Markets On The Brink, Again

In the near-term, whether coronavirus spreads or not may determine whether a break comes now or is put off into the future. Important assets such as energy, copper, coal, Brazilian real, Mexican peso, emerging market bonds and more are at, near or broken major support/resistance. These are in alphabetical order.

The 2019 Pivot in Asia and Freegold Too

Last year I posted 2018: The Pivot Year and Dollar Breaks Again. I also did similar posts around 2015 or 2016. The posts were based mainly on technical analysis, with charts indicating a possible shift in market direction. Commodity charts and commodity producing countries had inverted head & shoulders patterns completing back in 2016. Last year and this year, there are false breakouts that reversed. Last year, I stuck with my macro position on dollar strength despite some dollar weakness and chart breakouts and it was the correct one.

Right now, the number one chart is still the U.S. Dollar Index, but for now the most important "subchart" is the offshore yuan, USDCNH. The PBoC chief drew another redline at 7.00. 人民币会“破7”吗？刚刚，央行副行长给了颗定心丸！ For myself, a move through 7 to 7.25 or 7.50 is fine if it is driven by the U.S. dollar. If DXY is above 100 or at 105, USDCNY 7.25 signals nothing more than dollar fluctuation. Yet the PBoC has boxed itself in with a narrative here. The risk isn't that CNY goes through 7 as much as the "ominpotent PBoC" "they have reserves and can force the market whichever way they want" narrative dies.

iShares MSCI Emerging Markets (EEM). The red horizontal is from the 2011 top, the blue from 2007. Prices are $40.01 currently and $39.72. A break below these levels could invalidate the 2017 breakout. Support is down near $34 if it breaks. EEM is trading at $40.11 in pre-market on Monday.

Trade is the big story and South Korea is an economy that lives and dies by global trade. ROK's trade surplus was 8 percent of GDP in 2017, exports and imports combined for 70 percent of GDP. The target for USDKRW, if that's a completed H&S pattern, is 1250. If USDKRW makes it there though, it's likely there's breakdowns elsewhere, such as USDCNH. As for the iShares MSCI South Korea ETF (EWY), it has a failed breakout, major support around $45. EWY is below its 2018 low.

Below are several Southeast Asian ETFs. Indonesia (EIDO) is close to have a major test of support.

For "corroboration" here's the S&P 500 Index. The blue line is the trendline from the 2009 Satanic low of 666. It must recapture 2895.

Finally, here's the ratio of GLD to SLV, and GDX to SIL.

I won't rehash the topic here, but in quick and simple terms, freegold is the "freeing" of gold away from a medium of exchange and into more of a monetary asset, mainly a reserve asset that might be likened to Bitcoin's role in the cryptocurrency ecosystem (if transaction speeds never pick up). Gold is money as they say, whereas even silver has substantial industrial demand. The exchange rate for money/currency can be set an any amount. The dollar can equal 100 yen or 1,000,000 yen, and the economies adjust around that exchange rate. Obviously a transition from 100 to 1 million between dollar and yen would wreck the Japanese economy, but the initial exchange rate doesn't matter. Had they set it in the millions, we'd all be saying USDJPY 1 million. The same is almost true of gold (it does have some industrial users that will be upset by a soaring gold price) because it is money. Moreover, if all fiat currencies crash versus gold, the economy suffers a less disruptive adjustment because relative prices and exchange rates won't be as directly impacted they way they would if a similar collapse took place against oil or agriculture. USDJPY is 100 and gold is $1300 an ounce and USDJPY might be 120 if gold is $5000 an ounce. Finally, soaring gold valuations life central bank reserves, shrinking their debt levels and allowing them to restart the credit system.

In practice, freegold will be visible in the price of gold breaking away from silver, other precious metals and all commodities. The gold/silver ratio

Since this chart is about pivots, this might also be a great time to be buying silver. It might be a great time to buy emerging markets if you think the dollar is peaking. Both the silver and EM trade should be powered by global inflationary forces. Or maybe the larger trend is still in place, but it's time for a short-term trend reversal. If instead there's a breakdown in emerging markets and gold takes on greater monetary status, it is likely deflation is out of control again. Currency volatility will take off. For myself, I'm still leaning towards a higher U.S. dollar and trouble ahead.

Vietnam Bounce or Bust

Vietnam, illegal immigration and gold

Illegal immigration from Vietnam surges

In Vietnam, many young people want to work in China because the pay is much better, Hai says. "I earn 800 yuan a month here. Back home, I could only get 450 yuan at most."

Foreign Workers Replacing Chinese Migrants

"It's not a new phenomenon; it has been going on for a while. However, it has been in sharper focus recently because of the so called labour shortages in the Pearl River Delta," says Geoffrey Crothall of the China Labour Bulletin, a non-government organisation.

In February, just after the Lunar New Year, the Pearl River Delta had more than 2m job openings, according to The People's Daily, the official Communist party mouthpiece. The Pearl River Delta in Guangdong has for many years been the centre of China's light manufacturing industry.

...While there are also many illegal workers from other south-east Asian and African countries, Vietnamese workers are preferred because they look similar to the Chinese and many can speak the language. Most are given work on assembly lines that require no technical expertise or skills.

