July 19, 2019

A Bank With 49 Trillion Dollars In Exposure To Derivatives Is Melting Down Right In Front Of Our Eyes

Could it be possible that we are on the verge of the next “Lehman Brothers moment”?  Deutsche Bank is the most important bank in all of Europe, it has 49 trillion dollars in exposure to derivatives, and most of the largest “too big to fail banks” in the United States have very deep financial connections to the bank.  In other words, the global financial system simply cannot afford for Deutsche Bank to fail, and right now it is literally melting down right in front of our eyes.  For years I have been warning that this day would come, and even though it has been hit by scandal after scandal, somehow Deutsche Bank was able to survive until now.  But after what we have witnessed in recent days, many now believe that the end is near for Deutsche Bank.  On July 7th, they really shook up investors all over the globe when they laid off 18,000 employees and announced that they would be completely exiting their global equities trading business

It takes a lot to rattle Wall Street.

But Deutsche Bank managed to. The beleaguered German giant announced on July 7 that it is laying off 18,000 employees—roughly one-fifth of its global workforce—and pursuing a vast restructuring plan that most notably includes shutting down its global equities trading business.

Though Deutsche’s Bloody Sunday seemed to come out of the blue, it’s actually the culmination of a years-long—some would say decades-long—descent into unprofitability and scandal for the bank, which in the early 1990s set out to make itself into a universal banking powerhouse to rival the behemoths of Wall Street.

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July 18, 2019

Libra As A Competitor To Inflationary Central Banks

As an international private currency, Libra will be in competition with publicly issued currencies.

It could have large and fruitful repercussions on the global monetary policy, especially with reference to those countries where central banks are still heavily subject to political influence and tend to pursue inflationary monetary policies.

The introduction of the Libra project to the public has generated a lot of fuss over the consequences this cryptocurrency may have for the stability of the global financial system.

At first, we need to clear the ground from the most common mistaken facts about Libra running over the news. As detailed in this white paper, Libra will be a fully backed digital currency, it will be issued solely upon demand, and its value will be given by a basket of reserves whose composition will be diversified, privileging safe assets and stable international currencies (as thoroughly described in the technical part of the white paper dedicated to the functioning of the reserve mechanism).

Thus, despite the rumors, we know as a fact that Libra will not:

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July 17, 2019

Insanity: Now Even Junk Bonds Have Negative Yields

Think about this: a junk bond is basically debt issued by a company with financials so risky that analysts expect there’s a good chance the company won’t pay its debts.

Hell, the company might not even be in business by the time the debt matures.

And yet, despite these substantial risks, investors are willing to loan money to these companies… at NEGATIVE rates of return.

Seriously?? You take all that risk and then GUARANTEE that you’ll lose money.

In other words, as John Rubino recently noted, investors are now extrapolating falling interest rates into the future and playing junk bonds for the capital gains they’ll generate when their future borrowing costs go down. This is one of those sentiment shifts that financial historians will single out for special attention when sifting through the rubble of the coming crash.

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July 16, 2019

Congress courageously sticks US taxpayers with a $6 trillion liability

SECURE stands for “Setting Every Community Up for Retirement Enhancement”, which is pretty clever when you think about it.

People want to associate their retirement with a word like ‘secure’. So even without knowing anything about the law, most people will probably have good feelings about it based solely on the name.

But if you actually read the legislation, SECURE contains a number of predictably terrible consequences.

For starters, SECURE is a basically a gigantic tax increase. And it’s a tax increase that will particularly affect your children when you pass away.

Under current law, you could leave your IRA to your children in a fairly tax efficient way. That’s actually one of the nice things about an IRA.

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July 15, 2019

China Reports Slowest GDP Growth On Record, As Retail Sales, Industrial Output And Fixed Investment All Beat

The Chinese goalseek-o-tron was in perfect working order on Monday morning, when moments ago Beijing reported that China's Q2 Y/Y GDP rose at 6.2%, once again precisely as consensus had expected, down from 64% in Q1 and the lowest since "modern" records started to be kept 27 years ago in 1992, dipping below even the financial crisis low of 6.4$

Additionally, 2Q cumulative GDP rose 6.3% y/y, also matching the consensus estimate, and down from 6.4% in Q1.

"We expect Beijing to ramp up stimulus measures in the second half despite more limited policy room, though markets should not put too high expectations on the scale and duration of these stimulus measures,” Nomura's China economist Lu Ting wrote in a recent research note. “Domestic policies will to a large extent be dependent on the U.S.-China trade tensions.”

The disappointing GDP print comes just day after another miss, this time in the value of exports, which sharnk by 1.3% in dollar terms in June, after inching up in May despite the tensions with the US.

Property investment moderated to 10.9 per cent in the first six months, compared with growth of 11.2 per cent in the year to May. Strong property sales helped brighten the economy into April, but the sector lost momentum in the second quarter.

But while the record Chinese slowdown was widely as expected, there was an unexpected silver lining to the lowest Chinese GDP print on record, as all three core June economic indicators - retail sales, industrial output and fixed investment - beat sharply lowered expectations, to wit:

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July 12, 2019

AI-Trained Robots Set To Automate Recycling Centers, Will Displace Countless Jobs

AMP Robotics, an artificial intelligence and robotics company that is automating the recycling industry, has rolled out new trash-picking robots for recycling centers that will replace countless low-skilled jobs, reported The WSJ.

Single Stream Recyclers (SSR) in Sarasota, Florida, which processes 350 tons of waste per day, said last week that it would add eight AMP trash-picking robots to its already six. "Robots are the future of the recycling industry. Our investment with AMP is vital to our goal of creating the most efficient recycling operation possible, while producing the highest value commodities for resale," said John Hansen co-owner of SSR.

AMP robots are more productive than humans, can sort garbage more accurately and faster, are set to eliminate most human sorter jobs at SSR's Florida facility in the coming years.

"AMP's robots are highly reliable and can consistently pick 70-80 items a minute as needed, twice as fast as humanly possible and with greater accuracy. This will help us lower cost, remove contamination, increase the purity of our commodity bales, divert waste from the landfill, and increase overall recycling rates," said Eric Konik co-owner of SSR.

Hanson said, "It's 95 degrees, they're [human sorters] standing on a platform and sorting," adding that AMP robots are "twice as fast and they don't make mistakes."

