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By Ye Xie, Bloomberg Markets Live commentator

Three things we learned last week:

1. Trump is keeping the pressure on China amid Washington turmoil.

Secretary of State Michael Pompeo provoked Beijing when he said that the U.S. will remove decades-old restrictions on how its diplomats approach Taiwan. The move raises tensions over the One China policy — a red line for Chinese leaders.

It suggests that the Trump administration isn’t done taking on China, even as the president is besieged following a violent insurrection by his supporters at the Capitol. Lawmakers are pushing for him to be impeached, and a number of administration officials have resigned. Further hostility toward Beijing in his final days in office could set up more hurdles for Joe Biden to deal with China.

While Alibaba and Tencent were left off an updated U.S. Treasury list of Chinese companies considered to be tied to the military, it doesn’t necessarily mean that the tech giants are off the hook. And more state companies, including oil firms, could be added to the list and kicked off of the U.S. exchanges. The risk of sanctioning a major Chinese bank also remains.

2. Foreign investors cannot get enough Chinese stocks.

Overseas investors bought a record net 21 billion yuan worth ($3.2 billion) of Chinese shares through the north-bound stock connection last week, as the CSI 300 hit a 13-year high. South-bound flows from mainland investors to Hong Kong also reached a record. China Mobile, which is excluded from major indexes and due to be delisted by the NYSE on Monday, was the most bought stock in the southbound program Friday. It looks like there are plenty of Chinese happy to take advantage of the forced selling from U.S. investors.

3. Reflation trades are all rage.

MSCI’s global stock benchmark notched records as the Democratic sweep of Congress increases the odds for another round of stimulus in the U.S. Ten-year U.S. Treasury yields climbed above 1.1% and narrowed a gap with Chinese bonds. That didn’t kept the yuan from rallying further, prompting Chinese policy makers to take more steps to slow inflows.

Authored by Robert Wright via The American Institute for Economic Research,

Thirty shots rang out in the U.S. Capitol around 2:30 pm. Bullets struck five House Reps, all of whom survived, thanks in part to the valiant response of House Pages.

If that sounds different from news accounts of the events of 6 January 2021, it is because the event briefly described above occurred on 1 March 1954, when four Puerto Rican nationalists fired the shots from the visitors’ gallery while unfurling the Puerto Rican flag. The assailants were all eventually apprehended, tried, and convicted and were serving long prison sentences commuted by President Jimmy Carter in 1978 and 1979. 

The three men and one woman who gave half their lives were heroes to Puerto Rican nationalists and anti-imperialists but vile, failed assassins to those who wanted to maintain U.S. hegemony over the island it had taken from the Spanish Empire in 1898. Importantly, most of those who had given little thought to Puerto Rico’s status and likely could not find the island on a map also deprecated the attack because of the level of violence unleashed.

Of course the people who some Americans still proudly call Patriots were nothing more than nationalist rebels to the Tories. Had the Patriots lost the Revolutionary War, they would have at best suffered the same fate as the Confederate Johnny Reb. George Washington would be remembered today as a scoundrel and an enslaver and his sidekick Alexander Hamilton would have never spawned a hit musical. (Recent rumors of Hamilton’s slaveholding, incidentally, remain empirically baseless.) 

Today, obviously, matters are no different. If you think you will gain from the actions that some group takes, you will tend to rationalize its tactics and call its members good names. If you think the group’s actions will hurt you, then you will tend to oppose it and its tactics and call its members bad names. 

“Praise and blame” historians call it. One partisan’s hero is another partisan’s zero.

That is why it is so important for true supporters of “law and order” like myself to identify and reduce the causes of political violence before it becomes too late. In mid-March, I predicted rebellions if lockdowns continued for too long and many mass demonstrations, some quite violent, occurred throughout 2020 in many nations including, of course, our own. I also warned in December that trouble would ensue if the Supreme Court refused to hear the Texas election lawsuit … and here we are. If only the Capitol police had heeded my warnings they could have taken more effective precautions.

It isn’t terribly difficult, actually, to see trouble brewing. All it takes is a little theory and some empathy. Theory, like one laid out by Eric Hoffer, suggests that frustration breeds violent protest. Frustration isn’t measurable precisely but if you listen to what people — real people not TV pundits — say, and think about how you would feel in a similar situation, you can start to get a sense for genuine frustration.

