driven by a fundamental shift in the way both the US and China see their relationship. For the past four decades, business logic has prevailed over strategic rivalry. But we are in a new world in which political rivalry overrides economic incentives — even for a US president who prides himself on being a dealmaker. When Donald Trump was informed that his new order — forcing US companies to cut ties with WeChat, a Chinese messaging app — would hurt American sales in China, his response was, “whatever”.

This is not just Trumpian folly. There is now bipartisan consensus in Washington to get tough on China, even if it hurts corporate profits. A bill to force Chinese companies to delist from US stock exchanges if they do not open their books to US regulators was passed unanimously by the senate in May.

In Beijing, too, the political imperative to assert sovereignty now overrides the business incentive to avoid confrontation with the US — China’s largest export market. Since President Xi Jinping took power in 2012, China has built military bases across the South China Sea, ended the autonomy of Hong Kong and imprisoned millions of Uighur Muslims in Xinjiang. Military threats to Taiwan are becoming more overt.

Both sides blame the other for starting hostilities. The Chinese point to Mr Trump’s unilateral imposition of tariffs. The US responds that Google and Facebook were blocked in China more than a decade before the US took serious action against Chinese tech companies such as Huawei and ByteDance.

Whoever fired the first shot, both sides are now locked into a retaliatory logic. If the US takes more measures against WeChat and Huawei, Beijing is likely to respond by further restricting US tech companies in China. As political tension mounts, so American consumer brands will be vulnerable to boycotts by a nationalistic Chinese public. That is potentially bad news for high-profile American brands such as Starbucks and the National Basketball Association.

Emotions aside, decoupling is also driven by new assessments of risk. The vulnerability of Chinese companies including ZTE and Huawei to bans on sales of US computer chips has intensified China’s drive to become self-sufficient in key technologies. US companies are also hedging their bets. Apple, which has built its business around manufacturing in China, is making its latest iPhone in India, as well as China.

The emerging field of conflict is banking and finance. Over the past decade, the US has deployed financial sanctions against countries including Iran and Venezuela to often devastating effect. Now it is beginning to use this tool in its struggle with China.

Government officials in Hong Kong and Xinjiang have been targeted with sanctions, in effect shutting them out of the US financial system. Given the centrality of the dollar to global trade, international banks are wary of violating these. That risk is manageable, while it is confined to a few individuals. But what happens if and when financial sanctions are applied to major Chinese companies?

Wall Street banks, which have made a lot of money listing Chinese companies in New York, are assuming that even if further listings are banned, they can bring companies to market in Hong Kong. But that would rely on the forbearance of both the American and Chinese governments — neither of which can be taken for granted.

European or south-east Asian countries and companies are unlikely to be able to stay on the sidelines. The UK’s decision to open its 5G telecoms market to Huawei — in the teeth of US opposition — proved to be unsustainable. HSBC, which is headquartered in the UK and makes 80 per cent of its profits in Asia, has been dragged into the rivalry through its role in giving evidence in the US prosecution of Meng Wanzhou, chief financial officer of Huawei.

Big business will want to stay neutral in the emerging cold war between the US and China. But that may prove impossible. The past 40 years of world history have been built around globalisation and the rapprochement between the US and China. But that world is fast disappearing.


Chris Vermeulen
Chief Market Strategies


- The Monthly S&P500 E-Mini Futures chart is revealing an Expanding Wedge pattern that has been setting up since Jan/Feb 2018.

- The VIX has set up a base and begun to move moderately higher over the past 7+ days – above the 20.00 point level and above the GAP created by the initial COVID-19 selloff.

- Our Custom Volatility Index chart warns of a “bull trap” set up, and we may see an 11% to 15% (or more) sell-off in the US and global markets if the Custom Volatility Index collapses below 10 over the next few weeks.

- Are These Technical Setups Warning That A Market Top Is Forming?

I want to bring this large expanding wedge pattern to your attention as my research team and I watch the markets continue to push to new all-time highs. This is a follow on to our research from our Special Alert report warning of Head-and-Shoulder patterns in some of our custom charts.

We know it may sound a bit alarming to be the one to bring up a potentially devastating Bearish technical pattern at this time, but as technical traders, we must stay aware of risks even if they may not materialize. Trading is a process where we take measured risks in an attempt to generate profits over time. Risk becomes a very big issue if it is not properly managed – just as trading becomes very difficult if one doesn’t learn to take profits in good trades.


The Monthly S&P500 E-Mini Futures chart below highlights the Expanding Wedge pattern that is setting up over the past 26+ months (starting in Jan/Feb 2018). 

