Sive Morten
Special Consultant to the FPA
- Messages
- 18,673
Fundamentals
So, today we proceed with analysis of the US debt but now on a higher level, that more relates to gold market performance. Also we explain what Xi has talked about with J. Biden and why the results of this conversation will make impact on markets very soon. This is not a kind of long-term story. Events could start spinning up fast right in the beginning of 2024. And just add 2 cents to recent CPI analysis, showing that, in fact, inflation has not decreased at all, and markets see just what they want to see.
Market overview
Bullion gained nearly 1% after data showed that U.S. consumer prices were unchanged in October. U.S. producer prices fell by the most in three-and-a-half years in October, the latest indication of inflation pressures easing. The market was certain the U.S. central bank will leave rates unchanged in December, with most traders eyeing rate cuts from May 2024, according to the CME FedWatch tool. Swaps traders are now pricing in two Fed rate cuts by July next year, from just one before the inflation data. Wall Street banks remain highly divided on just how quick policy loosening will come in 2024.
Investors also looked at data that showed U.S. retail sales fell in October, though by less than expected, after months of strong gains, pointing to slowing demand that could further strengthen expectations of a rate-hike pause.
Goldman Sachs expects increased returns on commodities over the next 12 months, buoyed by higher spot prices amid easing monetary policy and recession fears while the asset class also strengthens on hedging against geopolitical supply risks. The bank has forecast returns of 21% on commodities over a 12-month horizon on the oil-heavy S&P GSCI Commodity Index, led by returns of about 31% from energy and 17.8% from industrial metals.
Finally, just to moments concerning recent CPI report. Yesterday we've taken a look at other indicators that discredit the suggestion of the US economy growth. But, if you take a look at CPI itself, first is - calculation of medical care services as been changed again. This time, a change in the methodology for calculating changes in health insurance prices resulted in the fact that data on insurance prices in October 2023 compared to October 2022 showed a decrease of 34% (!!!).
With the average monthly payment for health insurance in the US being $477 per month for those who pay for their own insurance, it's clear how much of a real impact these costs have on CPI and what they don't have. Changes in methodology on the index scale could have a significant impact on price changes.
Second is, take a look at the chart below, that shows CPI components changing. Excellent analysis. As we can see, overall inflation (left) fell only because the price of oil/energy fell in October. If the price of non-oil remained stable (either speculators or OPEC+ played a role here), then overall inflation would remain at the same level as before.
If you look at core inflation (on the right side), there is an interesting factor - transportation services, which played a negative role. But if you think a little, transportation services include three cost components - the cost of the vehicle itself, which is less volatile, wages and the cost of fuel. And if the cost of fuel did not have such a significant effect on the cost of transport services, then there could well be a plus for inflation. So, by and large, inflation is not fundamentally decreasing; only one volatile factor has had an impact. But the markets act as if victory is already close. And medical insurance... this is just absolutely nuts.
Now let's take a look at -
US DEBT (Part II)
This week we've got new data on foreign holders of the US Debt. China continued to dump American treasuries at a brisk pace. Maybe they wouldn't do it so fast, but they have no choice - economy is slowing down, PBOC has to support national currency and flow hundred billions of yuan, keeping rates low, trying to stimulate consumption. They have to keep yuan stable and this needs some reserves burning. Japan stands in similar situation, it doesn't want to, but it has to, because of constant yen weakens, they have to "burn reserves" to support it somehow.
Over the month, the amount fell from 805.4 to 778.1 billion dollars. That is, 27.3 billion were given away. The United States returns almost a billion per day to China.
Both Hong Kong (202.6 - 197 = 5.6 billion) and Taiwan (241 - 236.3 = 4.7 billion) dropped, and what is most interesting is the top owners, super-loyal, Japan and the UK - 28.5 billion and 27.3 billion, respectively.
The psychologically important bar of 800 billion has been broken. It is important because at its peak China owned US debt worth about 1.3 trillion dollars. Turning the amount into “700-something” is a conditional “halving”.
