by Tom Luongo, Tom Luongo:
The headlines are full of abject terror that Germany’s vaunted industrial base can collapse, and with it the banking sector, if Russia pulls all natural gas supplies.
Of course, this is exactly what the EU said they wanted, and the question now is will they get it, to quote H.L. Mencken, “good and hard.”
So, finally, after destroying their own economy, the politicians in Europe are considering the right question, “Did we do this to ourselves?”
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The Euro’s collapse this morning to a new twenty-year low below $1.03 is answering a resounding, “Yes. Yes you did.” I’m sure the board at Uniper, now staring at a $9+ billion bailout after Vice-Chancellor Robert Haebeck and the rest of his Green/Neocon zealots destroyed their investment in the Nordstream 2 pipeline, would agree with the market.
And so much of this is because now the markets are fully handicapping a global recession based on a spate of terrible economic news, including Germany running a trade deficit in May for the first time in 30 years.
So much for that argument that Europe has a positive cash flow statement and can’t/won’t break down because of it, c.f. my podcast from February with Peter Boockvar.
But to understand why things are accelerating this quickly, beyond the Fed’s hawkishness, I think it’s high time we look at what China’s role in this is and will be.
There’s been a lot of discussion about China’s lockdown policy since the beginning of the War in Ukraine.
What did it mean? Are they seriously paranoid or was this their very Chinese way of supporting Russia’s efforts in Ukraine by exacerbating the massive supply chain breakdown created by Davos’ Coronapocalypse? You know I side with the latter position.
So, after a successful BRICS Summit which saw both Iran and Argentina apply for member status (and China inviting Saudi Arabia to join it and the SCO), China announced a week ago they are loosening the COVID restrictions on foreign travelers into the country.
China unexpectedly slashed quarantine times for international travelers, to just one week, which suggests Beijing is easing COVID zero policies. The nationwide relaxation of pandemic restrictions led investors to buy Chinese stocks.
Inbound travelers will only quarantine for ten days, down from three weeks, which shows local authorities are easing draconian curbs on travel and economic activity as they worry about slumping economic growth sparked by restrictive COVID zero policies earlier this year that locked down Beijing and Shanghai for months (Shanghai finally lifted its lockdown measures on May 31).
The result is, as Zerohedge pointed out at the time, the return of capital inflow to China’s equity markets on the announcement. But the markets had been forecasting capital flight into China for weeks since bottoming in April.
That said, this is a perfect example of what I talk about all the time with respect to potential changes in the US political situation. Markets are always looking for changes in intentions by the political class.
These little changes are seen by traders and investors as edges to be played. They may not pan out, but are bets based on a probability calculation of a state change in public policy.
To this end, Fungal Joe is going to lift the Trump tariffs on Chinese imports this week to buy votes by hoping inflation moderates. I’m okay with him doing this trying to right the ship. Tariffs are never the answer, just like sanctions. Notice also this has zero to do with monetary policy and everything to do with supply disruptions caused by government diktat.
This change by China signals an intention by the CCP to open China back up to tourism and business development that isn’t likely to be reversed. I expect this to be real and for China to make even more little moves like this as the summer drags on and markets churn in the West.
With that change, capital inflow lessens the pressure on both the Hong Kong dollar (HKD) and the Hang Seng while giving China more cover to loosen monetary policy without necessarily raising rates and creates another place for capital to flow now that the ECB has capitulated.
