Archive - Aug 2010

Today's Treasury International Capital data had some unpleasant disclosures about the flow and size of international capital flows. The gross headline number of inflows was as expected higher, coming in at $44.4 billion, consisting of $33.9 billion in net foreign purchases of long-term securities ($16.6 billion purchases by private investors and 17.3 billion by official institutions), as well as $10.4 billion in sales of foreign securities by US individuals. This brought total foreign holdings of US securities to just over $4 trillion for the first time ever, or $4,009 billion. So far so good, however looking at the composition of purchases, it appears that foreigners were frontrunning the Fed already in June - they bought $33.3 billion in LT Treasuries, and $18.2 billion in agencies, precisely the categories that the Fed would be monetizing, even as they sold $13.5 billion in corporate bonds (the highest amount since January 2010), and $4.1 billion in corporate stocks, the most since July 2008. What are foreigners seeing that all the mutual funds are also seeing (with 14 straight outflows from domestic equity funds), yet the HFT, Primary Dealer group is so stubbornly ignoring? Most importantly: Chinese Treasury holdings dropped to a 1 year+ low of $843.7 billion, following reductions in both long-term and short-term treasurys. China now has almost $100 billion less in USTs compared to the peak of $940 billion in July 2009. One wonders what China is buying with the sale/maturity proceeds.

Markets in a Flash

· The USD is looking weak this morning as China see’s problems with US recovery.

· The JPY has started to look slightly stronger in the past few hours and is gaining against the USD and the EUR.

· US equity futures are lower today suggesting the selloff will continue when the markets open.

Deflation talk has the markets spooked during these last couple weeks. Since Bullard's comments (preparing the ground for QE2) and Bernanke's promises to combat deflation through treasury purchases, even the CNBC talking heads are discussing it. Editor's Contrarian note: Probably time to consider unwinding your bond longs if T.V.'s equivalent of your shoe shine boy is telling you deflation is coming. In deflation, Gold should be the tallest pygmy. Even If it drops 40% in a deflationary depression, it will still stand tall among the financial wreckage that is defaulted debt and worthless equity. But, if the Fed succeeds in combating this event (preemptively or after the fact), Hyperinflation becomes a high risk and we know what that portends for fiat currency.

The Empire State Mfg index rose modestly from 5.08 to 7.1, yet still missed expectations of 8.0. In a nutshell, price indexes fall, the employment indexes climb, and most critically, as this is a survey after all, the degree of optimism continues to weaken.

• China Overtakes Japan as World's Second-Biggest Economy (Bloomberg)
• US banks get securities buy-back window - $118bn of high-cost ‘Trups’ can be redeemed over 90 days (FT)
• Yield Curve as Harbinger (WSJ)
• It Takes a Tea Party to Start a Tax Revolution (Bloomberg)
• Evans-Pritchard: Ireland can withstand the euro's ordeal by fire, but can Southern Europe? (Telegraph)
• Workers Let Go by China’s Banks Putting Up Fight (NYT)
• Goldman Undercuts Rivals in GM IPO as It Loses Top Role (Bloomberg)
• Is This Normal? The uncertainty of our economic uncertainty (NYMag)
• Mark Zandi oped: The Tax Cut We Can Afford (NYT)

• China favors Euro over Dollar as Bernanke alters path.
• China's stocks rally on economic outlook, led by shippers, energy shares.
• Crude oil trades near a one-month low after Japan's economic growth slows.
• HK govt tightened mortgage lending rules, to increase supply of land to help cool prices.
• Japan economy surpassed by China as GDP is less than estimated.
• Japanese economy slows unexpectedly; annualised growth for quarter only 0.4%.
• Wheat futures advance, erasing losses, as Russia lowers harvest estimate by 38%.

