Sun Tzu's Art of War

November 11, 2022 key news items this week:

 1. Sun Tzu’s Art of War: The famous words of Sun Tzu in Chapter 3 verse 6 said”Hence the saying: If you know the enemy and know yourself, you need not fear the result of a hundred battles. If you know yourself but not the enemy, for every victory gained you will also suffer a defeat. If you know neither the enemy nor yourself, you will succumb in every battle.” (Fig. 1)

As ordinary citizens, we all got caught in the cross fire of Great Powers, it is imperative all the more that we need to know the designs of the forces around us and our own strength and weaknesses.

 Hosea ^4:6  My people are destroyed for lack of knowledge.(Fig. 2)

 At this weekend, we highlight for your consideration some data points which may indicate the undercurrents of the shape of things to come.

 2. Imperfect and Incomplete Knowledge: Events over the past 4 years and in particular in 2022 showed neither the East nor the West are operating with less than optimum knowledge regarding their attacks and defenses against their adversaries. Probably for the West, their leaders showed a further lack of knowledge regarding themselves. Hence, the constant change in leadership, infighting and disunity. Ideologies and propaganda only goes so far before realities sets in and we now see leaders on both sides have to settle for something less than their desires. Realities, such as

 3. Ukraine War Logistics: After 8 months of fierce fighting both NATO and Russia found themselves consumed far more weapons and munitions than they had bargained for. NATO had exhausted their stockpile of howitzer rounds and had to sourced from South Korea, (Fig. 3)

whilst Russia had to economize by sourcing drones from Iran (Fig. 4).

Bearing in mind, we are talking about the number 1 and 2 in military strength in the world, after an eight months conventional peers war, they have to temporarily take a pause because there was a break in the supply chain. Against this background, it gives a new twist to the true purpose of Sullivan’s (US National Security Advisor) dialogue with Kremlin (Fig. 5)

and concurrent RAF’s retreat with Kherson City.(Fig. 6).

Whilst no one knows exactly what deal was struck, knowledgeable analysts Pepe Escobar speculated sort of deal seems to have been struck between Jake Sullivan and Patrushev. (Secretary of the Security Council of Russia). After the meeting with Sullivan, Patrushev then flew off immediately to Tehran for a strategic partnership business with Ali Shamkhani, Secretary of Iran’s Supreme National Security Council.

 4. The Art of the US/Russian Deal: Elements of the deal may include:

(i) Russia would keep Donbass but not advance towards Kharkov and Odessa. And NATO expansion would be definitely frozen.

(ii) The Russians will leave the Dnieper riverbank in a managed military retreat. That would not be possible without managed military-to-military negotiations.  

(iii) These back channel negotiations have been going on for weeks. The messenger is Saudi Arabia. The US aim, in the short term, would be towards a sort of Minsk 3 accord – with Istanbul/Riyadh attached.  

For interested readers, the thesis by Pepe Escobar can be found in https://thealtworld.substack.com/p/sun-tzu-walks-into-a-kherson-bar (Fig. 7)

 5. US Financial Attacks in Retreat: To test if Escobar’s thesis has any merit, I also examined closely what happened this week in the financial markets and certainly I found some collaborative evidence.

 (i) Federal Reserve to Pivot in December: After the announcement of the October CPI number, stocks, bonds, energy and precious metals all rose sharply and DXY dropped 3.94%. The market of course was not reacting in anticipation of a Fed Pivot. The market is signaling the Fed, time to stop. According to Jeffery Gundlach, the reigning Bond King, the Federal Reserve never had the ability to decree interest rate increases or falls, it simply follows the market movement. The Fed Funds rate always lags and follows the Two Year Treasury Rates. (Fig. 8)

and the Two Year Treasury Rate has plateaued.

 (ii) Spread between Two Year Treasury and Fed Funds Rate: Historically the Two Year Treasury Rate has an average spread of 50 basis points over Fed Funds Rate and this Friday that average spread hit the sweet spot. (Fig. 9)

Theoretically speaking the Fed has no reason to push further on interest rate increases.

We will have further discussions on the financial markets in the following sections but it looks the rivalry between the West and the East will temporarily take a pause, an armistice, as each side needs a breather to consolidate and regroup from exhaustion. I am, however, not optimistic of a long term peace but for the time being, we all can take a badly needed respite over the next few months.

