Something is Brewing

Putin and Xi meet ahead of the Olympics and then Bitcoin rips 20%. Hmmm. My conspiracy theory flag is waved.

I am usually up for a good conspiracy theory when I can’t exactly explain the narrative behind strong moves in underlying asset classes. While there is often little credence to the conspiracy view, sometimes you can get 1+1+1=10 when trying to sleuth a bunch of puzzle pieces together.

So I find it fascinating that ahead of the start of the Olympics over the weekend, Putin and Xi have a long meeting where they announce the following:

1. Russia and China issue joint statement including harsh criticism of the US, re-affirmation of Russia’s support for the One-China principle, confirmation that Taiwan is an inalienable part of China and its opposition of any forms of independence of Taiwan. The joint statement also opposed further enlargement of NATO and called on the alliance to abandon its “ideologized Cold War approaches.”

2. Another sizable natural gas deal that will send more flows toward China and away from Europe during a time when European is scrambling for gas amidst their colder than normal winter. Gas / energy prices are at the foreground of the Russia/Ukraine potential conflict, Europe is stuck in the middle of this, Nord Stream 2 sanctions are being threatened. This is a big deal as the geopolitics surrounding energy policy are becoming more important.

3. Both Russia and China together discussed the need to broaden trade in their national currencies because of the unpredictability surrounding the use of the US$, particularly important now that the US continues to threaten sanctions on both groups and potentially removing them from using SWIFT for settlement of transactions.

The Putin/Xi bromance shows that the two leaders continue to move closer together as they seek a future that shows their respective countries as leaders while they view the US as a weakening superpower over time. They are seeing the Biden administration as wounded, flailing amidst weakening polling data stemming from rising inflation concerns in the US that arguably both China and Russia, through their own policies around supply chain management during Covid and energy production, have contributed mightily too. US citizens are simply not as interested in the Global 4d Chess that Russia and China are playing while they are struggling at home with higher prices for everything. As a result, both countries are continuing to antagonize the US, trying to figure out where the US government reaction function sits while they are pursuing what they believe to be their own domestic issues. We are in the Big Boy geopolitical arena here. We need to keep these mega trends in the background when we think about risk taking and what is happening in underlying asset prices.

What I find so fascinating about the post meeting pricing is the reaction of Bitcoin over the last week. As China and Russia are meeting, and suggest moving away from the US$ and possibly moving toward the use of a neutral settlement asset, Bitcoin has a sizable 20%+ rally off its recent lows, driving much of the rest of risk markets higher as well from crypto, to tech stocks, to oil, etc. Similarly, we continue to see selling in US treasuries, particularly accelerating after last week’s sizable gains in employment and strong wage figures. We also have gold rallying despite moves higher in real rates.

Source: Bloomberg Data

I don’t exactly know what is going on here but if Xi and Putin have a meeting and then Bitcoin, Gold, Oil have sizable rallies while USTs continue their sell-off (reminder: China is a big holder of USTs), perhaps there is something going on under the hood that is larger than we realize. Perhaps momentum toward a new neutral reserve settlement asset, especially for energy pricing, is in the works. We need more information. My caution flags are raised. Something is brewing.

*Important Disclaimer: This blog is for educational purposes only. I am not a financial advisor and nothing I post is investment advice. The securities I discuss are considered highly risky so do you own due diligence.