• Matthew Fotheringham

🌎 China invades India | Putin's porky pies | Stagflation around the corner | 3 Things


June 5th, 2020


Happy Friday!


We’ve been trying to find words that describe our feelings on the recent troubles sweeping across America. We truly hope that we can all agree that persecution of any type is simply not acceptable.


A number of people have been saying that 2020 is a year that they wish they could forget, maybe it’s the year that should always be remembered...

Did You Know...


We aren’t strangers to protest, people have been demonstrating for their causes both peacefully and aggressively all over the world for centuries.


Which is the world’s largest protest by the number of people attended?

(Answers below)


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CNY INR


China Invades India and Barely Anyone Noticed



In an area of the world far removed from civilization - and with a very troubled history- the Indian Army and the Chinese military are moving in heavy equipment and weaponry to their bases close to the disputed areas in eastern Ladakh. The two sides have been in a standoff in the perennially troubled region for over 25 days; but that doesn't really explain why.


Let's give a brief history lesson… Back in 1947 when the UK Parliament gave India its independence, both China and Pakistan were unhappy with the partition. Pakistan invaded within three months. China was in flux due to its civil war, but still managed to build roads in the disputed region. During 2019 there was a reorganization of the region’s many political/tribal areas. China saw the result as an effort by India to take back control of Ladakh. The China-Pakistan Economic Corridor passes through this region - the Belt and Road Initiative is now an overt occupying force. The BRI is the centrepiece of Mr Xi’s foreign policy, but it's faltering on many fronts (Covid, lapsed debt), and now center stage.


The Chinese Army has been gradually ramping up its strategic reserves in its rear bases near the Line of Actual Control or LAC in eastern Ladakh (there are no agreed-upon borders). The reinforcement by the two armies is happening even as both countries continue their efforts to resolve the dispute through talks at military and diplomatic levels.


Who knows what neighboring Pakistan (China’s ally against India) is thinking or doing. What we do have is a region that is remote, lawless, tribal, borderless, and disputed by three nuclear powers.


What could possibly go wrong?


Source - Johns Hopkins University

The Yuan is not terribly volatile, at 4%/annum. It has (like almost every other non-major) fallen against the USD for the last two years.


Hedging costs are fairly low at just under 2%/annum, favoring USD sellers. Hedging is usually done using the offshore Yuan, CNH, which tracks CNY very closely. With all that's going on in Hong Kong, it will be interesting to see what happens to CNH. The INR has slightly higher volatility at 6%/annum.




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RUB


Russia Battles COVID With Lies; Loses



Has Putin been telling fibs? That seems to be where every finger is pointing as Putin’s political machine is accused of masking the truth, probably to help him battle his plunging polls.


Russia has officially recorded over 300,000 cases of Covid-19 and 2,900 deaths. This fatality rate is less than 1%, compared with 4.5% in Germany and 14% in Britain. Statistically, that's quite unlikely.


The fatality rate among Russia’s health professionals (who keep their own records), is 16 times higher than in other OECD countries. Shades of Pravda.



The truth is outed region by region: on May 17th the health minister in Dagestan, a Russian territory of 3m people, told a local blogger that the true number of infections was four times higher than reported.


The RUB is extremely volatile, almost 14% annual volatility. This translates to almost 23% VaR. Hedging costs are middling, costing about 4%/annum, favoring USD sellers, RUB buyers.




USD


The Bond Market Is Flashing Stagflation Alarms



Could the United State’s eagerness to print money be its long term adversary? The Treasuries curve is the steepest in three years, with long rates climbing as the FED prints billions (the FED’s balance sheet has ballooned from $4Tr to 7Tr since March).



Usually, a steepening curve is a sign of improved prospects. However, in the pandemic’s wake the risk of stagflation, persistently high inflation, combined with high unemployment and stagnant demand, is a real possibility. The FEDs propping up the corporate bond market will likely lead companies to more leverage (on top of clogged WW supply chains), reducing productivity and growth.


If you were around in the 70’s, stagflation led to 30 yr yields above 30% (compared to 1.55% now). It wasn't pretty (our Head of Advisory had a car loan at 18%).




Dollar Index chart




In Other News



Currency Heat Map

This chart shows the relative volatility between currencies. The redder the color, the higher the volatility.




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Quiz of the week


On February 15th 2003 it was suggested as much as 10 million people took to the streets of 60 countries to protest against the Iraq war. Rome alone had 3 million people take place in the demonstrations, making it the biggest anti-war protest in history.

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