The Gap Between Reality And Hope Has Never Been Wider

US economic growth expectations have slipped dramatically throughout Q1 as weaker-than-expected (real) macro data has spoiled the party (along with rising geopolitical risk). However, surveys of economic hope are hyped up on goldilocks-like hype - to an extent we have never seen before... ever.

As BofAML's latest report shows, based on economic survey data, US economic growth should be (and should have been) up near 7%... a far cry from 'reality'...

And perhaps even more worrisome is BofAML's macro model divergence from the 'micro'-economic surge in company's earnings expectations (think tax cuts)...

In other words, profit bulls are now massively dependent on a sharp snapback in US GDP growth in Q2... just as the treade wars are hotting up.

PetroYuan' Futures Launch With A Bang, Volume Dominates Brent As Big Traders Step In

China's yuan-denominated crude oil futures launched overnight in Shanghai with 62,500 contracts traded in aggregate, meaning over 62 million barrels of oil changed hands for a notional volume around 27 billion yuan (over $4 billion).

As OilPrice.com's Tsvetana Paraskova notes, Glencore, Trafigura, and Freepoint Commodities were among the first to buy the new contract, Reuters reports.

After an initial surge in volume that outpaced overnight transactions in global benchmark Brent crude in London, trading tapered off toward the end of the session

Within minutes of the launch, the price had gone up to almost US$70.85 (447 yuan) from a starting price of US$69.94 (440.4 yuan) per barrel. The overall price jump for the short trading session came in at 3.92 percent.

Many awaited the launch eagerly, seeking to tap China's bustling commodity markets, although doubts remain whether the Shanghai futures contract will be able to become another international oil benchmark. These doubts center on the fact that China is not a market economy, and the government is quick to interfere in the workings of the local commodity markets on any suspicion of a bubble coming.

To prevent such a bubble in oil, the authorities made sure the contract will trade within a set band of 5 percent on either side, with 10 percent on either side for the first trading day. Margin has been set at 7 percent. Storage costs for the crude are higher than the international average in hopes of discouraging speculators.

As a result of these tight reins on the new market segment, some analysts believe international investors would be discouraged to tap the Shanghai oil futures. If the first day of trading is any indication, however, this is not the case, at least not for large commodity trading firms.

While it remains to be seen whether they're in it for the long haul, the participation of Glencore, Trafigura and other foreign investors in the contract's debut is a boon.

On the other hand, China is not leaving everything to market forces.

One energy consultant told Reuters that:

"The government (in Beijing) seems determined to support it, and I hear a number of firms are being asked or pressured to trade on it, which could help."

PetroChina and Sinopec are seen as instrumental in providing long-term liquidity for the new market as well.

Additionally, Bloomberg reports that contract grades in Shanghai crude oil futures exchange could account for around 200 billion yuan in trades, based on China's current import volumes, helping the nation in its efforts to internationalize its currency, Wood Mackenzie's research director Sushant Gupta says in an emailed note.

Woodmac expects China's crude import requirements to grow by ~2.1m b/d from 2017 to 2023, noting that incremental oil-requirement growth in China is much larger than any other country - meaning China would want to play a more active role in influencing the price of crude oil.

Trades on Shanghai International Energy Exchange, also known as INE, will enable China's crude-buying patterns to become more transparent to the world in the longer term, and will reflect China's crude supply-demand dynamic, becoming a reference for China's crude market (which is likely to have a bigger influence on global prices).

Woodmac expects INE prices to influence Basrah Light, Oman prices as a start as the grades account for a significant portion of contract volumes. China imports ~600k b/d of Oman crude which is large enough to start influencing Oman prices, which are retroactively set by the Oman Ministry of Oil and Gas.

Interestingly, as the PetroYuan started trading, so offshore yuan began to rally and has extended those gains today...

As most recently noted, after numerous "false starts" over the last decade, the "petroyuan" is now real and China will set out to challenge the "petrodollar" for dominance. Adam Levinson, managing partner and chief investment officer at hedge fund manager Graticule Asset Management Asia (GAMA), already warned last year that China launching a yuan-denominated oil futures contract will shock those investors who have not been paying attention.

This could be a death blow for an already weakening U.S. dollar, and the rise of the yuan as the dominant world currency.

But this isn't just some slow, news day "fad" that will fizzle in a few days.

A Warning for Investors Since 2015

Back in 2015, the first of a number of strikes against the petrodollar was dealt by China. Gazprom Neft, the third-largest oil producer in Russia, decided to move away from the dollar and towards the yuan and other Asian currencies.

Iran followed suit the same year, using the yuan with a host of other foreign currencies in trade, including Iranian oil.

During the same year China also developed its Silk Road, while the yuan was beginning to establish more dominance in the European markets.