The US stock market has rallied after the COVID-19 virus event to push to new all-time highs – rising above the upper wedge channel. Our researchers believe this pattern may be warning of a potential for a very deep price correction – possibly 11% to 18% or more.

There are a number of other technical setups that are starting to confirm a potential break down. The following Weekly Custom Volatility Index chart shows some very interesting price action this week. First, we want you to pay attention to the Standard Deviation Channels that are drawn on this chart – there are two of them. 

The longer-term Standard Deviation Channel is sloping higher while the shorter-term Channel is sloping downward. We want you to focus on the downward sloping Standard Deviation Channel and how price has risen to the upper 1x Standard Deviation range (the BLUE LINE) and stalled this week (while the markets continue to push to new all-time highs).

This setup on the Custom Volatility Index chart has our research team concerned that these new price highs may actually be setting up a “Bull Trap” – getting retail and institutional traders to chase the rally, then collapsing into a deep and aggressive downward price trend.

If the Custom Volatility Index collapses below 10 over the next few weeks, it would indicate a very strong selling mode has begun where we may see a 11% to 15% (or more) sell off in the US and global markets.

Now, pay attention to the long-term Standard Deviation Channel on this next chart. Notice how the current Volatility Index price level has just recently moved above the MIDPOINT of the longer-term Standard Deviation Channel (the MIDDLE of the Green area within the channel). 

This “touch-n-blowoff” type of price action suggests price have returned to the MIDPOINT of the longer-term price Std. Deviation range and run into strong resistance. 

If price is going to continue higher, we would expect this Custom Volatility Index to rally above the 14 level and continue to push higher. 

Right now, this moderate selloff within the Custom Volatility Index suggests a Peak or Top may be setting up in the markets – suckering in traders as the markets push to new highs on speculative trading in Technology and other sectors.


Lastly, the VIX has setup a base and begun to move moderately higher over the past 7+ days – above the 20.00 point level (above the GAP created by the initial COVID-19 selloff). Our researchers believe the upward price moves in the VIX over the past few days suggest that FEAR is starting to rise again while the US stock markets push to new all-time highs. 

This suggests that many traders are not comfortable with how the markets are pushing ever higher while economic data and forward concerns still persist. It may be that speculative capital has pushed the US stock market back to new all-time highs while traders chase the Technology Bubble – while more seasoned traders watch and think “what are these people doing chasing these crazy trends”?

Either way, a spike in the VIX above 25 to 30 would certainly spook the market after we have watched traders pour capital into these new all-time highs. And we believe the potential for the VIX to spike over the next 3+ weeks is substantial given the speed and tenacity of the upward price trend in the US stock market recently.

The upside price rally has been impressive, but is also create a very real risk potential when traders pile into speculative bubbles/trends like this. We’ve been through things like this before in 1999 and in 2005~2007. Look at the size of that Expanding Wedge pattern on the Monthly chart. Being on the wrong side of a 25% downside price correction is not a lot of fun. Be prepared and follow our research.

As a technical analyst and trader since 1997, I have been through a few bull/bear market cycles in stocks and commodities. I believe I have a good pulse on the market and timing key turning points for investing and short-term swing traders. 2020 is an incredible year for traders and investors. Don’t miss all the incredible trends and trade setups.

The Quiet Revolution in Emerging-Market Monetary Policy

Although emerging markets are no less at the mercy of advanced economies today than they were in the past, they are benefiting from massive spillover effects in the context of the current crisis. As a result, the ultra-expansionary monetary policies pioneered in advanced economies are now available to almost everyone.

Piroska Nagy-Mohacsi

nagymohacsi2_Igor KutyaevGetty Images_africamapeconomymarket

LONDON – Central banking in emerging markets has undergone a quiet revolution during the COVID-19 pandemic. Unlike in past crises, they have been able to mimic what central banks in advanced economies have been implementing: counter-cyclical policies with quantitative easing (QE), local-currency asset purchases, interest-rate cuts, and monetization of government deficits.

Although it is difficult at this point to say anything new about Donald Trump, it is never too early to start reckoning with the implications of his presidency. The only thing more disturbing is the possibility of what may lie ahead in – and after – November's election.

In the past, such policies would have fueled inflation and downward exchange-rate pressure. Not so this time. With the exception of a few central banks that were already in trouble before the pandemic, emerging-market central banks have been able to use QE to create more room to maneuver in responding to the crisis.

Monetary policies in the advanced economies enabled this change. Their own QE programs have had positive spillover effects, and they have expanded their currency swaps and foreign exchange repurchase (repo) operations in response to the crisis. Among the measures taken by the globally systemic central banks (GSCBs), the US Federal Reserve’s response has been the most important, but swaps and repos by the European Central Bank (ECB) and the People’s Bank of China’s (PBOC) have also had a significant impact at the regional level.