On the Chinese side, economists are looking for wages to rise further. For Vietnam, the interesting thing is that it is trying to build its capital base by importing the factories, rather than exporting its workers.
Is Vietnam Finally Ready for Foreign Investors?

Hanoi is cutting taxes and improving infrastructure in hopes of becoming the low-cost alternative for new factories and outsourcing call centers

Not everyone sees a big manufacturing exodus from other parts of Asia to Vietnam, especially given China's economic scale and far more advanced infrastructure. Even though costs have gone up in southern China's Pearl River Delta, companies can acquire goods from factories in less expensive parts of the country, like Tianjin or Qingdao in northern China. Before relocating to Vietnam "you would have to exhaust all the places in China," says Dan Berman, director of Langton, a Hong Kong-based supplier of stuffed animals and other toys to customers like Tesco (TESO) and Toys 'R' Us.

Vietnam boosters disagree. Don Lam, chief executive of investment firm VinaCapital Group, which manages $1.8 billion in assets in the country, points to the new highways the government is building to connect northern Vietnam to southern China. Those roads will enable Vietnamese factories to become part of Chinese supply chains more easily, Lam says, with a cost base that's at least a third lower than across the border. With China-based employers likely to feel the need to match raises offered recently by Honda, Foxconn, and others, that wage differential is only going to grow larger, he promises. "If people are thinking of relocating," says Lam, "now is the time."

The Market Vectors Vietnam ETF (VNM) has been dead money this year, but that's not a terrible performance. The economy is relatively sheltered from the global financial markets, but inflation is quite high, and that led a lot of Vietnamese to abandon the dong for gold.

Gold is effectively a parallel currency, says Scott Robertson, a senior economist with Dragon Capital in Ho Chi Minh. “It is a form of savings, people transact in it and it earns interest on deposit,” he says.

Many Vietnamese banks were offering 4.5 per cent interest by weight on gold deposits last year, 300 basis points above the rate they were offering for dollar deposits, and banks took in some $3bn worth of gold deposits in 2009, more than double what they held the previous year.

There are no accurate surveys as to how much gold Vietnamese hold, but Mr Robertson estimates that “street gold”, sums held outside the banking system, amounts to about $30bn, or 29 per cent of gross domestic product, and more than triple the volume of “street dollars”.

The wars and vast political upheavals that have ripped across Vietnamese society over the past six decades created a disposition toward assets that are liquid, portable and hold their value independent of bureaucrats, Mr Robertson says.

But he also says that Vietnamese investors have become expert hedgers of their currency and of equity risks. He points out that there was a huge spike in gold imports in mid-2008, just before the world stumbled into the financial crisis, although he declines to say whether he thought the move was driven by good luck or good judgment.

Dollars are popular, but have a number of shortcomings. Many Vietnamese have lingering memories of January 1996, when the US Treasury introduced new $100 bills and local currency dealers began refusing to accept older bills at par.

That is not the only problem. “Dollars fall apart in a highly humid environment. They go off,” says Mr Robertson.

Vietnam has some interesting dynamics, for sure.

These countries fall like dominoes...

Vietnam as Asia's first domino

The disconnect between central command and peripheral resistance was made apparent last year when many export-oriented industries refused to cash in their export receipts at the official exchange rate for the dong against the US dollar. As of October, there was a 9% spread between the official and black market rates, and that gap drove the government's decision in November to devalue the dong by 5% by expanding its permissible trading band. Even with that depreciation, financial analysts monitoring the situation say there is still a 5% spread between the official and black market rates.

One factor driving the distortion is the government's interest rate subsidies, which were implemented last year as part of the stimulus package to encourage more local lending. The policy effectively reduced lending rates from 10% to 6.5% and drove huge new lending worth around $24 billion, or nearly 23% of GDP. According to Standard & Poor's, a credit rating agency, Vietnam's year-on-year loan growth was up 37%.

Financial analysts say that because there was virtually no underlying demand for working capital among state-owned enterprises (SOEs) and export-oriented private companies that received the bulk of the new credits, much of the money was recycled into the local stock market. The footloose liquidity contributed to making Vietnam's stock market one of the world's best performers during the first half of 2009; it then fell dramatically in the second half.

It's unclear to financial and sovereign analysts how much of last year's US$24 billion in new lending was lost to stock market speculation. Kim Eng Tan, a sovereign and public finance analyst at Standard & Poor's, expressed his preliminary concerns about last year's 37% loan growth rate. He said that the balance sheets of major Vietnamese banks were in "reasonable shape" at the end of 2008, but that "we'll need to see what has changed after the new surge in lending".

Market Vectors Vietnam (VNM) would suffer from troubled in Vietnam. SPDR Gold Shares (GLD) may do relatively well if investors buy gold in response to currency crises, but in the short-run, PowerShares DB U.S. Dollar Index Bullish Fund (UUP) may see larger gains.

Vietnam ETF Completed H&S

I noticed this pattern forming last fall, unless I'm reading it wrong it looks to be a textbook example of a head-and-shoulders pattern. Interestingly, Vietnam did well this week, though it needs to at least get above it's 50-day to become interesting.