“Gold Is Back Above $1,300 And I’m Shocked It’s Not Much Higher”

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In the midst of the US and China Trade War, one of the greats in the business said, “Gold is back above $1,300 and I’m shocked it’s not much higher.”

“Gold Is Back Above $1,300”
 
May 31 (King World News) – Here is what Peter Boockvar wrote today as the world awaits the next round of monetary madness: So this is no more about free and fair trade, reciprocity, and protection of technological expertise. Tariffs can be thrown around as an economic bomb for anything now. Global growth rates will only continue to suffer. Sovereign bonds are loving it as the German 10 yr yield falls to a record low of an astonishing -.21%. Netherlands 10 yr is now below zero and the French 10 yr is down to .21%. The US 10 yr says 2.16% right now and sending its spread to the 3 month to -17 bps and. Gold is finally back above $1300 and I’m shocked that it’s not much higher…

We can certainly see how stocks are responding. European bank stocks in particular, highly sensitive to the deeper negative rates situation, is just a stone’s throw from the lowest level since 2016. In fact, at the current level of the Euro STOXX bank index is just 17% above the lowest level dating back to this index creation in 1986. It’s also 83% below its 2007 peak. Digest that ECB. 

The Tie That Binds US & Mexico
 
Here are some Mexican trade stats according to the Office of the US Trade Representative: 

“US goods and services trade with Mexico totaled an estimated $671b in 2018. Exports were $299.1b; imports were $371.9b…Mexico is currently our 3rd largest goods trading partner with $611.5b in total (two way) goods trade during 2018…Mexico was the US’ 2nd largest supplier of goods imports in 2018…Top import categories in 2018 were: vehicles ($93b), electrical equipment ($64b), machinery ($63b), mineral fuels ($16b), and optical and medical instruments ($15b).”

And of course keep in mind that many of these imports are from US companies that have facilities in Mexico. 

I saw one stat that said $1.6b worth of goods cross back and forth between the US and Mexico each and every day. Here is another in the biggest category according to the VP of the Center for Automotive Research in Michigan, “Mexico is a source of 37% of all imported auto parts to the US. Every vehicle has Mexican parts in it.” 

This is one last thing from a March 2019 report from the Congressional Research Service that said on the auto sector that:

“trade expansion has resulted in the creation of vertical supply relationships throughout North America. The flow of auto merchandise trade between the US and Mexico greatly increased the importance of North America as a production site for automobiles. According to industry experts, the North American auto industry has “multilayered connections”

…between US and Mexican suppliers and assembly points. A WSJ article describes how an automobile produced in the US has tens of thousands of parts that come from multiple producers in different countries and travel back and forth across borders several times. A company producing seats for automobiles, for example, incorporates components from four different US states and four Mexican locations into products produced in the Midwest. These products are then sold to major car makers. The place where final assembly of a product is assembled may have little bearing on where its components are made.”

Serenity Now
 
In other words, these tariffs that would only ramp up would be a total mess. In the meantime, business has another reason to sit on their hands before making any major decisions. You know how I feel about tariffs, Serenity Now. https://www.youtube.com/watch?v=Ow_9MglZrhs

China Trade War
 
With respect to the next move by China in response to what we’re doing with Huawei, they are creating an “unreliable entities list” that would “seriously harm the legitimate rights and interests” of Chinese companies. Who would go on it? A Chinese spokesman said “Foreign enterprises, organizations or individuals that do not comply with market rules, deviate from a contracts’s spirit or impose blockades or stop supplies to Chinese enterprises for non commercial purposes, and seriously damage the legitimate rights and interests of Chinese enterprises, will be included on a list of ‘unreliable entities.'” Great! I say sarcastically.

China reported its state sector weighted manufacturing and service PMI’s. The manufacturing index fell back below 50 at 49.4 from 50.1 and that was .5 pt below expectations. New orders are back below 50 while export orders fell to 46.5 from 49.2. Business Expectations fell 2 pts to a 4 month low. The services sector held in much better as it was unchanged at 54.3. The Shanghai comp was barely down in response (but who knows if the government was buying stocks) but the H share index in Hong Kong, more freely traded, was lower by .6%. 

Meanwhile in South Korea And Japan
 
South Korea’s industrial production figure for April was better than feared, falling .1% m/o/m vs the forecast of down 2.2%. South Korea is of course a key bellwether of global growth but could be a beneficiary of shifting supply chains. The Bank of Korea kept interest rates unchanged overnight as expected.

Japan’s labor market remains drum tight as their unemployment rate for April fell one tenth to 2.4% as expected. The jobs to applicant ratio held at 1.63, the highest since the 1970’s. Industrial production surprised to the upside with a .6% m/o/m gain vs the forecast of up .2%. Retail sales though missed, seeing no change m/o/m vs the consensus of up .6%. We await the decision on the VAT. 

Lastly in Japan, the May Tokyo CPI core/core rate rose just .8% y/o/y, below the estimate of up 1% and down from .9% last month. Another month that is far away from the BoJ goal but we now know that the BoJ can’t do anything more about it. More easing is spitting in the wind and would only be more restrictive on bank profitability and a step further to nationalizing country assets. 

We Don’t Want To The German Consumer
 
The one thing of note in Europe was the big miss in Germany retail sales for April. They fell 2% m/o/m vs the estimate of up .1%. We don’t want to lose the German consumer as the domestic side is what’s kept their economy out of recession in light of what’s happening on the trade and industrial side.