This is the collapse of a whole bunch of theories: “Where is he going to put such a debt, and the United States is tightly holding the Beijing throat in this way, and there are huge sums of money and nothing can be done with them, and in general, Xi from Washington has banned the sale of debt below a certain level.” While they were screaming and groaning, Xi sold a half, with each such decrease the leverage of the form “yes, the United States, if it wants, will simply cancel the debt, and China has blown up and doesn’t have a trillion-odd dollars, and everything will collapse at once” becomes more and more illusory.
And yes, with such dynamics, the huge question is what the United States will do next year. In 2024, approximately 8 trillion worth of treasuries expire (+$2 Trln of Budget deficit). Plus, we need to increase external borrowing, because the economy is stagnating. Who will buy these barges of freshly printed paper?
As a result, the Treasury market recorded its first outflow since 2021. Funds also cut exposure of the US bonds in favor of stocks. A brutal sell-off in Treasuries in previous months has fueled fears of an investor flight from a key market in the financial system. Some of the fears were confirmed: at least one group of investors headed for the exit back in September. ️Foreign investors sold $1.7 billion more in Treasury bonds than they bought, US Treasury data shows. Although the amount is small, it is the first net capital outflow since May 2021 and the weakest three months of foreign demand since May 2020.
Yes, Japan now stop selling and even has bought a bit, keeping total amount of ~ 1115-1120Bln. The same UK does, it is buying and increasing amount of investments, coming to ~$700 Bln. Very soon it could become a 2nd largest holder of the US debt replacing China. The amount of debt on the hands of foreign investors is raising in terms of notional value. But despite all this, the share of government debt held by foreigners continues to decline, and has already dropped from a peak of 30% to 23-24%.
This is how a third turned into a quarter and risks turning into 1/5. The United States is simply increasing its debt burden faster than its allies and neutrals are willing to buy. Hence such a wild increase in rates, service costs and, ultimately, a lack of money in the budget for various kinds of adventures. Such high rates with looming dates for refinancing large amounts of debt will simply suck all the margins from American corporations. And if there is no margin, there are no taxes.
This is where the rapidly rising cost of debt servicing and, at the same time, a reduction in tax collections will hit us from both sides. You will have to save seriously, the squabbling over the shrinking pie will (already) intensify, and you will have to be much more accommodating with external forces. It’s not for nothing that Biden was jumping on his legs in front of Xi.
We already mentioned that liquidity of the US Treasury market is deteriorating, new auctions become more difficult as investors demand higher returns and primary dealers have to buy larger part of total issue. But is it really so critical?
How much time the US Treasury has
To answer this question we have to consider the liquidity sources that the Fed and US Treasury have. They are - Banking Reverse Repo, Banking Reserves and US Treasury cash on deposit with the Fed account. So here they are:
Reverse Repo
The remaining cache in the reverse repo with the Fed shows that $1.3 trillion was spent on the purchase of new issues of Treasury bills from June to the current moment (5.5 months). A simple calculation shows that if the rate of transferring money to treasuries continues, this source will dry up by the end of February-beginning of March. Who will buy back the treasures and why this unknown source is not buying them now is a mystery.
The US Treasury cash deposit (TGA)
The Ministry of Finance has accumulated more than 739 billion dollars in money, so even if the Fed does not come to the rescue in March, the deficit will have something to cover for another three months. If, of course, the Fed continues to reduce its balance sheet at the same pace.
FED QT Programme
At the same time, the Fed's balance sheet decline rate is about 0.6 trillion. dollars for the same 5.5 months, so the balance, in general, more or less converges. The only thing missing is bank reserves. They cannot afford to deviate too much from their own program. Otherwise, what kind of fight against inflation is this? Therefore, the pace of draining money from reverse repo will probably remain the same, and the Ministry of Finance will drain TGA until mid-June.