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July 11, 2019

Big Pharma Hikes Drug Price 879% And That's Just One Of 3,400 So Far This Year

Big Pharma continues to jack up the prices on the drugs they peddle. The price of one drug was hiked 879%, and that’s only ONE of the 3,400 price increases that have occurred so far this year.

Pharmaceutical companies raised the prices of more than 3,400 drugs in the first half of 2019, surpassing the number of drug hikes they imposed during the same period last year, according to an analysis first reported by NBC News. While the average price increase per drug was 10.5%, a rate around five times that of inflation, about 40 of the drugs saw triple-digit increases. That includes a generic version of the antidepressant Prozac, which saw a price increase of 879%.

ARS Technica reported that the surge in price hikes comes amid ongoing public and political pressure to drag down the sky-rocketing price of drugs and healthcare costs overall. In May of 2018, President Donald Trump boldly announced that drug companies would unveil “voluntary massive drops in prices” within weeks, however, Big Pharma didn’t announce any big drops or actually reduce their prices. Trump then went on to publicly shame Pfizer for continuing to raise drug prices. The company responded with a short-lived pause on drug price increases mid-way through last year, but it resumed increasing prices in January along with dozens of other pharmaceutical companies.

“Requests and public shaming haven’t worked,” Michael Rea, chief executive of RX Savings Solutions, told Reuters last December. His company helps health plans and employers seek lower-cost prescription medicines. It also conducted a new analysis of some drug prices.

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July 10, 2019

The Workings Of The Gold Standard

A gold standard is a monetary regime where the monetary unit, the base money of the banking system — the outside money or the high-powered money — consists of a defined amount of gold. 

Gold standards can come in all manners and versions and with particular institutional and historical quirks that affect their operations. The key characteristic that unites them is that an economy’s underlying money is ultimately based on an amount of gold. 

Using the language and the classification in the first reading session of our Harwood Graduate Colloquium, commodity monies such as a gold standard consist of objects that have alternative nonmonetary uses (for instance in production or ornament) and are absolutely scarce. That is, their scarcity is a fundamental aspect of the good itself — as opposed to fiat money, which can be expanded at the discretion of a central bank. 

When money is gold, it can be increased only by extracting more gold from mines and minting it into monetary circulation. This process, expanding supply through the incentives provided by the price mechanism, subjects the supply of money to market forces rather than to discretionary policy making as is the case under our current monetary regime. That carries with it a few remarkable characteristics:

The opportunity for price inflation is — by present standards — very limited, as the total amount of money in the economy is limited by the amount of gold. This need not be strictly so, as monetary theories going back at least to Wicksell’s pure credit economy have bank credit (and money velocity) remedying the scarcity of a commodity money. Free banking under a fractional-reserve gold standard, can, in other words, mitigate this strict supply schedule somewhat. 

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July 9, 2019

30% Of The Companies In The Russell Are Unprofitable

Today we have 3 suggestions for portfolio positioning in 2H 2019. First, overweight US equities; ever more negative global interest rates over recent weeks are a warning sign. Second, expect more volatility from late July (post Fed meeting) through October; seasonality and fundamentals align on this point. Lastly, be cautious on US small caps; they are more cyclical than large caps and are levered to financial conditions.

From a fundamental standpoint, nothing much good happened in the first half of 2019. Specifically:

  • We didn’t get a US-China trade deal, and based on current press accounts we’re further away now than we were on January 1st. Moreover, bilateral tariffs are higher now than just a few months ago and apply to more goods.

  • Corporate earnings growth has been slipping. For example, first quarter S&P 500 earnings were slightly negative as compared to last year. Analysts expect the same for Q2, and margins are lower than a year ago for both quarters.

  • Slowing global growth. The export-driven German economy, long a bright spot in the Eurozone, likely slipped into contraction in Q2. Japan’s economy managed to post +2.2% GDP growth in Q1, but Q2 will almost certainly be slower. China’s economy has benefited from some easing of financial conditions, but trade tensions are clearly taking a toll as we start Q3.

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July 8, 2019

"The Deutsche Bank As You Know It Is No More": DB Exits Equities In $8.4 Billion Overhaul, To Fire Thousands

The bank which only a decade ago dominated equity and fixed income and sales trading and investment banking across the globe, and was Europe's banking behemoth, is no more.

On Sunday afternoon, in a widely telegraphed move, Deutsche Bank announced that it was exiting its equity sales and trading operation, resizing its once legendary Fixed Income and Rates operations and reducing risk-weighted assets currently allocated to these business by 40%, slashing as many as 20,000 jobs including many top officials, and creating a €74 billion "bad bank" as part of a reorganization which will cost up to €7.4 billion by the end of 2022 and which will result in another massive Q2 loss of €2.8 billion, as the bank hopes to slash costs by €17 billion in 2022, while ending dividends for 2019 and 2020 even as it hopes to achieve all this without new outside capital.

"Today we have announced the most fundamental transformation of Deutsche Bank in decades. We are tackling what is necessary to unleash our true potential: our business model, costs, capital and the management team. We are building on our strengths. This is a restart for Deutsche Bank – for the long-term benefit of our clients, employees, investors and society", CEO Christian Sewing said in a statement.

“In refocusing the bank around our clients, we are returning to our roots and to what once made us one of the leading banks in the world. We remain committed to our global network and will help companies to grow and provide private and institutional clients with the best solutions and advice for their respective needs – in Germany, Europe and around the globe. We are determined to generate long-term, sustainable returns for shareholders and restore the reputation of Deutsche Bank.”

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July 5, 2019

Goodbye Dollar, It Was Nice Knowing You!

Well the worm has finally turned, maybe. Even the feckless Angela Merkel’s Germany now understands that national interests must prevail when the United States is demanding that it do the unspeakable. At the recently concluded G20 meeting in Tokyo Britain, France and Germany announced that the special trade mechanism that they have been working on this year is now up and running. It is called the Instrument in Support of Trade Exchanges (Instex) and it will permit companies in Europe to do business with countries like Iran, avoiding American sanctions by trading outside the SWIFT system, which is dollar denominated and de facto controlled by the US Treasury.

The significance of the European move cannot be understated. It is the first major step in moving away from the dominance of the dollar as the world’s trading and reserve currency. As is often the case, the damage to US perceived interests is self-inflicted. There has been talk for years regarding setting up trade mechanisms that would not be dollar based, but they did not gain any momentum until the Trump Administration abruptly withdrew from the Joint Comprehensive Plan of Action (JCPOA) with Iran over a year ago.

