Markets became quiet Tuesday afternoon ahead of a rare mid-week holiday. Treasuries held their gains following a lackluster retail sales report. The data underscored a notable downward shift in consumer spending after stronger than expected readings earlier in the year. On the other hand, industrial production increased in May at a pace greater than expected.
Equites were essentially unchanged, with little change in the narrative.
Perhaps an event of considerable significance is the quiet abandonment of the petro dollar agreement between the US and Saudi Arabia. In 1973 President Nixon agreed to defend Saudi Arabia if Saudia Arabia agreed to price oil in only dollars. The agreement was perhaps as significant as the 1944 Bretton Woods Agreement which established the US dollar as the reserve currency or the 1971 abandonment of the gold standard.
The US has had a massive global advantage of pricing oil in dollars and the dollar being the primary reserve currency.
Over the past several years, Saudi Arabia begin to accept Yuan and other currencies for payment, thus some believe the abandonment is nothing other than the acknowledgement of reality. Many believe change is the result of the Administration labeling the oil rich Kingdom as a “Pariah Nation” and the rapprochement with Saudi Arabia’s arch enemy Iran.
The potential ramifications are infinite.
Speaking of an unquantified outcome, as already discussed the Administration orchestrated a policy where the interest from Russia’s frozen reserves will be used to fund the Ukrainian war..
This is precedent setting, a violation of the spirit of the 1944 Bretton Woods agreement. The Administration has further weaponized the flow of funds which may have a considerable impact on foreign reserves that are held in the US dollar or Treasury.
As discussed several times, foreign reserves held in dollars have dropped by a record amount on both the aggregate and percentage basis since 2020. While the amount of foreign reserves in dollars still dwarfs any other currency, the degree of change is significant.
Perhaps just as significant is the record sale of US Treasuries by China. While it is not clear what China did with the proceeds, it is believed the funds were redeployed in either gold or used in the country’s aggressive Belts and Roads project in Sub Sahara Africa which is really an economic exploitation policy to meet the West’s demands for the raw materials utilized in the transition to a “Green Economy.”
The markets have been very complacent over these events and others. Many years ago, an astute and legendary market strategist educated me about a “Minsky Moment.” It was named after a 20the century economist and is essentially defined as stability breeds instability.
A “Minsky moment” refers to the point at which financial markets suddenly moves from stability to instability. For Minsky, the period of stability creates the complacency that makes instability inevitable. The framework of understanding debt as either hedge borrowing, speculative borrowing, or Ponzi borrowing is unimprovable.
The world is considerably different today than four years ago. Many have yet to acknowledge that it has indeed changed.
What will happen today?
Last night the foreign markets were up. London was up 0.14%, Paris up 0.90% and Frankfurt up 0.55%. China was down 0.42%, Japan up 0.16% and Hang Seng down 0.52%.
Dow and NASDAQ futures are up 0.15% and 0.50%, respectively, as the mania in NVDA is continuing. NVDA is up a staggering 174% YTD or almost $2 trillion and is the largest publicly traded company. Shares are up another 3.7% this morning or by $122 billion or the approximate value of Dow member and chip manufacturer. INTC which is worth about $130 billion.
Is NVDA the New Tulip?
The 10-year is off 5/32 to yield 4.25%.
