Coronavirus & Markets Potpourri: Economic Phase Change and Yuan Deval Incoming

This is a kitchen sink post. Any discussion of markets is not intended as trading advice. It is a collection of my current thoughts on the market. I am positioned for a bounce on Monday, but everything is conditional on fast moving events. If the market goes lower on Monday, I'm afraid there's 15 percent downside from there in the short-term, and that also escalates the probability that we're in a straight-down bear market that will drop ~65 percent from the peak. That said, long-term trends are approaching reversal or phase change levels, where we either return to normal or establish new economic relationships. It's important to be focused on the long-term if you're not a trader. Charts such as Dow/gold and the Dow versus hourly wages will be worth keeping on hand.

Additionally, markets are moving so fast that it's hard to know "where we are." It's important to see the context of what's happening across many different markets. When the S&P 500, copper and euro all point to a major turning point, you pay attention. If some things sound contradictory, it's because I'm keeping an open mind about different possibilities. This post isn't to tell you what to think, only to express what I'm thinking about. Hopefully it proves useful. Finally, I thought that what is happening now would unfold in 2016, but it was aborted. I thought 2018 might mark the start of it. Nope and nope.

With coronavirus, I see far too much panic these days. It's partially why I think the long-side will see incredible short-term gains. This sounds nuts even to me, but I think the market is primed for 15-20% upside in one day if there's a combo of good news and a short-squeeze. I'm becoming less confident in this forecast though. Monday might be the breaking point.

As for China, yuan devaluation seems more likely as discussed below. I have linked a bunch of older posts. My approach to the market is to wait for events like now. I've spent about a decade focused on Chinese yuan devalution, the end of quantitative easing, combined with the social and political signs that would accompany it, applying my interpretation of Socionomic theory. Rising nationalism, the election of a populist president such as Trump (See this 2014 post: Immigration Issue Set to Explode in America; Prepare for Political Volatility)

I also posted my premature goodbye in August 2019: China Crisis Repeating a Familiar Pattern For the Last Time
I was wrong about the 2014 crisis turning into a major global downturn. Whether central bankers arrested it or not, it terminated in early 2016. The signs of a 1937 event were there, but there was not follow through. I'm always open to the possibility I could be wrong again, but I don't think the next cycle will be similar. If I'm right, I believe we have arrived at the base camp of Everest. What I've written about over the past 8 years or so, had led up to the moment. The preparation is done. The main event is here. If I'm wrong, then I'm wrong about how it ends because I don't expect another stimulus out of China. It's too late, the political, economic and financial situation around the world won't allow for another coordinated kick of the can. We are crossing the event horizon into a new future for China, the United States, and the world order.

The Long Goodbye

This blog was started with the intention of writing about Chinese stocks, believe it or not. It turned into a meta joke over time as that is one of the least discussed topics on the blog. Perhaps there is another couple of years of activity on this subject, but I sense the end is beginning for this blog. It will finally be time to get a new address (maybe on a whole new planet) and a new topic that is years in the making. Already, my long portfolio is increasingly filled with junior gold and cryptocurrency miners. In the end, the biggest emerging markets of the next 10 to 20 years might be right at home.
For myself, everything that's happening is what I've been thinking about for a decade. I'm already thinking more and more about the next 10 years, even as events finally unfold in the present. This is why I'm not going to do a large post discussing everything going on right now. This blog has been that, my prior thoughts (and bad timing, yes I've taken a beating on many of those miners) are here if you want to poke around.

Back in August 2019, I looked at the ratio between gold and copper: Copper, Gold and The End of Growth. I laid out two scenarios for this ratio, which is currently at 60-year extremes:
The optimistic scenario is the 2016 copper/gold low. There will be a bit more selling, a bit more yuan depreciation, maybe another 20 percent correction in U.S. stocks to test or even break the 2018 low. Copper/gold hits the 2008 low, but rebounds as China fears abate. The ratio rebounds and we find out this is the first half of a 20-year bottoming process.

The pessimistic scenario is the 2008 low doesn't hold and the early 1980s low looms. That move requires going beyond 700. That's huge for global markets and could entail major dislocations such as a major China crisis, but then comes the much larger question.
Is this a massive 40-year basing pattern for the gold/copper ratio? Gold soared relative to copper during the 1970s. A measured move off this basing pattern would carry gold to more than 1200 times the price of copper. That could mean $2 copper would trade alongside $2,400 gold or $10 alongside $12,000. The more probable move, in my opinion, is the former. A doubling of gold and stagnant or even falling commodity prices as growth evaporates.
Copper was around $2.60 per pound then. It closed at $2.17 on Friday.
Or looking at copper alone, a move to $1.40 seems possible. In a major deflation scenario and a 725 ratio, gold trades at $1000. At a 1200 ratio, gold trades around $1,700.

