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By Michael Every of Rabobank

US Secretary of State Pompeo’s speech yesterday was momentous if not yet guaranteed to be portentous. It was held to commemorate 50 years of ‘Nixon going to China’ – and said this had been a well-intentioned mistake. “We’ll keep on talking,” said Pompeo. “But the conversations are different these days…The only way to truly change communist China is to act not on the basis of what Chinese leaders say, but how they behave…I say we must distrust and verify…We can’t treat this incarnation of China as a normal country, just like any other….I call on every leader of every nation to start by doing what America has done – to simply insist on reciprocity.”

He pointed fingers when addressing “a NATO ally of ours that hasn’t stood up in the way that it needs to with respect to Hong Kong because of the fear Beijing will restrict access to China’s market. This is the kind of timidity that will lead to historic failure, and we can’t repeat it.” Then he underlined “If we bend the knee now, our children’s children may be at the mercy of the Chinese Communist Party.” This was not about containment, he concluded, but: “We can’t face this challenge alone….Maybe it’s time for a new grouping of like-minded nations, a new alliance of democracies…If the free world doesn’t change Communist China, Communist China will change us.” Pompeo also spoke about empowering the Chinese people as a tool to push back against the CCP – which will almost certainly be taken as an attempt to undermine it by Beijing.

In short, as the media have noted, the speech was just a notch below calling for regime change – and at the very least for Western decoupling via reciprocity…unless China changes. That makes it momentous. Whether it is portentous depends on what Western businesses do. History shows they are unlikely to take any moral lead when dollars are involved, which means the onus will be on governments to force their hand: will it, or is this just rhetoric? We shall soon see. (Today’s latest update is that China is closing the US consulate in Chengdu…and that it may refuse to comply with the US request to close its consulate in Houston, which truly would be without recent diplomatic precedent.)

Meanwhile, as Pompeo’s speech takes US-China relations back to 1970, and leading some to recall the Korean War (1950-53) where the two sides were fighting each other, other momentous developments are unfolding in the US on a separate but related front.

Just as US initial claims spike back to 1.4m, today is the deadline for extended US unemployment benefits to end. They are going to lapse with no replacement. Until Congress can agree on something new, we are about to find out what an economy looks like when you throw tens of millions into unemployment, because you would not nationalise payrolls like in Europe, and then throw unemployment benefits out too. Reports suggest some Republicans have even been trying to sneak in backdoor cuts to social security in any stimulus bill too for good measure. This prompted left-wing commentator Matt Stoller to tweet: “Not to give strategic advice to Republicans, but it’s probably a bad electoral strategy to negotiate aggressively to ensure that the next coronavirus package includes mercenary style hunting games of the poor. To put it differently, a good Republican electoral strategy five months before an election is ‘here free money for all the voters.’” Is his view of impending electoral suicide really painless? And if so, for whom?

Of course, there is a free-market fundamentalist view that the more the government spends, the worse things get. The logical corollary is that the more you eat, the greater the risk of obesity and heart attack. Which is true. On the other hand, try eating nothing. You tend to die a lot more quickly than the other way round. We also have lots of history to lean on to back up that point. Greek austerity was a disaster; Italian austerity was a disaster; and Weimar Germany austerity under Brűning resulted in Nazism. We are talking about tens of millions of people being unemployed with virtually no income. Think of the snowball effect of that income slump: at least think of the landlords and the businesses that will suffer too. Perhaps that’s why US stocks dipped yesterday – and why the Fed immediately stepped in to widen the range of firms it can bail out. No free-market fundamentalism there, eh?

So markets can now contemplate a serious escalation in US-China tensions that runs far beyond the risk of mere tariffs; and of a looming lurch lower in the US economy, which might necessitate even more focus on foreign policy as a distraction. They can also worry about India-China, UK-Europe, and now France-Turkey tensions too; the latter as President Macron calls for sanctions against Ankara to support Greece against Turkish maritime claims aimed at natural gas resources.

Is it any wonder bond yields are going down again, and that even stocks are wobbling? Or that risk-off FX is (very, very tentatively) risk off? Not at all. Indeed, with ideological fixity and the Korean War in mind, it’s hard not to conclude we are in a M*E*S*S and so to hum:

Through early morning fog I see; Visions of the things to be

The pains that are withheld for Xi; But Republicans just cannot see

That suicide is painless; It brings on many changes

And they can take or leave it if they please

Games of politics are hard to play; Trump’s gonna lose now anyway(?)

