“The Last, Best Hope of Earth”
Doug Nolan
Through the fog of war can emerge a degree of clarity.
Things seem clearer this week, sadly.
The Israeli/Hamas war is an unmitigated disaster for Gaza, even before what will surely be incredibly intense urban warfare.
Already, the human toll suffered by Gaza’s Palestinian population is sufficient to unleash regional unrest and conflict.
More warnings from Iran, along with evidence these threats are credible.
Tit-for-tat confrontations along Israel’s northern border with Lebanon, as Hezbollah ratchets up sporadic ground attacks and missile strikes into Israel.
Israeli and U.S. militaries this week confronted Iranian-backed militant groups on multiple fronts.
Israel struck deeper into Lebanon, while the U.S. military fought off drone attacks in Iraq and Syria, while the Navy neutralized drone and cruise missiles fired from Yemen.
Markets were struck on multiple fronts.
Ten-year Treasury yields surged 30 bps this week (to 4.91%), trading early Friday at 4.99% - the high back to July 2007.
Alarmingly, the previous week’s safe haven buying completely evaporated.
The iShares Treasury Bond ETF (TLT) was hammered 5.0%, while gold bullion surged 2.5% and silver jumped 2.9%.
In the conflict’s first two weeks, gold’s 8.1% gain brightly outshines the TLT’s 1.8% decline.
As the prospect of global turmoil came into clearer focus this week, the depth of Treasury market troubles turned all the more alarming.
Long-bond yields spiked 32 bps this week to 5.08%, the high back to July 2007.
MBS yields surged 29 bps to 6.78%, the high since July 2001.
Mortgage rates (daily) reached 8% for the first time since 2000.
The iShares Corporate Bond ETF (LQD) lost 2.7%, and the iShares High-Yield ETF (HYG) declined 1.1%.
The ongoing bond rout is global.
UK 10-year yields surged 27 bps to 4.65%, with Italian yields trading above 5% for the first time since the 2012 debt crisis.
German bund yields jumped 15 bps to 2.89%, the high back to 2011.
Australian yields rose 28 bps to 4.46% - also the high since 2011.
The EM dollar-denominated bond bloodbath was unrelenting.
Yields were up 33 bps in the Philippines (5.82%), 33 bps in Peru (6.29%), 32 bps in Turkey (9.05%), 32 bps in Panama (7.21%), 31 bps in Mexico (6.65%), 30 bps in Chile (6.15%), 29 bps in Indonesia (6.20%), 28 bps in Colombia (8.70%), and 27 bps in Brazil (7.06%).
Notable local currency EM yield spikes included Lebanon 803 bps (109%), Hungary 39 bps (7.63%), Indonesia 35 bps (7.06%), and Czech Republic 33 bps (4.82%).
Everything points to destabilizing de-risking/deleveraging.
Yet, most U.S.-based analysts remain narrowly fixated on Fed policy, economic fundamentals, and corporate profits.
“Is the Fed done or one more hike?”
“Soft or no landing?”
It was as if the conventional framework this week shriveled into triviality.
There is today momentous geopolitical upheaval unfolding before our eyes, with broadly negative ramifications for securities markets and financial assets – not to mention stability more generally.
If the enemy of my enemy is my friend, what is the “dear friend” “no limits” partner of my enemy?
There was more clarity this week.
Use of “competitor” to describe our disintegrating relationship with China has lost credibility.
I’m not paranoid, it’s just that everyone’s out to get me.
So, Xi transforms his beloved “belt and road” summit into the Xi/Putin “Anti-America, Anti-Democracy Initiative”.
Why would Xi Jinping so ardently embrace Vladimir Putin before an audience representing 130 countries?
Following Xi’s keynote, Putin spoke in the opening ceremony, before the two dictators shared private meetings.
Putin:
“All these external factors are common threats, and they strengthen Russian-Chinese cooperation.”
October 18 – Reuters (Guy Faulconbridge):
“Rare footage was shown on Wednesday of Russian President Vladimir Putin in Beijing accompanied by officers carrying the so-called nuclear briefcase which can be used to order a nuclear strike.