Copper is trading right at the .618 fib from the 2008 low to the 2011 high. A break and the next stop is trendline support just above $2.25. Break that and $1.40 opens up.
Barring major stimulus in China or a sudden inflationary surge (maybe the virus lifts early and all this stimulus comes rushing in), copper has one support left at the 2016 low, but it doesn't look that strong to me in the current macro environment.
In the short-term, copper is a good indicator for the market. If copper is going through $1.90, the chance for a relief rally are slim. A bounce will require a stop by $1.90 at the latest. Interestingly, the downside risk should the stock market break lower on Monday is around 15 percent. A drop of that magnitude in copper would take it to $1.84, which is in the ballpark. A rally here could be huge. I would look for copper to rise back to test $2.50, the S&P 500 back to the 2700 area at least.

I don't place too much emphasis on gold and copper themselves in the longer-term. The larger context is the global financial system and the China-emerging market growth story. Gold is a proxy for monetary changes. Copper is a proxy for commodities-driven growth in basic infrastructure and real estate. A breakout in gold/copper isn't a sign to put on a long-gold short-copper trade, it's that the next 10 years probably aren't going to look like the last 10, at least not until copper hits $1.40 or even plunges all the way back to $0.60 per pound.
Moving on, I've discussed a "Y2K" scenario here a few times, most recently last week:
Action in the forex and commodity markets is echoing with 1997-1998.

Nasdaq peaked at 2028 intraday on July 31. It fell to a low of 1475 on August 31, a drop of 27 percent. It rallied nearly 17 percent, then sold off again. It lost 23.6 percent in the second wave. The total drawdown at intraday low was 33 percent. The bottom was in early October, making for a nine-week crisis.

Few are thinking about a positive outcome, but there was real panic in summer 1998. The Federal Reserve organized a bailout of Long Term Capital Management. If coronavirus were a similar situation in time (with larger percentage moves), the bottom might come around the last week of April or first week of May. I'm not proposing that is going to happen, but it's worth keeping in the back of your mind. The final leg up was caused by Fed liquidity and also the destruction of the bears. Skeptics were calling the market a bubble before 1998, they were betting against Internet and tech stocks. The euphoria rally that followed was in part driven by the failure of a bear market in the face of a 33 percent correction.

The economy isn't heating up into a cyclical peak this time. Growth has been terrible for 11 years. Social mood isn't climbing into a major peak. It is arguably expressing a depression on par with the 1930s and even 1920s Weimar Germany. But the potential for an explosive bull move is not out of the cards yet, not until the virus pushes the economy into a clear recession that will not lift with the virus.
This scenario fades the longer quarantine policies are in place, and as long as economic production is dampened by fear of the virus. On the other side, massive government stimulus efforts could spark buying if the virus lifts early. The U.S. is talking about $4 trillion in stimulus now, or 20% of GDP.

There is even an echo of 1998 as we now learn the Federal Reserve bailout out hedge funds in September 2019. That was the reason for repo: Confirmed: Fed Bailed Out Hedge Funds Facing Basis Trade Disaster

On cornavirus, absurd death totals are being passed around, talking about upwards of 1 million or more deaths, which assume all quarantine efforts fail. I don't think that will be the case. The possibility of the Y2K scenario, and for a rip roaring relief rally will fade if containment efforts fail or take longer than expected, but right now I see hope is at a premium. People who are panicking could be proven correct, but I think the evidence says they will be wrong. Having said that, I think new highs for the market are gone. A "Y2K" move will be a final explosive bear market rally that will be your last chance to exit this bear market at attractive prices.

On the economy, I don't recall a similar recession where restaurants closed first. GDP will be misleading if the virus is contained or lifts early because consumption can resume quickly. It's much harder to restart production at factories (as China is showing) or major projects such as building a new factory. As long as the shutdown is short, consumption will jump quickly. Savings rates should soar with many people staying at home and not spending money on eating out, drinking in bars, etc. People who are bad with money might find their savings accounts flush with cash in a month if they continue working. The chart below shows gross output from Q3 2019. This measures all economic activity in the economy. Consumption is a smaller slice of total activity. If service-sector businesses such as restaurants get aid and the higher stages of the economy don't have to shut down, a deep recession or depression will be at minimum delayed.
Thanks to coronavirus, many domestic industries such as farming and (eventually) tourism and hospitality, will need to hire domestic labor instead of using cheaper imported labor.