The final card McConnell lay; As jobless lose all hope today

Suicide is painless; It brings on many changes

And they can take or leave it if they please

The fiscal sword will pierce our skin; It hurts like hell when it begins

But as it works its way on in; The pain grows stronger – yet DC grins

Suicide is painless; It brings on many changes

And they can take or leave it if they please

A brave Republican once requested me; To answer questions that are key

“Trump or Biden will it be?”; And I replied, “Cut benefits: you’ll soon see”

Suicide is painless; It brings on many changes

And voters can do it to them if they please

Precious metals prices are once again on the rise this morning with spot gold prices back above $1900…

Source: Bloomberg

“When interest rates are zero or near zero, then gold is an attractive medium to have because you don’t have to worry about not getting interest on your gold and you see the gold price will rise as uncertainty in the markets are rising,” Mark Mobius, co-founder at Mobius Capital Partners, said in a Bloomberg TV interview.

“I would be buying now and continue to buy, because gold is really on a run, it’s doing well.”

Source: Bloomberg

And gold is continuing to track the volume of global negative yielding debt once again…

Source: Bloomberg

The all-time record high price for spot gold, according to Bloomberg data, is $1921.18 in Sept 2011…

Source: Bloomberg

While spot gold prices are about $20 away from the all-time high, some futures contracts on the Comex are already trading even higher. December, which overtook August as the contract with the highest open interest according to data released when Friday’s Asian trading session was already underway, touched $1,927.10 an ounce Thursday. That’s above the record for the most-active contract of $1,923.70 reached in 2011.

Silver is rising too but less so for now, stabilizing after its breathless surge this week…

Source: Bloomberg

The Gold/Silver ratio is creeping higher again…

Source: Bloomberg

As a reminder the last time gold traded at these levels, the SNB pegged the franc to the euro.

Where’s Benoit?

 

Authored by Mike Shedlock via MishTalk,

President Trump’s two Federal Reserve nominees, including the hot-button pick Judy Shelton, will proceed to a vote in the full Senate.

The New York Times reports Shelton Clears Senate Committee, Moving Closer to Fed Board.

Judy Shelton, an unorthodox economist with close ties to the Trump administration, moved a step closer to a seat on the Federal Reserve Board after the Senate Banking Committee voted along party lines on Tuesday to advance her nomination to the full Senate.

Ms. Shelton moved forward along with Christopher Waller, who is research director at the Federal Reserve Bank of St. Louis and a more conventional pick. If they are confirmed by simple majority votes in the Senate, Ms. Shelton and Mr. Waller will fill the two empty seats on the Fed’s seven-member board in Washington.

Attack Dogs Blast Shelton

In a stunningly ignorant, yet hardly surprising op-ed, Steven Rattner says God Help Us if Judy Shelton Joins the Fed.

“Why do we need a central bank?” Ms. Shelton asked in a Wall Street Journal essay in 2009. She wants monetary policy set by the price of gold, a long-abandoned approach that would be akin to a Supreme Court justice embracing the Code of Hammurabi.

Anyone who questions the need for a Central Bank immediately has at least something on the ball. 

The Fed has blown 3 consecutive economic bubbles of increasing amplitude. 

By keeping interest rates too low too long, the Fed helped brew the dotcom bubble, then when it burst blew the housing bubble, then before Covid hit blew another enormous stock market bubbles.

Letting the market set rates would have been a dramatic improvement. 

The Federal Reserve is an indispensable player in managing our economy. Period. 

Wong. Period. 

Her past opposition to the Fed buying bonds to help stimulate the economy — as it did successfully during the 2008 financial crisis — would have prevented the central bank from standing up many of the rescue programs that are now helping to keep the economy afloat.

Were it not for the Fed blowing bubbles, we would not need the Fed to stimulate the economy. The Fed overstimulated the economy in a major way three times in the last 20 year. 

Rattner wants more of the same.

Between 1880 and 1933, the United States experienced at least five full-fledged banking crises; in the past 87 years, we’ve had two. Though promoted as smoothing price movements, a gold standard in fact magnifies them, as a comparison of the pre-Depression period to the post-World War II era makes clear.

Rattner is ignorant of history.

We had banking crises not because of gold, but because banks lent out more gold than they had on deposit, a fraudulent practice. 

A few other weird ideas from Ms. Shelton: She has questioned the accuracy of government statistics. She wants a single currency for North America. (Does she not know how badly the euro has worked?)

Government stats, especially GDP and the CPI are indeed fatally flawed.

But Rattner is correct that wanting a single currency for North America is ridiculous. 

However, that is nothing Shelton could do on her own even as Fed Chair. The US, Canada, and Mexico would all have to agree. 

Until her confirmation hearing, she backed getting rid of federal deposit insurance, a key protection for individual savers. 

Bingo, that is another plus for Shelton. FDIC is an enabler of Fractional Reserve Lending (that is lending more money or for longer period than there are deposits)

The system is so screwed up now that lending creates its own deposit reserves to the benefit of those with first access to money (namely the banks and the wealthy).

Thus Ratter openly advocates more income and wealth inequality. 

God help us if the next chair is Ms. Shelton or anyone else with her views. Senate Republicans must recognize this danger and show some backbone.