It's starting again. Japan 10 year JGBs just dropped to fresh 7 year lows of 0.95%, as UST 10 years are down at 16 month lows of 2.65% and German 30 Year yields are down to record lows of 3.09%. Maybe the Fed should just let deflation run its course to get ever closer to the target UST curve which we noted before. And while Japan is ravaged by a fresh bout of deflation, Europe is starting to crumble once again now that (lack of) vacations are generally over: the Greek/Bund spread has just hit the widest level since May 10, at 811 bps, while the Irish/German spread is at its widest ever of 303 bps, a move of 10 bps on the day. European weakness is resuming now that CPI came in at expectations (as opposed to beating them as has been the tradition for the past month) at 1.7%. The export-driven golden age, as we noted, is over. Elsewhere, the Telegraph posted rumors that the BoE is preparing to join the Fed and is about to commence a fresh round of QE as a new wave of global monetary easing is about to hit.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 16/08/10

The tide is suddenly heading out to sea for aspiring hedge fund traders. A torrent of talent pouring into the marketplace fleeing the onerous restrictions of FinReg. Hedge funds, have crimped new hiring, their own modest first half returns keeping new investors at bay. Could we be setting up for a bonus draught like the one we saw in 2008?

Despite missing this most recent paper by Buiter at its first publication three weeks ago, it represents the bedtime reading for this evening as it is just as relevant now as it was then. In it, the Citi strategist asks "who will control the deep pockets of the central bank?" and does so from the perspective of a game of "chicken" in a prisoner dilemma context. Buiter summarizes the problem as follows: "As long as neither the monetary authority nor the fiscal authority gives in, the deficit is financed by public debt issuance. With the public-debt to GDP ratio rising without bound, an eventual catastrophe occurs: the sovereign defaults and banks holding large amounts of sovereign debt may collapse, triggering a financial crisis and a deep slump. Following default, the fiscal authority loses access to the government debt markets, at least for a while. The resulting need to instantaneously balance the government’s primary budget means sharp public  spending cuts and tax increases. This would be the "collision" outcome. The outcome where the monetary authority gives in and monetises public debt and deficits is called Fiscal Dominance. Monetary dominance is the outcome where the fiscal authority gives in and cuts public spending and/or  raises taxes to stabilise or reduce the public debt to GDP ratio to prevent a sovereign default." Buiter does a dramatic deconstruction of this theoretical principal to the practicality of Europe, in a truly fascinating and must read analysis. His conclusion is that the "analysis emphasises that the Eurosystem can absorb much larger losses without risking its solvency or undermining the effective pursuit of its price stability target. We don’t, however, argue that the resources of the Eurosystem should be used in this quasi-fiscal manner. Openness, transparency and accountability suffer when the central bank is used/abused for quasi-fiscal purposes, and the legitimacy of the institution can be undermined." Alas, this only means that fiscal stimulus fundamentalists like Krugman will now start pushing for monetary replacements to traditional policy. And with that QE2 (and its myriad of imminent associated alphabet soup programs) is even more of a certainty.

A look at the key economic events in the relatively quiet week ahead from the perspective (and benchmarks) of Goldman Sachs.

Our religulous readers at theStreet.com decided to take a stab at Zero Hedge over the weekend due to our discovery, first among all media, that the Hindenburg Omen had struck this past Thursday. We take this opportunity to teach theStreet a few of the key rules of blogging etiquette.

Just another dumb program that puts cash in the big bank's pockets.

Analysts say they expect South Korea’s public pension funds, which now hold more than 300 trillion won ($252.73 billion) in assets, to be increasing their equity holdings soon.

In 1919 the major London gold dealers decided to get together in the offices of N.M. Rothschild to “fix” the price of gold each day. While this was notionally to find the clearing price at which all buying interest and all selling interest balanced the possibility for market manipulation and self-dealing is inherently systemic in such a cozy arrangement. This quaint anti-competitive procedure continues to this day. In no other market in the world do the major players get together each day and decide on a price. Imagine if Intel, AMD and Samsung were to meet each day to “fix” the price of microchips, or if the major oil companies were to meet each day to “fix” the price of crude oil; wouldn’t there be a public outcry and a flurry of antitrust violation lawsuits? The “fix’ is not open to the public, there are no published transcripts of each fixing, and there is no way to know what the representatives of the bullion banks discuss between each other. The current London Gold Fix is conducted by the representatives of five bullion banks, namely HSBC, Deutsche Bank, Scotia Mocatta, Societe Generale, and Barclays. The “fix” is no longer conducted in an actual meeting but by conference call.