There were other signatories to the JCPOA, all of whom were angered by the White House move, because they believed correctly that it was a good agreement, preventing Iranian development of a nuclear weapon while also easing tensions in the Middle East. Major European powers Germany, France and Great Britain, as well as Russia and China, were all signatories and the agreement was endorsed by the United Nations Security Council. The US withdrawal in an attempt to destroy the “plan of action” was therefore viewed extremely negatively by all the other signatories and their anger increased when Washington declared that it would reinstate sanctions on Iran and also use secondary sanctions to punish any third party that did not comply with the restrictions on trade.

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July 3, 2019

HP, Dell & Amazon Join Manufacturing Exodus Leaving China

Though China wasn't the only Asian nation where manufacturing activity slumped last month, according to a slate of almost unilaterally disappointing PMI readings released earlier this week, the tend over the past year is increasingly clear: The trade war is President Trump's to win, as more tech companies resolve to move at least some production outside of the mainland.

And in the latest warning to Beijing that the trade war is having a real, and perhaps irreversible, impact, Nikkei Asian Review reports that HP, Dell and Amazon are joining the wave of consumer-electronics manufacturers who are planning to shift production elsewhere.

The burgeoning exodus, which also reportedly includes a half-dozen Apple suppliers (most notably Foxconn), Nintendo, Sony and others is threatening China's status as the global manufacturing hub.

HP and Dell, the world's No. 1 and No. 3 laptop manufacturers, who are responsible for a combined 40% of the world's production, are planning to shift 30% of their production elsewhere.

Lenovo Group, Acer and Asustek Computer are also evaluating plans to shift production elsewhere. And Amazon is planning to shift at least some of the production for its Kindle e-reader and Echo assistant. For all of these companies, the focus would mostly be on products bound for the US.

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July 2, 2019

From "Ponzi" To "We're Working On It" - BIS Chief Reverses Stance On Crypto

The head of the Bank of International Settlements (BIS) has appeared to U-turn on issuing digital currencies after a fresh interview with the Financial Times on June 30. 

Speaking to the publication, BIS chief Augustin Carstens actively endorsed the creation and issuance of digital versions of national fiat currencies

“Many central banks are working on it; we are working on it, supporting them,” he said.

“And it might be that it is sooner than we think that there is a market and we need to be able to provide central bank digital currencies.” 

The comments struck a curious note with many, coming just months after Carstens emphatically advised against issuing such digital currencies.

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July 1, 2019

Is This The Beginning Of A New Oil Crisis In Canada?

Canada is desperately trying to build the much-delayed Trans Mountain Expansion, but even as it tries to advance the ball on one front, another pipeline has found itself in the crosshairs.

Enbridge’s Line 5 pipeline carries more than a half a million barrels of oil and products per day from Alberta, across the border into the U.S., and ultimately to refineries back in Canada at the major refining and petrochemical hub of Sarnia, Ontario.

The 540,000-bpd pipeline may be in trouble, however. The state of Michigan just launched a lawsuit, which could force Enbridge to shut the pipeline down. Michigan is concerned about the possibility of a leak from the aging pipeline, which crosses under the Straits of Mackinac. A leak could threaten drinking water and spoil the scenic Great Lakes.

Governor Gretchen Whitmer promised to stop the “flow of oil through the Great Lakes as soon as possible.”

Enbridge has been trying to build a replacement for the pipeline, which is nearly 70 years old. But the replacement proposal has been a huge point of contention. Michigan’s attorney general is hoping to shut it down. The risk the state most fears is an anchor strike.

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June 28, 2019

China's Rogue Regime

It is commonly accepted now that China is using its trade with the United States and other OECD countries to increase the size of its economy, which in turn will allow it to build its military to the point where it can attack the United States and other countries and hope to win. At its simplest, every Chinese container landed at the Port of Los Angeles contributes to a U.S. combat death at some point in time of China’s choosing. Every item of injection-moulded plastic from China picked off the toy shelves at Walmart contributes to a future U.S. combat death.

Some of our leaders seem to comprehend this but speak in a kind of code. Thus,Vice President Mike Pence told the West Point graduating class last month, “You will lead soldiers in combat. It will happen.” General James Mattis has made similar remarks. How can they be so certain that the size of the U.S. military won’t be enough to discourage a belligerent from disturbing the peace of the world?

Because that belligerent country is China and their intentions are as plain as day. Would a peaceful country continually bait Japan as China does?  This graph from the Japanese Foreign Ministry shows Chinese incursions into Japanese waters.

The sudden leap in incidents in 2012 was due to the rise of Xi Jinping as Supreme Leader, later uprated to Core Leader. All these incursions by Chinese fishing vessels are funded by the Chinese Government; it seems the budget is for 12 per month. This is the steady heartbeat of Chinese hate and enmity while they wait for the moment when they can attack.

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June 27, 2019

Stunning Exposé Offers New Details About China's Infiltration Of 8 Tech Giants

Over the past year, Western media organizations have published a non-stop stream of reports about "Operation Cloudhopper": The Chinese government's clandestine program to spy on and siphon economic secrets from some of the world's largest tech companies. 

We have shared some details of the program before: China's Ministry of State Security has worked with a shadowy group of hackers called 'Advanced Persistent Threat' 10 to infiltrate American and European enterprise tech firms using a very consistent MO: Hackers would infiltrate the cloud computing networks of 'managed service providers', then 'hop' from network to network', gaining entree to the networks of these firms' clients. Back in December, the US named some of the hackers suspected of working with APT10, and was backed up by Germany, New Zealand, Canada, Britain, Australia and other allies all issued statements.

Notably, the Chinese cyberespionage campaign continued even after Beijing and the Obama Administration agreed to a pact to cease all cyberespionage activities.

But as devastating as these attacks have been, the details have been kept under wraps, as corporate victims have pushed for their privacy to be protected. But for the first time since the US indicted the two suspected APT members, a sweeping Reuters investigation has laid out details of attacks, many of which have been previously reported, but not in quite as much depth.