But the U.S. petrodollar still had a fighting chance in 2015 because China's oil imports were all over the place. Back then, Nick Cunningham of OilPrice.com wrote…

Despite accounting for much of the world's growth in demand in the 21st Century, China's oil imports have been all over the map in recent months. In April, China imported 7.4 million barrels per day, a record high and enough to make it the world's largest oil importer. But a month later, imports plummeted to just 5.5 million barrels per day.

That problem has since gone away, signaling China's rise to oil dominance…

The Slippery Slope to the Petroyuan Begins Here

The petrodollar is backed by Treasuries, so it can help fuel U.S. deficit spending. Take that away, and the U.S. is in trouble.

It looks like that time has come…

A death blow that began in 2015 hit again in 2017 when China became the world's largest consumer of imported crude…

Now that China is the world's leading consumer of oil, Beijing can exert some real leverage over Saudi Arabia to pay for crude in yuan. It's suspected that this is what's motivating Chinese officials to make a full-fledged effort to renegotiate their trade deal.

So fast-forward to now, and the final blow to the petrodollar could happen starting today. We hinted at this possibility back in September 2017…

With major oil exporters finally having a viable way to circumvent the petrodollar system, the U.S. economy could soon encounter severely troubled waters.

First of all, the dollar's value depends massively on its use as an oil trade vehicle. When that goes away, we will likely see a strong and steady decline in the dollar's value.

Once the oil markets are upended, the yuan has an opportunity to become the dominant world currency overall. This will further weaken the dollar.

The Petrodollar's Downfall Could be a Lift for Gold

Amongst all the trouble ahead for the dollar, there are some good news too. The U.S. might have ditched the gold standard in the 1970's, but with gold making a return to world headlines… we could see a resurgence.

For the first time since our nation abandoned the gold standard decades ago, physical gold is being reintroduced to the global monetary system in a major way. That alone is incredibly good news for gold owners.

A reintroduction of gold to the global economy could result in a notable rise in gold prices. It's safe to assume exporters are more likely to choose a gold-backed financial instrument over one created out of thin air any day of the week.

Soon after, we could see more and more nations jump on the bandwagon, resulting in a substantial rise in gold prices.

BofA: We Are Witnessing The Third Biggest Bubble Created By A Central Bank

In its scramble to reflate the biggest asset-bubble in hopes of inflating away the $233 billion in global debt, which at 318% of world GDP has never been higher, the Fed took a wrong turn somewhere, and instead of successfully sending "inflation" assets into the stratosphere, it successfully "reflated" deflationary assets.

Commenting on this divergence, BofA notes that while we are now in the second longest US equity bull market of all time...

... the bull market leadership has been in assets that provide scarce "growth" & scarce "yield". Specifically, the "deflation" assets, such as bonds, credit, growth stocks (315%), have massively outperformed inflation assets, e.g., commodities, cash, banks, value stocks (249%) since QE1. At the same time, US equities (269%) have massively outperformed non-US equities (106%) since launch of QE1

And, as happens every time the Fed tries to manage asset prices, it has blown another bubble.

As BofA's Michael Hartnett writes, the "lowest interest rates in 5,000 years have guaranteed a melt-up trade in risk assets", which Hartnett has called the Icarus Trade since late 2015, and points out that the latest, "e-Commerce" bubble, which consists of AMZN, NFLX, GOOG, TWTR, EBAY, FB, is up 617% since the financial crisis, making it the 3rd largest bubble of the past 40 years, and at this rate - assuming no major drop in the 6 constituent stocks - the e-Commerce bubble is set to become the largest bubble of all time over the next few months.

Stocks Revisit the February Lows Just As We Predicted. What’s next?

Three weeks ago we called for stocks to revisit the February lows. At that time we were told we were "complete idiots" who were going to miss out on the next major Bull Run.

Instead this happened:

I don't know about you, but that sure looks like a revisit of the February lows to me.

So where does this leave us now?

Stocks are probably about to begin a massive bull run. Not because fundamentally things have improved… but because sentiment is EXTREMELY bearish. In fact, according to some metrics, investors are even more bearish today than they were during BREXIT!?!?Whenever you see thhttp://gainspainscapital.com/is extreme a sentiment reading, taking the other side of the trade can be quite profitable. I expect we're going to see a "blow off" top to complete this market run in the next 6 weeks.

Dornbusch on economics timing

In economics, things take longer to happen than you think they will, and then they happen faster than you thought they could."

– Rudiger Dornbusch

 

In economia, le cose richiedono più  tempo di quanto pensiate, e poi accadono più velocemente di quanto pensavate di poter fare. "

- Rudiger Dornbusch

Deutsche: "We Are Entering An Environment Where Everything Wants To Sell Off"

The market responded with confusion to last week's Fed statement, which initially was interpreted as more dovish than expected in anticipating only 2 more rate hikes in 2018 sending the S&P spiking, only for a more hawkish narrative to gradually take over, facilitating last week's violent selloff, as the market focus shifted to the hawkish path of tightening signaled by the Fed dots. Even here though, the dot plot was slightly steeper but hardly enough to cause sleepless nights, even as Jay Powell repeated that the Fed will remain data dependent.