The effects of interest-rate cuts and huge liquidity injections in advanced economies have reached emerging markets as a result of the global search for yield. After an initial market stumble in March, capital flows returned to emerging markets, which have seen high debt issuance in subsequent months. Emerging markets have also been able to reduce their interest rates, and their central banks have started issuing domestic-currency-denominated assets in cases where the market is sufficiently large.

Meanwhile, the massive expansion of currency swaps by GSCBs has eased exchange-rate pressures. These swap lines act as safety nets to forestall foreign-currency shortages in domestic markets. Early in the pandemic, the Fed reactivated its standing swap arrangements with the ECB, the Bank of Canada, the Bank of England, the Bank of Japan, and the Swiss National Bank, while also extending their maturities. It then followed up by providing swap lines to the central banks of Australia, Brazil, Denmark, South Korea, Mexico, New Zealand, Norway, Singapore, and Sweden.

While the Fed deployed similar measures during the global financial crisis a decade ago, it has now gone much further. At the end of March, it started offering a new additional temporary repo facility for foreign and international monetary authorities (FIMAs). This arrangement allows central banks and public monetary institutions around the world to use their existing stock of US Treasury bills as a channel for accessing US dollar liquidity.

Although repos are not genuine currency swaps (because the FIMAs must already have dollar-denominated assets on hand as collateral), they have nonetheless proven to be a powerful source of market confidence. And because the mere availability of repos can be enough to reassure markets, they do not need to be used in many cases.

Moreover, repos can serve as a precursor to true currency-swap arrangements, following the model of the ECB’s repo operations with Poland and Hungary in 2009. In the current crisis, the ECB and the PBOC have both expanded swap lines and repos within their monetary spheres of influence, allowing for a sharp reduction in exchange-rate risks in emerging markets.

Emerging-market central banks’ additional room to maneuver will last for as long as advanced economies’ monetary policies remain sufficiently expansionary. The chances for that are high in the near and medium term, because advanced-economy central banks have been unable (for various reasons) fully to exit from the QE that they launched a decade ago, even after growth and employment recovered.

Now, given the pandemic and the deep economic recession that it has caused, there is effectively no end in sight for QE. Several central banks, moreover, are formally committed to keeping interest rates low or even negative, and new central-bank digital currencies could make such policies relatively easy to implement.

The upshot for emerging-market central banks, then, is that they will most likely continue to enjoy monetary-policy spillovers from the GSBCs for the foreseeable future. But there are limits to the benefits of this policy freedom. Many emerging-market central banks may soon experience unintended consequences in terms of financial stability and governance.

After all, QE and a prolonged recession will inevitably hit the balance sheets of companies, households, and eventually banks. When that happens, bankruptcies and non-performing loans will soar, and governments in emerging markets will find that they still have much less fiscal space than their advanced-economy counterparts do for addressing such problems.

Governance issues also are likely to surface. Central-bank asset purchases that go beyond government bonds will raise concerns about transparency and accountability. In fact, this may well become an issue in advanced economies, too (though they will still have the advantage of more fiscal space and robust institutional arrangements).

One way or another, emerging-market vulnerabilities are likely to become apparent soon in various domains of domestic financial stability and governance. Policymakers in these countries would do well to keep their guard up.

Piroska Nagy-Mohacsi is Program Director and Senior Fellow at the Institute of Global Affairs, London School of Economics.


Chris Vermeullen

Presidential election cycles drive US Dollar trends.

US Dollar expected to rise before the election and then stall right before the day of the election.

Money will start shifting away from the stock market now, and traders will likely target safe-haven investments and undervalued traditional investments (dividends, blue chips, utilities, energy, bonds, consumer service and supplies, and possibly technology suppliers) going forward.

The potential for a US Dollar upside price rally after the elections (just like the 2013~2014 setup) is a very valid expectation from a technical analysis perspective.

This is the final part of our three-part US Dollar research article. My research team’s belief is that the US Dollar will recover in value before the US Presidential Election, then stall right before the election date as traders attempt to digest the outcome of the election. In this final part of our research article, we’re going to share insights and technical analysis setups that we believe support our predictions on the US Dollar. Please take a minute to review Part I and Part II of this research series if you have missed any portion of it.

Our research team has highlighted a price pattern in the US Dollar that seems to be fairly consistent over the past 8+ years. This pattern suggests the US Dollar will move higher over the next 60+ days, which may likely correlate with the US stock market stalling and/or moving lower.

Just prior to the November 3, 2020 election date, the US Dollar should stall as global traders and investors await the results. After the election is complete, then we watch the scramble as global traders and investors attempt to reposition assets to take advantage of perceived opportunities.