Many Patriots, for example, felt that British policymakers were unresponsive to their concerns about how Imperial tax and monetary policies had led to the impoverishment and hence imprisonment of many colonists following the French and Indian War. They beseeched London elites not to tack the Stamp Act onto their many woes but were met with disdain. They won that one, with some violence and many threats, but the British soon piled on additional regulations. The colonists responded with remonstrances, trade embargoes, and so forth, but after the Boston “Massacre” (Patriot propaganda of course) and the mob insurrection against tea in Boston Harbor (British propaganda), violence soon escalated into full blown war.

Puerto Rican nationalists were also frustrated. The island had gained some de jure independence from Spain in 1897, the year before the Yankee empire invaded and claimed jurisdiction over it. It took over half a century for the United States to grant limited autonomy to Puerto Rico, a reform that did not go far enough for nationalists, who in late October 1950 openly rebelled in several important towns and cities, including San Juan. Puerto Rican police and troops, bolstered by US military forces, quelled the uprisings, which resulted in scores of casualties. On 1 November, two Puerto Rican nationalists attacked President Truman in the Blair House, his temporary residence while the White House was being renovated. One LEO was killed in the attack, as was one of the attackers, while the other was captured, convicted, and imprisoned. 

Unscathed in the attack, Truman supported a plebiscite on Puerto Rico’s status but, crucially, independence was literally not on the ballot. Nationalists boycotted the election, which overwhelmingly endorsed commonwealth status for the island. From their perspective, the election had been stolen even before it was held.

None of that background excuses the 1954 attack but it does explain why some nationalists were frustrated enough to resort to violence.

The same could be said of the small minority of peaceful protestors who attempted to overrun the White House in early June 2020. As I then wrote, those calling for redistribution of resources away from the police were rightly frustrated by continued state violence against poorer Americans, especially those of color, and offered a path toward reducing governmental power without encouraging criminal chaos.

As for the events of 6 January, every politico lays blame on somebody else and moralizes instead of admitting their own role in causing, or at least not allaying, the frustrations that undergirded the attack. (All federal politicians should resign and donate their entire net worths to the Treasury because all are abject failures … but I won’t hold my breath on that.)  

I have bad news — much like my news that 2021 would not necessarily be better than 2020 — things could get much, much worse. If you thought recent events were scary, imagine a million or more armed Americans storming the federal zone in DC and burning it to the ground regardless of upgraded security measures. (Vide the apparently insufficient 2017 upgrade.) That is not yet a prediction, and is certainly not a wish, but the probability of such an event is palpably higher than it was just a year ago.

To reduce the probability of such a horror, America needs real statesmen (leaders of any gender who seek to implement rational policies instead of engaging in constant partisan pandering) to emerge from this mess.

Real leaders should:

1. Not use the attack on the Capitol as an excuse to further erode civil liberties. In fact, they should encourage frustrated individuals to engage in peaceful protest, like burning effigies, that is more cathartic than mere virtue signaling via haberdashery or social media posts.

2. Stop lying about Covid-19. Read the Covid-related posts on this website for the last year for details.

3. Lay bare the fact that most policy proposals redistribute resources from one group to another and encourage open debate about the tradeoffs involved.

4. Focus policy on reducing frustration, even if that means cutting the power of corporate or party monopolies and duopolies, unions, and the government itself. 

5. Chastise every media outlet that engages in partisan hyperbole and encourage the reestablishment of trusted, nonpartisan news sources.

6. Chastise politicians who call for metaphorical “wars” on everything and anything (including viruses!) and constantly use martial words like “fight” when they really mean “work on behalf of.”

7. Pass reforms that reestablish trust in elections. (I have long advocated a Constitutional amendment to tie representation in the House [and hence Electoral College weight too] to the number of people who cast ballots rather than on the number of residents, which frankly is already a tricky concept that will get trickier as online work becomes more common. This would give states incentives to encourage voting but also implicate the Census Bureau as a federal check. But other possible reforms abound.)

8. Insist that any other reforms, say of SCOTUS, be completely nonpartisan by, for example, having any additional justices chosen by the next administration or, better yet, a random draw from a qualified group.

Do any such real leaders exist in 2021 America? I doubt it, but sometimes existential threats birth greatness.

With Chinese stocks soaring in recent weeks, and the blue chip CSI 300 index surpassing its 2015 Chinese stock bubble highs..