But perhaps the market was mostly taken aback by (lawyer) Powell's straight-to-the-point talking style, answering questions directly and efficiently, avoiding the coma-inducing verbal diarrhea that defined the press conferences of Janet Yellen (in fact, Powell's first presser set a record for shortest quarterly news conference by Fed chair), and generally eliminating much of the two-way confusion that markets had welcomed in the past, as it had provided a welcome buffer courtesy of Powell's predecessors saying so much fluff (and nothing of substance) that it paradoxically "justified" the market's every opinion (and resulted in such bizarre outcomes as record easy financial conditions amid several consecutive rate hikes).

What does the Fed's changing narrative mean? According to Deutsche Bank, two things.

First, in analyzing the market's response to the Fed statement, and especially the aggressive reaction in the rate vol space, Deutsche's resident semiotic and post-modernism analyst, Aleksandar Kocic - who has for the past year explained virtually every market move in the context of the bi-directional information pathway between the Fed and market, a trope he picked up by reading Lacan (the "mirror stage"), Derrida, Foucault and other pomos - who wrote that last week signaled a more hawkish Fed, "which suggests that monetary policy could become potentially disruptive for markets – after years for hyper-stimulative monetary policy, where everything used to rally, stimulus unwind is taking us into an environment where everything wants to sell off."

While it is hardly news that the Fed is now in balance sheet roll-off mode, if only until stocks tumble at which point the Fed will resume easing, Kocic warns that this hawkish shift "is now happening at accelerated pace and along the way creating new pattern of vulnerability across the markets."

It also leads to an important new question:

What is the hierarchy of vulnerability in this context -- which market sectors are going to be the more vulnerable than the others?

The practical, market implications of this "hawkish shift" narrative are a continuation of what we observed in the aftermath of the vol explosion in early February: a bifurcation of relative vol across asset classes. According to Kocic, the market still seems to see rates (and duration in general) "less vulnerable than equities." He explains furter:

This sentiment is reflected through enthusiasm for rates volatility, selling of the covered puts in credit, and equity/credit vol switches. The underlying logic of defensive credit trade is that scaling down on credit is taking place on the back of view of its gradual widening. Short credit vol overlay compensates for the loss of carry, but remains risky in case of violent widening. This is in tune with an implicit belief that further compression in credit is likely
to be limited and orderly. The latter trade, financing equity vol with credit vol, is a complement of the credit view with high vulnerability of equities. Based on the last week's finale, rising geopolitical risk and trade tariffs are only going to reinforce this hierarchy of vulnerability as well as provide support for bonds which, when coupled with a more hawkish Fed, could add more flattening bias.

Here it's also worth noting that another, parallel shift is taking place in terms of the market's response to newsflow from the political arena (of which Donald Trump has made sure there is plenty). As Deutsche Bank has repeatedly commented for the past year, markets have learned to discount the effects of political volatility "and growing political entropy." Ironically, noisy politics "was interpreted as an obstacle to ability to produce consensus and legislate changes." In other words, political uncertainty became synonymous with status quo and, as such, remained bearish for market volatility.  The paradox is that the more D.C. squabbled, and the more Trump got into hot water, the more traders and algos saw this as validation of the status quo.

And while, to a large extent this still remains the case, "with the escalation of political risks new modes of market vulnerability are emerging at the intersection of politics and policy," according to Kocic. Translated into English, this means that - as last week showed - outbursts from Trump are once again shaking markets, especially when it comes to the developing "trade war" narrative.

All this combined, pushes vol away from rates and into equities, and argues in favor of outperformance of equity vol over credit, "with a possibility that further escalation of political risk taking rates deeper into gamma bearish territory" as traders dump risky assets and buy such relative safe havens such as credit and duration (at least until China retaliates by announcing it will halt or sell TSYs).

Indicatively, we have already seen the onset of this pattern of repricing: this is shown in the two figures below, the first of which compares rates and credit vol...

... and the second looking at the repricing higher in equity vs credit vol.

So should one just enter into a "crash" pair trade, of selling rates vol and buying equity vol? Sure, just be careful for a potential whiplash in credit vol: as Kocic concedes, while in the near term, an aggressive/hawkish Fed is seen more disruptive for risk than for rates or credit, "that could change in the long run" especially if China, that holder of $1.3TN in TSYs decides to send a powerful message to Trump as to who is really calling the shots in the incipient trade war.

