From Russell Napier of ERI-C
It’s Not a Pet, It’s a Falcon: How the decline of the RMB destroys belief in central banking and a successful reflation
Turning and turning in the widening gyre
The falcon cannot hear the falconer;
Things fall apart; the centre cannot hold;
– The Second Coming- W.B. Yeats
First catch your falcon, as the formidable Mrs Beeton might have said if she was in need of a method of catching her main course (see Mrs Beeton’s Book of Household Management 1861- ‘Recipe for Jugged Hare’).
Having caught your wild falcon, you can now begin the training process. You are attempting to impose your will upon a creature that, in its wild state, catches, kills and devours other birds. This is creative destruction in its rawest form as those acts of savagery provide the fuel to keep our falcon flying. Taming such wild forces is not easy, whether they be birds of prey or the desires, wishes, greed and fear of millions of people determining prices through their supply and also their demand.
The attempt to train the wild forces of supply and demand by the authorities has really ramped up since 2009. Just four trading days into 2016 the widening of the gyre makes it very obvious that they have failed to create a pet to do their bidding. The wild forces of supply and demand have sought to deliver deflation, at least since 2008, but the falconer has demanded the lift-off of inflation. In the first four trading days of January 2016 it has become even clearer that gravity wins and this bird will not fly.
Throughout 2015, in four quarterly reports for subscribers, this analyst explained that, no matter where you and might stand, this lever of nominal interest rates is simply insufficient to pivot the world into inflation. Those reports focused on what you should buy given that failure. The rest of this Fortnightly looks at the investment consequences of this failure and what investors should do when ‘the centre cannot hold’.
The key failure of control is in China because that failure will overwhelm other seeming successes. In 2012 this analyst labelled one chart “the most important chart in the world”. It was a chart of China’s foreign exchange reserves. It showed how they were declining and The Solid Ground postulated that this would produce a decline in real economic activity in China and higher real interest rates in the developed world. The result of these two forces would be deflation, despite the amount of wind puffed below the wings of the global economy in the form of QE.
Of course, no sooner had this report been issued than China’s grand falconer got to work by borrowing hundreds of billions of USD through its so-called commercial banking system! The alchemical process through which this mandated capital inflow supported the exchange rate while permitting money creation in China stabilized the global economy- for a while.
However, by 2014 it was ever more difficult to borrow more money than the people of China were desperate to export and the market began to win. Since then foreign reserves have been falling and the grand falconer has tried to support the exchange rate while simultaneously easing monetary policy to boost economic growth. I’m no falconer but isn’t this akin to trying to get a bird to fly while tying back its wings?
Some investors, well paid to believe six impossible things before breakfast, did not question the ability of the grand Chinese falconer to fly a falcon with tethered wings.
They changed their minds briefly as the bird plummeted earthwards in August 2015 but still the belief in the ability to reflate the economy and simultaneously support an overvalued exchange rate continued. In January 2016 this particular falcon, let’s call it the people’s falcon, was more ‘falling with attitude’ than flying.
This bird does not fly and if this bird does not fly the centre does not hold. A major devaluation of the RMB is just beginning and the faith in all the falconers will wane as deflation comes to the world almost seven years after the falconers first fanned the winds of QE supposed to levitate everything.
Any political fiat, when monetary fiat fails, will be tantamount, in some way or other, to an attempt to directly control the allocation of capital/savings. History shows that this commences a giant game of hide-and-seek, and while gold may shine brightly it is also moved freely in briefcases and is easily hidden. Paper assets are easily tracked, discovered, conscripted and ultimately denuded in value. For gold to rise while the USD also rises signals that investors are beginning to see through the terrible burden on the price of the shiny stuff from ever-rising real rates of interest extant since 2011. Real rates have further to rise but a few more days of a strong USD and a strong gold price means gold has probably entered a bull market that should last for decades rather than years; its value boosted initially by its ability to avoid conscription, but underpinned by the authorities’ mass mobilization of resources to ultimately generate inflation.
From 2009-2015 investors were well paid, at least in the developed world, to believe the most impossible of the six things before breakfast: that central bankers can subvert the desires, wishes, greed and fear of millions of people who set prices every day through their actions.
You now have two choices: keep believing the most impossible thing, or accept that the wild force that establishes market prices has not been tamed. It’s not a pet, it’s a falcon and ‘The falcon cannot hear the falconer’. The ‘people’s falcon’ may be the first to enter ‘a widening gyre’ but it won’t be the only wild force that refuses to be tamed in 2016.
Full article: Russell Napier Explains How The Decline Of The Yuan Destroys Belief In Central Banking (Zero Hedge)