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June 26, 2019

Exposing The Fed's False QE/QT Narrative With Its Own Data

It doesn’t take much calculation to see that the Fed’s position on quantitative tightening (QT) is blatantly inconsistent with its position on quantitative easing (QE). You only need to notice that the excerpts above, taken together, violate the following pair of postulates:

  1. When A and B are opposites, the effects of A should be opposite to the effects of B.
  2. QT is the opposite of QE.

So financial markets and the economy should respond significantly to both QE and QT—although in opposite directions—or they should respond to neither QE nor QT. To claim otherwise, as in the excerpts above as well as other similar communications, is like arguing that one of the two postulates is wrong in the context of the Fed’s bond portfolio. That seems unlikely, but not impossible. In particular, the first postulate falls short of being an absolute truth, reality sometimes being more complicated than we’d like it to be. Consider that Newtonian physics seemed absolute enough until Einstein came along.

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June 25, 2019

Ethereum Co-Founder Slams Facebook's Libra Token For Centralization

Ethereum co-founder Joseph Lubin said that Facebook’s Libra token is like “a centralized wolf in a decentralized sheep’s clothing” in an article published on tech news outlet Quartz on June 21.

The social media giant released the white paper for a its cryptocurrency dubbed Libra earlier this month to mixed reviews from experts in the cryptocurrency and blockchain industries and concern from government regulators.

In his article, Lubin notes that Libra’s white paper describes feelings common among many in the cryptocurrency community. It states that “sending money across the globe should be as simple and inexpensive as sending a message on your phone,” and “financial infrastructure should be globally inclusive and governed as a public good.”

While noting the white paper’s claim that “People will increasingly trust decentralized forms of governance,” Lubin pointed out the need for users to trust Libra’s fiat currency and government bond backing, and merchants to trust that the network be responsibly run. Furthermore, Lubin also noted its centralized infrastructure:

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June 24, 2019

Bring on Higher Oil Prices: They’ll Boost the US Economy. Powell Sees it Too. A New Experience for the US

Powered by the iffy situation in the Persian Gulf, the Strait of Hormuz, and the Gulf of Oman, with attacks on tankers and now the downing of a US drone, the price of crude oil got a little nervous in recent days. WTI jumped about 6% today to over $57 a barrel.

But this was just a minor uptick in the overall scheme of things: The US, which has become the largest oil producer in the world, is in the middle of its second oil bust in five years:

These two oil busts are largely a consequence of surging US crude oil production. During the oil bust of 2014-2016, the price of WTI collapsed by over 75%, careening from $107 per barrel to a low of $27 per barrel in 18 months, before starting to rebound. In the process, a slew of oil-and-gas drillers filed for bankruptcy.

For a while it looked like the shale boom, where all the growth in production had come from, was running out of money, and therefore out of fuel. Production fell sharply from early 2015 through much of 2016, but then new money from Wall Street appeared, and production began to soar again, hitting new records all along the way.

Shale wells produce a variety of liquid hydrocarbons (they also produce gaseous hydrocarbons which are not included here). This production of crude oil and petroleum products soared from just over 7 million barrels per day (bpd) in 2010 to 16.6 million bpd currently, according to EIA data:

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June 21, 2019

Facebook’s New Libra Digital Currency, Trust Issues (Many), and Sovereignty

Facebook Inc. unveiled plans for a new, global financial system with a broad group of partners from Visa Inc. to Uber Technologies Inc. on board to create a cryptocurrency it expects will one day trade much like the U.S. dollar and inject a new source of revenue. Called Libra, the new currency will launch as soon as next year and be what’s known as a stablecoin–a digital currency that’s supported by established [fiat] government-backed currencies and securities [see Reuters on stablecoins here]. The goal is to avoid massive fluctuations in value so Libra can be used for everyday transactions across Facebook in a way that more volatile cryptocurrencies, like Bitcoin, haven’t been. To come anywhere close to matching the U.S. dollar for utility and acceptance, Libra will need to be widely trusted.

As we shall see below, trust issues are key to the entire venture. Friend-of-the-blog Matt Stoller has an Op-Ed in the New York Times that you should all read; he expands on how the “partnership” may work:

As far as I can tell, Facebook aims to build a new payments and currency system using blockchain technology. Facebook is starting a subsidiary, Calibra, to “provide financial services” to individuals and businesses, including saving, spending and sending money. The actual standards for the currency will be managed by a nonprofit in Switzerland called the Libra Association. The currency will have its own central bank known as the Libra Reserve, and the board will be the committee of corporations that helped set it up.

Needless to say, a privatized Central Bank will take some time to set up (Bloomberg also says the Libra Association’s Charter is not yet written). Facebook COO Sheryl Sandberg:

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June 20, 2019

Krieger: 'FacebookCoin' Is A Trojan Horse Of Corporate Oligarchy

I do not think Zuckerberg’s ultimate goal is running a stable coin, although he could live with that arrangement and benefit from it for as long as necessary. I think the main reason Facebook has structured the coin with fiat backing is to make it seem less threatening to the current monetary establishment and world governments. It’s a way of saying Facebook isn’t trying to compete with the current status quo, but rather make the status quo run more smoothly and efficiently. Then, once it has a foot in the door and gains traction amongst its massive user base, all Facebook has to do is wait until the current assortment of global governments and their respective central banks fail.
At that stage it can remove the fiat currency backing (who will want it anyway), and let FacebookCoin free float. With the credibility of global governments and central banks in the toilet by then, Facebook and its corporate oligarch partners will be in a prime position to take over a sizable chunk of worldwide payments using their own currency. In other words, this appears to be a long-term scheme by elements of corporate oligarchy to position themselves as an unelected and unaccountable future sovereign power.
All that said, I want to be clear about something. Just because the above represents a plausible scenario doesn’t mean it’ll work out that way. If enough people recognize the dangers of this scheme, it could very well be stopped in its tracks.
In this regard, I want to highlight one of the biggest threats posed by a financial system run by a corporate oligarchy. For one thing, there’s the ever-present issue of censorship. I understand why many in the “crypto” world are fine with FacebookCoin since they see it as a threat to state power and control, but this is myopic in my view. Let’s not forget who is silencing the voices of Americans online in 2019. It’s not the state, but rather Facebook, Google, Twitter, etc. If we allow these companies to gain control of payments, you can be sure the same sort of unaccountable blacklisting will follow in the world of transactions.
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June 19, 2019

CEO Of Germany's 2nd Largest Bank: In A Few Years We Will Notice The ECB's Experiment Was A Historical Mistake

“The cultural level of a nation is mirrored by its rate of interest: the higher a people’s intelligence and moral strength, the lower the rate of interest.” Thus declared economist Eugen von Böhm Bawerk, according to Richard Sylla and Sidney Homer’s classic tome A History of Interest Rates. By that logic, Europe is the domain of superhumans, as the overnight deposit rate has resided below zero since June 2014 and at negative 40 basis points since March 2016.