… momentum chasers investors from around the world are predictably once again poking around in Chinese markets (especially amid the recent confusion surrounding the bilateral crackdown on Alibaba, and the US-led sanctions on Chinese telecom and various megacap stocks), which is why Goldman’s top China strategist Kinger Lau writes that amid the “extensive client conversations” he had in recent days, investor interests and questions have revolved around ten particular topics. Here are the Top 10 China FAQs by Goldman clients, from the latest Goldman “China Musings” report:

1. Upside and drivers? China rallied 26% in 2020. Strong EPS growth (21%/15% for 21E/22E) on stable PEs (GSe: 15.6x vs 15.5x now) will drive 17% total returns for MXCN this year. Goldman expects a more balanced return profile (New vs.Old China) and prefers China A tactically given its higher macro cyclicality and lower sensitivity to external and Internet policies.

2. GDP growth and vaccine? China’s output has surpassed its pre-Covid levels. (GSe: 2%/8% GDPg in 20/21), with consumption being a key growth driver in2021. The first Chinese vaccine has been approved last week but should have only moderate growth impulse.

3. Is China tightening? Policy stimulus should fade this year as growth recovers. However, the recalibration should be gradual and growth-dependent, and, in what may be the most laughable statement in modern history, Goldman claims that “moderating policy support doesn’t always deflate equity returns.” Brilliant.

4. Industry regulation? Antitrust and FinTech regulations are top policy priorities for 2021, but unlike in 2018, regulatory oversight isn’t tightening across the board although it may pressure valuations for certain companies/sectors.

5. US restrictions on Chinese stocks? Clarity has recently emerged for ADR de-listing risks but uncertainty remains regarding the Executive Order, notably the scope of restriction, index exclusion, and forced de-listing. 

6. Rotating from Growth to Value? Goldman stays structurally positive on Growth, but have been scaling up cyclical exposures, instead of pure Value, in its allocation.

7. Themes and sectors for 2021? Following the 14th Five Year Plan as the anchor for thematic investing, Goldman favors a hybrid of Growth and Cyclicals sectors to start 2021.

8. Is China crowded? No, in fact, positioning is at all-time lows according to GS, which expects robust inflows on decent growth, continuing market reforms, and an appreciating Rmb.

9. HSI revamp? More New China, less Old China and HK representation are likely after the index rebalancing in Mar.

10. Risks? Sino-US tensions, private sector policy, leverage, and property tightening:

• The developments of US-China relationship under a new US administration;
• Over tightening in China property which contributes to around 20% of GDP via direct and indirect channels;
• China leverage, which is at all-time highs with rising number of defaults;
• POE regulation tightening which my present upside risk to equity risk premia.

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

President-elect Joe Biden on Jan. 8 promised to “defeat” the National Rifle Association while he’s in office.

Biden’s official Twitter account was responding to former Rep. Gabby Giffords (D-Ariz.), who was among 14 people wounded in a shooting rampage by Jared Lee Loughner in Tucson in 2011; six people died in the attack. Giffords had recounted how her life and community “changed forever.”

“But the attack did not break me—or the people I represented in Congress. We came together, turned pain into purpose, and found hope in each other,” she wrote, adding that she continues to work to “achieve a safer America.”

Biden responded, saying: “Your perseverance and immeasurable courage continue to inspire me and millions of others. I pledge to continue to work with you—and with survivors, families, and advocates across the country—to defeat the NRA and end our epidemic of gun violence.”

The NRA, which has more than 5 million members, seeks to protect and educate people about their Second Amendment rights.

While the association didn’t immediately respond to a request for comment on Biden’s post, its lobbying arm recently published an article that says Biden would “begin a concerted attack on the rights of American gun owners” after being inaugurated.

“We must be ready for the onslaught,” the post reads, adding that a Biden administration, if officials get their way, “will ban and confiscate the most-commonly-owned rifle in the United States” and “will arbitrarily limit the number of guns that can be bought per month,” among other measures.

Biden’s website says he has a plan to end “our gun violence epidemic” and boasts that he has taken on the NRA twice and won, referring to his help passing the Brady Handgun Violence Prevention Act in 1993 and in passing a 10-year ban on some weapons and magazines the following year.

“As president, Joe Biden will defeat the NRA again,” the site states.

Some of the proposals include banning the manufacture and sale of so-called assault weapons and high-capacity magazines, restricting the number of guns one person may buy per month to one, and prohibiting people convicted of hate crimes from owning guns.

In late December, in our recap of a “year like no other” for credit markets, we showed a stunning chart which perhaps best summarized the “insanity unleashed by central banks.” The chart in question showed that a record-high number of European IG (investment grade) bonds were trading with negative yields. To wit, as of December 15, 41% of the EUR IG iBoxx index yields in sub-zero territory; a level that matches the previous record in August 2019.