MetroUK: Farming industry urgently needs workers to feed UK amid coronavirus crisis
DailyMail: Farmers call for sacked hospitality workers to be turned into army of Land Girls - and boys - to help pick fruit and veg because travel ban means they have lost thousands of foreign workers
‘Last year 98 per cent of harvest staff were from outside the UK. We are now very concerned about securing enough workers to help harvest our vital crops and get fresh fruit and vegetables to the public.

‘To help, in the next few days the berry industry will be mounting a large-scale recruitment campaign to encourage people who are in the UK and looking for work because of the current economic impact of the coronavirus to come and work on our farms.
Right now, people are not thinking about this offsetting labor demand, nor are they considering how political trends such as nationalism will very likely make these shifts permanent with new restrictions on foreign labor and immigration. Major changes are coming. Trade deficit and nations with high immigration are going to see their domestic industries and domestic industry boom in the wake of this crisis, particularly in the U.S. where onshoring medical production is only the start.

Speaking of hope with respect to coronavirus, here is a Governor Cuomo of New York press conference from March 21. He sounds very confident, like he finally has a handle on this. Case growth will continue, but this is not a man who thinks everything is spiraling out of control. he looked more shell-shocked in prior conferences.

Evidence from South Korea, China and Japan shows the disease can be contained. South Korea is reaching its potential turning point: South Korea Says Next Two Weeks Crucial in Its Virus Battle
Prime Minister Chung Sye-kyun said public behavior in the next 15 days will determine whether South Korea will win its fight against COVID-19. Failure to obey restrictions could lead to a ban in gatherings or legal action, he said in a national address on Saturday.

Chung’s appeal to the public comes hours after South Korea’s Centers for Disease Control and Prevention warned of a rising fatality rate. After reporting several hundred new cases every day at one point, South Korea seemed to have passed the worse when the number dropped to below 100 a day this week. It later trended higher again.

“We’ve seen sporadic group infections from some churches, care homes for senior citizens and a call center. We’re also seeing a higher risk of imported cases,” Chung said. “Companies are at the crossroads of survival and failure, while self-employed and mom-and-pop stores are suffering indescribably.”

Chung said the government aims to deliver a “visible” accomplishment before the start of April, when schools are scheduled to reopen.
Wuhan has had no new cases for 4 days. Delivery service companies are restarting: 武汉快递企业全面复工
According to the postal administration of Hubei Province, the express delivery companies in Wuhan will gradually resume work from March 20, and strive to reach 60% of the resumption of work by the end of March, and reach 90% or more in mid-April; other cities and prefectures serve as low-medium risk areas And strive to reach more than 90% in early April. As of March 19, each of the delivery companies had accumulated a total of 38,731 emergency vehicles in and out of Wuhan, 9,4527.7 tons of medical and living supplies; Post, SF, and JD.com delivered 6,586 pieces of baggage to the Han Medical Team for free, and a total of 115,004 pieces of baggage.

On the 21st, some citizens have started using courier services. Since then, citizens will begin to receive parcels. It is understood that during the epidemic prevention and control, citizens receive and send parcels mainly in a "non-contact" manner. The timeliness of parcels will be affected compared to usual times. We also hope that citizens will understand and remind them to take precautionary measures when receiving parcels.
Medical advice from France and Spain.
From France: Do not take ibuprofen! Only acetaminophen. French cases of young people dying from COVID19 involved ibuprofen. The French think it makes the disease 5x worse. Coronavirus and medication

From Spain: Drink warm liquids frequently. If you leave your home, the virus can stick to hard and clothes. Disrobe and shower. Attack any inkling of a sore throat with vitamins on hot liquids. Advice from Spain

Apparently some medical professionals are being told not to wear masks at work because it "spreads fear and panic." Unbelievable.
Panic is not the problem
. This reminds me of the anti-racism fight from a month ago, when "avoiding Asians" (aka social distancing) was a bigger threat than the virus. Deadly virtue signaling caused Covid-19 to kill Italians (Opinion).

This might go behind the paywall, but great stuff from David Llewellyn-Smith at MacroBusiness. Much more at the link: Welcome to the Second Great Depresssion
When the UK’s political and economic weight dramatically declined through the first 30 years of the 20th century so did this mechanism. And to make matters worse, when 1929 arrived the US was not ready to shoulder the burden of global leadership. When trouble came, it closed its trade borders. The globe was leaderless and deprived of all external demand.

