Hey There Income Hunter,

 

Two major macro forces are building strength …

 

1. $80 trillion of non-bank, hidden-dollar debt puts the entire system at risk. 

 

The Bank for International Settlements (BIS), the central bank of central banks, put out a report last week stating that if the Fed allows even one systemically-important institution to fail, it runs the risk of collapsing the entire financial system. 

 

2. China’s President Xi proposed to settle oil trades in yuan when trading with OPEC states via the Shanghai oil and gas platform.

 

This announcement is the culmination of a strategic plan put in place a decade ago after the financial crisis of 2008. This is critically important to understand.

 

Let’s look at the impact of these major macro forces on the markets.

 

BIS Report

 

What the BIS is referencing is the shadow banking system, which refers to non-banks outside the US and non-US banks that provide liquidity to the financial system through use of unregulated, off-balance sheet, bilateral derivative agreements. . 

 

When one counterpart defaults in a bilateral arrangement, it sets off a domino effect through the financial system. Unless the Fed bails out the important players in the system, it can collapse. 

 

The charts below illustrate the dangers lurking for off-balance sheet derivative debt, which is more than double that of the transparent, regulated debt in the system. 

 

 

We witnessed what can happen when counterparts begin to fail in 2008 (Lehman), when Congress was forced to sign a massive bailout of banks to stabilize the system. 

 

The important question today is will Congress be willing to bail out banks again? 

 

Not a simple yes answer when the current regime, led by Elizabeth Warren, blames the Fed and the banks for the high inflation, slow growth environment the country is stuck in. 

 

Keep a close eye on developments.

 

President Xi Announces That China and the OPEC Nations Are Natural Partners

 

This was a major announcement of disregard for the US dollar as the sole global reserve currency 

 

In reality it signals:

 

• China’s re-opening the gold standard that Nixon shut in 1971. China’s yuan (CNY) will be exchanged at a floating rate for gold as opposed to the fixed rate standard the US deployed in 1971. 

 

• China is now shielded from foreign powers creating a capital outflow crisis in China because now to do so means they would have to buy gold to accomplish it. 

 

So, think about that … If anyone tries to buy up gold (the anti-dollar) to hurt CNY, that also hurts the US dollar and creates more inflation in the US.

 

So what does this mean for the markets?

 

1. Medium- term this is very bullish gold. Although in the short-term, heading into recession with the Fed still hiking rates, gold could correct lower first. 
2. It is bearish for US Treasury bonds because now there is a real alternative to the US system of buying energy in dollars and Treasury bonds with surplus dollars.
3. Bearish the US dollar as the demand for dollars decreases. Although in the short run the US may be forced to tighten for longer, so the dollar could recover back to the 108-110 range first.

 

Bring It Home 

 

Looking ahead this week, we have two US Treasury bond auctions on Monday (3-year and 10-year) and a 30-year bond auction on Tuesday after the CPI report. Look closely at foreign buying for clues on any changes in bond flows.

 

Then there is thh FOMC meeting on Wednesday when Powell is expected to show up as Scrooge for the Q&A at 2:30 p.m. Watch for any talk of possible rate hikes for longer.

 

Finally, we have the massive daily, weekly, monthly,  quarterly and annual Dec. 16 OpEx. With just a light negative gamma buildup in the December expiration, the market may attempt to remain stuck in the 390 – 400 SPY trading range …

 

However, any break of 390 and we could accelerate down to 380 or below quickly.

Live and Trade With Passion My Friends,

 

Griff