Putin, after a meeting with Chinese President Xi Jinping in Beijing, was filmed walking to another meeting surrounded by security and followed by two Russian naval officers in uniform each carrying a briefcase.
The camera zooms in on one of the briefcases.
Russia's nuclear briefcase is traditionally carried by a naval officer.
Known as the ‘Cheget’ (named after Mount Cheget in the Caucasus Mountains), the briefcase is with the president at all times but is rarely filmed.”
It's worth noting that Russian Foreign Minister Sergei Lavrov was also in Beijing for high-level meetings, and upon departure flew directly to North Korea to meet Kim Jong Un.
BBC:
“At an official reception on Wednesday, Mr. Lavrov pledged Moscow’s ‘complete support’ for Mr. Kim and accused the US and its allies of unleashing a ‘war against the Russian federation’.
He also said he was there to discuss implementing the arrangements made when Mr. Putin and Mr. Kim met last month…”
Team Xi and Putin were out this week to intimidate the U.S., while bolstering their anti-America alliance in the Middle East (and the “global south” more generally).
Recall that Iran joined China and Russia’s Shanghai Alliance in July, with the Russian military now equipped with Iranian drones in Ukraine.
And a September headline: “China’s Xi Hails ‘Strategic Partnership’ with Syria in Bashar al-Assad Visit.”
Mirroring Putin, China has refused to condemn Hamas.
Chinese Foreign Minister:
“Israel’s actions have gone beyond the scope of self-defense,” calling for an end to “collective punishment.”
Putin:
“I think that many people will agree with me that this is a vivid example of the failure of United States policy in the Middle East.”
Beijing didn’t receive a market vote of confidence for its big “belt and road” (anti-U.S.) party.
The Shanghai Composite sank 3.4% to lows since November.
The growth oriented ChiNext Index lost 5.0%, trading to lows since April 2020.
The Hang Seng China Financials Index sank 4.5%
October 20 – Bloomberg (Iris Ouyang):
“China injected a record amount of liquidity into the markets via a short-term tool, as an indicator for funding costs surged to the highest since April.
The onshore yuan edges lower.
The People’s Bank of China granted lenders a net 733 billion yuan ($100bn) of cash with the so-called reverse repurchase contracts on Friday.
The seven-day repo rate, a gauge of interbank funding costs, surged 24 bps to a six-month high of 2.31%.
The PBOC might be seeking to calm sentiment in China’s bond market through its cash injections Friday, said Zhou Hao, chief economist at Guotai Junan International…
China bonds have come under pressure recently due to tighter funding conditions.”
At 4.9% (y-o-y), China’s Q3 GDP exceeded expectations.
Double-digit Credit growth-induced GDP matters little at this point.
China’s Bubble deflation is accelerating and broadening.
“China Tells Banks to Roll Over Local Government Debts as Risks Mount.”
“China Tells Banks to Extend Local Government Loans Amid Crunch.”
“Country Garden Default Is All But Official, Restructuring Looms.”
“China Sells Most US Securities in Four Years Amid Yuan Weakness.”
Numbers not easy to comprehend: China’s developers have $12.4 TN of liabilities (Bloomberg) – of which $124bn are currently in default.
Local government debt totals $12.6 TN (Reuters).
This week from the Wall Street Journal:
“A Financial Crisis in China Is No Longer Unthinkable.”
Well, crisis appears probable and perhaps imminent.
Bubble deflation is accelerating and broadening.
October 20 – Bloomberg (George Lei):
“The exodus of money from China has intensified in September with few signs of abating in recent weeks…
China’s FX regulator, SAFE, released a disturbing set of data on Friday: onshore banks net sold foreign currencies worth $19.4 billion to their clients in September, the most since November 2018…
Banks sent a net of $53.9 billion abroad on behalf of clients, the biggest monthly outflow since January 2016, shortly after PBOC engineered a one-off depreciation in August 2015.”
With the Xi/Putin agenda now unambiguous, why would western finance even view China as investable?