 The past week’s financial markets:

 A. Stock Market: Dow rose 1,344,64 points for the week (+4.14%) (Fig. 10). 

Some ascribed the stock market performance to a softer October inflation of 7.7%, others acknowledge it was China easing up her Zero Covid Policy. Equally there were strong negatives like Crypto Exchange FTX filed for bankruptcies and Meta and Twitter massive laid offs. My pet theory is a temporary truce has been struck between the East and the West and we just witnessed movements by the insider first movers and a classic short squeeze. (Fig. 11).

 B. Debt Market: (Fig. 12): USGG10YR ended the week at 3.811% a significant drop of 35.2 basis points or -8.455% change from the previous week. 

On the US Treasury Yield Curve, there were declines of 17 to 41 basis points between 1 Year to 30 Years. (Fig.13). 

Despite the duration rate declines, the yield curve inversion actually got worse and an economic recession is unavoidable. We have witnessed the carnage of the Tech sector and Crypto across the board. Even with better performance with Energy and Arms Manufacturers sectors, Boeing cannot possibly do well without the Chinese Market. The upcoming Xi Biden talks at the G20 meeting will be watched very closely and I am sure there will be some horse trading. It is interesting that China warns US not to disclose details of the talks to Taiwan. (Fig. 14)

C. FX Market (Fig.15): for the week ended November 11, 2022, DXY opened at 110.788 and closed at 106.416 (Down -3.94%).

We noted even before announcement of a softer US October CPI, EUR, GBP and JPY were moving higher against USD as Sullivan negotiated with Patrushev. This was despite the market being spooked by the unexpected Powell speech last week. The soft October CPI was icing on the cake as if to herald a new chapter. As tension eases in Europe, Brent begins to drift down by as much as 6% until the October CPI released which knocked down the USD. Precious metal moved up in reaction to over 6% for the week. (Fig. 16).

My thesis of a peak of DXY at end of September and a cascade down once 110 is crossed has been vindicated.

D. Precious Metals & Crypto :(Fig. 17) Gold price opened at $1680.2, and closed the week at $1771.2, a gain of $91 (+5.42%).

A major move by the Bullion Banks to reduced their short position kicked off the rally early in the week, followed by hedged funds forced to reduce their naked shorts in gold and trimming their long USD position sealed the momentum for the week. Silver moved in tandem with gold but problems with FTX triggered a Crypto carnage and Bitcoin dropped over 20% (Fig. 18)

 Luke 14:31  Or what king, going to make war against another king, does not sit down first and consider whether he is able with ten thousand to meet him who comes against him with twenty thousand? 32  Or else, while the other is still a great way off, he sends a delegation and asks conditions of peace. 33  So likewise, whoever of you does not forsake all that he has cannot be My disciple.        

 

When Gentleman Plays Dirty

 November 4, 2022 key news items this week:

 1. When Gentleman Plays Dirty:Russia has named UK as the culprit behind the pipeline explosions and drone attacks in Crimea.(Fig. 1)

The story line is simple, Liz Truss phone was hacked even whilst she was Foreign Minister (Fig. 2).

Between the time GAZPROM detected a decompression in the gas pipelines to Liz Truss as UK Prime Minister texting Anthony Blinken saying “It’s done”, there was only a time lapse of 1 minute.(Fig. 3).

Modern spycraft have everything time stamped recorded and leaves little room for conjectures. Naturally there are other collaborative evidences but the series of planned information leaks by Russia has tilted the balance of international opinion that the Anglo American were the saboteurs. On cui bono alone, the Anglo Americans were already the primary suspects . Who needs enemy when you have friends as such? The blow back is immediate, Germany finally woke up and despite objections from pro US ideologists, Scholz led a high power industrial delegation to China on the pretext to secure economic cooperation.(Fig. 4)

But according to Professor Michael Hudson, the Scholz caravan went to Beijing to essentially lay down the preparatory steps for working out a peace deal with Russia, with China as privileged messenger.

 2. Proxy War of Anglo American Empire Against Russia in Ukraine: When will this war end? Well according to latest Russian MOD directives, the war at Ukraine will be a war of attrition (Fig. 5).

As the burden to prop up Ukraine will gradually falls solely on UK/US, I am optimistic that comes next Spring, green shoots of peace may break out.