Even more impressive: more than 10% of the index now yields below -0.25%, and as Goldman concluded, “negative yields are likely remain a fixture of the EUR IG corporate bond market in 2021, even if bund bond yields back up in response to solid growth next year. Combined with the decent demand tailwind from ECB purchases, this would keep search for yield motives strong.”

Fast forward a few weeks, when it’s not just the EU where the corporate bond market is trading at absurd levels.

As Goldman’s credit strategist Michael Puempel writes, in early December, real yields on USD IG corporate bonds turned negative for the first time in history, against a backdrop of all-time high duration.

As Goldman elaborates, the relentless march lower of real yields to negative territory “reflects the combined effects of the material decline in nominal corporate bond yields and the back-up in inflation expectations.”  The next chart shows how widespread negative real yielding corporate debt in the USD market is, with more than 25% of issues, representing more than 30%of index-eligible par value, priced with a real yield below -0.5%.

This means that a large portion of IG-rated corporations are expected to be paid, on an inflation-adjusted basis, to borrow in the USD market today, according to Goldman. And although all-time high duration comes with its own risks, negative real yields will likely skew incentives for corporate issuers – encouraging them to issue even more debt – while at the same time mechanically increase risks for investors.

A quick look at these two key factors starting with…

Skewed incentives for issuers

There is always competing interests between equity- and debt-holders when it comes to corporate issuance and the uses thereof. This tension will be exacerbated for corporates that can issue at very low, i.e. negative, real yields. Specifically, the lower the yield at which a corporation can issue debt, the higher the incentives are to return capital to shareholders, via either debt-funded M&A or share repurchases (or, more recently, by purchasing bitcoin). Meanwhile, Goldman forecasts that negative real yields for such a large portion of the IG universe has elevated the risk that “the significant increase in gross balance sheet leverage, which was meant to be a temporary response to the sudden stop in the economy, ends up being permanent.”

Elevated risks for investors

The risks for investors in this environment, as it relates to negative real yields is two-fold:

First, and the most acute, is that investor returns are now very susceptible to even the slightest unexpected uptick in the inflation. While traded breakeven inflation is not a perfect proxy for expected inflation, as it embeds a risk premium, positive real yields have historically provided, at least to some degree, a cushion with respect to an unexpected inflation shock. This is no longer the case, because even if realized inflation falls below market expectations, it may not be enough to push ex-post real yields back into positive territory given current levels.

The second risk for investors is related to the second-order effect of low yields; re-leveraging risk. That is, if firms take the “opportunity” presented by yields at historic lows to increase the size of their capital structures even further, this could in Goldman’s words, “manifest itself in heightened fallen angel/downgrade risk under a scenario in which the earnings recovery of highly levered issuers do not rebound at a pace commensurate with expectations.”

While these risks should be manageable in the near-term given improving growth expectations for 2021 on the back of massive stimulus, as the economy reverts back to full-capacity, Goldman concludes that “it will be crucial for both corporate bond issuers and investors to shift their decision-making frameworks to account for real, as opposed to nominal, outcomes.”

Authored by Mark Dittli via TheMarket.ch,

Louis-Vincent Gave, CEO and co-founder of Gavekal Research, sees a dramatic paradigm shift playing out in the world economy. In this in-depth conversation, he explains how investors should position themselves for the future.

Louis-Vincent Gave is a master of the big picture. The co-founder of Hong Kong-based research boutique Gavekal is one of the most esteemed writers about geopolitical and macroeconomic developments and their impact on financial markets.

In this in-depth conversation with The Market NZZ, Mr. Gave shares his views on the Dollar, stock markets, oil and gold prices – and he explains why the United States are starting to act like a «sick emerging market».

Mr Gave, 2020 has been a catalyst for some big shifts in the global investment environment. Looking into the future, what are the biggest topics for you?

I’ve spent most of my career in Asia, so my lens is fundamentally biased towards Asia. With that disclaimer, I would say this: When the Covid crisis started, the view in the West was that this would be China’s Chernobyl Moment. That they completely screwed up, which would eventually weaken the regime. Fast forward to today, and China comes out of this looking much better than most Western countries. If there is one big divergence in the world, it is this: In most Western countries, the population is angry at how their government dealt with the pandemic, either because they think the government did too much or too little. But in China, there is a feeling that there were two big crises in the past 15 years, the Global Financial Crisis in 2008 and now Covid, and China in both cases came out ahead of the West. Most of Asia actually came out of this much better than the Western world.