* * *

There is a second "narrative" to emerge as a result of last week's hawkish FOMC: as Deutsche explains, "last week's FOMC meeting can also be interpreted as an attempt of the Fed to take control of the process of rates market normalization. This is the alternative narrative." This particular narrative is one of substantial latent risks, as until now, the Fed was willing to let market's dictate the normalization process, even if it means a dual paradoxical outcome whereby the tightening after several rate hikes lead to higher risk, while yields rose in the context of an acute, and recessionary, curve flattening.

It is this nonsensical reaction to "normalization" that the Fed is hoping to "normalize" in turn, although in doing so it risks losing control of the entire process.

As Kocic notes, for more than seven years after 2008, bear steepeners and bull flatteners were dominant modes of the curve -- while short end hardly moved, back end articulated response to market shocks.

These two modes of curve response were effectively a referendum on success of stimulus. However, one should keep in mind that these two curve modes are highly unnatural. Normally, shocks arrive at the front end of the curve and, since rates are mean reverting, their effect attenuates with time making them less visible at the back end. This is why in normal times bull steepening and bear flattening represent dominant modes of the curve. In that context, bear steepeners and bull flatteners are a reflection of explosive rates dynamics (negative mean reversion) – front end shocks amplify with time. The explosive process does not present a problem as long as the front end is in a "sleeper" mode, but as soon as it starts moving – when rate hikes commence – the risk of the long end getting unhinged becomes a problem.

This "breathing" of the curve between Bear Flattening (BeF) and Bear Steepening (BeS) is shown schematically below:

It is this curve "breathing", which directly impacts downstream risk assets, that the Fed has been trying to control since the beginning of rate hikes."

As a consequence of this effort, "every violent bear steepener has been  encountered with an appropriate response of the short end of the curve causing a gradual flattener in such a way to shift the action closer to the front end. This is the "breather" mode of the curve. Effectively this was an attempt to recalibrate rates market and remove the risk of "exploding" back end. As a result, with time the bear steepening eruptions became less volatile and more limited arguing in favor of Fed's success in their effort.

However, as a result of the changing narrative, and especially if indeed Powell wants to regain curve control over the recent resumption in flattening, the Fed risks jeopardizing its "credibility" of being able to control the curve.

In any case, according to Kocic, what this boils down to is that the Fed continues to supply convexity to the market, albeit in different form then before (rates range during QE or transparency and dialogue with the market in the first two years of rate hikes). It is in this shift that "the risks are being flexed."

In terms of market mechanics, this means that as monetary policy remains negatively convex to higher rates due to tail risk of the bond unwind trade, "the Fed's supply of vol is effectively financed by increasing their negative convexity exposure."

In practical terms, this means that in a dramatic regime change, one which we hinted at in February when we first relayed the new Fed chair's stunning philosophical admission that "the Fed has a short volatility position", Powell now appears to be abandoning the problem of facing the tail risk by being behind the curve and is instead pushing rates higher themselves, or as Kocic summarizes, "instead of risking that markets raise rates" - a process which can quickly spiral out of control - "are taking control of that process."

This is where the biggest risk emerges:

And although locally vol could stabilize, stakes are getting higher with time and the question of whether the Fed would be able to successfully fine-tune its exit and take control of rates normalization without causing major disruption remains open.

However, a few more big, sharp drops in the S&P and there will be no question what the market thinks of the Fed's sharp regime change, and its chances of successful execution, especially if what Deutsche said earlier on, namely that "stimulus unwind is taking us into an environment where everything wants to sell off" remains the case.

Rickards Warns: PREPARE IMMEDIATELY For Fallout From Massive Escalation In The Trade Wars

Jim Rickards says the trade wars are about to get much more intense as nuclear options will be used. Here's the details…

What we have seen so far are just the opening shots of the coming trade war. Think of it as the Battles of Lexington and Concord that opened the Revolutionary War. Much larger tariffs and penalties are waiting in the wings.

Trump will soon receive a report under Section 301 of the Trade Act of 1974. That report has been almost a year in preparation and will reveal that China has stolen over $1 trillion in U.S. intellectual property.

Section 301 of the Trade Act of 1974 is the "nuclear option" when it comes to trade wars.

I don't want to get too deeply in the weeds here, but Section 301 gives the president broad authority to impose sanctions and penalties. The president will have a completely free hand to impose billions of dollars of damages if not more on China.

Trump could receive this report within days or weeks. Regardless, it is coming soon.

Once the president receives it, the law gives him 90 days to react. But he will likely act within days or weeks upon receiving it.

Importantly, Trump does not require Congressional approval to act. Again, the law gives the president enormous flexibility. So he doesn't need Congressional backing as he did for, say, the tax cuts.

Initial reports indicated that these penalties will be about $60 billion. In fact, Trump used that figure in today's press conference on tariffs. But that's just for starters.

Trump will wait to see if China is willing to make concessions in other areas. If not, he can easily double or triple that $60 billion figure.