We are going to start by reviewing our Custom Smart Money Index Weekly chart, below. This Smart Money Index chart highlights the triple-top pattern that appears to be setting up after the COVID-19 collapse. We find this important because the “true smart money peak” in the US stock market occurred near the peak in January/February 2018. Therefore, our researchers believe the true organic growth peak in the US and global markets occurred well over 2 years ago – not throughout the new price peaks we’ve experienced in the US markets after the COVID-19 collapse. Those, secondary price peaks, were speculative peaks – not organic economic growth peaks. And speculative peaks tend to end in explosive contraction events.

Without getting into politics, policies or other aspects of the 2020 US Presidential Election, there are only 60+ days left for skilled traders and investors to prepare for either a Trump or Biden Presidency. Each candidate has outlined numerous objectives, tax policies and spending plans. 

All of the translates into how consumers and businesses plan for and prepare to operate within these potentially new economic constructs. When you stop and think about the potential differences between a Trump second term and a new Biden term – the stakes for investors and traders are much higher than many expect.

Because of this high-stake US Presidential election, we believe global traders and investors will begin to move assets away from the high-flying US stock market and away from excessive risks. Traders will instead likely target safe-haven investments and undervalued traditional investments (dividends, blue chips, utilities, energy, bonds, consumer service and supplies and possibly technology suppliers) going forward.

Be sure to sign up for our free market trend analysis and signals now so you don’t miss our next special report!

My research team believes the transition away from the high-flying technology sectors and S&P sectors will be a move into protection – away from risks relating to a potential collapse in the US stock market. We believe the triple-top in our Custom Smart Cash Index clearly illustrates how the US and global stock market is functioning – even though the price charts for the NASDAQ and S&P 500 charts show moderately higher price levels. 

This Custom Smart Cash Index shows a clear Head-and-Shoulders pattern setting up – which is a strong indication that another decline in price levels may be in our immediate future.


This comparison chart, below, comparing the Asian currencies and the US/Western currencies highlights another technical pattern that we believe substantiates a potential US Dollar rally over the next 60+ days. The Custom Asian to US/Western currency index chart is the Candlestick price chart while the US Dollar Index is shown on this chart as the BLUE LINE on this chart. 

What we want you to focus on is how the Asian to US/Western index tends to parallel the US Dollar Index more than 80% of the time on this chart. Yet, we also want you to focus on the times when the US Dollar Index (the BLUE LINE) varies away from the Custom Index price levels. We found this very interesting as the US Dollar Index tends to react in ways that leads and lags the price correlation of the Custom Index.

We also believe the current extreme low price level in the US Dollar Index is similar to the 2013~14 area on this chart – where the US Dollar was pushed lower because the US stock market continued to rally to new highs and traders/investors concerns were the “fear of missing out” of the rally. 

When this happens, global traders pile into the US stock market and ignore the US Dollar. Who cares that the US Dollar lost 3% to 4% of value when the US Stock market just rallied 13% to 20% over the past 16+ months.

Yet, the minute the US stock market enters a period of consolidation, sideways trading and concern, then everyone suddenly cares what’s happening with global currencies and the US Dollar because 8% to 15%+ rotations in the stock market while the US Dollar is falling 3% to 5% or more can really hurt foreign investors.

We believe the current setup on the right side of this Asian to US/Western currency correlation chart is very similar to what happened in late 2013 – where the correlation price index rose to a peak near 38 – then stalled into a narrow sideways channel. 

The US Dollar Index collapsed throughout this span of time and then suddenly started to gain in value in late 2014 – right near the peak in the markets before the 2015/2016 US stock market (which also correlated with the start of the 2016 Presidential Election campaigns). 

Imagine what would happen if a similar rally in the US Dollar took place after the 2020 elections and how that will reflect as global investors pile into the US markets with a stronger US Dollar.

As technical traders, we attempt to identify and analyze these types of technical patterns as well as price patterns and other advance price theory. Our job is to try to find hidden, often somewhat secret, correlations in price, technical patterns, seasonal patterns or cross-market trends so our members can profit from these setups. When we’re right, we try to take advantage of these setups and alert our members to the trade setups as they happen. When we’re wrong, we take our losses – just like everyone else.

We believe this setup in the US Dollar Index could be a very valid technical price trigger that could prompt a big rally in the US Dollar and US Stock market. We believe the rally in the US stock market may start to to really shape up in late 2021. Yet, everything depends on what happens over the next 90+ days and how the US elections turn out. 

This year, the one thing we’re not going to try to predict is the results of the US Presidential elections – that’s not our specialty. 

We do believe the potential for a US Dollar upside price rally after the elections (just like the 2013~2014 setup) is a very valid expectation.