What else do you see?

When I look at markets, there are three key prices in the world economy: Ten year Treasury yields, oil, and the Dollar. One year ago, yields were going down, oil was going down, and the Dollar was going up. Today, Treasury yields are going up, oil is going up, and the Dollar is going down. This is a huge reversal. When I see a market where interest rates are rising and the currency is falling, alarm bells go off.

Why?

This is what you would see in a sick emerging market. If you’re invested in, say, Indonesia, rising interest rates and a falling currency is a signal that investors are getting out, because they don’t like the policy setting there. Today, the US is starting to act like a sick emerging market. We even have a question mark over whether they have the ability to run a fair election. Suffice to say that at least 30% of Americans believe their election system is rigged. This is mindblowing.

What’s the policy setting investors don’t like in the US?

Government debt in the US has increased by more than $4 trillion this year, which adds up to $12,800 per person. This is a world record, but actually most Western governments have gone on a massive spending spree during this crisis. In a way, they’re using the playbook that China followed after 2008, when they allowed a massive increase in fiscal spending and monetary aggregates. Today, Beijing sits on its hands in terms of fiscal and monetary policy, while the West knows no limits.

They’re doing it to soften the blow of the pandemic. What’s wrong with that?

When China did this in 2008, they funded massive infrastructure projects: airports, railroads, roads, ports, you name it. Some of these projects turned out to be productive and some not, but I always thought they would be definitely more productive than social transfers. But this year, the debt buildup in the US has funded zero new productive investments. No new roads, no airports, railroads, nothing. They were basically just sending money to people to sit at home and watch TV. In the end, this buildup of unproductive debt can be reflected in one of two things: Either in the cost of funding for the government, i.e. in rising interest rates, or in a devaluation of the currency. This is what the French economist Jacques Rueff taught us years ago. Very soon, this is going to put the Fed in a quandary.

In what way?

They will have to decide whether to let bond yields rise or not. If they let them normalize to pre-Covid levels, 10-year Treasury yields would have to rise to about 2.5%. But if they do that, the funding of the government becomes problematic. A 50 basis point increase in interest rates is equivalent to the annual budget for the U.S. Navy. Another 30 bp is the equivalent for the U.S. Marines, and so on. The U.S. is already borrowing money to pay its interest today. If rates go up, they’re getting into the cycle where they have to borrow more just to be able to pay interest, which is not a good position.

Do you expect the Fed to move in and cap interest rates?

Yes, I do. And when they do, I’d say the Dollar will take a 20% hit.

Ten year Treasuries currently yield around 0.95%. At what level will the Fed step in?

I think they will have to cap interest rates at 2%, otherwise the drag on the government will become too big. That question will arise rather soon, because come this spring, the base effects for growth and for inflation will kick in. Growth will be very strong, and so will inflation, which means that yields will quickly try to get back up to 2%.

You recently wrote a piece where you recommended buying gold and financials to prepare for this event. Why gold, and why financials?

My base case is that Treasury yields will move up to around 2%, at which point the Fed will introduce some variant of yield curve control. In this case, the Dollar would tank, real interest rates would drop and gold would thrive. But maybe I’m wrong, maybe the Fed freaks out when they see inflation rising to 4%, and maybe they decide to let yields rise. If that’s the case, then financials will rip higher, driven by a steeper yield curve. So come this spring, if the Fed caps interest rates, gold will thrive, and if it doesn’t, financials will thrive.

But you’d lean towards gold?

Yes. It’s quite possible that in the coming weeks, the Dollar will rise while Treasury yields move up. This could provoke a sell-off in gold. If that were to happen, I’d take the other side of that trade, I would buy gold. But at the same time, you can buy out of the money call options on financials. That would be the hedge for the scenario of the Fed changing its mind and letting the yield curve steepen.

The Dollar has been strong for the past ten years. Has it entered a new structural bear market?

Yes, there is no doubt in my mind. A year ago, the Dollar was the only major currency offering positive real rates. My view is that capital flows into positive real rates, just like water flows downhill. Today, the U.S. has one of the most negative real interest rates worldwide. Given the year-on-year rise we will see in inflation this spring, real interest rates in the U.S. will drop even further.

Apart from negative real yields, what are the other reasons for the Dollar bear market?

We first have to ask ourselves why we even had a Dollar bull market in the past decade. The answer is the shale oil revolution. As the United States moved towards energy independence after 2011, its trade deficit shrank. The shale oil revolution meant that all of a sudden, the U.S. was no longer exporting money.