The M.D. overseeing Europe’s monetary affairs has his own version of the Hippocratic Oath.  Speaking at the ECB’s annual forum at the resort town of Sintra, Portugal today, ECB president Mario Draghi made waves by suggesting the central bank will impose still lower interest rates:

Further cuts in policy interest rates and mitigating measures to contain any side effects remain part of our tools. . . Negative rates have proven to be a very important tool in the euro area.

In the absence of improvement, such that the sustained return of inflation to our aim is threatened, additional stimulus will be required.

The implications are clear. Claus Vistesen, chief eurozone economist at Pantheon Macroeconomics, told Bloomberg: “Draghi is going to finish his tenure [set to end on Oct. 31] with a cut. The door is now open and I don’t see how they can not walk through it.” Mike Riddell, fund manager at Allianz Global Investors, noted: “The ECB has just handed the bond bulls an ammunition dump.”

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June 18, 2019

Evidence That The U.S. Economy Could Be Plunging Into A Very Deep Recession Is Rapidly Mounting

Not since 2008 have we seen so much bad economic data come rolling in all at the same time.  Even without a war with Iran, which by the way is looking increasingly likely with each passing day, it definitely appears that the U.S. economy is steamrolling toward recession territory.  The employment numbers for last month were abysmal, global trade has collapsed to the lowest level that we have seen since the last recession, and manufacturing numbers just keep getting worse and worse.  In fact, the New York Fed’s Empire State manufacturing index just suffered the worst one month decline in history

The New York Fed’s Empire State business conditions index took a sharp turn for the worse in June, falling into negative territory for the first time in more than two years.

The Empire State manufacturing index plummeted 26.4 points to negative 8.6 in June, the New York Fed said Monday. That’s a record decline. Economists had expected a reading of positive 10, according to a survey by Econoday.

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June 17, 2019

Wilbur Ross Warns Not To Expect A US-China Deal At G-20 Meeting

To anyone expecting a major breakthrough at the June 28-29 Osaka G-20 meeting, Wilbur Ross has a simple message: "Don't."

Speaking to the WSJ, US Commerce Secretary Wilbur Ross sharply played down prospects of a "major" trade deal if President Trump and China’s President Xi Jinping meet at the Group of 20 summit in Japan later this month (which they very well may not as Xi has yet to commit to a meeting which would show him at a power disadvantage to Trump), but nonetheless he said he believes the two sides will ultimately get back to negotiations.

"I think the most that will come out of the G-20 might be an agreement to actively resume talks,” Ross said in a phone interview Sunday. “At the presidential level they’re not going to talk about the details of how do you enforce a trade agreement."

So what is the best case scenario? Well: a return to square one, such diplomatic relations are now well in negative territory:  “The most that might come is new ground rules for discussion and some sort of schedule for when detailed technical talks might resume,” said Mr. Ross.

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June 14, 2019

Risk on, risk off.

One day after traders were greeted by a sea of green - on potential world war news - we are back to the sea of red as global stocks struggled and safe haven bets were back in play on Friday with German bond yields plumbing record lows after the latest dismal Chinese data dump sparked fears about the health of the global economy and concerns of a new U.S.-Iran confrontation intensified (which, by the way, was somehow bullish for risk yesterday).

Beijing May activity reported overnight was very weak and painted a fairly gloomy picture of the world’s second largest economy as the trade war with the United States starts to bite. May industrial output growth slowed to a more than 17-year low, the weakest since since 2002, and well below expectations, while fixed-asset investment also fell short of forecasts. Retail sales growth accelerated and surprised to the upside however.

Industrial Output for May: 5.0%, est. +5.4% (range +5.1% to +6.4%, 35 economists), down from +5.4% last month.

May retail sales +8.6% y/y; est. +8.1% April +7.2%

Jan.-May fixed-asset investment excluding rural households +5.6% y/y; est. +6.1% (range +5.2% to +6.5%, 34 economists). Jan.-April +6.1%

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June 13, 2019

Putin Sets The Table To Leave The Dollar Behind

This is twice that Russian President Putin has said on the global stage the Federal Reserve Note no longer deserves the status and privilege of “world reserve currency” that allows unlimited printing of the currency.

The first time he made mention he actually said that it was a threat to Russia’s national security.

In a speech at the International Economic Forum, in St. Petersburg, Russia, “Russian Davos”, President Putin reaffirmed his position regarding the Federal Reserve Note and it’s international role. For the record, we see the abuse of the Federal Reserve and the Federal Reserve Note, U.S. dollar, in similar light as President Putin. The current status of “world reserve currency” should not be allowed in this day and time. The absolute abuse of power, excessive power granted and the ability to shackle entire nations through the use of a currency that is not even their own should have never been allowed but it is way past time for this system to be dissolved.

In a speech at a plenary session, Mr Putin accused Washington of seeking to “extend its jurisdiction to the whole world.”

“But this model not only contradicts the logic of normal international communication. The main thing is, it does not serve the interests of the future.”

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June 12, 2019

Nintendo Reportedly Moved Switch Production Out Of China Over Trump's Tariff Threats

Offering yet another example of the trade war will inevitably drive more companies to move manufacturing out of mainland China and to Taiwan or Vietnam instead, Nintendo is shifting production of one of its most popular gaming consoles to limit the impact of US tariffs.

Per WSJ, Nintendo is moving some of its production of its Switch hand-held console to Southeast Asia from China to limit the impact of US tariffs on Chinese-made electronics. This comes as the company plans to update the popular Switch console with two new models later this year.

Since videogame console makers tend to sell their devices at thin margins, in the hopes of earning higher profits on sales of more lucrative games, the move suggests Nintendo is trying to avoid selling its Switch handheld consoles at a loss. Over the next two holiday seasons, Nintendo is facing stiff competition from Microsoft, with both companies offering competing devices.

The fact that Nintendo's decision comes just a day after a senior Foxconn executive said Apple's biggest manufacturing partner had the capacity to move its production outside of China presents an interesting and important message about how quickly global supply chains will change as the trade spat with China intensifies, said Bill Blain of Mint Partners.