This analysis has two important points to make about our current situation. The first is that for the past couple of business cycles, the world has enjoyed a remarkably similar parallel in its macros settings. As the US boomed through the late nineties internet economy then again through its post-millennium housing bubble, capital flooded in, causing some to argue that the widening current account deficit was a result of a surplus of investment opportunities. The result was an imports boom, which boosted the peripheral or emerging markets, in particular China.

Then, as the US weakened, and monetary and fiscal policy was eased, capital flooded outwards to emerging markets, again especially China.

The second point to draw from Kindleberger is that the UK/US global leadership impasse is a clear parallel with the US/China today. The US is no longer willing, or in a position, to be the engine of global demand; the political price for its working classes is too high. Equally clearly, China is not yet of sufficient size, power or sophistication to lead the world into a new economic era through an open economy.

Indeed, it is worse than that. The Chinese system is a half-pregnant capitalist autocracy with completely different priorities to those of a liberal democracy which will lead to even more perverse political economy outcomes.

We can see this already today in the remarkable, and shocking, push to blame the US for the Chinese derived pandemic. Rather step up as global leader, the Communist Party of China has ordered its diplomats to spread the vicious lie that America planted the virus in Wuhan.

Let me reiterate, it’s not not ratbag media or fringe nutjobs or shadowy psy-ops at work. The CCP diplomatic corp is doing this. It is an open declaration of psychologial war.

Such an extreme gambit exposes where CCP thinking is at. It has clearly concluded that its relationship with the world is about to collapse. That the trade deal with the US is dead. Indeed, that its relationship with the US in general is over. And that it is worth sacrificing because the Party’s prospects are better if it can channel public rage offshore, away from itself.
He goes through examples in different countries. I don't have time to search through all my posts, but I have discussed how China is similar to the USA in 1929 and the USA to Europe. The USA was a major exporter, a creditor nation, with a credit bubble, stock and real estate bubbles. It sank into depression as demand collapsed. Aside from the stock market valuation, China hits all the notes. Europe devalued more quickly and emerged more rapidly from depression. Indeed, it was European devaluations, dubbed "begger-thy-neighbor," that helped make the depression more severe for the USA. It wouldn't devalue, and end the depression, until 1934. What followed was horrendous economic policy that trapped the nation for another 7 years, but that's another story... Additionally, the U.S. dollar was undervalued relative to the pound in the 1920s, an intentional policy of the UK and US central banks. Similarly to how China undervalued the yuan for many years. I saw this parallel after reading America's Great Depression by Murray Rothbard during the 2008 financial crisis. Central banks have held this at bat for 11 years, but now it seems the next phase could be underway.

This post is also relevant again: The Logic of Strategy: Yuan Devaluation and the Road to Trade War
Whichever path is chosen, the economic and geostrategic paths will line up. An economic crisis in China will add the economic component to the emerging geostrategic China policy. A geostrategic decision to confront China economically would set in motion an economic crisis that would propel the strategy forward since China would respond in kind. The decision to halt rare earth exports to Japan and the widespread anti-Japanese riots of recent years already show how China will respond. A major confrontation from the U.S. would require an even larger policy response. Luttwak lays out some possible policy choices, starting with small ones such as banning technology transfers in a limited area such a military or telecom. I fully expect that were a Chinese crisis and devaluation to accompany another recession in the United States, the push for tariffs would find a bipartisan majority in the House and Senate.

Yuan devaluation is inevitable as soon as China enters a serious financial crisis. If the government refused to devalue, the nation would go through a 1930s style deflationary Great Depression. China is unlikely to allow the market to take the yuan lower in a panic collapse like a replay of 1997. At some point, it would announce a large devaluation designed to end the selling and the crisis. This will be called a political act in the United States (those who understand the economics will nonetheless spot the political opportunity) and the political push for protectionist policies will be too attractive to be ignored. The United States will retaliate with sanctions and the world will follow. This will put even more pressure on the Chinese economy and lead to a massive rise in nationalist sentiment (either that or anti-CCP sentiment, so expect the CCP to redirect it into nationalism). A chill wind will blow across the Pacific that will last a generation or more.
What are the odds of yuan devaluation if China no longer believes it can or should sustain good relations with the United States?

Recent posts related to China and Forex

Bad Idea: Chinese Buying Steel Bars Instead of Gold
Massive Generational USD Basing Pattern Complete
The Bear Market Moves to Forex
Forecasting Through the Tumbling Australian Dollar

That last post gives additional color to the picture I'm painting for the markets. Any asset will have a bull and bear case. Sometimes it's indeterminate (in between major support and resistance). Sometimes it's reaching a critical juncture where it will hold or break major support or resistance. What I'm seeing in the charts is confirmation across assets. The euro and yen are at major support areas that, should they break, would signal this bear market plunge will continue. Longer-term, I think these will break because I believe a bear market has started. But the timing could be months later if the market bounces here and DXY slides below 100.'

