Notes From Underground: Notes From Underground: A Question to Ponder

Do China and Russia have state authorities investing in the markets?

If the answer is yes then global investors have many issues to consider. The use of massive amounts of leverage (perfectly legal) utilized by Sovereign Wealth Funds and national pension funds have the power to distort prices as much as the involvement by the FED, ECB and BOJ to cause major distortions in the credit markets. Add in the Bank of Canada, Reserve Bank of Australia, the RBNZ and the price of credit is as overvalued as COPPER during the onset of the pandemic.


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Elevated raw material prices in a world that is struggling to find growth is a divergence as great as German Bunds yielding NEGATIVE 20 BASIS POINTS with inflation in Germany approaching 3%.

The ability to distort and disrupt resides in the powerful conduits of many government policy makers. The Swiss National Bank has utilized the haven status of its currency to print hundreds of billions of Swiss francs selling the FIAT LARGESSE to the market and in turn using the foreign proceeds to purchase thousands of high quality global macro stocks.

The Chinese would do well to unload hundreds of billions of U.S. dollars in exchange for purchasing and stockpiling the raw materials of food and industrial inputs. Not all wealth is hung on the walls of museums, mansions or parked in garages. The Chinese and others can use the futures markets to consign contracts for future delivery.

Maybe the powerful impact from state global actors is not as transitory as central bankers wish to believe. As a caveat, the large sovereign wealth/pension funds and other state authorities can also cause disruption to long /short positions through manipulating geo-political headlines, as well as announcing a curtailment in raw material needs. In an ALGO-driven trading environment the power to control the popular narrative can provide great potential profits.

This is just another reason why context, nuance and patience are the bedrock of good trading and investment practice. As the third quarter begins it is important to consider the global macro environment with eyes wide open. THE FED MAY NOT BE THE ONLY GAME IN TOWN.

Helping make the case for the impact from large state investors was the release of Japan’s Government Pension Investment Fund. Given that asset classes around the world rallied as covid vaccines eased the economic slowdown and central banks continued pumping through monetary stimulus, the JGIP “booked a gain on its investments of 25% equating to $339 billion.” The breakdown was as follows:

  • Japan domestic bonds -0.4%
  • Domestic equities +9.3%
  • Foreign Bonds +1.6%
  • Foreign equities +12%

This provides a great deal of FIREPOWER to nation-state actors. Imagine, if the BOJ wishes to put downward pressure on the YEN it just has to push the JGIP to invest its massive asset base in foreign assets. However, when bear markets ensue and money is repatriated back to Japan the opposite occurs. The bottom line for all investors is that state actors are dynamic forces and need to be watched for market impacts.

***David Marsh of OMFIF warns of a “Special ECB CONCLAVE TO DEBATE INFLATION AND ASSET PURCHASES,” expected to take place Tuesday, July 6 through Thursday. The meeting in Frankfurt “is intended to provide clarity on asset purchases and other sensitive monetary issues in the euro area.” It has been pushed for by the more HAWKISH members of the EU: German, Dutch, Belgian and Austrian banks.

Pay close attention because if Weidmann and others bring a sense of an end to QE due to rising fears of inflation the European debt markets may become volatile, and give a boost to the EURO. According to Marsh, a key item is Weidmann’s desire to prevent the ECB from embarking on Flexible Average Inflation Targeting, something the FED has been proposing. This means making up for past bouts of low inflation by running inflation hotter for longer. Do your work and look for critical technical levels for the EURO.

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