Archive - Jan 2014

On the heels of Shinzo Abe's seeming hyprocrisy in Davos, commenting that "if peace and stability were shaken in Asia, the knock-on effect for the entire world would be enormous," while he raises military budget, antagonizes China, and inflames the militaristic fervor in his own nation with war-crime shrine visits, the Chinese have struck back specifically at Abe's comparison of China and Japan's present tensions to Germany and Britain's in 1914... Foreign Minister Wang Yi - writing from the Chinese Embassy in the US, warned:

• *CHINA'S WANG CALLS ABE'S STATEMENT ON WW1 'ANACHRONISTIC'
• *CHINA HAPPY TO REVIEW WORLD HISTORY WITH ABE: WANG YI
• *CHINA WANTS ABE TO RETHINK OWN COMMENTS, ACTIONS: WANG YI

Adding that, as we warned last night (and described in great detail here), China and the US need to show mutual respect and avoid conflict and confrontation on the matter of Japan.

The elimination of low-risk interest income in favor of risky speculative credit/asset bubbles has led to a monumental misallocation of capital and the institutionalization of perverse and highly corrosive incentives. Needless to say, the current bubbles in stocks, bonds and real estate will implode, and the phantom wealth that the bubbles temporarily generated will vanish.

China faces a very significant test of its reform policy pursuit rhetoric. With China's Bank regulator set to issue an alert on coal-industry loans - "as a result of outout cuts, they don't have much cash flow and thus they can't repay loans and debt," the massive growth in wealth products such as the CEG#1 (which offered a 10% yield for a 3 year term) based on these loans leaves the Chinese with a moral hazard dilemma - bailout or no bailout. ICBC has made it clear it wil not bailout investors since reputational damage would be "well manageable," and former-PBOC adviser Li Daokui adds that "a controlled default is much better than no default," noting critically that trust defaults "will teach future investors a very important lesson." Belief that contagion can be "contained" brings back memories of 2008 in the US but a total (or even partial) bailout will merely increase the leverage and risk-taking problem and signal government talk of policy reform is not real.

Earlier this week we reported that at JPMorgan, the many will pay for the crimes of the few, after the bank revealed that compensation for most workers would be flat with 2012, and no raises were planned for the bank's employees as a result of the massive, $20+ billion legal bill the bank has raked up in recent months as one after another market manipulation, fraud and malfeasance by current and former JPM workers has been revealed. One person, however, will be exempt from this blanket punishment: the firm's CEO Jamie Dimon, of course. Because there is always a reason Jamie is richer than you...

Following yesterday's early morning surge when gold jumped $30 from the low $1230, on news that India may relax its gold capital controls, today's sharp spike follow through is more a function of ongoing emerging market currency devaluation and overall risk-offness hitting equities around the globe. And with Bitcoin going nowhere even as both Turkey and Argentina continue to turmoil, it means there is only one good old faithful fiat-alternative - the barbarous relic. Sure enough, at last check, gold was trading north of $1270, back to levels last seen in November, and one sovereign default away from soaring a few hundred fiat equivalents higher. And since all hopes now rest on more BOJ easing (or else watch out below), and more of the same pent up inflation, we may have seen recent lows in gold for quite some time, especially with Gartman once again openly "hating" gold.

The last time markets scrambled for protection against sovereign defaults was over European country collapse in the summer of 2012 around the time Mario Draghi introduced a non-existent measure to allow Europe's nations to engage in zero reforms while their bond yields plunged. This time it is the emerging markets.

• Argentina +139bps at 2562.07bps, hit highest since Sept.
• Venezuela +81bps at 1398.19bps, highest since 2010
• Turkey +11.6bps at 276.7bps, highest since June 2012
• South Africa +10bps at 236bps, highest since Sept.

Of course, CDS aren't telling us anything (capital-controlled) FX hasn't already made quite clear.

• Emerging market sell-off raises specter of contagion (Reuters)
• China Bank Regulator Said to Issue Alert on Coal Mine Loans (BBG)
• Argentina to Ease FX Controls After Peso Devaluation (BBG)
• Pimco's Gross problem: who can succeed the 'Bond King'? (Reuters)
• Ukraine protesters seize building, put up more barricades (Reuters)
• Mideast Turmoil Dominates Gathering of Business Elite (WSJ)
• Central Banks Withdraw Dollar Funding (WSJ) - oh really?
• Samsung warns of weak earnings growth this quarter (FT)
• Three explosions rock Cairo, killing 5 (USA Today)

It's Risk Off time.