And that tide has now turned?

Yes. Oil production in the U.S. is collapsing. The Texan wildcatters have lost out in the price war against the Saudis and the Russians. U.S. oil production has already gone down 2.5 million barrels per day and is slated to go down by another 2.5 million over the next twelve months, because every major oil company is cutting capital expenditures. Just look at Chevron and Exxon, their capital spending plans over the next five years are at half the level they were in 2014. And so, as the U.S. economy picks up after Covid, America will be importing oil on a massive scale again. The U.S. will be back to exporting $100 to $120 billion to the rest of the world, mostly to places that don’t like America, who will turn around and sell those Dollars for Euros. This is bearish for the Dollar.

When we see the oil price heading above $50 again, wouldn’t that cause US production to rise?

You can’t turn up oil production like a tap. It will take at least a couple of years to come back. Plus, shale oil production in the U.S. was hugely capital destructive. More than $350 billion was lost in the shale oil patch over the past ten years. Look at the energy sector today, it’s at 2.5% of the S&P 500. When oil was at $10 per barrel, back in 1999, energy was 5.5% of the S&P 500. So I’m going to answer your question with another question: If oil prices go up, and the U.S. could produce more oil again, it would require hundreds of billions of Dollars in capex. Who will provide that kind of capital, with an incoming Democratic Administration that has been ambivalent about fracking? I don’t see it.

So we are moving back into a world where the U.S. is a structural oil importer and a Dollar exporter?

Yes. The seeds are planted. That’s a huge shift that I don’t think people are taking into account yet.

When the world economy normalizes after the pandemic, where will the oil price settle?

Before Covid, it seemed that the oil market had found a balance between 60 and 80 $ per barrel.

Is that the range we’ll head back to?

I think so, and for a pretty simple reason: Above 80 $, China basically stops buying. That’s a big difference relative to ten to fifteen years ago, when China hadn’t built any sizeable inventory and was a forced buyer of oil. This is no longer the case. In fact, you saw it during the Covid crisis: Between April and June, when the oil price collapsed, China imported about 13 million barrels per day, which was 40% more than normal. Clearly, they were building up inventory, taking advantage of the low price. China is the marginal buyer, and its behaviour is a key driver for the oil price: Above 80 $ they stop buying, and below 60 $ they buy in size. Incidentally, in that range, many oil companies make pretty decent money. Saudi Aramco makes a killing at this price level.

You see the Dollar in a bear market. Meanwhile, the Renminbi has strengthened significantly. Is that also a structural shift?

I think so. In the past, every time there was a crisis, the reaction of the People’s Bank of China was to freeze the exchange rate. During and after the global financial crisis, the RMB flatlined against the Dollar at 6.82 for two years. In 2015, when the Chinese equity bubble burst, the RMB was flat for several months. When things went bad, historically, they froze it. Not this year. This year, we saw the sharpest six month RMB rally in history. That is a clear change in policy.

What’s behind that change?

I don’t know, but the facts are clear. China today is the only major economy in the world that offers large positive real interest rates. Thus, capital flows into the Chinese bond market. The PBoC is the only major central bank publicly saying they won’t destroy their currency and they won’t proceed to the euthanasia of the rentier. The consequences of this are hugely important. A strong RMB is a fundamentally inflationary force for the world economy.

How so?

Manufacturers around the world have to compete with Chinese producers. Therefore, a weak RMB drives prices down, whereas a strong RMB drives prices up. You can compare it to the role of the Yen forty years ago. A stronger RMB means stronger consumption in China and Asia, and it means that whatever we buy from China is going up in price. It’s not surprising that as the RMB rerates, the U.S. yield curve steepens and oil prices go up: It’s all part of the same reflationary backdrop.

Given this backdrop: Do you see a return of structural inflation in Western economies?

Yes, I think inflation will come back with a vengeance. One of the key deflationary forces in the past three decades was China. I wrote a book about that in 2005; I was a deflationist then, as my belief was that every company in the world would focus on what they can do best and outsource everything else to China at lower costs. But now, we’re in a new world, a world that I outlined in my last book, Clash of Empires, where supply chains are broken up along the lines of separate empires. Let me give you a simple example: Over the past two years, the US has done everything it could to kill Huawei. It’s done so by cutting off the semiconductor supply chain to Huawei. The consequence is that every Chinese company today is worried about being the next Huawei, not just in the tech space, but in every industry. Until recently, price and quality was the most important consideration in any corporate supply chain. Now we have moved to a world where safety of delivery matters most, even if the cost is higher. This is a dramatic paradigm shift.