Banks Reserves
Everything is stable in bank reserves at the Fed. Trillions are piling up. Potentially, this is a good source, but it is rather a source of last hope. Because, apparently, banks are not individuals. They understand that, from a risk perspective, holding money in reserves at the Fed and in Treasury bills are not the same thing. The Fed will never default and reserves are not subject to depreciation. So maybe they will buy treasures, but for this to happen the stars must somehow align. That is, banks must understand that it is more profitable for them to take on the risk. What factors could make them to do this? Now it is difficult to say. Probably they could be forced to do this by the Fed, or some legislation of banking reserves will change that make it acceptable. Definitely they will not be transferred totally into US bonds, but if even they will, it gives ~6 more months gap for the Fed and US Treasury. Total amount of cash reserves now stands around 5.5 Trln, but more probable that it will be around $3 Trln as some part of reserves will stay in cash and the Fed will grab ~$1-1.5 Trln more from the market via QT.
Taking it all together, US financial authorities could feel relatively calm within 9-10 months until the autumn of 2024 - right up to elections moment.
Hopefully I get in your head not too much. You maybe asking why it is so complexity with all this stuff around the debt and how this relates to gold market. When you read next political part, you understand the whole drama of current moment.
Cherry on the Pie - Politics
So, obviously Xi has come to the US not just to participate in APEC summit. It was most important meeting in recent one or even two years. Xi has come to find compromise on two subjects - access of Chinese high technology sector to developed markets, second - decide something on South East Asia markets. Both agreements failed. China and US have similar problems in general but very different in details. While the US economy just can't start growing based only on domestic demand (yesterday we've shown this in FX report, take a look at Industrial Production index chart). It vitally needs fast growing, strong new market to supply their goods - space for expansion, new strong demand for its manufacturing sector. And this is the only source rest on the planet.
China also needs it as we see failure of any attempts to re-boost economy. China is loosing margin of textile production as the wealth level of population is growing. That's why if in 90s and even 2000s the textile goods costed almost nothing - now they become more expensive. Textile sector has low margin and China earnings are dropping. They need to get somehow on high margin markets, which high technology sector is - semiconductors, wire, net, phones, defence systems, space etc. But this market mostly stands in developed countries because of high personal wealth where people could buy all this stuff.
Thus, Xi has come to J. Biden to discuss this and maybe find some compromises. But failed. The US model that they could accept stands as follows : "We (US) and China will tell to other APEC countries what to do and how to behave, while behind the curtain We tell to China what it could buy or sell by what rules and where, totally controlling their access to high technology sector and get S-East Asia market instead". While China can't accept this and wants parity, equal rights with the US in this question, getting fair access to developed markets and sharing S-East Asia market.
Based on recent statements from J. Biden it becomes clear that they haven't come to agreement. J. Biden calls Xi as "Dictator". The US efforts to isolate China from access to India ocean are accelerated. We constantly update this subject. The US on a final way to achieve this. China has just two ways to the ocean - through Burma (Myanmar) and via Strait of Malacca. Malaysia is an old US ally, so this way is closed. On Philippines, the US has opened four military bases. And recently they have signed agreement on defence cooperation with Indonesia . So, Taiwan - Philippines - Indonesia - Australia - isolation circle is locked. US accelerates their activity in Vietnam. Burma stands in the focus on f the US foreign policy for a long time already, since B. Obama presidency. Now the US policy is aimed on support pro-American political forces.
Just this information is enough to understand that it is becoming too hot. But, there is another one moment - Taiwan elections on January 13th. Xi is probably counting on the victory of the pro-Chinese candidate. And thus, without military action, simply through a series of police operations, seize Taiwan from the Americans, as was the case with Hong Kong.
The Americans, naturally, do not plan to give up so easily and will engage in the merry-go-round during the elections, and if that doesn’t help, then move towards the Coupe, as their favorite tactics. This is probably the issue Xi came to discuss. And received the answer that we do know - US President Joe Biden notified Chinese President Xi Jinping of Washington’s intention to continue supplying weapons to Taiwan, despite Beijing’s protests. John Kirby, coordinator for strategic communications at the White House National Security Council, announced this at a briefing. Why Xi came and what he wanted in the end is not clear. Humbled himself and went home. So in just 2 months the issue of Taiwan will definitely become interesting. Will anyone remember Zelensky by then? This is, of course, a rhetorical question.