 

3. Winds of Change:

(i) Brazil: Lula defeats Bolsonaro and a more independent and balanced international affairs profile from Brazil can be expected.(Fig. 6)

(ii) EU: In a reversal from Ursula von der Leyen proposal for seizing Russian assets, EU Commissioner for Justice Didlier Reynders reveals conditions for unblocking Russian assets.(Fig. 7)

(iii) Qatar: More and more middle east countries are breaking away from the Anglo American Hegemony, Qatar ready to turn its back on Europe and redirect gas supplies somewhere else. (Fig. 8)

 The past week’s financial markets:

 A. Stock Market: Dow dropped 458,58 points for the week (-1.39%) (Fig. 9). 

The optimism for a Fed pivot was punctured after the midweek FOMC meeting with another hawkish Powell lamentation. The Dow gave up 1296 points. Fed Funds rate was hiked up by 75 basis point without fanfare. The expectation was the Fed should go slow at the Dec FOMC meeting. Friday saw short covering all round with stocks, energy and precious metals all rebounded as DXY dip.

  

B. Debt Market: (Fig. 10): USGG10YR ended the week at 4.163% a gain of 15.3 basis points or +3.8% change from the previous week.

On the US Treasury Yield Curve, there were increases of 10 to 20 basis points between 1 Year to 30 Years. (Fig.11).

We have previously discussed how the Fed dresses up the lack of domestic US demand for Treasuries by Reverse Repo. Using the Treasury TIC (Treasury International Capital) report, we have also identified global de-dollarization has gone main stream and window dressing by SWAPS with 5Eyes, BLICS, and Bermuda and Bahamas were necessary to soften the mad rush to exit. Since September, the 3 US subordinated Central Banks, namely BOE, BOJ and ECB has also been forced to defend their own currencies by dumping USD. This week we saw a liquidity collapsed as the Fed’s Foreign Reverse Repo spiked to $351 billion, a historic high. (Fig. 12).

With both foreign and domestic Reverse Repo running at historical level(Fig. 13),

despite the tough Powell talk on interest rate increases, the international community have expressed their lack of trust of US Govt debt very vividly through their unwillingness to hold such IOUs. A credit event is unavoidable and with that the spigot of QE will be opened again but this time round the world will finally realized currencies of the western alliance are empty promises which they do not intend to honour.

 

C. FX Market (Fig.14): for the week ended November 4, 2022, DXY opened at 110.668 and closed at 110.788 (Up +0.1%).

The surprise hawkish Powell only provided macro traders one day of fun. After spiking to 113.096(+2.19%) from previous week close, DXY quickly collapsed to where it began. The dire financial position of US is plain to see. As they say, you can fool some of the people all of the time and all of the people some of the time. But you shouldn’t think you can fool all of the people all of the time. In the previous section, I mentioned there was all round short covering. As the hedgie goes, it was a few months of easy picking when Europe and Japan get stuffed with US led energy crisis. Short Yen, buy dollar. Short Euro buy dollar, Short Silver buy dollar, Short Gold buy dollar, bet on Fed hiking, short oil. But of course, as prices of some asset class got whacked, supplies went out of the window. Master of the Paper Universe does not equate to Master of the Real Universe. As Fed hiked another 75 basis points, it is advisable to check whether there were indeed demand destruction and surprise surprise, there wasn’t for energy and previous metals and all of a sudden there was a scramble to cover shorts. (Fig. 15)

 

D. Precious Metals & Crypto :(Fig. 16) Gold price opened at $1644.3, and closed the week at $1680.2, a gain of $35.9 (+2.18%).

Following the FOMC meeting, Gold was hammered down to $1620 but what momentum traders did not expect was the long queue of buyers waiting at Comex to pickup physical gold at the low prices. The realization turned into a panic and a short squeeze developed. The long expected fireworks should continue. The reason, all Western Central Banks which have carried on QE non-stop since 2008 like a drunken sailor, namely Federal Reserve, ECB, BOJ, BOE and many others have printed currencies to overpay Government Bonds to suppress interest rates now found their bond portfolio have shrunk in value by 20 to 30%. With a thin equity, these Central Banks are all trading at negative net worth. Unwilling to admit their mistakes, one option opened to the Central Bankers is to revalue their gold holdings. Such a proposal was formally tabled by the Dutch Central Bank Governor. (Fig. 17).

If Gold Standard were to be introduced, the equilibrium price of gold would be US$6400 per ounce and Silver at $869 per ounce. (Fig. 18).

For the week both Bitcoin (+2.73%) and Silver (+8.26%) has outperformed Gold (Fig. 19)

 

Psalm 7:14  Behold, the wicked brings forth iniquity; Yes, he conceives trouble and brings forth falsehood. 15  He made a pit and dug it out, And has fallen into the ditch which he made. 16  His trouble shall return upon his own head, And his violent dealing shall come down on his own crown. 17  I will praise the LORD according to His righteousness, And will sing praise to the name of the LORD Most High.