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June 11, 2019

For The Equity Markets To Keep Rallying, This Has To Happen...

With markets now pricing in at least three rate-cuts and expectations for a July cut surging to over 80%, belief in a pre-emptive "insurance" cut is now consensus - and The Fed had better not disappoint.

However, as Bloomberg's Ye Xie warns, while, historically, preemptive Fed rate cuts have tended to boost the stock market, this time may be different.

Any student of stock market history would tell you that the Fed’s "insurance" cuts in 1995-1996 and 1998 did extend the bull market and economic expansion.

What’s different this time is that the front-end of the yield curve is much more deeply inverted than in the 1990s. In other words, markets have more aggressively discounted policy easing. With Fed fund futures pricing in about 70 basis points of cuts by year-end, the FOMC has a high bar to keep equity investors happy without fomenting recession fears

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June 10, 2019

Chinese Exporters Dodge US Tariffs With Fake 'Made In Vietnam' Tags

Chinese exporters who are hoping to evade tariffs as high as 25% on some of their goods are hoping to capitalize on the explosion of exports from Vietnam to the US - and not by simply and legally routing their products through Vietnam as a legal transshipment point, but by masking their true origins, provoking fears that the US might seek to punish the Vietnamese for failing to crack down on this type of fraud.

On Sunday, Vietnam released a statement pledging to increase penalties on trade-related fraud. It was one of the first times an Asian government has ever alleged such misbehavior, and comes after Vietnamese authorities found dozens of fake product origin certificates and illegal transfers presumably by Chinese companies trying to sidestep US tariffs on everything from agriculture to textiles, according to Bloomberg.

The crackdown comes as Vietnam has emerged as one of the fastest growing sources of American imports.

One member of the Vietnamese national assembly's economic committee said the government is worried it could provoke the wrath of the US if it doesn't crack down on the flow of mislabeled Chinese products. The sheer magnitude of the jump in Vietnamese exports has prompted some to question how much of this could possibly be due to legitimate commerce.

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June 7, 2019

Huawei Signs Contract To Build 5G Network In Russia

In a sign that Huawei is increasingly reliant on adversaries of NATO and the West to bolster its grip om global 5G dominance as Washington conspires to run it out of the west, the Guardian reports that the Chinese telecoms giant has struck a deal with an unlikely ally, Russian Telecoms giant MTS, to develop a 5G network in Russia over the coming year.

According to the Guardian, the agreement was signed on the sidelines of a meeting between Chinese leader Xi Jinping and Russian president Vladimir Putin in Moscow, on the sidelines of a critical annual Russian economics forum.

The deal will see “the development of 5G technologies and the pilot launch of fifth-generation networks in 2019-2020." MTS said in a statement on Wednesday.

In a statement, Huawei’s Chairman Guo Ping said he was "very happy" with the agreement "in an area of strategic importance like 5G."

During the meeting in Moscow, Putin repeatedly praised Xi as a "close friend," noting that they had met nearly 30 times over the past six years. The trip is Xi’s eighth to Russia since 2012.

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June 6, 2019

The US Economy's Dirty Big Secret

There is a dirty little secret in economics today: the United States has benefited – and continues to benefit – from the global slump.

The US economy is humming along, even while protesters in the United Kingdom hurl milkshakes at Brexiteers, French President Emmanuel Macron confronts nihilist yellow-vested marchers, and Chinese tech firms such as Huawei fear being frozen out of foreign markets.

Last year, the US economy grew by 2.9%, while the eurozone expanded by just 1.8%, giving President Donald Trump even more confidence in his confrontational style. But relatively strong US growth amid sluggishness elsewhere is not what economics textbooks would predict. Whatever happened to the tightly integrated world economy that the International Monetary Fund and the World Bank have been advocating – and more recently extolling – since World War II?

The US economy is in a temporary but potent phase in which weakness abroad lifts spirits at home. But this economic euphoria has nothing to do with Trump-era spite and malice, and much to do with interest rates.

Borrowing costs are currently lower than at any time since the founding of the US Federal Reserve in 1913, or in the UK’s case since the Bank of England was established in 1694. The ten-year US Treasury bond is yielding about 2.123%, and in April, the streaming service Netflix issued junk bonds at a rate of just 5.4%.

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June 5, 2019

The Fed Has No Choice But To Return To Ultra-Low Interest Rates

The current boom is heavily built on credit. This is because in today’s fiat money regime central banks, in close cooperation with commercial banks, increase the quantity of money by extending loans – loans that are not backed by ‘real savings’. The artificial increase in the supply of credit pushes market interest rates downwards – that is, below the levels that would prevail had there been no artificial increase in bank credit supply.

As a result, savings decline, consumption increases and, investment takes off, and a “boom” gets going. However, such a boom can only last so long. Its continuation rests on more and more credit being fed into the system, provided at ever lower interest rates. The last ten years provide a good illustration: The Fed’s lowering of interest rates and monetary expansion in the financial and economic crisis 2008/2009 has helped the banking industry to get back to its business of churning out more and more credit (see chart a).

As credit recovered, and stock and housing prices began to rise again (see chart b). The Fed succeeded in re-establishing the ‘asset price inflation regime’. In December 2015, however, the monetary policy makers in Washington D. C. decided to take away the punch bowl by beginning to raise interest rates. Until December 2018, the Fed had brought back the Federal Funds Rate to a band of between 2.25 to 2.5 per cent. Where to go from here?

The Fed has signaled recently that it wants to take a break as far as any further interest rate decisions are concerned. Financial markets have their own view, though: They seem to expect that the Fed’s hiking cycle is already over, and that the central bank will sooner or later lower interest rates again. The likelihood that this expectation will turn out to be correct is quite high: As the Fed wishes to keep the boom going, it has no choice but to return to the policy of suppressing interest rates.

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June 4, 2019

Multi Billion Fund Blocks Redemptions

In a moment of financial serendipity, earlier today we tweeted that as a result of the sudden collapse in the market's most crowded positions (which as we noted over the weekend, now face the biggest risk of a wipe out), "hedge fund redemption requests re-emerge."

It turns out we were very much spot on, because just a few hours later, the Financial Times reported that Neil Woodford, the UK's equivalent of David Tepper, has blocked redemptions from his £3.7bn equity income fund after serial underperformance led to an investor exodus, "inflicting a serious blow to the reputation of the UK’s highest-profile fund manager."