Biden signed temporal budget that doesn't suggest spending for Ukraine and Israel. The document itself assumes the approval of part of the expenses by January 19 and the second part by February 2. But who will care on Ukraine after January 13th? Supposedly the US will probably pretend until February that Zelensky does not exist, but in March they will already run out of ammunition. The help from EU is also stuck in Brussels. It means that Zelensky is drained.
Finally the US has big challenge from Israel as it drains too much resources off from confrontation with China. Two days ago the US has got another negative turn - Israel strikes Lebanon Aluminium plant. That is, Israel believed in itself so much that it rushed to Lebanon. At the same time, for the State Department, everything that is happening is, of course, a terrible reputational loss. They hoped to be friends with Muslims against China and Putin, but it turned out that they created all the conditions for friendship of Muslims around the world with that same China and Putin.
Speaking on China - recent meeting takes all questions off the table. China will fight. The only way that is acceptable now is South China sea and its "arguable" islands. We expect that China will accelerate its efforts in the region. They already do. The events are turning into hot stage and South-Eastern Asia very soon will become the top of the world.
For China is another task exists - it has no clear long-term strategy, programme. The US have something to offer - US Dollar. China has "one belt-one way" strategy but it is not shaped yet. Still, this is long-term story and not very important right now.
Conclusion:
Now, hopefully it becomes clear how US debt issue combines with political risk. US has only ~ 9-12 month to get some, at least initial results in Asia. Confrontation is spinning up. It is a bit surprising, how the US was straightforward with China and comes on evident confrontation, when they do know about big problems on M. East and Ukraine. For now hardly it will turn to hot war. Both sides will try to use political and economical levers. Nevertheless, it will be very thin edge.
For gold as we've mentioned this, might be "win-win" situation. If inflation turns up again, the real rates start to fall as the Fed has reached the limits of economy ability to hold high rates. Any war is additional expenses. At the same time, political games will not disappear whatever situation in the US economy will be and keep supporting gold. We consider 2300-2400$ as nearest upside target on gold market. Current events are enough already to achieve it. Potentially gold could go much higher. Pre-election domestic showdown also could bring political chaos.
So, today we proceed with analysis of the US debt but now on a higher level, that more relates to gold market performance. Also we explain what Xi has talked about with J. Biden and why the results of this conversation will make impact on markets very soon. This is not a kind of long-term story. Events could start spinning up fast right in the beginning of 2024. And just add 2 cents to recent CPI analysis, showing that, in fact, inflation has not decreased at all, and markets see just what they want to see.
Market overview
Bullion gained nearly 1% after data showed that U.S. consumer prices were unchanged in October. U.S. producer prices fell by the most in three-and-a-half years in October, the latest indication of inflation pressures easing. The market was certain the U.S. central bank will leave rates unchanged in December, with most traders eyeing rate cuts from May 2024, according to the CME FedWatch tool. Swaps traders are now pricing in two Fed rate cuts by July next year, from just one before the inflation data. Wall Street banks remain highly divided on just how quick policy loosening will come in 2024.
Investors also looked at data that showed U.S. retail sales fell in October, though by less than expected, after months of strong gains, pointing to slowing demand that could further strengthen expectations of a rate-hike pause.
Goldman Sachs expects increased returns on commodities over the next 12 months, buoyed by higher spot prices amid easing monetary policy and recession fears while the asset class also strengthens on hedging against geopolitical supply risks. The bank has forecast returns of 21% on commodities over a 12-month horizon on the oil-heavy S&P GSCI Commodity Index, led by returns of about 31% from energy and 17.8% from industrial metals.
Finally, just to moments concerning recent CPI report. Yesterday we've taken a look at other indicators that discredit the suggestion of the US economy growth. But, if you take a look at CPI itself, first is - calculation of medical care services as been changed again. This time, a change in the methodology for calculating changes in health insurance prices resulted in the fact that data on insurance prices in October 2023 compared to October 2022 showed a decrease of 34% (!!!).
With the average monthly payment for health insurance in the US being $477 per month for those who pay for their own insurance, it's clear how much of a real impact these costs have on CPI and what they don't have. Changes in methodology on the index scale could have a significant impact on price changes.