Things got really out of control, and the USDJPY plunged by some 150 pips in the matter of hours, plunging as low as 102, when EM revulsion once again hit participants, in particular TRY and ARS which also supported bid tone in USTs. This also saw spot TRY rate print fresh record high, while 5y Turkish CDS rate advanced to its highest level since June 2012, while at the same time Argentina announced it would life currency controls and dollar purchases in the aftermath of the ARS devaluation by 13%.  And since everything tracks the JPY carry pair as we have been showing for the past year, futures once again plunged overnight, for now held by 1810 support, Treasurys are bid throughout, with the same treasury yields that have "no where to go but up" sliding to 2.71% from 2.87% at the beginning of the week, while gold is finally spiking as the realization that absolutely nothing has been fixed, that apparently nobody got the taper is priced in memo, and that soon the Fed will have to untaper, begins to spread. Are the central planners finally starting to lose control?

UltraCoin -> PayPal -> Disintermediation -> Margin Compression -> Icahn -> Old School

The conventional view of China and India sports not one but two pair of rose-colored glasses: Chindia (even the portmanteau word is chirpy) is the world's engine of growth, and this rapid economic growth is chipping away at structural political and social problems. Nice, especially from a distance. But on the ground, China and India (not Chindia--there is no such entity) are both powder kegs awaiting a spark for the same reason: systemic corruption in every nook and cranny of both nations. The conventional rose-colored view is that corruption will inevitably decline with modernization and economic growth. This is simply wrong on multiple levels...

As if the fact that the Privacy and Civil Liberties Oversight Board found the NSA's bulk telephone collection "has shown minimal value in safeguarding the nation from terrorism," the 238-page report concluded it was illegal in several ways and violates privacy. Coincidentally, on the day of the release of the 9/11 Commission-prompted report, Edward Snowden (in an online chat - below) stated, "It's not good for our country, it's not good for the world, and I wasn't going to stand by and watch it happen, no matter how much it cost me." Indeed, one wonders if this would have ever come to light; but now following these findings that the program is not authorized by the Patriot Act the panel may give ammunition to critics in Congress and fuel legal challenges presenting a problem for President Obama who said last week (instead of waiting for the report) that he would allow the program to continue.

The PBOC has injected around CNY 400 billion into China's banking system in the last week focused in the 7-day reverse-repo maturity. While this has been greeted with moderation of the spiking trend in ultra-short-dated funding costs, there is a problem still. With the CEG#1 Trust maturing on 12/31 coinciding with the farce that is the 'confess all mismatched sins' debacle that occurs every Chinese Lunar New Year, the need for liquidity through that maturity is becoming extreme (while shorter-dated not so much). 14-day repo is now at 7.2% - almost 300bps above 7-day repo (which matures before year-end). In fact, it seems those concerned about possible Chinese contagion effects are buying protection aggressively as 5Y CDS jumped over 5bps to 102bps - the widest in 7 months (since the credit crunch in the Summer). This is far from over...

If the extreme drought in the western half of the country keeps going, the food supply problems that we are experiencing right now are only going to be the tip of the iceberg.  The size of the U.S. cattle herd has dropped to a 61 year low, and organic food shortages are being reported all over the nation.  Surprisingly cold weather and increasing demand for organic food have both been a factor, but the biggest threat to the U.S. food supply is the extraordinary drought which has had a relentless grip on the western half of the country.  According to the U.S. Drought Monitor, drought conditions currently stretch from California all the way to the heart of Texas.  In fact, the worst drought in the history of the state of California is happening right now.  And considering the fact that the rest of the nation is extremely dependent on produce grown in California and cattle raised in the western half of the U.S., this should be of great concern to all of us.

With China's shadow-banking system turmoiling and data not at all supportive of the same kind of growth investors are hoping for, some were surprised when China's GDP magically turned out at the 7.7% expectations deemed acceptable by the government. As Xinhua reports, not all is as it seems. China's GDP amounted to 56.9 trillion yuan (9.3 trillion U.S. dollars) in 2013. However, the aggregate of the provincial GDP figures, which were independently calculated and released, was about 2 trillion yuan more than the 56.9-trillion-yuan figure arrived at by the NBS, even though three of the 31 localities that were yet to release the figures were not included. This has aroused suspicion (just as we saw with the PMI data in the past) that some growth-obsessed local officials have cooked the books.