The penalties Trump seeks to impose are not limited to specific sectors but may apply across a wide range of goods and services from China that benefitted in any way from the theft of intellectual property (IP).

IP is a very tricky subject with a lot of gray area.

Trade restrictions on steel, for example, are much easier to implement. Steel is tangible. You can weigh it, track it, etc.

Intellectual property, on the other hand, is much more vague, much more amorphous. It exists inside human brains, or on the internet or a computer thumb drive. It can be everywhere at once in a sense.

So it's much more difficult to identify, quantify, and throw tariffs on than traded products like steel, autos, solar panels or washing machines. Yet intellectual property is more important than ever.

We live in a world of technology, a world of the internet, of smart devices, and even cryptocurrencies for that matter. These are all forms of intellectual property.

Now, China has been stealing U.S. intellectual property for decades in various ways. Sometimes it happens when a Chinese scientist comes to the United States and takes what he learns back to China.

But a lot of the theft has been done through malicious hacking of U.S. technology companies. These could be big defense contractors like Lockheed Martin or Northrop Grumman. But they could also be small firms with one great innovation or idea. These smaller firms may actually be more vulnerable because they don't have the defenses against hacking or cyber warfare that the big guys do.

With this stolen intellectual property, China has been able to build up companies like Huawei, a large technology and telecommunications firm. And its defense industry has made enormous strides because of stolen intellectual property.

Because intellectual property is so amorphous, the president could look at a wide variety of Chinese industries and say:

"You know those electronic products you're assembling, like smart phones? They wouldn't be so smart if you hadn't stolen some of our intellectual properties. So we're going to throw a tariff on them."

These penalties will have a much broader and deeper impact than the steel and aluminum tariffs, or those on washing machines or solar panels.

China has issued a pro forma denunciation of the fines and tariffs, but have not announced any specific retaliatory measures in the immediate aftermath of Trump's actions.

China will retaliate for U.S. sanctions not with their own tariffs, but with asymmetric financial warfare including diversifying reserves away from U.S. Treasuries into gold and European bonds, and with restrictions on U.S. direct foreign investment in China.

Both sides can continue the trade war in cyberspace with ongoing reciprocal theft of intellectual property and intrusions into critical infrastructure.

I want to mention one other trade weapon the president has at his disposal, something called CFIUS. CFIUS stands for the Committee of Foreign Investment in the United States.

It does not have to do with trade specifically, but with what's called direct foreign investment. That's when a foreign entity from China or Europe or anywhere else buys a U.S. company.

Generally, the U.S. has been very open to direct foreign investment in the same way we've been open to trade.

But there's always one big exemption, which is national security. And the 1974 trade act, which I mentioned earlier, does provide a national security provision to limit direct foreign investment in the U.S.

CFIUS is designed to protect U.S. companies from foreign takeovers where national security could be compromised.

Nobody cares if a company from a friendly country like Canada wants to buy a nonstrategic asset like an ice cream company in the United States. No one thinks that involves national security.

But if the Russians or the Chinese wanted to buy AT&T, that's a completely different story. That would not be allowed because that's a critical part of the infrastructure of the United States.

That's a simple example of how CFIUS can be used for national security reasons to protect against foreign acquisitions of U.S. companies.

The president has already announced that he's going to be very aggressive in preventing Chinese acquisitions of U.S. companies. So that's another arrow in Trump's trade war quiver. He's using them more aggressively than at any time going back to the 1980s — maybe even the 19th century.

What are the practical implications of tariffs, IP penalties, and all these trade war developments?

First, Chinese companies that export to the U.S. will be hit with tariffs. But U.S. companies like Boeing that import materials from China will be affected also. Further, U.S. companies that export to China will get hit with retaliation. And U.S. companies looking to expand in China will be denied permission.

Likewise, many Chinese companies looking to expand to the U.S. will be denied permission under CFIUS. And U.S. companies that are hoping for a Chinese buyout offer may not be able to sell to a Chinese company.

But it goes beyond China. You can take those examples and just substitute South Korea or the Eurozone. Will a South Korean company be able to buy a U.S. company if there's a trade war going on? Maybe not.

So the trade war is going to ratchet up and get much more intense. Wall Street has its head in the sand. This trade war is not going away anytime soon. It will last for years, likely intensify and be a major headwind for stock prices.

Investors need to prepare immediately for the fallout from this massive escalation in the trade wars.

It’s All Starting To Make Sense: The MOST SOUND Currency In The World RIGHT NOW Is?

Hint: They're evil people who meddle in everything and cause myriad ruckus around the world, but talking finances, they're king of the hill, and it will matter…

So it's all starting to make sense now.

We keep hearing the terms "global reset", 'monetary reset", and "financial reset", but resetting what to what, and how would that look?

First, why would there be a reset?

Resets happen quite regularly for reasons such as hyperinflation, default on debt, break-down of the system, and loss of confidence, etc.

The last reset was in 1971 when Nixon closed the gold window.

Prior to that, it was the Bretton Woods Agreement that came out of WWII.

And now, we're close to the point of the next reset.

The way that a nation conducts a reset, traditionally, which has always been the case and will be the case again, is that gold is revalued to a price that gets it equal to the outstanding debt or outstanding money supply of the nation.

Let's use the example of money supply and look at where things stand right now.

In our example, let's take 'M0', which is a type of money supply.

M0 is the most liquid type of money there is.

M0 is a measure of the money supply which counts all the cash floating around in the system as well as the liquid assets held in checking and savings accounts. Think of M0 as something that can be converted into cash on a whim.

So in our example, we will be resetting the price of gold to M0.

One question that comes up is, how much of the currency should be backed by gold?

We often hear analysts, such as Jim Rickards, throw out numbers of 20% gold backing or 40% gold backing.

I'm not goin' down that road, however.

You see, Article 1 Section 8 of the US Constitution says that congress is to coin money and fix the standard of weights and measures.

Then, Article 1 Section 10 takes it one step further and requires that only gold and silver be our money.

This means the dollar (and units of the dollar, and multiples of the dollar) is supposed to be a specific weight and purity of gold & silver.

So I'm going to go with a 100% gold backing because that's the only money we're constitutionally allowed to have.

Santiago Capital has done all the grunt work for us:

So looking at the chart above, we can get back to the original question in the title of this article: Who has the soundest currency?

First, what does that mean?

That means that for the amount of gold backing their M0 monetary supply by 100%, this country needs the lowest U.S. dollar price for gold to fully back their currency.

In other words, their currency is more sound than those who need a very high U.S. dollar price for gold to 100% fully back their currencies.

Said differently, if a nation has a crap-ton of currency (M0) out there, and not a lot of gold, they need a sky high gold price.

Look at Japan, for example.

Now, the nation that has the best ratio of gold compared to the money supply outstanding?

Yup. Russia.

You see, Russia only needs a $2,368 (USD) gold price to fully back their money supply.

Compare that to the United States, where we need nearly a $15,000 gold price to back our money supply.

It is all starting to make sense now, isn't it? This is exactly why China and Russia have been so busy stacking the yellow metal.

Speaking of China, if we cast aside the World Gold Council "official reserves" for China and use a number of tons more in line with what many analysts believe, then China has an even more sound money supply than Russia.

Again, the math has been done for us, on the working assumption that China really has 20,000 tons of gold and not the paltry stack the WGC says they have.

Here's the number's crunched by James Anderson:

China's 3 pots of #Gold #Bullion #Reserves are estimated near 20k gold tonnes. That would divide their M0 number by a factor of over 10 here low $2k oz #Au to clear

As for their massive M1 M2 figures expect Xi to get ghost cities occupied by fiat and the yuan devalued to #Goldpic.twitter.com/VR3FT6PR8h

— James Henry Anderson (@jameshenryand) March 21, 2018

Looky there: China needs an even lower USD gold price than Russia.

"Unofficially" of course.

What can we conclude about all of this?

China and Russia are in way better shape than the United States, and China and Russia are in way better shape, financially, than most countries for that matter.

Most countries need between a $10,000 and $20,000 gold price to cover their M0 money supply.

Granted, this is a country by country reset in our example. A global reset would look much different because we would be talking about total global M0 divided by total global gold reserves.

But we're not going there for now. For now, we're looking at financial soundness of individual nations.

Wrapping it all up, what can we conclude?

This is more evidence of the ongoing shift of power from West to East.

With the exception of Japan, the East is in much sounder shape than the West, and as they say, "he who owns the gold makes the rules", all things considered, China and Russia are near the point if not at the point of being able to make the rules.

Furthermore, China and Russia are still very busy stacking the shiny phyzz, and as just shown, their finances are much sounder than ours – no complicated math or sophisticated models needed.

Again, all you have to do is take the nation's M0 money supply and divide by the ounces of gold, and your answer is the dollar price you need for the M0 to be fully backed by gold.

In the case of Russia, the math looks like this: $141,237,200,000 / 59,651,090 oz = $2367.72 per oz.

Side note: Here's some more hi-res pics inside Russia's gold vault for anybody wanting some eye candy of a fat stack.

Bottom line: Sooner or later the world is going to eat their losses on U.S. Treasuries and ditch the dollar.

The dollar is on the life support of U.S. Military Backing.

Think about this: If the "economic recovery" is long in the tooth, with the U.S. military actively engaging around the world in armed conflict since basically September 11th, 2001, the U.S. military is surely over-extended and therefore the U.S. military support of the dollar is also long in the tooth.

In conclusion: China and Russia are busy stacking gold (and silver) because they have the opportunity to stack at bargain basement prices, and there is people dumb enough to sell it to them at bargain basement prices all to keep the dying dollar alive just a little while longer.

The end is near.

So is the “Trade War” Crushing Stocks?

Bull markets climb a wall of worry. What the heck happened?

OK, it was an ugly week. Facebook (FB) dropped 14% and lost $75 billion in market cap. It's down 10% year-to-date. It's currently trying to dig itself deeper into its self-inflicted debacle. It wasn't just Facebook. Alphabet (GOOG) dropped 10% in the week and is down 2.4% year-to-date. This was a broad selloff.

The S&P 500 index dropped nearly 6% for the week and 9.9% from the peak on January 26. It's down 3.2% year-to-date. At 2,588, it's just 7 points above the low point on February 8, which is begging to be taken out on Monday. This drop is big enough to show up on a long-term chart, but given the nine-year 320% rally, why would anyone be surprised?

The Dow dropped 5.7% for the week. It's down 11.6% from the peak on January 26, and down nearly 5% year-to-date. It carved out a new low in this down-cycle.

The Nasdaq dropped 6.5% for the week, and 7.8% from its peak on March 12, but is still up 1.3% for the year.

When stocks soared no matter what, it was because they were "climbing a wall of worry," which is, as it was ceaselessly pointed out, what bull markets do. Bad news was good news. It didn't matter what happened. The worse the news was, the more stocks would climb. Falling earnings and revenues no problem. Geopolitical nightmare scenarios no problem. Trump's promises during the campaign and after the election to fix the trade imbalances in the US were just as well communicated as his promises to cut taxes. From the day Trump was elected until its peak on January 26, the S&P 500 soared 30%.

And yet, suddenly, according to Wall Street analysts and the media, the universally declared culprit for the sell-off this week was the decision by the White House to do what Trump had been promising to do since the campaign.

"A Horror Week for the Dow Has Investors Begging for Trump Respite," Bloomberg said. Of course, these investors are always whining when their investment theories fall on their nose, no matter what the perceived cause. Perma-bulls on Wall Street always beg for "respite." Usually, their begging is directed at the Fed, but now it's directed at Trump.

"Wall Street nosedives as investors flee on trade war fears," Reuters reported.

"Trade Fears Jolt Global Asset Prices," The Wall Street Journal said. "Looming trade conflict between U.S. and China is weighing on stocks, currencies and commodities."

Though everyone saw the tax cuts coming and priced them into stocks, thus driving up the S&P 500 30% since Trump's election, no one saw the trade policies coming? I mean, come on!

Everyone knew Trump would crack down on the trade imbalances. The NAFTA renegotiation has been going on for months. China's gigantic trade imbalance with the US has been on Trump's verbal target list since 2016.

But the fact is simple: during a bull market, this type of "bad news" would have caused stocks to jump 6% at a minimum in the week. A bull market climbs a wall of worry, analysts would have said. Nothing would have mattered.

When markets head south, the media and analysts are trying to find a reason,other than reality. This time, the excuse du jour was the risk of a "trade war." Next time, it's some other excuse du jour.

Reality is a little harder to stomach for these folks. The stock market is horribly overpriced, with many individual stocks at absolutely ludicrous levels. This is a flaming stock market bubble. Every indicator has been pointing it out for years. At some point, bubbles reach their maximum and begin to deflate.

In addition, the Fed has been tightening, and the markets have been fighting the Fed. This always ends the same way. Eventually, the markets will back off from fighting the Fed, and this leads to a long series of downward adjustments in the markets. The Fed has been pointing at the stock market as one of the asset classes where values are "elevated." It's worried about financial stability and doesn't want asset prices to inflate to such an extent that they'll take down the financial system when they implode. So this selloff has the Fed on its side.

The Fed has also been unwinding QE. This started in October with baby steps that are now accelerating. Just as ZIRP and QE caused the biggest bout of asset-price inflation the world has ever seen, rate hikes and the QE-Unwind will reverse some of this. It's not a secret. What are people thinking?

Investors around the globe had it historically good for nine years, with all asset classes experiencing sometimes hilariously sharp price surges that lasted year after year after year. The real reason for the selloff now is that enough players see that this cannot go on forever, and they're trying to unwind some leverage and take some risk off the table, and other players are losing their enthusiasm. These players could be algo-driven or human. Either way, at these rarefied levels of asset prices, any decline in blind enthusiasm causes prices to swoon. No trade war required. Just the reality of pandemic asset bubbles having reached their limits.

In an interview about the trade sanctions President Trump is throwing at China and at Corporate America, Ambassador Cui Tiankai trotted out all kinds of vague threats, including the possibility that China might cut back on its purchases of US Treasuries

Competition Eats the Profits of Big Shaky Banks in Euroland: So Consolidate

The plan: Take out mid-sized banks to create a "bipolar" industry of large and small banks, and a lot less competition.