I'm seeing crazy possibilities with the euro and yen: EURUSD 0.50 and USDJPY 200. When I look at Australian dollar crosses, they also point to some crazy moves. Some don't make sense in combination because there is a three-body problem when looking at forex crosses, but some line up with what I see in USD crosses. USDCNY looks like it is going much higher and AUDCNY looks like it could be headed to 4.00 soon. If that happens, and USDAUD looks headed to around 2.25, then USDCNY would be 9.00. I can't emphasize enough that these are still potential futures.

More broadly, gold in US dollars looks like US dollars versus the world. Here's both since 1980. Dollar bull markets coincided with gold sell-offs. But this time, gold bottomed after the initial rally in the dollar index. Since then, gold has continued it's basing pattern and the DXY has developed a bading pattern. However, as shown above in the generational USD basing post, the dollar has broken out versus most emerging market currencies. A chart of gold in foreign currencies shows the same. The chart below is the ratio of SPDR Gold Share (GLD) to Invesco U.S. Dollar Bearish (UDN), the inverse of DXY which covers the major currencies. In emerging market currencies, gold and the dollar have already achieved incredible breakouts into full blown bull markets. My expectation is all state-issued fiat currencies will burn, but the U.S. dollar will be last. All of them could be falling versus gold and other assets though.

If the market is going to bounce, I look for biotech to do well.
If the market is going down, I expect stocks that have held up well, such as the biotechs above, but more likely a stock such as Netflix (NFLX) will bear the brunt of new selling as investors start liquidating everything.
The S&P 500 Index hit 61.8% fibonacci support on Friday, measured from 2009 low to 2020 peak. The next leg down would take it to 50% retracement and the 2016 level.

Other posts you may find of interest, that relate to larger macro issues. From early and late 2018: 2018: The Pivot Year Correction or Bear Market? Find Out Soon. Much of what I said is still relevant, but my timing was wrong.

Also the idea that the stock market tracks the Fed's balance sheet is relevant again: Does Fed Balance Sheet Matter. If it doesn't matter anymore, the Fed can't stop the bear market.

Breaking 7 discusses USDCNY breakout. Did not come in 2018. Looks highly probably now (I have open positions on this).

Finally, to emphasize how the wrong people (or with a wrong worldview/ideological framework in place because as Taleb argues, they lack skin in the game) are in power from the top to the bottom of society: central bankers don't know what's going on. Jeff Snider argues for global collateral from the Fed, in addition to ending the world of hidden balance sheets and rehypothecated assets. The Solution Is To Stop Being Backward
And then when it’s all said and done, remake the system so this cannot possibly happen a third time. Blockchain establishing the lineage and parameters of all collateral in use, in real time, no more repledging and rehypothecations. Nothing wrong with repo and wholesale, but it’s long past time to institute some discipline within them – with policymakers who actually know how they work.

Real reform that starts with finding people who could possibly be good at the job, open minded and honest enough to view the monetary system from a scientific rather than ideological perspective. Enough with the PhD Economists, time for some real bankers again. Clean house.

Final random thoughts. Credit spreads have blown out, even investment grade bonds tumbled last week. That needs to stop for a bounce in markets. Bitcoin and other cryptocurrencies have held up well. Not sure they can continue in the face of another wave down, but their rally could be a sign a bounce is coming because those markets are on the bleeding edge of speculative activity. Bitcoin is up 50 percent from its low and bounced on Thursday/ It has held the gains thus far. Market internals also turned favorable on Thursday, which is why I was looking for a bounce on Friday. They also looked good for much of Friday before deteriorating.


  1. "particularly in the U.S. where onshoring medical production is only the start"

    Sound quite bullish US. When covid passes, I imagine that could bring several years of strong growth (and hence bull market)?

    So it will really be up to an unknown event years down the road that brings about your final "doomsday" scenario for US equities?

    1. Assuming they actually follow through, it would cause inflationary growth. Equities might perform as in the 1970s, going nowhere in nominal terms and losing money in real terms. The big show is when the U.S. dollar loses value, probably not until the 2030s.

  2. Also the only thing that boosted US out of the 1930s depression was ww2. If history rhymes, China will be in deep depression unless and until a giant war erupts? I just don't see any upside in China for at least one generation.

    1. The first depression ended in 1934 when gold was revalued. From 1934 until WWII, FDR's administration tried to centrally plan the economy. They failed miserably.