There are storms brewing but for the moment markets are stuck in the Doldrums waiting for the winds to increase in velocity. The issues confronting the market are all too familiar as NOTES FROM UNDERGROUND has been categorizing for the previous months.

On July 5, me and Rick discussed an issue that has finally caught the attention of the financial media pundits. Those who have little knowledge of yield curves are now dictating the narrative now that the U.S. 2/10 curve has flattened through 30 basis points. My previous blog post generated a great deal of commentary and I advise you read the comments and pay close attention to the thoughts from STEFAN.

Click on the image to watch me and Rick discuss the yield curve.

The ferocious bulls fill the airwaves, telling viewers to ignore the yield curve for the current environment is DIFFERENT than all prior flattening events. Maybe SO but as I have cautioned over the last two years, it is difficult to time equity moves to yield curves. In my research over the last 40 years there is definitely a lag effect. It’s worth looking at this 25-year chart of the 2/10 curve overlayed with the S&P 500. Note the lags in stock market corrections following rounds of curve flattening.

***Issues we have discussed but certainly have the power to disrupt markets:
1. Trump is heading to the NATO summit and he will be as disruptive in Brussels as he was at the G-7 meeting in June. The Trump team believes that the most relevant days of NATO are over and if the U.S. allies wish to sustain the alliance they will have to bear  a greater financial burden. NATO is a relic of the Kennan State Department in which containment of the Soviet menace was the major component of U.S. security/economic policy. I raise the question again: Will the Western powers go to war to protect Erdogan’s Turkey if the brash dictator in Ankara were to conflict with Moscow? Remember that Article 5 of NATO‘s mission statement calls for collective action. Raise your hand high if you believe that Turkey in its current form is worth embarking on a war for any reason. While Trump is not a diplomat in manner it doesn’t mean his substance is wrong.
2. Now this is a perplexing situation. The Shanghai Composite has dropped dramatically in recent weeks  as has the CHINESE YUAN. Typically when a major exporter of goods undergoes a currency depreciation its equity market receives a BID as a weaker currency is considered positive for its exporters. However, the correlation has been recently broken. I am watching this to see if the market senses that this correlation breakdown is signalling a major slowdown in China and the negative ramifications for the large debt load that the Chinese private sector has piled on.
The recent break in COPPER has been blamed on a large Chinese speculative position gone awry. When it comes to China it is often difficult to separate private from public so it will take time to analyze the outcomes of the recent COPPER weakness. The initial fears about the emerging markets undergoing stress from a DOLLAR SHORTAGE have not created a rush from long-established emerging market positions but the recent weakness has caused concerns but not fear. Mexico has stabilized  as fears over the election of AMLO has subsided. Argentina remains an issue but the $50 billion IMF credit line has helped to lessen concerns about financing its debt coverage. Other emerging market s are certainly a concern but not enough to cause the winds of volatility to be freshened.
3. The tariff issue we have raised in NOTES continues to fan the flames of economic uncertainty. The argument continues about the impact from tariffs. Are they inflationary or potentially deflationary? (Inflationary because domestic prices will raise as imported goods are taxed higher. Deflationary because of the effect on global trade as disruption of supply chains leads to a global economic slowdown.) Even the FED‘s June FOMC minutes raised the issue of economic impact from tariffs, but the concern did not prevent the central bank from raising interest rates. Several months ago I alerted readers to the ridiculous use of the Trade Expansion of 1962 and its section 232 to invoke tariffs on aluminum and steel as a matter of national security.
Last week, William Poole wrote a piece for the Mises Institute that is well worth the read. The former St. Louis Fed President detailed out the bad politics of the recent use of tariffs by the Trump White House.
Also, last week the Reserve bank of Australia used “uncertainty regarding the global outlook stems from the direction of international trade policy in the United States.” The FOMC is raising rates in the face of Trump tariffs while other central banks are using the tariff issues to keep their interest rates low creating downward pressure on their currencies versus the dollar. On Wednesday the Bank of Canada meets and is expected to raise rates by 25 basis point to 1.5%. Let’s see if the BOC decides to refrain from raising and cite the tariffs as a reason to fear the uncertainty.
4. On June 10, I warned to watch Russia and the rouble as President Putin would try to leverage his position as the Syrian/Mideast kingmaker as a way to get Trump to ease the sanctions on Russian oligarchs. This would be in exchange for Putin’s cooperation in forcing Iran out of Syria and other nations that the Sunni Arabs and the U.S. are concerned. Since then, Trump has arranged to meet Putin in Helsinki before he arrives home from the NATO summit. The rouble has recently strengthened, as has the Russian ETF–RSX. The world is far more confusing and volatile then the lack of winds in the doldrums would suggest.