The freeze on redemptions, exactly five years after Woodford opened his eponymous fund management group, underlines his increasingly precarious position. It follows a steady stream of investor outflows, which have occurred each month for two years, with the fund shrinking by two-thirds to £3.7bn since a peak of £10.2bn in May 2017.

The severity of this latest hit to the hedge fund industry can not be underscored enough. The FT quoted a veteran fund manager who has known Woodford for more than 20 years, who said that "this is one of the bigger events for the UK asset management industry of the last decade. A bonfire of reputation and a terrible moment for investor confidence."

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June 3, 2019

Chinese Bank With $105 BN In Assets On Verge Of Collapse

While the western world (and much of the eastern) has been preoccupied with predicting the consequences of Trump's accelerating global trade/tech war, Beijing has had its hands full with avoiding a bank run in the aftermath of Baoshang Bank's failure, scrambling to inject massive amounts of liquidity last week in the form of a 250 billion yuan net open market operation to thaw the interbank market which was on the verge of freezing, and sent overnight funding rates spiking and bond yields and NCD rates higher.

Unfortunately for the PBOC, Beijing is now racing against time to prevent a widespread panic after it opened the Pandora's box when it seized Baoshang Bank two weeks ago, the first official bank failure in a odd replay of what happened with Bear Stearns back in 2008, when JPMorgan was gifted the historic bank for pennies on the dollar.

And with domino #1 down, the question turns to who is next, and will they be China's Lehman.

This was the question we asked last Thursday, when we published a list of regional banks that have delayed publishing 2018 reports, the biggest red flag suggesting an upcoming bank solvency "event."

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May 31, 2019

"This Is A Black Swan Event": Markets Turmoil As Trump Unleashes Tariffs On Mexico "Until Illegal Immigration Stops"

Amid negotations and escalations in the process of moving USMCA through Congress, Trump has decided to go after one on America's closest trade partners: "On June 10th, the United States will impose a 5% Tariff on all goods coming into our Country from Mexico, until such time as illegal migrants coming through Mexico, and into our Country, STOP. The Tariff will gradually increase until the Illegal Immigration problem is remedied, at which time the Tariffs will be removed. Details from the White House to follow."

The White House warning that it will hike Mexico tariffs to 25% by October 1, if the border crisis persists, as Trump is activating a scorched earth approach whereby he will "punish" any offshore nation that he believes is transgressing, by imposing tariffs.

Meanwhile, moments after Trump's shock tweet, the Mexican deputy foreign minister Seade said that if President's threat to impose tariffs is carried out, "it would be disastrous", and Mexico would "respond strongly", adding that "we will not remain with out arms folded" before the tariff deadline "to see if it is serious."

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May 30, 2019

Japan Is About To Sell Its First Ever Junk Bond... With A 1% Coupon

While corporate bond yields have been plumbing ever lower lows in the yield-starved "New Normal", prompting even the world's largest bond fund Pimco to warn that this is the riskiest credit market ever, Japan is about to deliver the proverbial "hold my beer" moment to the entire world. 

Aiful, the consumer lender which almost went bankrupt a decade ago, is preparing to sell Japan’s first ever yen-denominated "high yield" - and in this case we use the term very, very loosely - in the public markets, showing how desperate for yield local investors are, and how much risk they are willing to take in exchange for virtually no return, as negative interest rates have now become the new normal.

What is most remarkable about the bond sale in the country where the 10Y yield has been trading mostly in negative territory for over half a decade, is that the 18 month yen junk bond is set to price on Friday with a coupon of, wait for it, 1%.

Another unique aspect of the upcoming issuance is that it is taking place in the first place. As Bloomberg notes, the junk bond offering will be historic for Japan's bond market, where companies haven’t felt compelled to sell below investment grade notes as they’ve traditionally had close ties with banks, who tend to be more forgiving than bondholders in tough times.

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May 29, 2019

Russian Central Bank Eyes Gold-Backed Crypto

First there was Tether; a controversial dollar-backed cryptocurrency by crypto exchange firm, Bitfinex. Then came Petro, the industry’s first oil-backed crypto issued by the Venezuelan government last year. And now we might be about to see the first gold-backed cryptocurrency—by a central bank, no less. According to Russian news agency, TASS, Russia’s central bank, the Bank of Russia will consider issuing gold-backed cryptocurrencies - a rather strange move considering how cryptocurrencies are generally anathema to central banks.

Shot in the arm

But before crypto bugs can start doing a round of high fives, the head of the Bank of Russia, Elvira Nabiullina, has revealed that the cryptocurrencies are not meant for retail use but rather for conducting big mutual settlements for entities with global jurisdictions.

In other words, only the heavyweights will get to lay their hands on them. Further, she says that she still believes that it’s better for countries to develop international settlement systems such as the Eurasian Economic Union (EAEU) framework that use their own national currencies noting the said framework has demonstrated good dynamics.

Finally, she admonishes that the latest twist should not be interpreted to mean that the bank supports a scenario where cryptocurrencies eventually replace fiat in the monetary system.

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May 28, 2019

American Soil Is Being Globalized: Nearly 30 Million Acres Of U.S. Farmland Is Now Owned By Foreigners

All across America, U.S. farmland is being gobbled up by foreign interests.  So when we refer to “the heartland of America”, the truth is that vast stretches of that “heartland” is now owned by foreigners, and most Americans have no idea that this is happening.  These days, a lot of people are warning about the “globalization” of the world economy, but in reality our own soil is rapidly being “globalized”.  When farms are locally owned, the revenue that those farms take in tends to stay in local communities.  But with foreign-owned farms there is no guarantee that will happen.  And while there is plenty of food to go around this is not a major concern, but what happens when a food crisis erupts and these foreign-owned farms just keep sending their produce out of the country?  There are some very serious national security concerns here, and they really aren’t being addressed.  Instead, the amount of farmland owned by foreigners just continues to increase with each passing year.

Prior to seeing the headline to this article, how much U.S. farmland would you have guessed that foreigners now own?

Personally, I had no idea that foreigners now own nearly 30 million acres.  The following comes from NPR

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May 27, 2019

Is 2019 About To Repeat 2018? 3 Similarities, 3 Differences... And JPM's Ominous Conclusion

For several months at the start of 2019, analysts, pundits and the media argued that the year was shaping up as a mirror image of 2016, and specifically a repeat of the Shanghai Accord in January 2016 which resulted in a global credit explosion emanating from China and meant to arrest the global bear market. To be sure, in January of 2019 we saw a similar "gargantuan" credit tsunami out of China after the injection of an unprecedented 4.64 trillion yuan in January.