And as Middle East developments expose the threat posed by the China/Russia/Iran/North Korea anti-U.S. axis, I’m not sure why money wouldn’t head for the exits?
Links have become clearer.
China’s wealth bolsters Russia and its war machine, while Putin bolsters North Korea, Syria, and Iran - with Iran propagating the likes of Hamas, Hezbollah, Islamic Jihad, the Houthis, and myriad militias throughout Syria and Iraq.
Why would the West be content to bolster China the Enabler?
Actual amounts and liquidity profiles are unclear, but China still has formidable international reserves to support its currency.
But how long will Beijing be willing to burn through valuable holdings before resorting to onerous capital controls and other measures?
October 15 – Reuters (Leika Kihara):
“Hiroshi Watanabe, Japan's former top currency diplomat, recalls how Chinese policymakers eagerly studied ways to avert a Japan-style burst of an asset bubble that led to prolonged deflation and economic stagnation - until around 2015.
‘Then they stopped.
In the past seven to eight years, they seem to be ignoring everything they learned,’ said Watanabe, who retains close ties with incumbent policymakers.
‘Under the Xi administration, China probably shifted its attention away from economics,’ he told Reuters.”
Xi should have carefully studied Karl Marx’s theses on Credit (i.e., “Credit and Fictitious Capital”).
Fixated on achieving global superpower status, Xi Jinping accommodated history’s greatest Bubble.
There will be momentous fallout, for China and the world.
At the Bubble’s apex, Xi and his dear friends have suffered delusions of grandeur.
And as the Bubble now deflates, impetus for New World Disorder will grow only more forceful.
October 19 – Bloomberg (Hema Parmar):
“Elliott Investment Management founder Paul Singer said the world is much more perilous than markets are pricing in and that investors should be more worried.
‘The world is now completely dependent on the good sense of leaders to avoid an Armageddon,’ he said, questioning just how much ‘good sense’ is coming from Russia, China and Iran…
Compared to the geopolitical chaos of recent weeks, Singer said, the markets have remained relatively calm.
‘It’s hard to avoid the conclusion that investors aren’t nearly as worried as they should be,’ he said.”
“I picked up on the initial words of the President when he said that we were at an ‘inflection point’.
And from someone who spent four decades in uniform, I firmly believe this is one of the most dangerous times in our history.
The things he pointed out: first of all, in just summary, others are seeking our help.
He tied both Israel’s actions and Ukraine’s actions to a fight for survival; a fight for protection of their people; a fight for freedom and dignity.
And then what he also said was that others are watching: our friends, our foes, our competitors.
What he then did – which I found very moving – was he tied all of that, not to the money, not to what’s expected, and not to the capacity of Americans to help.
But he tied it all to what should be our values: our human dignity, our respect for one another, our religious freedoms, and our freedoms writ large.
This is an appeal, certainly, and it’s a warning that he’s going to send ‘packages,’ as he called it, to Congress to fund.
What it really is – tying back to that inflection point – is saying, this is a time for action.
People in Ukraine, people in Israel are depending on us as that beacon of hope he just described.
And it’s important that we turn the light on, and we support them as best as possible. Because they reflect who we are as a people.”
Lieutenant General (retired) Mark Hertling, commenting after President Biden’s Oval Office address to the American people, CNN, October 19, 2023.
“Joe Biden last night made one of the most important speeches we have heard from the Oval Office for years.
It was speech that could only have come from that desk, and a message that could not have been broadcast from any other capital but Washington DC.
It was a speech in which the Commander-in-Chief of the United States acknowledged what I believe is the reality, that in spite of all its faults, all its anguished introspection, all its absurdities, America is still the world’s greatest power and the last, best hope of Earth.
In accepting the responsibilities that go with that role, the president channelled his heroic wartime Democrat predecessor Franklin D. Roosevelt.
‘American leadership is what holds the world together,' he said.
He set out to explain why American leadership matters, and why, in Roosevelt’s phrase, the U.S. must once again be the arsenal of democracy…”
Boris Johnson, October 20, 2023 (UK Daily Mail)
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