Second is, take a look at the chart below, that shows CPI components changing. Excellent analysis. As we can see, overall inflation (left) fell only because the price of oil/energy fell in October. If the price of non-oil remained stable (either speculators or OPEC+ played a role here), then overall inflation would remain at the same level as before.
If you look at core inflation (on the right side), there is an interesting factor - transportation services, which played a negative role. But if you think a little, transportation services include three cost components - the cost of the vehicle itself, which is less volatile, wages and the cost of fuel. And if the cost of fuel did not have such a significant effect on the cost of transport services, then there could well be a plus for inflation. So, by and large, inflation is not fundamentally decreasing; only one volatile factor has had an impact. But the markets act as if victory is already close. And medical insurance... this is just absolutely nuts.
Now let's take a look at -
US DEBT (Part II)
This week we've got new data on foreign holders of the US Debt. China continued to dump American treasuries at a brisk pace. Maybe they wouldn't do it so fast, but they have no choice - economy is slowing down, PBOC has to support national currency and flow hundred billions of yuan, keeping rates low, trying to stimulate consumption. They have to keep yuan stable and this needs some reserves burning. Japan stands in similar situation, it doesn't want to, but it has to, because of constant yen weakens, they have to "burn reserves" to support it somehow.
Over the month, the amount fell from 805.4 to 778.1 billion dollars. That is, 27.3 billion were given away. The United States returns almost a billion per day to China.
Both Hong Kong (202.6 - 197 = 5.6 billion) and Taiwan (241 - 236.3 = 4.7 billion) dropped, and what is most interesting is the top owners, super-loyal, Japan and the UK - 28.5 billion and 27.3 billion, respectively.
The psychologically important bar of 800 billion has been broken. It is important because at its peak China owned US debt worth about 1.3 trillion dollars. Turning the amount into “700-something” is a conditional “halving”.
This is the collapse of a whole bunch of theories: “Where is he going to put such a debt, and the United States is tightly holding the Beijing throat in this way, and there are huge sums of money and nothing can be done with them, and in general, Xi from Washington has banned the sale of debt below a certain level.” While they were screaming and groaning, Xi sold a half, with each such decrease the leverage of the form “yes, the United States, if it wants, will simply cancel the debt, and China has blown up and doesn’t have a trillion-odd dollars, and everything will collapse at once” becomes more and more illusory.
And yes, with such dynamics, the huge question is what the United States will do next year. In 2024, approximately 8 trillion worth of treasuries expire (+$2 Trln of Budget deficit). Plus, we need to increase external borrowing, because the economy is stagnating. Who will buy these barges of freshly printed paper?
As a result, the Treasury market recorded its first outflow since 2021. Funds also cut exposure of the US bonds in favor of stocks. A brutal sell-off in Treasuries in previous months has fueled fears of an investor flight from a key market in the financial system. Some of the fears were confirmed: at least one group of investors headed for the exit back in September. ️Foreign investors sold $1.7 billion more in Treasury bonds than they bought, US Treasury data shows. Although the amount is small, it is the first net capital outflow since May 2021 and the weakest three months of foreign demand since May 2020.
Yes, Japan now stop selling and even has bought a bit, keeping total amount of ~ 1115-1120Bln. The same UK does, it is buying and increasing amount of investments, coming to ~$700 Bln. Very soon it could become a 2nd largest holder of the US debt replacing China. The amount of debt on the hands of foreign investors is raising in terms of notional value. But despite all this, the share of government debt held by foreigners continues to decline, and has already dropped from a peak of 30% to 23-24%.
This is how a third turned into a quarter and risks turning into 1/5. The United States is simply increasing its debt burden faster than its allies and neutrals are willing to buy. Hence such a wild increase in rates, service costs and, ultimately, a lack of money in the budget for various kinds of adventures. Such high rates with looming dates for refinancing large amounts of debt will simply suck all the margins from American corporations. And if there is no margin, there are no taxes.