However, several months later, it appears that China's determination to reflate at all costs fizzled, Europe failed to piggy back on China's spike in the credit impulse, and suddenly comparisons to 2016 were quietly scrubbed. This is how Horseman Global's Russell Clark explained the shift in sentiment:

Markets turned around in 2016 when it became obvious that the Chinese policy of cutting capacity and pushing up commodity prices was the real deal. This was Chinese policy to create inflation internally to the benefit of corporates and the financial sector. However, it seems these polices have been reversed, and share prices of Chinese steel companies and banks are beginning to reflect these problems again. If the US dollar stays strong, and China cannot create inflation internally, then they are going to be forced to devalue. Many of the long positions of the fund began to reflect this at the end of April, including mining stocks and currencies.

As a result, Clark writes that "the likelihood of sustained inflation is beginning to disappear" and "deflation again looks more likely, just as it did from 2011 to 2016."

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May 24, 2019

Vicious Cycle: The Pentagon Creates Tech Giants & Then Buys Their Services

The US Department of Defense’s bloated budget, along with CIA venture capital, helped to create tech giants, including Amazon, Apple, Facebook, Google and PayPal. The government then contracts those companies to help its military and intelligence operations. In doing so, it makes the tech giants even bigger.

In recent years, the traditional banking, energy and industrial Fortune 500 companies have been losing ground to tech giants like Apple and Facebook. But the technology on which they rely emerged from the taxpayer-funded research and development of bygone decades. The internet started as ARPANET, an invention of Honeywell-Raytheon working under a Department of Defense (DoD) contract. The same satellites that enable modern internet communications also enable US jets to bomb their enemies, as does the GPS that enables online retailers to deliver products with pinpoint accuracy. Apple’s touchscreen technology originated as a US Air Force tool. The same drones that record breath-taking video are modified versions of Reapers and Predators.

Tax-funded DoD research is the backbone of the modern, hi-tech economy. But these technologies are dual-use. The companies that many of us take for granted–including Amazon, Apple, Facebook, Google, Microsoft and PayPal–are connected indirectly and sometimes very directly to the US military-intelligence complex.

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May 23, 2019

World Trade War I: US Asks South Korea To Join Anti-Huawei Campaign

The bilateral trade war between the US and China is gradually becoming a global trade war of global geopolitical and commercial dominance between the US and Chinese spheres of influence.

Shortly after the two largest mobile phone companies in the UK decided against launching Huawei-built 5G phones this morning, and roughly around the time a bevy of Japanese tech and telecom companies including ARM Holdings, Panasonic and SoftBank all imposed a boycott on supplying Huawei with mission critical components joining Australia, and New Zealand as major US allies to end commercial relations with Huawei following the US decision to crack down on the Chinese telecom giant (see "Huawei Feels U.S. Squeeze in U.K., Japan as Partners Curb Business") the White House is now pressuring another critical Chinese trading partner - South Korea - to cease ties with Huawei.

According to the Chosun Ilbo newspaper, the US recently asked South Korean government to support and join its anti-Huawei campaign.

Forcing Seoul to pick sides in a fight it would rather stay out of - especially since both sides still bear a distinct grudge from the Korean war - the US delivered a message several times to S. Korea’s Foreign Ministry that "using Huawei products may cause security problems" and as a result, the US requested S. Korea’s "active" support of US policy toward China as South Korea is seen as an American ally.

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May 22, 2019

Yuan, Futures Slide On Reports Trump Administration Expands China Tech Blacklist

US equity futures are sliding as Asian markets open after a NYTimes report that the Trump administration is considering limits to a Chinese video surveillance giant’s ability to buy American technology.

Hangzhou Hikvision Digital Technology, a company controlled by the Chinese government, is now the world's largest supplier of video surveillance equipment, with internet-enabled cameras installed in more than 100 countries.

The move would effectively place the company on a United States blacklist, and as NYT notes, it also would mark the first time the Trump administration punished a Chinese company for its role in the surveillance and mass detention of Uighurs, a mostly Muslim ethnic minority.

And this escalation has sparked selling in stocks...

Congress and the administration have responded with other measures that may clamp down on Hikvision’s business. Congress included a provision in its 2019 military spending authorization bill that banned federal agencies from using Chinese video surveillance products made by Hikvision or Dahua.

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May 21, 2019

Beijing Warns Of "Unwavering Resolve" In Huawei Fight, Accuses Washington Of "Bullying & Blackmail"

As the anti-American sloganeering reaches an unprecedented level of froth (there's now an unofficial trade war 'fight song') across China, the Commerce Department has softened its anti-Huawei stance, calling for a 90-day reprieve  to allow American broadband companies more time to work out a 'Plan B'.

The delay will cover continued operation of existing networks and equipment, as well as support to existing handsets and other limited actions, according to Bloomberg.

But that's not even the biggest trade headline of the morning, as analysts wonder how Beijing will retaliate for the war on Huawei. Anyone who thinks Beijing won't respond is being naive, China's ambassador to the EU warned Tuesday. China will provide a "necessary response" to Washington's "wrong behavior."

"This is wrong behavior, so there will be a necessary response," Zhang Ming, China’s envoy to the EU, said in an interview in Brussels on Monday. "Chinese companies’ legitimate rights and interests are being undermined, so the Chinese government will not sit idly by."

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May 20, 2019

Huawei will not bow to US pressure: founder

Chinese telecoms giant Huawei is ready to deal with Washington’s crackdown and will reduce its reliance on US components, its founder told Japanese media.

President Donald Trump effectively barred Huawei from the US market on Wednesday and added it to a list which would restrict US sales to the firm amid an escalating trade war with Beijing.

“We have already been preparing for this,” Huawei founder and CEO Ren Zhengfei told a group of Japanese journalists Saturday in his first interview since Trump’s move.

Ren said Huawei would continue to develop its own components to reduce its dependence on outside suppliers.

Huawei is a rapidly expanding leader in 5G technology but remains dependent on foreign suppliers.

It buys about $67 billion worth of components each year, including about $11 billion from US suppliers, according to The Nikkei business daily.

The usually elusive Ren, 74, has come out of the shadows in recent months in the face of increasing pressure on his company.

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