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Goldman Sucks

Financial district

Being big doesn’t equal being right.

However, the confirmations keep rolling in for my contrarian positions against some of the greats like Goldman Sachs. I’m not referring to my stock positions, as I have none right now, but my opinions on where the economy is headed. You can listen to the Golden Boys — the experts — if you prefer, but let me remind you of how they saw nothing coming during the Great Recession. At least, their public advice ran opposite of how things went (and that was by design).

Today’s news, again, confirmed one recent “Deeper Dive” in which I wrote about how the BRICS are crumbing; how there would be no currency from the BRICS nations, and how the yuan was particularly breaking down miserably. The point of the latter was that nothing China does works to prop the yuan up anymore, and a limp, overcooked yuan-ton currency is not going to make for a readily desired BRICS currency. Another headline appeared in the news today, saying that China just took its biggest step — again — to prop up the flaccid yuan.

China’s central bank offered the most forceful guidance on record with its daily reference rate for the yuan, as the managed currency weakened to a level unseen since 2007.

Seems it is one biggest step after another these days for China. They’ve gone from stepping to leaping. Not only did the BRICS nations not even talk about a new BRICS gold-backed currency or any kind of BRICS currency (as if they were too embarrassed to even bring that idea up again in light of present circumstances), but the currencies they already have keep plunging into deeper holes.

It seems every week we hear about China taking its biggest stab yet at saving the yuan, only to read the next week or even the next day that they took an even bigger one. Now the yuan has weakened in value all the way back to the days before China’s economic prominence that brought China to the forefront during and after the Great Recession. That dramatic decline is in spite of those weekly and sometimes daily interventions throughout the past summer.

Meanwhile the dollar, which many said was supposed to fail, keeps getting stronger on international exchanges, while the Fed is seen as being all the more tied today to its dollar-lifting program now that new signs of inflation are emerging:

Indications of US economic resilience are persuading some traders that the Federal Reserve will keep interest rates higher for longer. That’s helped lift the Bloomberg Dollar Spot Index by around 5% since a July low, while a gauge of Asian currencies has plumbed its lowest since November.

Meanwhile, the policy-makers in these low-plumbing nations are desperately draining down their reserves to support their currencies against King Dollar:

These moves are emboldening policymakers in the region — who spent last year burning through their reserves to support local currencies — to head back to the battlefield to take on bearish speculators.

The prospect of higher-for-longer US rates is reigniting pressure.

Those inflation pressures pummeled US stocks today and kept oil floating at a high price around $90 a barrel. Higher oil prices in 2023 were another one of the predictions I made at the start of year. Oil, of course, is a major driver of the higher inflation that was also in those January predictions as a likelihood and was part of my last “Deeper Dive” — “The Nation is on Fire.”

Elevated oil prices have also reignited fears over higher inflation… China’s dire economic outlook, which was built on data have been disappointing for months, is also weighing on sentiment in emerging-market currencies….

Signs are emerging the dollar has room to extend gains if bets against the currency— steadily amassed as it weakened earlier this year — are suddenly reversed….

What’s Remarkable About the Dollar Is Positioning….

The yen and yuan are among the worst performers among Asian currencies this year. While Japan has stopped short of using more aggressive tools to support its currency, China already sought to bolster the yuan by asking state-owned banks to sell dollars while tightening liquidity offshore to squeeze short currency bets.

So, the currency war against the dollar from China has been intense, but has consistently failed all the same. And here is the catch for China that I’ve talked about a lot this summer still playing out:

The immediate implication of the soaring US dollar is that it will prevent most Asian central banks from loosening monetary policy, out of fear of aggravating currency weakness….

China, in other words, is barred from stimulating its economy, as I’ve been saying this summer because doing so would weaken its currency even further. So, the lesson here is to never be quick to write the dollar’s obituary. It may be declining in buying power here in the US, but it almost always ends up as the best duck in the cess pool of fiat currencies. And these values are relative … to each other.

This is germane because it was only back in May that Goldman said they expected to see a modest gain in the yuan three months down the road due to a recovering economy, not three months of devastating decline. We’re a little past three months, and China’s economy looks worse and so does the yuan. I’ve stated the opposite from Goldman’s positions all along, and China has not disappointed in delivering that. So, being big is not necessarily being right. GS has been revising itself a lot.

Another part of that “Deeper Dive” that I just mentioned got reaffirmed in the news today, too. That’s the part about how seriously interest on the US debt is burning out of control. One commentary in today’s headlines reads …

Interest on national debt on pace to eclipse entitlements, defense spending amid funding battles…

The report, which outlines the challenges that face the next administration, projects that such payments will exceed the combined costs of Medicaid, SNAP (food stamps), and Supplemental Security Income (SSI) in late 2023, though it varies depending on interest rates.

Well, those interest rates are set to keep rising — maybe not a lot higher, but certainly to be held a lot longer because the other thing talked about in that “Deeper Dive” into the fires of inflation and soaring interest was how inflation appears to have put in a turn and gone back to rising. Today’s news particularly jolted markets with more intensity on inflation turning the heat back up.

As a result, the 10-year Treasury bolted back up today, and the NASDAQ fell for its third straight day as …

Fed rate hike fears return.

Wednesday’s rise in Treasury yields coincided with stronger-than-expected economic data that fueled some concern over the likelihood of further hikes. Recent readings on both the services and manufacturing sectors of the U.S. economy show that prices are moving in the wrong direction.

“The ISM reinforced all the concerns that have been bedeviling stocks for weeks – higher yields undercut stock valuations, robust growth [and] sticky inflation keep pressure on the Fed, healthy growth gives a further bid to oil,”

So, we just saw almost everything talked about as the likely trend in that “Deeper Dive” play out in more big steps today.

The prices component of the ISM services index rose 2.1 percentage points to 58.9% in August, representing the share of companies reporting increases as well a four-month high.

And this flare-up of inflation, forcing the Fed to fight longer, is one of several reasons Goldman sucks for downgrading US recession odds to a mere 15% this year. (Which is simply the safe, normal odds in any given year based on nothing more than how often recessions happen.) Why GS is wrong will be the topic of my next “Deeper Dive,” as well as how we can fall into recession again with supposedly warming economic numbers that beg the Fed to tighten harder.

If you don’t have access to the “Deeper Dives,” at least, bear in mind the fact that GS had the odds of recession pegged at over 30% earlier in the year. By their own admission now, they were off by double back then compared to what they say today. So, if they can be off by their own re-evaluation that much one way; they can be off the other way.

Also, it would be wise to keep in mind that GS got the nickname “Vampire Squid” back in the days of the Great Recession because it deliberately encouraged all of its clients (even its really big, really smart ones) to buy the very stocks GS was selling wholesale from its own portfolio. So, they do sometimes talk their book. In this case, though, I think they are looking at the wrong things or looking at them the wrong way, and I’ll be laying out how that is.

I didn’t believe GS back then in what it was saying publicly, and I don’t believe them now either because I simply don’t trust them to be honest brokers. Remember, Sachs of Gold also said inflation would keep falling this year. Today’s news agrees with my “Deeper Dive” on inflation, not their prognostications, and says, “Uh, maybe not so fast there, Buddy.”

The belief that inflation will keep falling has been key to GS’s recent downgrades of recession risk. If they are wrong on that, they are wrong on recession.

The Fed keeps saying, even today, there may be more in store — more inflation and, therefore, more intentional economic ruination.

Earlier in the day, Boston Fed President Susan Collins said the central bank can “proceed cautiously” on more rate hikes, but indicated that “further tightening would be warranted” depending on the data.

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