China Coup, $LINK, and Currency Crashes
099: Preview on critical intelligence
Going to be a big week for investors as well as macro. We have some interesting events playing out Sunday into Monday morning with rumors of a China coup over President Xi (we’ve outlined the evidence thus far on this in this edition of Arb Letter).
Smartcon is the week in New York City - the smart contract conference features heavyweights from tech and crypto at a NYC based conference.
For LINK (Chainlink) marines, smart contract enthusiasts, and crypto interested folks this is a massive event where staking or CCIP is expected to be potentially announced and the visions for oracles, smart contracts, and blockchain tech will be explored by some of the smartest people in the industry.
Speakers include Sergey Nazarov the Co Founder of Chainlink, Former CEO of Google Eric Schmidt, Founder and CEO of FTX Sam Bankman-Fried, Founder and CEO of AAVE Stani Kulechov, and many more. You can sign up online.
Macro has dominated the discussion on markets for weeks on end but the question we want to get to the bottom of is when is enough enough?
We’ll touch on FX and currencies today because we believe this could be the straw that breaks the camels back or in this case, forces the Fed to ease up on turbo nuking our net worths and the global economy.
Europe continues to see surprising election results amid heightened social and political tension as the conservative party claims victory in Italy. First Woman PM btw. In a surprising move - this morning Canada lifted all COVID border requirements for travelers and suspended mask mandates for planes and trains AND Twitter said they may reinstate Donald Trump’s account.
The content just keeps coming.
Let’s get into some of the weekend and the week ahead’s largest themes.
China Coup and world elections
This weekend rumors began swirling on twitter and the rest of the internet around a potential Chinese coup that featured President Xi put on house arrest.
The bizzare claims circulated rapidly and included videos of military vehicles, images of flight patterns or lack thereof over China, and analysis of recent political jailings.
While the coup is unconfirmed and information is quiet out of China, there is some evidence to suggest political tension in the country is at an all time high.
Last week, a Chinese court jailed the former vice-minister of public security Sun Lijun, the former justice minister Fu Zhenghua, and several former police chiefs of Shanghai, including Chongqing and Shanxi on alleged corruption charges.
After Xi Jinping's outing at SCO in Samarkand, claims of the president being under house arrest spread rapidly.
The claims have been dismissed by experts saying that there is a strong possibility that the Chinese premier is under quarantine owing to the country's strict zero-Covid policy that mandates every individual who enters China from abroad to undergo quarantine.
This is all happening before the Chinese Communist party’s (CCP) most important political meeting which is known as the the twice a decade party begins soon. This is where the political elite are reorganized, reshuffled around, and assigned to the various positions of power within the one-party state government. Obviously there is much game theory, deceit, and planning that goes into the event and it’s highly anticipated outcome.
At this moment the rumors of a coup are debunked but we will cover any more breaking updates on the topic.
For what it is worth it isn’t surprising to see rumors like that floating around especially given the opaque and clandestine nature of this Chinese succession and political proceeding - the results of which will have large impacts on foreign policy, economy, and Chinese influence in the coming years.
China is not the only country facing political contention and reshuffling.
Across the globe conservative parties continue to reign king in elections. Italy’s Giorgia Meloni won the election for Prime Minister following on the heels of Sweden where Magdalena Andersson's centre-left bloc lost narrowly to a bloc of right-wing parties that will be headed up by Moderate Party leader Ulf Kristersson.
This trend of conservatives winning isn’t surprising to us considering the plethora of global issues countries face at the moment.
It seems people are getting tired of loose, globalist policies and for better or for worse the conservatives continue to win. (in Europe the energy, immigration, and food crisis is likely swaying voter’s decisions).
Will the trend continue in America?
Currency Action
Forex advisors, scammers, and gurus might yet be in luck lmao.
As the US dollar hits 20-year highs, we are seeing the consequences ripple throughout other nation’s currencies across the globe.
As of last week the British pound is at its lowest level against the dollar since the year 1985 - it is taking a real pounding at the moment.
Last week, the Bank of England raised interest rates by half a percentage point to 2.25% to try to calm inflation, which is at a 40-year high of 9.9%. The rate increase was the seventh in a row and took rates to the highest for 14 years (BBC).
The euro has been selling for less than one dollar on foreign exchange markets and the the Japanese yen, is now at a 24-year low against the US Dollar. The Japanese central bank has taken action meaningfully for the first time since the late 1990’s.
The Australian Dollar and Chinese Yuan have been getting clobbered as well.
As US exports get more expensive and the Fed “transfers” some of this inflationary pressure overseas, there are ramifications that end up coming back to hurt us (mainly in the realm of multi national businesses bottom lines).
A whole slew of British Hedge Funds managed to make a killing on the collapse of the pound - go figure!
But further, the rising rates and tweaked yields put pressure on emerging foreign and global markets. One silver lining as the house is burning down, is that the Fed could have to pivot on it’s stance if things begin to get too bad globally.
Obviously less than ideal if they are forced to begin printing money while inflation still remains elevated, but we could very well see that given global equities are dumping and global interest rates are ripping non stop.
The Moscow Stock Exchange continues to drop this morning down as much as 10.5%.