This is where the rapidly rising cost of debt servicing and, at the same time, a reduction in tax collections will hit us from both sides. You will have to save seriously, the squabbling over the shrinking pie will (already) intensify, and you will have to be much more accommodating with external forces. It’s not for nothing that Biden was jumping on his legs in front of Xi.
We already mentioned that liquidity of the US Treasury market is deteriorating, new auctions become more difficult as investors demand higher returns and primary dealers have to buy larger part of total issue. But is it really so critical?
How much time the US Treasury has
To answer this question we have to consider the liquidity sources that the Fed and US Treasury have. They are - Banking Reverse Repo, Banking Reserves and US Treasury cash on deposit with the Fed account. So here they are:
Reverse Repo
The remaining cache in the reverse repo with the Fed shows that $1.3 trillion was spent on the purchase of new issues of Treasury bills from June to the current moment (5.5 months). A simple calculation shows that if the rate of transferring money to treasuries continues, this source will dry up by the end of February-beginning of March. Who will buy back the treasures and why this unknown source is not buying them now is a mystery.
The US Treasury cash deposit (TGA)
The Ministry of Finance has accumulated more than 739 billion dollars in money, so even if the Fed does not come to the rescue in March, the deficit will have something to cover for another three months. If, of course, the Fed continues to reduce its balance sheet at the same pace.
FED QT Programme
At the same time, the Fed's balance sheet decline rate is about 0.6 trillion. dollars for the same 5.5 months, so the balance, in general, more or less converges. The only thing missing is bank reserves. They cannot afford to deviate too much from their own program. Otherwise, what kind of fight against inflation is this? Therefore, the pace of draining money from reverse repo will probably remain the same, and the Ministry of Finance will drain TGA until mid-June.
Banks Reserves
Everything is stable in bank reserves at the Fed. Trillions are piling up. Potentially, this is a good source, but it is rather a source of last hope. Because, apparently, banks are not individuals. They understand that, from a risk perspective, holding money in reserves at the Fed and in Treasury bills are not the same thing. The Fed will never default and reserves are not subject to depreciation. So maybe they will buy treasures, but for this to happen the stars must somehow align. That is, banks must understand that it is more profitable for them to take on the risk. What factors could make them to do this? Now it is difficult to say. Probably they could be forced to do this by the Fed, or some legislation of banking reserves will change that make it acceptable. Definitely they will not be transferred totally into US bonds, but if even they will, it gives ~6 more months gap for the Fed and US Treasury. Total amount of cash reserves now stands around 5.5 Trln, but more probable that it will be around $3 Trln as some part of reserves will stay in cash and the Fed will grab ~$1-1.5 Trln more from the market via QT.
Taking it all together, US financial authorities could feel relatively calm within 9-10 months until the autumn of 2024 - right up to elections moment.
Hopefully I get in your head not too much. You maybe asking why it is so complexity with all this stuff around the debt and how this relates to gold market. When you read next political part, you understand the whole drama of current moment.
Cherry on the Pie - Politics
So, obviously Xi has come to the US not just to participate in APEC summit. It was most important meeting in recent one or even two years. Xi has come to find compromise on two subjects - access of Chinese high technology sector to developed markets, second - decide something on South East Asia markets. Both agreements failed. China and US have similar problems in general but very different in details. While the US economy just can't start growing based only on domestic demand (yesterday we've shown this in FX report, take a look at Industrial Production index chart). It vitally needs fast growing, strong new market to supply their goods - space for expansion, new strong demand for its manufacturing sector. And this is the only source rest on the planet.
China also needs it as we see failure of any attempts to re-boost economy. China is loosing margin of textile production as the wealth level of population is growing. That's why if in 90s and even 2000s the textile goods costed almost nothing - now they become more expensive. Textile sector has low margin and China earnings are dropping. They need to get somehow on high margin markets, which high technology sector is - semiconductors, wire, net, phones, defence systems, space etc. But this market mostly stands in developed countries because of high personal wealth where people could buy all this stuff.