And this paradigm shift will be a key driver for inflation?

Yes. It adds up to a huge hit to productivity. Productivity is under attack from everywhere, from regulation, from ESG-investors, and now it’s also under attack from security considerations. This would only not be inflationary if on the other side central banks were acting with restraint. But of course we know that central banks are printing money like never before.

What will that mean for investors?

First, there will be two kinds of countries going forward: countries that massively monetized the Covid shock and those that did not. I’d compare the picture to the late 1970s, where countries like the U.S., the U.K. or France monetized the oil price shock, while Japan, Germany and Switzerland did not. This led to a huge revaluation of the Yen, the Deutschmark and the Swiss Franc. Today, the Fed and the ECB were among the central banks that massively monetized, while many central banks in Asia did not. So I expect a big revaluation of Asian currencies over the coming five years, which in itself is inflationary for the world. If you look at the U.S. today, inventories are at record lows. With the economy improving in 2021, companies will have to restock, and they will have to restock with a falling Dollar. The Dollar is down 20% to the Mexican Peso over the past six months, down 10% to the Korean Won, down 8% to the RMB, so whatever Americans buy from abroad will be more expensive. Countries with weak currencies, the U.S. first among them, will have higher inflation.

Where will inflation rates settle?

I don’t know. There is the idea among central bankers that they can engineer inflation rates around 2.5% and keep them there. I doubt that this will be possible to control. But just for the sake of it, let’s assume they manage to do what they say, that they are the perfect engineers they think they are and get inflation at 2.5% for the next five years. Why on Earth would you want to own Treasuries at 0.9% or German Bunds at below zero? You don’t even have to get to a scenario where inflation accelerates to 4 or 5% to see that bonds are madness today. Even if central banks just manage to do what they say, you are guaranteed to lose money with bonds.

What should investors do to position themselves in this new world?

In the old world, where interest rates were falling, the Dollar was strong and oil was weak, you bought Treasuries and U.S. growth stocks and went to the beach. Now, the world has changed. This means you have to stay away from bonds and U.S. growth stocks. In a world of Dollar weakness, you buy emerging market equities and debt, and within emerging markets, I prefer Asia. In a world where either the yield curve will steepen or the Dollar will collapse, either financials or the commodities sector will be doing well. Everything seems to point towards commodities, including energy, but as mentioned, I’d still buy financials as a hedge against a steepening yield curve. So, in a nutshell: Buy value stocks, buy the commodities sector, and buy emerging markets. And for the antifragile part of your portfolio, buy RMB bonds and gold.

How about Japan?

Absolutely, Japan is in a stealth bull market, it has been very strong, and nobody talks about it. We never get questions on Japan from clients. I’m a big bull on Japan, it’s not a crowded trade, so I feel comfortable in it. In a world that is reflating, Japan typically does well. And in this unfolding new Cold War between the U.S. and China, Japanese industrial companies are well positioned.

Aren’t you a bit early in writing off big U.S. tech?

Growth stocks have had their run in the past ten years, with falling bond yields and a rising Dollar. In a reflationary world, they will underperform. Plus, tech is the main battleground in the war between the U.S. and China. I see the tech world breaking into three separate zones, one dominated by America, one dominated by China and India evolving into a zone by itself. You can own the champions in each zone, which means you can own Amazon or Google for the West, or Tencent in China. In danger are companies that straddle the two worlds. Huawei tried, and we saw it being killed. I see Apple at risk, too. I know I said this to you a year ago, and I turned out to be completely wrong, but I still think Apple is in danger, as it straddles the U.S. and Chinese tech spheres.

In the middle of this tech war sits Taiwan. What are your thoughts about Taiwan and the semiconductor industry?

Taiwan today is what Alsace-Lorraine was 120 years ago. There were two hugely important events this year that most people have missed because of the Covid crisis. One, the market value of the global semiconductor industry has moved above the market value of the global energy sector. The market is telling us that semiconductors are more important than energy; they are the commodity of the future. We should think of Taiwan the way we used to think of Saudi Arabia.

What’s the second important event?

At the end of 2019, the market value of Taiwan Semiconductor Manufacturing was $200 billion, while the market value of Intel was $350 billion. Today, TSMC is $450 billion, while Intel has dropped to $200 billion. Why? This summer, TSMC came out and said they can produce 7 nanometer chips and will be able to produce 3nm chips in 2023. A week later, Intel came out and said they won’t be able to produce 7nm chips by 2021. So in the summer of 2020, we witnessed the passing of the technological baton from Intel to TSMC. The leadership in the semiconductor industry now belongs to Taiwan.

Why does this matter?

It matters because Washington has decided to make semiconductors the battleground in its war against China. And that means that Taiwan is the battleground in the great conflict of the 21st Century, an island that Beijing regards as a renegade province, sitting 60 miles from its shore. Taiwan has always been a sore point between China and the U.S., even when Taiwan produced plastic toys and bicycles. Imagine if Saudi Arabia was a political uncertainty between America and China, where the regime depended on Washington for survival, but the territory was claimed by China. We’d be very worried.

How will that conflict play out?

I don’t know what will happen. But I’d just say that the fact that the Trump Administration decided to make semiconductors the battleground in its fight with China strikes me as extremely dangerous, given the fact that the U.S. has just lost the technology leadership baton to Taiwan. That, to me, will be the most important event in 2020, more important than Covid.

Some pro-Trump rioters who stormed the Capitol complex last week may have already been added to the federal No-Fly List. 

Last Thursday, Rep. Bennie G. Thompson (D-MS), Chairman of the Committee on Homeland Security, released a statement requesting the Transportation Security Administration and the Federal Bureau of Investigation to use their powers to add pro-Trump rioters to the No-Fly List.

“Given the heinous domestic terrorist attack on the U.S. Capitol yesterday, I am urging the Transportation Security Administration and the Federal Bureau of Investigation to use their authorities to add the names of all identified individuals involved in the attack to the federal No-Fly List and keep them off planes,” Thompson said in a statement.

He added: “Alleged perpetrators of a domestic terrorist attack who have been identified by the FBI should be held accountable.”

Federal authorities have requested assistance in identifying people “related to violent activity” in the Capitol building. 

For days, one after another, rioters who stormed the Capitol have been identified and arrested. In particular, the most iconic image of the chaos last week was a man sitting back with his feet on Nancy Pelosi’s desk.

Days later, the man was arrested by federal authorities. 

So here’s where things get interesting. 

A video surfaced on Twitter Sunday via @RayRedacted who said, “People who broke into the Capitol Wednesday are now learning they are on No-Fly lists pending the full investigation. They are not happy about this.” 

The unidentified man, yelling at an unknown airport about being kicked off a plane because he was labeled a “terrorist.” 

In the video, the man could be heard saying, “They kicked me off the plane – they called me a f**king terrorist.” 

People who broke into the Capitol Wednesday are now learning they are on No-Fly lists pending the full investigation. They are not happy about this. pic.twitter.com/5GfHo1eVU8

— Ray [REDACTED] (@RayRedacted) January 10, 2021

We should remind readers the video has yet to be confirmed.

Top government officials in Pakistan are urging calm after the entire country was plunged into darkness on Saturday night due to a breakdown in the national power grid.

“A countrywide blackout has been caused by a sudden plunge in the frequency in the power transmission system,” Pakistan’s Power Minister Omar Ayub Khan announced, according to Reuters.

The blackout is nearly unprecedented as it has impacted over 200 million people across every city, town and village. The last power grid shutdown approaching this size hasn’t been seen since 2015. 

According to CNN reporting:

In a statement, the Ministry of Energy said that, according to an initial report, there had been a fault at the Guddu Thermal Power Plant in Pakistan’s southern Sindh province, which had caused power plants across the country to shut down.

…Efforts are now underway to restore power to various parts of the country. Large swathes of Karachi, the largest city in Pakistan, still do not have power, according to information shared by K-Electric, the company supplying power to the city.

The report further quoted residents who were witnessing hours-long lines outside gas stations where people were hoping to fuel generators. 

Pakistan is hit by a massive power blackout, officials say, with much of the country, including all major cities, plunged into darkness https://t.co/55594UXW7y pic.twitter.com/dDOQt5LJer

— AFP News Agency (@AFP) January 10, 2021

“There are long lines outside petrol pumps in the city, cars are queuing as people buy fuel for their back up generators. I was in the line, people have been waiting for hours with petrol cans in hand,” one Karachi resident said.

A Pakistan airline industry official had said, “All major airports in the country have back up generators,” while noting airports and flights remained operational. 

As of early Sunday evening (local time) Pakistan’s energy minister said that power had been restored to much of the country, and faulted a significant technical issue.