“It’s an ‘every man for himself’ scenario right now because the world is much more fragmented today than in the 1980s…. the chances of global coordination to weaken the dollar are close to zero -- expect to see more reverse currency wars.”
-George Boubouras - Head of research, K2 Asset Management
Christine Lagarde, the President of the European Central Bank had the following to say during one of her recent speeches as she touched on the severity of inflation, energy prices, and economic woes in Europe:
Inflation rose further to 9.1 per cent in August. Energy and food price inflation remained extremely elevated and were the dominant contributors to overall inflation. Price pressures are spreading across more sectors, in part owing to the impact of high energy costs across the whole economy.
Almost half of the items in the inflation basket recorded annual inflation rates above 4 per cent in August and measures of underlying inflation remain high. While supply bottlenecks have been easing, their inflationary impact continues to gradually feed through to consumer prices. Similarly, recovering demand in the services sector is putting upward pressure on prices. The depreciation of the euro has also added to the build-up of inflationary pressures.
Europe will be in a tough spot this Winter and we anticipate things to get much worse before the sun begins to shine again.
The impact on currencies is yet another consequence of the US Fed policy.
Mix the worsening state of some of our allies’ currencies with the ongoing impact from the War in Ukraine and heightened political division globally and you have quite the stage for the next 2-3 years set in Europe and emerging markets.
Nuclear Threat
We highlighted the threat of a nuclear event in Europe in our last deep dive. We will continue to closely monitor the situation in Ukraine and Europe on the heels of Putin’s mobilization last week.
Volodomyr Zelenskyy, the president of Ukraine said recently on CBS that Putin, "He wants to scare the whole world. These are the first steps of his nuclear blackmail. I don't think he's bluffing”.
Zelensky knows Putin isn’t bluffing, I know he’s not bluffing, but do US leaders?
As Russia continues to get desperate following a successful Ukrainian counter offensive, we should be weary of Russian diction and sentiment especially as the US and NATO mount scaled proxy support for Ukraine.
As stated last week - we expect this conflict to continue on the ground until at least spring of 2023.
Escalation is now what we are looking for and the chances of that seem to be growing each day.
Market Events this Week
Some key market catalysts this week to keep note of. Loosely, we are bullish this week on some sort of bounce in the markets.
We highlighted last week, that retail and institutional put option volume is sky high amid the sell offs we saw induced by the Fed’s 75 bps hike.
Purchases and buying of put options on stocks and exchange traded funds have ripped, with money managers spending almost $34.3bn in the last several weeks on the contracts per research cited by the Financial Times by Options Clearing Corp along with data analysed by Sundial Capital Research.
IDK about you guys but typically I’m not one to buy put options after the S&P 500 has already lost 22% in a year - bu that’s just me.
Bond yields sky rocketed last week after the Fed announced the hike. The 2-year and 10-year Treasury rates hit high levels not seen in over 10 years.
Many, and I mean many, are expecting another doom sell off.
They could be right - but we are more inclined to think that the market creates max pain and max pain by the numbers right now would be a face melting rip to the upside to bleed out all of the short term bears.
Rarely does the market move in the expected direction and make the dumb rich.
Normal people aren’t supposed to get rich!
Regardless, we will be looking to add some tech this week including more MSFT, NVDA, and AMZN. I may take some bites out of Defense ETFs or plays like Lockheed or Raytheon as well.
Crypto in my eyes has held up well all things considering. I am bullish on LINK this week with Smartcon and added some ETH today.
TSLA, APPL, and SPY all have incredibly high option volumes taken out and we expect that trend to continue this week, particularly if we see some strong green candles early on.
Investors will have several events and releases to keep eyes on in the coming week, including the latest gauges on:
PCE inflation (the Federal Reserve’s “special” inflation measure)
Durable goods orders
New home sales
Consumer confidence.
You should mind these events as there’s a high chance some if not all will determine the direction that we end up trending this week.
Bulls - let’s pray for some bounces and an absence of worsening news for FX, Ukraine, China, and Tech.
Bears - you guys may get a nice relaxing week as markets continue to mull over all of the horrid news and sentiment that continues to pour out in a whole range of sectors and regions.
Monday 26th
*Bank of England expected to make a statement
Tuesday 27th
7:30 am - Fed Chair Jerome Powell speaks on digital finance
10:00 am - New home sales (SAAR)
Thursday 29th
8:30 am -Initial jobless claims
This week we are focusing on dialing in on some topics that would be most helpful to you guys. We have an awesome partnership to announce later this week that I think many beginning and advanced investors will find helpful.
As usual - we will tailor our content to what continues to play out in the real world. My aim at the beginning of starting Arb Letter was to make sure that everyday people had access to the most pertinent and impactful news and market updates that are breaking in real time.
It is a crazy time to write as there is a seemingly endless supply of content and topics we can cover. Feel free to comment and/or send us an email id there is a topic that you would like us to cover in depth.
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*Upcoming (Wednesday) - My Philosophy for dealing with people
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Disclaimer: None of this is to be deemed financial advice I am literally not in any way shape or form qualified to give you any kind of financial advice.
All opinions are my own.
I oppose money printing and global coordination to weaken the dollar.
The British pound has been downgraded to the British ounce.