That was written before the committee vote. Shelton passed the committee 13-12 and now advances to the full senate.

Diversity Desperately Needed

What the Fed desperately needs is diversity in new ideas not token people of color or gender that all think the same way,

Regardless of what one thinks of gold, it is clear the Fed needs new ideas instead of the same old bubble-blowing mindset of a bunch of clowns who have proven they do not know what inflation even is.

Question for Rattner

Hello Steve what do you think if I proposed the Fed set the price of steel or oranges? 

Hopefully you would think that would be crazy. But setting the correct price of interest rates and money supply is much harder. 

We know that based on 3 consecutive bubbles.

Having seen a series of hope-filled headlines in recent months on the progression of Boeing’s revival of the 737 MAX (despite and industry-wide collapse in demand), the airplane-maker suffered a blow this morning as The FAA issues an “emergency airworthiness directive” requiring operators of any Boeing 737 passenger jet to inspect and potentially replace a key engine component, following four reports of unexpected engine shutdowns.

The FAA’s order applies to any 737 that has been in storage, which covers any plane that has not been flown in a week. Operators will be required to inspect and potentially replace a certain valve that can get stuck in the open position.

The FAA said it had four recent reports of engines shutting down because of that stuck valve condition.

“Corrosion of these valves on both engines could result in a dual-engine power loss without the ability to restart. This condition, if not addressed, could result in compressor stalls and dual-engine power loss without the ability to restart, which could result in a forced off-airport landing,” the directive indicated.

It would appear that the plane “designed by clowns… supervised by monkeys” is suffering once again from Boeing’s cost-cutting efforts (in lieu, some might claim, of safety).

Full order below:

Tesla shares are slumping early on Friday morning, two days after the company reported yet another “profitable” quarter helped along by a massive sale of over $400 million in regulatory credits.

In fact, TSLA is now down over 21% from its recent record highs, officially entering a bear market in many investors’ minds…

And Robinhooders are surging in as the price tumbles…

It seemed like yet another story of Tesla playing with its numbers – whether it be regulatory credits, A/R or warranty reserves – to turn a profit during a quarter when it most certainly shouldn’t have. We outlined Tesla’s results in this full report and also noted analyst Gordon Johnson’s analysis of how Tesla posted the numbers it did here.

But after this quarter – and especially after CFO Zach Kirkhorn said on the company’s conference call that Tesla would not be selling nearly as many regulatory credits next quarter, it appears that focus could actually be turning to the company’s auto sales growth. And if that’s the case, look out below. 

Amidst all the bluster about expanding Gigafactories and the narrative of saving the world, there remains the core issue of whether or not Tesla plans on ever making money selling cars. As we noted in our earnings writeup, Tesla’s sales growth has been about as impressive as its net income ex-regulatory credit sales. That is to say, not impressive at all. 

A new Bloomberg opinion piece published by Chris Bryant the day after Tesla’s earnings also seems to begrudgingly (and finally) address the issue of sales growth. It called the company’s $104 million of net income a “modest amount” for a company that trades at 800x its trailing earnings. Modest, we would argue, is an understatement.

The piece then hones in on the fact that these regulatory credit sales can not, and will not, last forever:

The profits are also more than accounted for by $1 billion of regulatory credits that Tesla sold to other carmakers during the 12 months to June, including $428 million in the latest quarter. It’s only able to earn this income because rivals haven’t gotten their act together yet on building enough electric vehicles and have to buy credits from Musk’s company to satisfy emissions regulators. Tesla acknowledges this good fortune won’t last forever.

The op-ed piece calls for a renewed look at Tesla’s revenue growth – which isn’t really growth at all. In fact, what we noted earlier this week is that for a company that is valued more than most other automakers in the world combined on its prospective growth, and is larger than both the entire US and European auto sector, one would expect revenue to actually, well, grow at some point?

 

Bryant seems to realize that these chickens could soon be coming home to roost. So far, in the second quarter, we have seen nothing but Tesla slashing demand – of both its Model 3 in China and its Model Y. This would indicate to use that the automaker may once again be having issues getting vehicles out the door. Here is a snapshot of Tesla’s total production and deliveries over the last 5 quarters, also showing unimpressive growth:

 

“Tesla isn’t growing all that much right now, which is hard to square with the massive jump in its share price. Revenue declined 5% year on year in the latest quarter. The pandemic will have taken a toll, but Tesla will only really start to merit its ‘Big Tech’ valuation once its top line starts firing again,” the op-ed concludes. 

Remind us to explain gamma squeezes to Bloomberg one of these days; maybe we can unravel the mystery of Tesla’s “massive jump” in its share price.

Regardless, if Tesla is, in fact, having a demand problem – and regulatory credits dry up in Q2 while the financial mainstream starts to realize the ridiculous nature of the company’s valuation – we could see a sharp move closer to reality, which for Tesla shares is probably closer to double digits than all time highs.