Thus, Xi has come to J. Biden to discuss this and maybe find some compromises. But failed. The US model that they could accept stands as follows : "We (US) and China will tell to other APEC countries what to do and how to behave, while behind the curtain We tell to China what it could buy or sell by what rules and where, totally controlling their access to high technology sector and get S-East Asia market instead". While China can't accept this and wants parity, equal rights with the US in this question, getting fair access to developed markets and sharing S-East Asia market.
Based on recent statements from J. Biden it becomes clear that they haven't come to agreement. J. Biden calls Xi as "Dictator". The US efforts to isolate China from access to India ocean are accelerated. We constantly update this subject. The US on a final way to achieve this. China has just two ways to the ocean - through Burma (Myanmar) and via Strait of Malacca. Malaysia is an old US ally, so this way is closed. On Philippines, the US has opened four military bases. And recently they have signed agreement on defence cooperation with Indonesia . So, Taiwan - Philippines - Indonesia - Australia - isolation circle is locked. US accelerates their activity in Vietnam. Burma stands in the focus on f the US foreign policy for a long time already, since B. Obama presidency. Now the US policy is aimed on support pro-American political forces.
Just this information is enough to understand that it is becoming too hot. But, there is another one moment - Taiwan elections on January 13th. Xi is probably counting on the victory of the pro-Chinese candidate. And thus, without military action, simply through a series of police operations, seize Taiwan from the Americans, as was the case with Hong Kong.
The Americans, naturally, do not plan to give up so easily and will engage in the merry-go-round during the elections, and if that doesn’t help, then move towards the Coupe, as their favorite tactics. This is probably the issue Xi came to discuss. And received the answer that we do know - US President Joe Biden notified Chinese President Xi Jinping of Washington’s intention to continue supplying weapons to Taiwan, despite Beijing’s protests. John Kirby, coordinator for strategic communications at the White House National Security Council, announced this at a briefing. Why Xi came and what he wanted in the end is not clear. Humbled himself and went home. So in just 2 months the issue of Taiwan will definitely become interesting. Will anyone remember Zelensky by then? This is, of course, a rhetorical question.
Biden signed temporal budget that doesn't suggest spending for Ukraine and Israel. The document itself assumes the approval of part of the expenses by January 19 and the second part by February 2. But who will care on Ukraine after January 13th? Supposedly the US will probably pretend until February that Zelensky does not exist, but in March they will already run out of ammunition. The help from EU is also stuck in Brussels. It means that Zelensky is drained.
Finally the US has big challenge from Israel as it drains too much resources off from confrontation with China. Two days ago the US has got another negative turn - Israel strikes Lebanon Aluminium plant. That is, Israel believed in itself so much that it rushed to Lebanon. At the same time, for the State Department, everything that is happening is, of course, a terrible reputational loss. They hoped to be friends with Muslims against China and Putin, but it turned out that they created all the conditions for friendship of Muslims around the world with that same China and Putin.
Speaking on China - recent meeting takes all questions off the table. China will fight. The only way that is acceptable now is South China sea and its "arguable" islands. We expect that China will accelerate its efforts in the region. They already do. The events are turning into hot stage and South-Eastern Asia very soon will become the top of the world.
For China is another task exists - it has no clear long-term strategy, programme. The US have something to offer - US Dollar. China has "one belt-one way" strategy but it is not shaped yet. Still, this is long-term story and not very important right now.
Conclusion:
Now, hopefully it becomes clear how US debt issue combines with political risk. US has only ~ 9-12 month to get some, at least initial results in Asia. Confrontation is spinning up. It is a bit surprising, how the US was straightforward with China and comes on evident confrontation, when they do know about big problems on M. East and Ukraine. For now hardly it will turn to hot war. Both sides will try to use political and economical levers. Nevertheless, it will be very thin edge.
For gold as we've mentioned this, might be "win-win" situation. If inflation turns up again, the real rates start to fall as the Fed has reached the limits of economy ability to hold high rates. Any war is additional expenses. At the same time, political games will not disappear whatever situation in the US economy will be and keep supporting gold. We consider 2300-2400$ as nearest upside target on gold market. Current events are enough already to achieve it. Potentially gold could go much higher. Pre-election domestic showdown also could bring political chaos.
Last edited:
