Could The 'China Puke' Signal The Lows In The Dollar?

Authored by Kevin Muir via The Macro Tourist blog,

Trading is difficult. If anyone tells you differently, they are either new (and haven’t been hurt yet), or just plain stupid. You are competing in the greatest game out there, against some of the smartest people on the planet.

Even when you do your analysis and get the call right, it is no guarantee you will make money. The Market Gods have a way of making sure that being right is way easier than stuffing dough in your pocket.

The perfect example of this is my call from early in summer regarding China. In May, Moody’s downgraded China, and everyone got their knickers in a knot predicting the collapse of the world’s largest economy. The guru type hedge fund media outlets were filled with grim forecasts of a spiraling 2008 type crisis. These hedge fund managers sure sounded smart, and they all definitely have a lot more money than me, so I was a little timid when I wrote a piece called China Downgrade- Buy the news?.

The gist of my argument was that China would stimulate to make sure their economy was humming along when the hugely important 19th National Congress of the Communist Party was held this Autumn. Proving that a stopped clock is right twice a day, I managed to get this one right.

The trouble was, I didn’t buy the right stuff. I should have loaded up on copper and the other China centric commodities.

Have a look at the copper chart.

China was downgraded, and then copper ran like it stole something.

Same deal with iron ore.

There is no doubt China put the gas pedal down this summer, and it affected capital markets throughout the world.

None more so than the Chinese Yuan. Although most hedgies were all betting on a massive decline, the Yuan has been strengthening like Lance Armstrong after visiting his bio-chemist.

This massive strength has forced at least one prominent China bear to throw in the towel. From Bloomberg:

Mark Hart spent seven years and $240 million waiting on a crash in China’s currency.

He lost sleep. He lost clients. He damn near lost his sanity.

And now he’s lost his conviction: Hart, who called for a more than 50 percent yuan devaluation last year, has turned bullish on China and its currency.

His reversal hasn’t come easily. From his base in Fort Worth, Texas, the hedge fund manager spent countless nights on the line to Hong Kong, parsing market news and exchange rates. At times, the stress took a toll on Hart personally and left his employees demoralized.

“I always thought we had a good risk-reward trade on, but we made a number of mistakes, including being way too early,” Hart, who started the yuan bet after predicting both the U.S. subprime mortgage bust and the European debt crisis, said in a telephone interview. “And now the world has changed.”

In cool hindsight, the 45-year-old founder of Corriente Advisors sees last year’s Group of 20 summit in Shanghai as a key turning point. Like many investors, Hart suspects the meeting resulted in a tacit agreement among world leaders to prevent the yuan from tumbling. He calls it China’s “whatever it takes” moment – when policy makers resolved to prop up the currency at any cost.

“China now has the breathing room it needs to either temporarily stave off a slowdown with fiscal and monetary stimulus, or reform, grow and upgrade itself into the world’s largest developed economy,” Hart said.

Whether or not China got help from other G-20 nations, the government has clearly succeeded in stabilizing the exchange rate. The yuan ended a three-year slide in late December and has rallied almost 7 percent in 2017, including a 0.5 percent increase on Thursday. It’s now trading at the strongest level in more than a year versus the greenback.

Even at its weakest point, the yuan never dropped enough to move the needle on Hart’s wager, which started in 2009. His dedicated China funds, which had fixed lifespans, bought options that were designed to deliver one of two outcomes: a massive payoff in the event of a currency crash, or a near total wipeout if a major devaluation failed to occur.

The trade went against him almost from the beginning. After holding steady for the first six months of 2010, the yuan strengthened for the next three and a half years. It eventually reversed course, but the sharp devaluation that Hart had anticipated never materialized. His second China fund shut in December. All told, he lost between $240 million and $250 million.

When long time bears finally cry Uncle, it’s most likely a short term top. These trades are taken off at a point of maximum pain, not in the midst of a cool, well thought out, investment decision process.

This morning copper is unexpectedly down 1.5%. Gianclaudio Torlizzi, an LME Metals Trader, has posted a couple of terrific longer term charts of Iron Ore and Rebar that show potentially bearish developments.

I know the Chinese have not had their big assembly. But it sure feels like we are close to the point where many of these trades are about to roll back over.

Right now everyone is all bulled up on gold, and extremely bearish on the US dollar. No one can imagine any of the short term trends stopping. I wonder if copper is the canary in the coal mine that a turn is at hand.

*  *  *

Here is another thought. If China has been goosing their economy for their plenum, then could market strategists be misreading the recent economic global strength? Did China create a false positive for world growth?

I am not sure, but it is worth considering. I have long said that what happens in China is by far the most important determinant of financial asset prices. We all sit staring at US economic releases, but we should really be spending more time trying to figure out what China is up to.

*  *  *

If a turn in the US dollar is indeed close, then take a look at the Eurostoxx chart.

With EUR screaming higher, it is no wonder that the Eurostoxx has been declining. Yet what happens if USD gets a bid? A break in the Eurostoxx downtrend line could be explosive to the upside.

China Capitulation: Corriente Advisors' Mark Hart Ends 7-Year Bet On A "Massive Yuan Devaluation"

China bears like Kyle Bass claimed victory last year after bets that the Chinese yuan would weaken paid off handsomely – particularly if they were supercharged by leverage. Hopefully, for their sake, yuan decided to lock in those gains early this year. Because since January, China’s currency has whipsawed higher, reversing most of its 2016 depreciation as the US dollar has endured a period of broad weakness, and Chinese policy makers have turned their attention to managing the currency’s valuation against a basket of currencies.

But Mark Hart, who, like Bass is a Texas-based fund manager, and who built his bear case against China on the theory that the PBOC would opt for a series of one-off devaluations in the yuan, instead of allowing it to gradually depreciate, which would be tantamount to a policy error.

Here’s more from a post on Hart’s outlook that we published last year:

“Hart believes that the Chinese crawling devaluation is an error as it carries with its the latent threat of much more devaluation in the future, thus encouraging even more outflows, which in turn forces China to sell even more reserves, which destabilizes the economy even further, forcing even more devaluation and so on.

Instead, a one-off devaluation would allow policy makers to “draw a line in the sand” at a more appropriate level for the yuan, easing pressure on China’s foreign-exchange reserves and removing an incentive for capital outflows, according to Hart, who’s been betting against the currency since at least 2011. He adds that China should devalue before its $3.3 trillion hoard of reserves shrinks much further, he said, because the country can still convince markets it’s acting from a position of strength.”

According to Hart, while a devaluation this year would be “jarring” and may initially accelerate capital outflows, it would ultimately put China in a stronger position. He said the country could explain the move by saying it would put the yuan at a level more reflective of market forces and allow the currency to catch up with declines in international peers.

However, the 50% devaluation that Hart had been anticipating never materialized. So, after seven years, Bloomberg is reporting that Hart has (pun intended ) had a change of heart after spending $240 million on his losing bet against the currency, which nearly cost him his sanity.

Hart is now taking the other side of the trade, joining the ranks of Bridgewater Capital’s Ray Dalio and other yuan bulls:

“Mark Hart spent seven years and $240 million waiting on a crash in China’s currency.

He lost sleep. He lost clients. He damn near lost his sanity.

And now he’s lost his conviction: Hart, who called for a more than 50 percent yuan devaluation last year, has turned bullish on China and its currency.”

According to Bloomberg, Hart’s dedication to his short-yuan position left employees demoralized at his Fort Worth, Texas fund. Hart claims that his investing thesis was sound. His biggest mistake? Hart says he was “too early” in putting on the trade.

“His reversal hasn’t come easily. From his base in Fort Worth, Texas, the hedge fund manager spent countless nights on the line to Hong Kong, parsing market news and exchange rates. At times, the stress took a toll on Hart personally and left his employees demoralized.

‘I always thought we had a good risk-reward trade on, but we made a number of mistakes, including being way too early,’ Hart, who started the yuan bet after predicting both the U.S. subprime mortgage bust and the European debt crisis, said in a telephone interview. ‘And now the world has changed.’”

Hart now believes that G-20 leaders tacitly conspired to a “Plaza Accord”-type agreement to stanch the dollar’s appreciation while putting a floor under the yuan last February during a G-20 summit in Shanghai.

“In cool hindsight, the 45-year-old founder of Corriente Advisors sees last year’s Group of 20 summit in Shanghai as a key turning point. Like many investors, Hart suspects the meeting resulted in a tacit agreement among world leaders to prevent the yuan from tumbling. He calls it China’s “whatever it takes” moment - when policy makers resolved to prop up the currency at any cost.”

The agreement has tremendously benefited China, Hart says.

“‘China now has the breathing room it needs to either temporarily stave off a slowdown with fiscal and monetary stimulus, or reform, grow and upgrade itself into the world’s largest developed economy,’ Hart said.”

Regardless of whether Hart’s “conspiracy theory” is accurate, China has clearly succeeded in stabilizing the exchange rate. The yuan ended a three-year slide in late December and has rallied almost 7 percent in 2017. China’s central bank strengthens its daily reference rate for onshore yuan for a ninth day on Thursday, the longest run of increases since January 2011. The PBOC raised the yuan reference rate by 0.06% to 6.5269 per dollar, extending the strengthening streak since Aug. 28 to 2%. Meanwhile, the offshore yuan surged, sending the USDCNH below 6.50 for the first time since May 3, 2016.

Even at its weakest point, the yuan never weakened enough for the options that Hart originally purchased in 2009 to pay off. His dedicated China funds, which had fixed lifespans, bought options that were designed to deliver one of two outcomes. According to Bloomberg, a massive payoff in the event of a currency crash, or a near total wipeout if a major devaluation failed to occur.

Germany Bans 'Extremist AntiFa' Website For "Legitimizing Violence Against Cops"

While over 300,000 Americans have signed a petition demanding the US government formally recognize AntiFa a terrorist organization (and some "cells" calling for "all-out revolution"), the US mainstream media continues to provide cover for the violent leftist organization (as do college professors). However, in Europe, German authorities have banned the most influential AntiFa website in the wake of violence that occured last month outside the G20 summit in Hamburg.

In an unprecedented move against violent left-wing extremism, Germany’s Interior Ministry informed the owners of the left-wing site about the crackdown Friday, the Local reported.

Interior Minister Thomas de Maizière claimed the website helped incite the violence in Hamburg and warned of “serious consequences” of left-wing radicalism, the New York Times reported.

“The prelude to the G-20 summit in Hamburg was not the only time that violent actions and attacks on infrastructural facilities were mobilized on linksunten.indymedia,” the minister said, identifying the website.

He also said the site tried to “legitimize violence against police officers,” which he described as an “expression of an attitude that tramples human dignity.”

“This is absolutely unacceptable and incompatible with our liberal democratic order,” he added.

Fox News reports that, according to the Local, Germany’s internal spy agency once described the website, which has operated since 2008, as “the most important platform for violent left-wing extremism in Germany. For years it has been providing a forum for people to publish first-hand reports on left-wing crimes.”

The violent clashes between the Antifa and police led to around 476 police officers being injured, while around 186 demonstrators were arrested and 225 were temporarily detained.

The Interior Ministry said the website was shut down because it “goes directly against the law in both its aims and actions,” Spiegel reported.

The police, meanwhile, searched the properties connected to the owners of the radical website in the German state of Baden-Württemberg.

“At the moment several premises are being searched,” said Thomas Strobl, the state’s interior minister.

“This step marks a major blow against the extreme left in Germany,” he added.

Following the announced closure, the extremist website now directs visitors to a “what to do” article calling the government’s move an “authoritarian crackdown.” It also urges people to spread “revolutionary material and ideas everywhere” and come up with “alternative ways to communicate with each other and the general public in times of intensifying state censorship and control.”

Notably, as Ron Paul recently explained, the alt-right and its leftist opponents are two sides of the same authoritarian coin.

The alt-right elevates racial identity over individual identity. The obsession with race leads them to support massive government interference in the economy in order to benefit members of the favored race. They also favor massive welfare and entitlement spending, as long as it functions as a racial spoils system. Some prominent alt-right leaders even support abortion as a way of limiting the minority population. No one who sincerely supports individual liberty, property rights, or the right to life can have any sympathy for this type of racial collectivism.

Antifa, like all Marxists, elevates class identity over individual identity. Antifa supporters believe government must run the economy because otherwise workers will be exploited by greedy capitalists. This faith in central planning ignores economic reality, as well as the reality that in a free market employers and workers voluntarily work together for their mutual benefit. It is only when government intervenes in the economy that crony capitalists have the opportunity to exploit workers, consumers, and taxpayers. Sadly, many on the left confuse the results of the “mixed economy” with free markets.

Ironically, the failure of the Keynesian model of economic authoritarianism, promoted by establishment economists like Paul Krugman, is responsible for the rise of the alt-right and antifa.

While we should be willing to form coalitions with individuals of good will across the political spectrum, we must never align with anyone promoting violence as a solution to social and economic problems. We must also oppose any attempts to use the violence committed by extremists as a justification for expanding the police state or infringing on free speech. Laws against hate speech set a dangerous precedent for censorship of speech unpopular with the ruling elite and the deep state.

Libertarians have several advantages in the ideological battle over what we will replace the Keynesian welfare model with. First, we do not need to resort to scapegoating and demagoguing, as we have the truth about the welfare-warfare state and the Federal Reserve on our side. We also offer a realistic way to restore prosperity. But our greatest advantage is that, while authoritarianism divides people by race, class, religion, or other differences, the cause of liberty unites all who seek peace and prosperity.

"The Mood Is Very Pessimistic": US Begins "Removing Furniture And Equipment" From Seized Compound In Russia

Two days after Russian President Vladimir Putin formally expelled 755 American diplomats and announced plans to seize two compounds used by US State Department employees, US officials have started "removing furniture and equipment from the compounds", according to Reuters.

The early start suggests that the US is making every effort to comply with Putin’s demand that the US reduce its 1,200 diplomatic personnel by 60% before Sept. 1, made in retaliation to a bill authorizing fresh sanctions against Russia that President Donald Trump is expected to sign. Late last year, the Obama administration expelled 35 Russian diplomats and seized two Russian diplomatic compounds near Washington, D.C. Putin refrained from responding at the time.

According to Reuters, the movers at the US compounds arrived at around 7 a.m. (0400 GMT) and were seen packing furniture, including beds and lamps, into three white vans over the course of three hours.

Ironically, the US is allowed to choose who stays and who leaves. Because of this, it’s expected that many of those who will be let go will be Russian citizens, Reuters noted. Putin’s decision has severely impacted morale among State Department employees, many of whom have given up on working and are instead updating their resumes and looking for new jobs online, Reuters reports.

“One person at the embassy, who spoke on condition of anonymity because they are not authorized to talk to the media, said staff there were feeling depressed and despondent as they came to terms with the Kremlin"s order.

‘The mood in the office is very pessimistic,’ the person said. ‘Everyone is just loitering, or sitting on job websites looking for a new job.’”

Reuters also noted that Putin’s ultimatum was carefully calibrated to preserve his relationship with Trump after the two world leaders purportedly hit it off over the course of several meetings at a G-20 summit in Hamburg last month.

“The ultimatum issued by the Russian leader is a display to voters at home that he is prepared to stand up to Washington - but is also carefully calibrated to avoid directly affecting the U.S. investment he needs, or burning his bridges with Trump.”

Congress’s sanctions bill risks derailing already tense US-Russia relations, despite Trump’s expressed desire to work more closely with Russia on areas of mutual benefit like containing ISIS in Syria. Vetoing the bill would be seen as a waste of political capital by Trump, who is fighting off allegations that his campaign colluded with the Russian government to tilt the election in his favor, because Congress, which passed the bill with overwhelming majorities in both the House and Senate, would likely be able to override it with a 2/3rds majority.

Despite Trump’s calls for closer ties, the Pentagon may be already contemplating its next steps in the escalating conflict with Russia, which as the WSJ reported will likely involve supplying Ukraine with antitank missiles and other weaponry - a red line for the Kremlin not even the Obama administration dared to cross.

By escalating tensions with Russia, the US also risks straining its relationship with Europe. On Monday, the Germany economy minister said that new penalties against Moscow proposed by US lawmakers violate international law, and that officials in Brussels should consider countermeasures.

Speaking to Funke Mediengruppe newspaper, Brigitte Zypries said that "we consider this as being against international law, plain and simple." She added that "of course we don"t want a trade war. But it is important the European Commission now looks into countermeasures."

She also said that “the Americans can not punish German companies because they operate economically in another country." Retaliatory measures may include limiting US jurisdiction over EU companies, according to a memo leaked to the Financial Times and Politico last month. Some European government officials object to language in the sanctions bill that could limit interactions between US and Russian energy firms related to the construction of pipelines, which European officials believes could damage their trade relationship with Russia.
 

Steve Bannon In "Self-Imposed Exile" After Disputes With Trump's Inner Circle

Back in February when Time Magazine ran a cover dubbing Steve Bannon "The Great Manipulator," we wondered whether there was any truth to the assertion or if it was just a clever attempt to sow discord in the White House.  Here"s what we said previously in a post entitled "Is Steve Bannon "The Great Manipulator" Or Is It All Just More "Fake News"".

Various mainstream media outlets would like for you to believe there is discord in the White House between President Trump and Steve Bannon.  The typical narrative goes something like this:  Steve Bannon is "The Great Manipulator" (as Time Magazine described him) pulling all the strings from behind the scenes and Trump, the perpetual narcissist, is growing weary of competing for the spotlight.

The question is whether any of it is true or if this is just more "fake news" from a mainstream media intent upon doing anything possible to sow the White House discord they so desperately seek?

Of course, if the media were actively looking to leverage a "character flaw" of a President they see as intent upon always capturing the spotlight, putting staff members on the cover of prominent national magazine covers would be a great way to execute that plan.

Of course, if sowing discord was the intent then it just may have worked.  As Politico points out today, following alleged disputes between Steve Bannon, Jared Kushner and others within Trump"s inner circle, Bannon has apparently resorted to living his daily life in "self-imposed exile" in the White House.

Steve Bannon has largely disappeared from the White House’s most sensitive policy debates — a dramatic about-face for an operative once characterized as the most powerful man in Washington.

Bannon, chastened by internal rivalries and by President Donald Trump’s growing suspicion that he is looking out for his own interests, is in a self-imposed exile, having chosen to step back from Trump’s inner circle for the sake of self-preservation, according to several White House advisers who spoke to POLITICO on the condition of anonymity to avoid angering a colleague.

He was absent from Trump’s recent trips to Europe for the G-20 summit and from his visit with French president Emmanuel Macron. Bannon’s non-attendance is all the more noteworthy given his interest in European history and politics, particularly his antipathy to the European Union.

As Politico notes, whereas Bannon was, not long ago, a near-constant presence in the Oval Office — often seen standing over Trump’s shoulder or sitting in on calls with world leaders — he now spends hours camped out at the conference table in the office of White House Chief of Staff Reince Priebus, reading the news or working on his phone.

Meanwhile, it"s apparently not just the Oval Office where Bannon"s presence has been limited as he"s pretty much removed himself from all policy discussions as well.

For Bannon, reduced visibility has brought reduced influence. On trade, his protectionist views are well known; though he initially joined a series of White House meetings begun in the spring to resolve disagreements between advisers with disparate views on the subject, from free traders like economic adviser Gary Cohn to protectionists like National Trade Council director Peter Navarro, he has not shown up at one in six weeks.

Nor did Bannon attend a major policy meeting on Tuesday on trade policy towards China, even though he is known to favor tough economic measures towards Beijing. He did, however, have time for a meeting with former Trump campaign aides David Bossie and Corey Lewandowski that focused on political issues, including how to woo back Republican senators who had abandoned Trump on health care.

Bannon has not been entirely absent from the West Wing’s heftiest policy discussions. On Monday, he attended a meeting of the NSC’s Principals Committee, which includes top officials from throughout the government, according to a senior White House aide. Though the president removed Bannon from the NSC in April, the aide estimated that Bannon has been at approximately 20 percent of the Principals Committee meetings since then. Bannon has reportedly dueled with McMaster over troop levels in Afghanistan and Iraq and Syria, in each case warning against deeper U.S. involvement.

“He follows everything closely. He knows what’s going on. I don’t know if he has a feeling that strategically it’s better if his hands aren’t directly on things, but he’s definitely in the fold on the legislative agenda,” said Sam Nunberg, a former Trump political adviser.

Of course, following controversies surrounding everyone from Bannon to Kellyanne Conway and Sean Spicer, there have been never-ending media reports of late suggesting that a shakeup of the White House staff is inevitable at some point in the not so distant future...a shakeup which Politico thinks could come next month...

But he now plays a surprisingly minor role in key administration policy debates. White House aides speculate about whether Bannon is trying to protect his job amidst long-running talk of a White House staff purge. Several West Wing advisers said they expect Trump to decide once and for all on a White House shakeup during his planned vacation next month, when he is expected to consult with friends beyond the Beltway. “If there is a big staff shakeup, it will be in August,” said a senior White House aide. “My guess is that Bannon probably sees that and doesn’t want to be in the press.”

...mission accomplished?

How Trump Is "Putting The Valuation Bubble In Equities At Risk"

Authored by Komal Sri-Kumar via Bloomberg.com,

Donald Trump’s appeal last November was linked to two factors. Both are now putting the valuation bubble in equities at risk.

The first factor was his emphasis on stimulus -- tax reform, infrastructure spending and fewer regulations -- that has pushed markets to higher and higher levels. The new administration was targeting at least 3 percent annual growth in real gross domestic product, well in excess of levels that the U.S. economy has experienced since the financial crisis.

Investors reasoned that properly directed fiscal spending would create employment and cause consumer demand to increase, while the reforms would validate a rise in market measures of valuation -- lower corporate taxes would be like valuing a company at 17 times earnings rather than 20 times, for example. Expectation of fewer regulations was a major factor in the increase in bank share prices.

The second component of the Trump campaign presented the U.S. trade deficit as a sign that the country was being treated unfairly by its trading partners. The remedy was to impose higher tariffs on imports, with China and Mexico mentioned as specific targets.

Fear that the trade restrictions the candidate threatened during the campaign would dominate the incipient administration was the reason U.S. equity futures plunged during the hours immediately after the election results were known. Retaliation by trading partners to new tariffs would have slowed global economic growth and demand, resulting in a headwind for equities.

In the first months of the Trump administration, the emphasis seemed to be on the stimulus front, and markets rose sharply. Trump was not going to name China a “currency manipulator,” and Commerce Secretary Wilbur Ross suggested that even if the North American Free Trade Agreement was canceled, the U.S. could have a new bilateral treaty with Mexico with similar terms as before. A 15 percent jump in corporate earnings in the first quarter compared with the first quarter of 2016 also helped propel equity valuations. Between the day of the elections and June 30, 2017, the S&P 500 equity index had risen by 13 percent (chart below).

The S&P 500 Soars

While equities have continued to rise to new levels in July -- the S&P 500 index hit its 25^th record on July 14 -- the Trump policy pendulum has swung away in the past few weeks from stimulus toward restrictions. Disappointed that Chinese authorities did not do enough to curtail North Korea’s nuclear initiatives, U.S. officials have suggested that China may face increased trade action. There is also talk in Washington that Chinese banks that have business connections with North Korea could face sanctions. Almost certainly, such moves would provoke retaliation from Beijing.

And at the recent meeting of G-20 leaders, Trump reiterated -- even in the presence of Mexican President Enrique Peña Nieto -- that a wall on the U.S. southern border would be built and that he would get Mexico to pay for it. These measures are considered to be deeply demeaning by Mexico. The Trump statement came a few days after his decision to withdraw the U.S. from the Paris climate accord that was supported by all the remaining 19 nations in the G-20 group.

Trade tensions with Europe have also increased. Trump criticized Germany in May for its large trade surplus and inadequate contributions to the North Atlantic Treaty Organization budget. The president was reacting to Chancellor Angela Merkel’s suggestion that the European Union could no longer rely on the U.S. but had to take fate into its own hands.

Equity markets continue to be pushed higher by positive earnings expectations, and earnings numbers for the second quarter suggest the trend will continue. But neither of the other two legs of the stock market tripod -- stimulus and economic reforms -- seems likely to be supportive.

With the health care reform bill stuck in Congress, tax reforms, set to be next in line, seem like a distant dream. Weakening retail sales, and a falling inflation rate, are signs of an economic slowdown in prospect. If a trade war supplements the absence of stimulus, financial markets will face a double whammy in the months to come.

Fed Chair Janet Yellen recently cited “somewhat rich” valuations in U.S. financial markets to justify the central bank’s intention to continue raising interest rates.

The growing risk for investors is that delay in stimulus measures and the rise in global trade tensions could deflate the valuation bubble faster than Fed action can.

Trump Slams "Fake News Story Of Secret Dinner With Putin" At G-20 - "Press Knew!"

President Trump has tweeted in on the latest "scoop" from the media about his "dealings" with Russian president Putin...

Fake News story of secret dinner with Putin is "sick." All G 20 leaders, and spouses, were invited by the Chancellor of Germany. Press knew!

— Donald J. Trump (@realDonaldTrump) July 19, 2017

The Fake News is becoming more and more dishonest! Even a dinner arranged for top 20 leaders in Germany is made to look sinister!

— Donald J. Trump (@realDonaldTrump) July 19, 2017

*  *  *

As we detailed earlier, it has been exactly one week since the latest Russia story involving Trump, or in this particular case his son, and with attentions once again starting to drift from the main news cycle narrative of the year, which was eclipsed today by the Senate republicans" humiliating failure to replace or repeal Obamacare, on Tuesday afternoon a White House official said that Donald Trump and Vladimir Putin held a second, "previously undisclosed" (except to all the world leaders who were in the room at the time) meeting at the G-20.

According to Reuters, the White House confirmed that the meeting took place during the G-20 heads of state dinner, hours after Trump"s formal bilateral sit-down with Putin. In that conversation, Trump spoke with the Russian leader for roughly an hour, joined only by Putin"s translator. And while the meeting took place in the open in front of all other leaders, it had previously gone without mention by the White House.

“There was a couples-only social dinner at the G-20; toward the end, the president spoke to Putin at the dinner,” NSC spokesman Michael Anton says.

The White House official did not say how long the second meeting took place or what was discussed in front of everyone.

While details of the meeting are scarce, the WaPo reports that halfway through the official dinner Trump left his seat to occupy an empty chair next to Putin. Trump was alone, and Putin was attended only by his official interpreter. In other words, it happened in front of everyone, during the so-called "mingling."  According to Eurasia Group president, Ian Bremmer, who first reported the meeting, Trump got up from his seat halfway through dinner and spent about an hour talking "privately and animatedly" with Putin, "joined only by Putin"s own translator." Bremmer said that the lack of a translator is a "breach of national security protocol", though one that the president likely would not know about.

During Trump"s initial formal meeting with Putin, one which was scheduled to last 30 minutes but exceeded two hours, Trump said he had pressed Putin about Moscow"s efforts to meddle in the 2016 election, which the Russian president denied.

And now the newscycle turns away from the failure of the republican healthcare bill to just what nefarious secrets that two heads of state were exchanging in front of and within earshot of every major world leader. Keep an eye on Trump"s twitter account for immediate details.

Why Hamburg Was The Perfect Storm For G-20 Chaos (In 1 Simple Chart)

Germany"s second largest city, Hamburg, hosted the G20 this week. With 6,000 delegates and 3,000 members of the global media flocking to the city, residents and the police braced themselves... and rightly so.

Adding to the problems created by the somewhat baffling choice of a city center location, Hamburg is home to a burgeoning left wing scene, far from shy to take to the streets.

 Indeed, a number of protests took place, culiminating in Thursday"s "Welcome to Hell" march which ended in violent chaos, when around 8,000 leftwing radicals and anarchists descended on the location of the summit - the Congress Center - and fought with police.

Complicating the security operation further, the Congress Center is located on the edge of the "Schanzenviertel", an area of the city much-loved and lived in by those involved with or sympathetic to left wing groups.

As Statista"s Martin Armstrong details, according to the Hamburg police force, there are 1,090 known left wing extremists residing in the city, 620 of which are considered to be prone to violence. Looking to the whole of Germany, the figures grow to 26,700 and 7,700 respectively.

You will find more statistics at Statista

The resources required to police this huge group of people left less available for the ever-present threat of jihadist terrorism. In addition to the far-left and far-right, there are believed to be at least 640 Salafists living in Hamburg. 310 of these have been classified as jihadist.

In the worst case, this could have ended up leading to a perfect storm of chaos... so why did Merkel decide Hamburg city center was the right place to do this?

Judging by CNN"s response to the riots - blaming Trump, and claiming that this has never happened before - the answer is simple politics.

Which of course is utter crap, as G-20 Summits have been crushed by protests and riots (not sure of the difference aside from level of violence) since at least as far back at Clinton in 1999...

#FakeNews Bust: Germany Protest NOT FOR TRUMP. Happened on Bill Clinton"s Watch! 1999 G-20 Globalist/WTO Protestors @OTUS @realDonaldTrump pic.twitter.com/7MhdCA2x87

— Gary Klug (@garyinlv01) July 6, 2017

In fact take your pick.

Obama in London in 2009...

Obama in Toronto in 2010...

G20 Riots in 2010, Trump wasn"t President then but CNN is trying to pin this on him today.#ButtHurtCNN pic.twitter.com/esvK41Da7V

— Don (@FLoperatorChief) July 6, 2017

To name just a few.

And The Worst Performing G-20 Stock Market This Year Is...

When it comes to stock market performance this year, there’s no uniting the U.S. and Russia.

The S&P 500 and the Micex began the year at almost the same level, but equities in the former Soviet nation have tumbled amid losses in crude and evaporating optimism over the lifting of sanctions under U.S. President Donald Trump.

Spot the odd one out...

As the leaders of the G-20 met in Hamburg, equities in almost every other market in the group have risen.. but Russia has collapsed.

New York Mayor Defends Decision To Attend Hamburg G-20 Protest

After facing a backlash for his decision to travel to Hamburg, Germany and speak at an anti-capitalist, protester-organized gathering on Friday outside the G-20 conference, NYC Mayor Bill de Blasio, who’s facing re-election this year, defended his decision, arguing that it’s up to local officials like himself to speak up on issues like climate change now that President Donald Trump has taken the US out of the Paris Accord, Bloomberg reports.

De Blasio, who left NYC the day after NYPD officer Miosotis Familia was assassinated in the Bronx, didn’t publicly disclose his plans to appear as the keynote speaker at the anti-capitalist rally in Germany until just hours before his departure. He left the city as New Yorkers were struggling with a deteriorating subway system, a spike in crime, uncollected bulk trash, an increase in homelessness, and myriad other problems. He also skipped an NYPD swearing-in ceremony for 524 new NYPD recruits, further damaging his already strained relationship with the police.

Yet Hizzoner says it was all worth it to show the people of Germany that not all Americans are like Trump, according to Bloomberg:

“It’s a variation on the concept of voting with your feet,” de Blasio, a Democrat, said in an interview before speaking at the “Hamburg Shows Attitude” protest on Saturday. “While the national governments will probably only make limited progress, the rest of us don’t have that choice. If we make only limited progress we’ll only be going backwards.”

“We almost have Washington as an island at this point, unrepresentative of the views of the American people on many levels, and that’s going to take a different kind of politics to address,” de Blasio said.

Eric Phillips, de Blasio’s spokesman, said the mayor only agreed to go grandstand in Hamburg after making sure he would be able to attend Familia’s funeral, scheduled for July 11. He returns to New York on Sunday. De Blasio, who met Hamburg’s mayor on Friday, tried to spin the trip as a reconnaissance mission to learn more about Hamburg’s renewable energy and early-childhood education programs, though he also said it was also important to make sure people understand President Donald Trump’s views are not shared by all Americans.” Because apparently some within the G-20 have never watched CNN, and think that everyone in the US agrees with Trump?

I"m at the G20 to remind the world that on issues like equality, climate change and more, our cities — and their people — lead the way. pic.twitter.com/t2qyp7mRfy

— Bill de Blasio (@NYCMayor) July 8, 2017

The organizers of the rally where de Blasio, 56, was to speak distanced themselves from the violent clashes between protesters and police that have broken out at the G20.

Meanwhile, in a trolling of the Mayor, New York City’s Sergeants Benevolent Association kept up its criticism, tweeting that 160 police had been injured during the protests. “Whose side are you on, Mr. Mayor??” the group asked the socialist mayor.

So far 160 police officers have injured by protesters at this year"s G20 summit. Whose side are you on Mr. Mayor?? https://t.co/OB3nG7VByZ

— SBA (@SBANYPD) July 7, 2017

Adding to the insults, De Blasio’s  Republican challenger in November’s mayoral election, Staten Island Assemblywoman Nicole Malliotakis, posted an image on Twitter of de Blasio’s face photo-shopped onto a picture of a man in lederhosen sitting in front of tall glasses of beer and a plate stacked with sausage and sauerkraut.

“While #NYC ’s subways crumble, sex crimes increase double digits, litter on streets pile up & the number of street homeless soars... #G20,” Malliotakis wrote.

While #NYC "s subways crumble, sex crimes increase double digits, litter on streets pile up & the number of street homeless soars...#G20 pic.twitter.com/JsYoHhHaVG

— Nicole Malliotakis (@NMalliotakis) July 6, 2017

Meanwhile, Trump"s trip to Germany - in which he established “personal relations” with Russian President Vladimir Putin and achieving a “breakthrough” truce involving the southern de-escalation zone in Syria  - appeared more successful, and actually prompted the G-20 to conclude that the 2-day meeting wasn"t a waste, even though during his speech de Blasio voiced his "doubts" that the world leaders could resolve important global issues at the G20 summit. You can watch more below:

In Victory For Merkel, G20 Reach Compromise On Trade But Trump Holds Out On Climate

World leaders meeting at the G-20 summit in Germany have agreed on almost every aspect of the joint communique, where in a victory for Merkel they vowed to fight protectionism and secure fair trade seeking to defuse President Donald Trump’s threats of unilateral measures the WSJ reported; they have so far failed, however, on a compromise position in the section on climate where the United States is pushing for a reference to fossil fuels, European Union officials said according to Reuters.

In the end it was "all against Trump": as the WSJ puts it, "securing Mr. Trump’s support for the G-20 communiqué, to be released later Saturday, as the president threatens to undermine the international order with his “America First” policies, is emerging as a rallying cry as the two-day gathering in Germany draws to a close."

For the head of the global diplomatic "resistance" against Trump and the so-called new "leader of the free world" Angela Merkel, the summit was an opportunity to show off her diplomatic skills ahead of a federal election in September, when she is seeking a fourth term in office. She treated the leaders to a concert at Hamburg"s Elbphilharmonie on Friday night, where they listened to Beethoven while their aides began their all night slog to work out a consensus on trade that had eluded the leaders.

The communique comes after weeks of fears that Merkel, this year’s G20 president, might fail to achieve an agreement in the face of the disputes generated by Donald Trump by his criticisms of free trade and international cooperation and, especially, his decision to pull out of the Paris climate change accord, which the other 19 G-20 states support.

The consensus statement was drafted after "marathon meetings" resulted in compromises on deploying defensive measures for balanced trade and a recognition of the U.S.’s split from the other G-20 members on climate change. The officials said aides had worked until 2 a.m. to finalize the G-20 communique, overcoming differences on trade after U.S. officials agreed to language on fighting protectionism.

The G-20 agreement also follows days of continuous effort trying to reconcile disputes between the US and other nations while also taking account of the German Chancellor’s pledge to make clear important differences. According to the FT, the result will allow Merkel to claim a success even though the meeting has been overshadowed by violent anti-G20 demonstrations in Hamburg, and where the spotlight was on the first meeting between Trump and Putin.

Another official from a European delegation said the talks had shown that a new international consensus on economic issues could be slowly rebuilt despite the challenges thrown by Mr. Trump’s election.

“All things considered, my impression is that we’re getting back in small steps in many areas to a greater degree of business as usual,” the official said. The U.S. wasn’t alone in having different views on trade, the official added, pointing at the consensus on securing a level playing field as a common stance forged at the summit.

According to the FT, Berlin is also highlighting the opportunities given for bilateral meetings among world leaders, including the first face-to-face encounter between Mr Trump and Russian president Vladimir Putin, which the two men described as “constructive”.

In addition to agreements over trade and migration, the communique includes commitments to address global overcapacity in steel, which could help defuse growing tension in the sector: the US has been considering sanctions against rival producers and the EU is preparing to retaliate, raising risks of a trade war.

With the final statement almost nailed down, the summit marked a diplomatic success for Merkel as she finessed differences with U.S. President Donald Trump, who arrived at the two-day summit isolated on a host of issues, and who was far more focused on his meeting with Putin. Even so he made a point of congratulating Merkel for her hosting: "You have been amazing and you have done a fantastic job. Thank you very much chancellor," Trump said. 

Meanwhile, Trump on Friday said he found chemistry in his first face-to-face meeting with Russian President Vladimir Putin. The two presidents discussed alleged Russian meddling in the U.S. election but agreed to focus on future ties rather than dwell on the past, a result that was sharply criticized by leading Democrats in Congress.

* * *

Trump"s bromance with Putin aside, on Saturday, the G-20 was delighted that Trump did not destroy any chance for a compromise.

"We have a G20 communique, not a G19 communique," an EU official said quoted by Reuters. "The outcome is good. We have a communique. There is one issue left, which is on climate, but I am hopeful we can find a compromise," he added, speaking on condition of anonymity. "We have all the fundamentals."

Well almost: climate change policy proved a sticking point, with the United States pressing for inclusion of wording about which other countries had reservations. That passage read: "... the United States of America will endeavor to work closely with other partners to help their access to and use of fossil fuels more cleanly and efficiently ..."

The climate section took note of Trump"s decision last month to withdraw the United States from the landmark Paris climate accord aimed at combating climate change, and reaffirmed the commitment of the other 19 members to the agreement.

According to Bloomberg, all G-20 members except for the U.S. said Paris accord on climate change is “irreversible,” as per the expected final statement,

“The United States of America announced it will immediately cease the implementation of its current nationally-determined contribution and affirms its strong commitment to an approach that lowers emissions while supporting economic growth and improving energy security needs”

“The United States of America states it will endeavor to work closely with other countries to help them access and use fossil fuels more cleanly and efficiently and help deploy renewable and other clean energy sources, given the importance of energy access and security in their nationally-determined contributions.”

“The Leaders of the other G-20 members state that the Paris Agreement is irreversible”

* * *

As the leaders met on Saturday, police helicopters hovered overhead. Overnight, police clashed with anti-capitalist protesters seeking to disrupt the summit. In the early morning on Saturday, heavily armed police commandos moved in after activists had spent much of Friday attempting to wrest control of the streets from more than 15,000 police, setting fires, looting and building barricades. Police said 200 officers had been injured, 134 protesters temporarily detained and another 100 taken into custody.

John Podesta Responds To "Whack Job" Trump In Angry Tweetstorm

In response to President Trump"s tweet that Democratic National Committee (DNC) email leaks were the talk of the G-20 meeting in Hamburg, Germany...

Everyone here is talking about why John Podesta refused to give the DNC server to the FBI and the CIA. Disgraceful!

— Donald J. Trump (@realDonaldTrump) July 7, 2017

John Podesta pulled his car off the road and unleashed a tirade at the "whack job" president...

1/ On a x-country road trip with my wife;

— John Podesta (@johnpodesta) July 7, 2017

And once he was safely at a "pit stop", the torrent of abuse began...

2/ Pulled in for a pit stop in E. Fairmont W. Va. to see that our whack job POTUS @realDonaldTrump is tweeting about me at the G20.

— John Podesta (@johnpodesta) July 7, 2017

3/ Get a grip man, the Russians committed a crime when they stole my emails to help get you elected President.

— John Podesta (@johnpodesta) July 7, 2017

4/ Maybe you might try to find a way to mention that to President Putin.

— John Podesta (@johnpodesta) July 7, 2017

5/ BTW, I had nothing to do with the DNC.

— John Podesta (@johnpodesta) July 7, 2017

As The Hill reports, Podesta finished off his broadside against Trump by urging him to focus on the G-20 summit, rather than commenting on the ongoing controversies surrounding his administration back in Washington...

6/ God only knows what you"ll be raving about on twitter by the time we get to Utah.

— John Podesta (@johnpodesta) July 7, 2017

7/7 Dude, get your head in the game. You’re representing the US at the G20.

— John Podesta (@johnpodesta) July 7, 2017

And we are sure, now that President Trump has "accepted" Russia"s denial of their involvement in hacking the election, we are sure, John, Hillary, and the gang at CNN and MSNBC will have plenty to tweet/chat about.

US, Russia Agree On Ceasefire In Southwest Syria

With Presidents Trump and Putin having spoken for over two hours on the sidelines of the G-20 meeting in Hamburg, well over the 30 minutes initially scheduled, the US press was going berserk with speculation what the two asre discussing for so long - surely CNN"s anonymous sources had already disclosed that Trump was about to announce some tax-efficient handover of the US to Moscow...

... there was a surprise announcement, because as AP reported, the US and Russia did announce a cease-fire agreement in southwest Syria. 

As the WSJ adds, the U.S. and Russia have been "meeting secretly in recent months to discuss setting up what officials call a de-escalation zone in southwest Syria", in which Syrian government forces and rebels would be separated in hopes of ending hostilities in the region.

Officials hope that the first such zone will help reduce violence and that the U.S. and Russia can work to set up other zones around the country.

As AP adds, the cease-fire is set to take effect July 9 at noon Damascus time, and "the deal marks a new level of involvement for the U.S. in trying to resolve Syria’s civil war."

A separate deal to create “de-escalation zones” was brokered between Russia, Turkey and Iran, but not the U.S., but follow-up talks this week in Kazakhstan to finalize a cease-fire in those zones failed to reach a deal.

The U.S. and Russia have been backing opposing sides in Syria’s war.

This is a positive sign that there is some rapprochement between the two nations, but John McCain and the neocons won"t like it, so expect a new barrage of unsourced "intel" published by the WaPo and NYT over the next 24 hours, confirming once again "beyond a doubt", and without any evidence, that Trump is just a two-bit KGB spy.

The Fed Has An Alarming Low-Inflation Problem

With all the talk of central bank hawkishness in the last week, one might assume there was some inflation to point to. It is quite the opposite. It is one thing to talk about inflation being below the Fed’s target of 2%, it is an entirely different issue to see it flirting with deflation! Shorter-term trends of core-inflation are very near to 0%, levels we haven’t seen since the great recession and the advent of quantitative easing.

In its most common form, inflation is quoted by measuring its percentage change compared its level 12 months ago, the so-called year-over-year (YoY%) metric. But, shorter-term periods can be measured to get a sense of more recent trends as well as if there is acceleration or deceleration in the metric. The shorter the period measured, the more volatility the metric has, and so year-over-year (YoY%) has become the standard. It also has the added benefit of eliminating any seasonal effects.

In the charts below, we show the two top-tier measures of consumer price inflation, the Fed-preferred core PCE deflator, and the core CPI; with its common year-over year (YoY%) format, 6 months back annualized, and 3 months back annualized. Comparing the three gives a sense of acceleration of deceleration. If the 3mo. is less than the 6mo. is less than the 12mo., there is deceleration and vice-versa, there is acceleration.

 

But, beyond these charts, evidence of low inflation abounds. The headline versions of these numbers (including oil and food) are negative over the last three months, the ‘prices paid’ component of the manufacturing ISM number fell by a large amount in a release on Monday (7/3), the ‘prices paid’ component of the Service-sector ISM is now contracting, inflation expectations in all indicators have been falling since February, and the OECD published a report yesterday (7/4) that the inflation rate has fallen for four straight months in G-20 economies.

Despite the excitement last week at the prospect of global central banks moving away from easy money policies, there is no fundamental basis for this. We expect that the Fed will soon need to move to a neutral from tightening bias.

Riot Police Use Water Cannons, Tear Gas To Disperse G-20 Protesters

Riot police in Hamburg used water cannons to disperse a large crowd of protesters who had gathered in the city’s parks in anticipation of the G-20 Summit, which will see world leaders – including US President Donald Trump and Russian President Vladimir Putin and Turkish President Recep Tayyip Erdogan – converge on the city for a two-day summit beginning Friday.

Police are cracking down on protesters, many of whom arrived in the city last week and set up camp, Occupy Wall Street-style, in the city’s parks. While pushing protesters out of the camps, police discovered a cache of weapons carried by the far-left and anarchist demonstrators, including throwing knives, telescopic batons, precision catapults and other items that could be used to cause very serious injury to law enforcement or others.

Clashes occurred Tuesday night in the Neuer Pferdemarkt area, where thousands of activists have been rallying throughout the day, according to Russia Today. At least 15,000 police officers from all of Germany’s federal states are being deployed to ensure public security at the G20 summit.

“We have every German special unit available to the summit,” Hamburg’s police president Ralf Meyer said Tuesday.

Wasserwerfer werden eingesetzt. #G20hh #hardcornern #nog20 pic.twitter.com/4WQGhVenEi

— Steffen Lüdke (@stluedke) July 4, 2017

Germany’s Federal Criminal Police Office is responsible for protecting the visiting leaders. Demonstrators who arrived early had been given until the start of this week to dismantle their protest camps around the city. Most refused, prompting police to forcefully disperse them.

Police clarified that protest camps are permitted, but protesters cannot stay in them overnight.

Tens of thousands of protesters are expected to march in the city this week against globalization and what they say is corporate greed and a failure to tackle climate change, according to Reuters. German authorities believe around 8,000 demonstrators were prepared to use violence, the interior minister said on Tuesday. Some 20,000 police officers will be deployed.

Polizei hat mehrmals Wasserwerfereinsatz angedroht #G20Hh #NoG20 #hardcornern pic.twitter.com/c00GFL3lgR

— Steffen Lüdke (@stluedke) July 4, 2017

According to Reuters, the Germany army fears protesters will use unarmed drones and that it has deployed a radar to locate any possible aerial intrusions. Earlier Tuesday, protesters dressed as zombies for the "1,000 Figure" march. Video is available below.

Grauer Protest gegen #G20: Kunstaktion #1000Gestalten direkt um die Ecke der @DIEZEIT #NoG20 #G20HAM17 pic.twitter.com/OyFNwdimHw

— ZEIT Hamburg (@ZEIT_HH) July 5, 2017

China Sends Warships, Fighter Jets To Intercept US Destroyer In South China Sea

Just days before Trump"s meeting with the Chinese president in Hamburg later this week for the G-20 summit, the Trump administration sent a guided-missile destroyer near Triton Island in the South China Sea, Bloomberg reported, a move "which may cause concern ahead of President Donald Trump’s meeting with his Chinese counterpart."

According to an anonymous official cited by Bloomberg, the U.S. Navy sent the destroyer USS Stethem within 12 nautical miles (22 kilometers) of Triton Island on Sunday, passing through the contested waters on the basis of "innocent passage." 

The Arleigh Burke-class guided-missile destroyer USS Stethem

It was the second such operation conducted by the US during Donald Trump’s presidency. On May 24, the US Navy guided-missile destroyer, the USS Dewey, came within 12 miles of the Mischief Reef in the Spratly Islands, another disputed archipelago that lies in the southern part of the South China Sea. At that time, the Chinese Defense Ministry also sent two frigates to “warn off” the US vessel and said that it was “firmly opposed to the US behavior of showing force and boosting regional militarization.”

The news of the US ship deployment to the contested area comes just days after reports suggest China has completed construction of new missile shelters on Mischief and Fiery Cross reefs.

The sea patrol move could signal that the U.S. is displeased with China based on the extent of its efforts to pressure North Korea to curb its missile and nuclear programs. The White House has made several moves in recent weeks, including announcing economic sanctions against Chinese companies with ties to North Korea.

And while in recent weeks China has shown remarkable restraint in not responding, or retaliating, to US escalations today Beijing finally reacted instantly and with "outrage" with People"s Daily reporting that China deployed military vessels and warplanes to “warn off” the USS Stethem, according to Chinese Foreign Ministry spokesperson Lu Kang.

“Under the pretext of ‘freedom of navigation,’ the US side once again sent a military vessel into China"s territorial waters off the Xisha Islands without China"s approval,” the spokesperson said in a statement, adding that such US behavior “has violated the Chinese law and relevant international law, infringed upon China"s sovereignty, disrupted peace, security and order of the relevant waters and put in jeopardy the facilities and personnel on the Chinese islands, and thus constitutes a serious political and military provocation."

"The Chinese side is dissatisfied with and opposed to the relevant behavior of the US side,” Lu added.

Escalating matter further, China"s foreign ministry also accused the US of "deliberatrely stirring up troubles" in the contested waters and warned Washington to "immediately stop such kind of provocative operations that violate China"s sovereignty."

 “Working together, China and ASEAN member states have cooled down and improved the situation in the #SouthChinaSea. The US, who deliberately stirs up troubles in the South China Sea, is running in the opposite direction from countries in the region who aspire for stability, cooperation and development,” Lu added.

"The Chinese side strongly urges the US side to immediately stop such kind of provocative operations that violate China"s sovereignty and threaten China"s security. The Chinese side will continue to take all necessary means to defend national sovereignty and security," the statement reads.

The head of US Pacific Command, Admiral Harry Harris, recently criticized China’s activity in the region. "China is using its military and economic power to erode the rules-based international order," he said in a speech delivered on Wednesday in Brisbane during the joint US-Australian military exercises.

"Fake islands should not be believed by real people," he added, as reported by Fox News.

* * *

The Paracel Islands, of which Triton is a member, are contested by China, Taiwan and Vietnam.  China has already built runways, aircraft hangars, radar sites and hardened surface-to-air missile shelters on its artificially-created islands in the region, according to photos analyzed by the Washington-based Center for Strategic and International Studies (CSIS).

Beijing’s actions have sparked concerns in Washington and the US Navy, which is fiercely opposed to this Chinese initiative, has deployed additional warships in the disputed zone, conducted maneuvers near China’s artificial islands, and flown over them, claiming it has been done in the interest of the “freedom of navigation.” In response, China called Washington’s involvement in the dispute the “greatest” threat to the region.

In early June, China and the US both held exercises involving air and navy forces, in another episode of confrontation over the disputed South China Sea. The US sent two B-1B Lancer supersonic bombers to fly a 10-hour mission from Andersen Air Force Base, Guam, which was conducted in conjunction with the US Navy’s Arleigh Burke-class guided-missile destroyer the USS Sterett.

A day earlier, the Chinese People’s Liberation Army (PLA) conducted its own air and navy exercise off Hong Kong. The patrol mission involved three helicopters and two Type 056 corvettes, the Qinzhou and the Huizhou, the Defense Ministry reported.

“The Discord Is Obvious" - Merkel Slams Trump Ahead Of G-20

Ahead of next week"s G-20 summit in Hamburg, Germany, chancellor Merkel had some fiery words about her two least favorite topics: Donald Trump and Brexit. In a speech to lawmakers in Germany’s lower house of parliament on Thursday, Merkel said that “the world has become less united” and acknowledged that discussions at the G-20 meeting in Hamburg on July 7-8 “will be very difficult.” Quoted by Bloomberg, Merkel said that “the discord is obvious and it would be dishonest to paper over the conflict."

The unexpectedly confrontational posture comes as Germany is set to host world leaders including President Donald Trump and Russia’s Vladimir Putin, who are expected to hold their first head-to-head meeting in Hamburg, although the details have not yet been ironed out. Also present will be China"s Xi Jinping and Merkel"s nemesis, Turkey"s president Erdogan, with the meeting taking place "amid a global shake-up that threatens much of the international order on issues established since World War II. On the agenda for the meeting are free trade, climate change and migration."

If recent G-20 summits are any indication, next week"s meeting is likely to end in confusion and even more fingerpointing, with little in terms of consensus and even shorter communiques.

Aware of the upcoming dissensus, to use a word coined by Deutsche Bank, Merkel took a swipe at Trump’s “America First” rhetoric, saying that nations turning to isolation and protectionism are making a serious mistake and showcased a renewed “spirit of unity” in the European Union after the U.K. decision to exit.

All the same, the G-20 takes place “amid a particular set of challenges,” she said. “I’m convinced that we need the G-20 more urgently than ever before, because we can only move things together,” Merkel said. “Whoever believes that you can solve problems through isolation and protectionism is making a grave error.”

However, as Bloomberg notes, the German leader reserved her most dramatic language for the Paris climate treaty after Trump pulled out of the global accord aimed at confronting climate change, which Merkel called “irreversible and not negotiable.”

“We want to tackle this existential challenge and we can’t and we won’t wait until the last person on earth is convinced of the scientific basis for climate change,” Merkel said slamming Trump"s recent pullout from the Paris accord.

Merkel also accentuated the recent geopolitical pivot, in which Germany has distanced itself from its formerly staunchest allies the US and UK, and toward France:

In response to Trump’s inward shift, Merkel played up new French President Emmanuel Macron as an ally, saying the German-France axis will drive forward European unity, “regardless of Brexit.” She is hosting Macron in Berlin on Thursday along with European leaders including the U.K.’s Theresa May and Paolo Gentiloni of Italy to align their position ahead of the G-20.

“It’s clear to both of us that German and French interests are extremely closely linked when it comes to Europe’s future,” she said.

And while the G-20 meeting will likely end up a flop, one wildcard remains: China. While Merkel has reached out to Beijing as a partner on climate change and free trade, she’s also warning Chinese investors that they may face restrictions in Europe. 

Germany’s government is “thinking about defining industrial sectors of strategic importance for Europe,” Merkel said in an interview with business weekly WirtschaftsWoche published Thursday. “For instance, we decided to resume major investments in microchips. If countries like China want to buy up what was just built up with a lot of subsidies, we have to react.”

Ironically, in the "new new world order", China has emerged, at least in its own eyes, as the grand champion of free trade hoping to fill the void left by the "protectionist" US, in the process growing it regional and global influence. Which is ironic because China still remains among the world"s most trade protectionist regimes, and if Merkel is hoping to pivot toward China as the next great source of trade, she is set for a major disappointment.

Trump Warns Germany "Owes Vast Sums To US... Must Be Paid For Defense"

Amid #NoHandshakeGate and the "we have something in common" moment, yesterday"s meeting between President Trump and German Chancellor Merkel was at best cordial, judging by the G-20 discussions, and this latest tweet from Trump...

Despite what you have heard from the FAKE NEWS, I had a GREAT meeting with German Chancellor Angela Merkel. Nevertheless, Germany owes.....

— Donald J. Trump (@realDonaldTrump) March 18, 2017

...vast sums of money to NATO & the United States must be paid more for the powerful, and very expensive, defense it provides to Germany!

— Donald J. Trump (@realDonaldTrump) March 18, 2017

Of course this is not the first time he has pointed this out... NATO, he said, “has problems.”

“[NATO] is obsolete, first because it was designed many, many years ago,” Bild quoted Trump as saying about the trans-Atlantic military alliance. “Secondly, countries aren’t paying what they should” and NATO “didn’t deal with terrorism.”

While those comments expanded on doubts Trump raised about the North Atlantic Treaty Organization during his campaign, he reserved some of his most dismissive remarks for the EU and Merkel, whose open-border refugee policy he called a “catastrophic mistake.”

FACT CHECK: Trump is 100% Correct - Germany has been under-funding its defense budget for years... NATO"s 28-member countries committed in 2014 to spending 2 percent of their gross domestic product on defense within a decade. But only the U.S. and four other members of the post-World War II military coalition are meeting the standard, Pence said.

Failure to meet the commitment, he said, "erodes the very foundation of our alliance."

"Let me be clear on this point: The president of the United States expects our allies to keep their word, to fulfill this commitment and, for most, that means the time has come to do more," Pence said.

More awkward looks to come...

Trump Wins: G-20 Drops 'Anti-Protectionist, Free-Trade, & Climate-Change Funding' Commitment

After delays and hours of discussions amid tensions over "trade" comments between the United States and the rest of The G-20, it appears President Trump has "won". While China was "adamantly against" protectionism, the finance ministers end talks without renewing their long-standing commitment to free trade and rejection of protectionism after US opposition.

The world"s financial leaders are unlikely to endorse free trade and reject protectionism in their communique on Saturday because they have been unable to find a wording that would suit a more protectionist United States, G20 officials said.

This would break with a decade-old tradition among the finance ministers and central bankers of the world"s 20 top economies (G20), who over the years have repeatedly rejected protectionism and endorsed free trade.

But the new administration in the United States is considering trade measures to curb imports with a border tax and would not agree to repeat the formulations used by previous G20 communiques, clashing with China and Europe, the officials said.

"Unless there is a last minute miracle, there is no agreement on trade," one official, who declined to be named, told Reuters.  "This is not a good outcome of the meeting," a G20 delegate quoted Bundesbank President Jens Weidmann as saying.

In a partial face-saving move, as The FT details, G20 finance ministers meeting in the German resort town of Baden-Baden noted the importance of trade to the global economy, but dropped tougher language from last year that vowed to “resist all forms of protectionism”.

The new communique said: “We are working to strengthen the contribution of trade to our economies. We will strive to reduce excessive global imbalances, promote greater inclusiveness and fairness and reduce inequality in our pursuit of economic growth.”

The watered-down commitments on free trade reflected the anti-globalisation mood that Donald Trump has brought to Washington and came in the first G20 meetings between Steven Mnuchin, the new US Treasury Secretary, and his foreign counterparts.

US Treasury Secretary Mnuchin spoke to reporters after the meeting:

• *MNUCHIN: LOOKING FORWARD TO WORKING CLOSELY W/ G-20 COLLEAGUES


• *MNUCHIN: CONFIDENT U.S. CAN WORK CONSTRUCTIVELY WITH PARTNERS


• *MNUCHIN: U.S. BELIEVES IN FREE, BALANCED TRADE


• *MNUCHIN SAYS WILL LOOK AT TRADE SURPLUSES WITH VIEW TO CORRECT


• *MNUCHIN SAYS MULTILATERAL AGREEMENTS HAVE VERY IMPORTANT PLACE


• *MNUCHIN SAYS U.S. WANTS TO RE-EXAMINE TRADE DEALS INCL. NAFTA


• *MNUCHIN: U.S. BELIEVES IN APPROPRIATE REGULATION


• *MNUCHIN SAYS IMPORTANT BANKS CAN PROVIDE LIQUIDITY IN MARKETS

Reuters also points out another potential win for Trump as the communique will also drop a reference, used by the G20 last year, on the readiness to finance climate change as agreed in Paris in 2015 because of opposition from the United States and Saudi Arabia.

Trump has called global warming a "hoax" concocted by China to hurt U.S. industry and vowed to scrap the Paris climate accord aimed at curbing greenhouse gas emissions.

Trump"s administration on Thursday proposed a 31 percent cut to the Environmental Protection Agency"s budget as the White House seeks to eliminate climate change programs and trim initiatives to protect air and water quality.

Asked about climate change funding, Mick Mulvaney, Trump"s budget director, said on Thursday, "We consider that to be a waste of money."

The G20 do agree, however, to show continuity in their foreign exchange policies, using phrases from the past on foreign exchange markets.

As we noted earlier, needless to say, such an acrimonous end to the weekend"s summit would likely result in a surge in FX volatility when markets open for trading late on Sunday, reflecting the new state of global trade flux, in which the future of the US Dollar is completely unknown, and reflecting the emerging chaos over the future parameters of trade.