Barely nine months have passed since Spain's sole officially too-big-to-fail bank, Banco Santander, took over its collapsed rival, Banco Popular, in a shotgun marriage hastily endorsed by panicked Spanish and EU authorities. Santander still hasn't even fully digested Popular's assets, yet it already has its sights set on new takeover targets.

In a speech to shareholders the bank's president, Patricia Ana Botín, stressed the lender's capacity for "organic growth" but she also refused to rule out the possibility of fresh acquisitions. "We have the obligation to analyze the opportunities for external growth that arise in our markets and that could strengthen our business," she said.

The speech comes at a time that Goldman Sachs is predicting a new round of consolidation in Spain's financial sector. After the acquisitions of Popular (by Santander) and BMN (by Bankia) last year, the first cycle of the consolidation process of Spanish banking is almost complete, Goldman said in a recent note to investors. Now, a second cycle, designed to capture new efficiency gains, can begin.

In the report the New York-based investment bank identified the most attractive acquisition targets for alpha-banks like Santander, BBVA and Caixa Bank, based on factors such as the target bank's valuation, size, shareholding structure and potential cost savings for the buyer. The bank that came out on top is Unicaja, "a relatively small and clean bank," with significant potential for generating efficiencies "if its branch network is reduced."

Banco de Sabadell, Spain's fifth largest lender, placed second on the list, although given its size, Sabadell is just as likely to acquire another bank as be acquired by one. Also on the list of takeover targets are smaller lenders like Kutxa, Ibercaja, Cajamar, Abanca and Liberbank, which almost collapsed in the wake of Popular's demise last summer.

Spain's banking industry is already heavily concentrated, with the five biggest lenders — Banco Santander, BBVA, CaixaBank, Bankia and Sabadell —controlling 72% of the retail banking space. Before the crisis the country was home to 45 savings banks and a dozen commercial banks. Now there are barely more than ten large or mid-size lenders left. And the latter are right at the top of the former's menu.

"The essential problem is for mid-sized lenders whose collapse [like Popular's] could trigger adverse effects on the system," said Fernando Restoy, former Bank of Spain governor and current president of the Financial Stability Institute (FSI) of the Bank for International Settlements (BIS). "These entities could come under heavy pressure in the future."

Once they do, the job of monetary authorities will be to "help facilitate" corporate operations that would favor an "orderly transition towards the industry's new bipolar structure" (i.e. of small and big banks), he said. It goes without saying that in this new "bipolar" world the emphasis will be on creating ever bigger banks rather than, say, breaking up big banks into ever smaller banks.

Senior ECB representatives have repeatedly underscored the need to weed out smaller banks in order to cut competition for bigger lenders. In September 2017 Daniele Nouy, Chair of the ECB's Supervisory Board, and thus in charge of the Single Supervisory Mechanism, which regulates the largest 130 European banks, blamed fierce competition from smaller banks. Rather than lots of competition between banks, what Europe needs, Nouy said, are "brave banks" that are willing to conquer new territory.

It's not just senior central bankers who are calling for a new round of consolidation for Europe's banking industry. So, too, are executives at the helm of the big banks that stand to benefit the most from the industry's restructuring. They include John Cyran, the CEO of Deutsche Bank, which last week reported yet another round of annual losses while dishing out bonuses that had somehow quadrupled in size on the previous year's bonus pot.

In a panel discussion at last year's Frankfurt European Banking Congress, Cyran argued that Europe would benefit from having "a handful of institutions" powerful enough to compete on a global stage with larger US and Chinese rivals. "There are too many institutions in Europe, especially in this country (Germany)," he said. "China and the United States have very large banks which have the heft to invest globally and which can withstand relatively long eras of low returns."

Deutsche, which has already acquired domestic peers Postbank and Sal. Oppenheim over the last decade with no noticeable improvement in its financial health, held talks with its biggest rival Commerzbank over a potential merger in 2016. In the end the talks fell through but every few now and then fresh rumours reemerge that a tie-up between Germany's two biggest, serially troubled banks is in the works.

Both lenders are in such dire straits that the German newspaper recently Welt just asked if they can still be saved. Perhaps the only way is to meld them together into the world's scariest semi-publicly owned Frankenbank, as Reuters' Breaking Views just suggested. The alternative would be for bigger, healthier European alpha banks to swoop in and take over Germany's two most important lenders, a solution that is unlikely to satisfy German policymakers and business leaders.

Meanwhile, Banco Santander, another global systemically important lender, has acquired a taste for taking over struggling mid-sized banks. And it knows that in this endeavor it can count on Europe's monetary, political and regulatory authorities for a helping hand whenever needed.

After the largest British outsourcer collapsed, two other large British outsourcers are also on the verge of collapse, and the vultures are circling.