Archive - Aug 2010 - Story

Today's stunning if true news comes from Stratfor which has just issued a blast notifying of circulating rumors "in China that People’s Bank of China (PBC) Gov. Zhou Xiaochuan may have left the country." If proven true, this will be the proverbial first rat bailing on the sinking ship. It gets scarier vis-a-vis prospects of US bonds: "The rumors appear to have started following reports on Aug. 28 which cited Ming Pao, a Hong Kong-based news agency, saying that because of an approximately $430 billion loss on U.S. Treasury bonds, the Chinese government may punish some individuals within the PBC, including Zhou." Um, $430 Billion in losses? Hopefully this explains why next month's TIC report won't show any incremental increase in Chinese holdings of Treasuries (and most likely quite the opposite). Stratfor continues: "Although Ming Pao on Aug. 30 published a report on its website indicating that the prior report was fabricated by a mainland news site that had attributed the false information to Ming Pao, rumors of Zhou’s defection have spread around China intensively, and Zhou’s name has been blocked from Internet search engines in China." Even if Zhou is safe and sound in Beijing, the fact that China has experienced nearly half a trillion in losses on its UST holdings is shocking, and means that the US Treasury bubble may be approaching the popping phase.

A Bloomberg TV report looks at a troubling and all too expected trend developing currently in Greece: namely the overabundance of easy credit provided to Greek consumers to fund unprofitable business, and which loans the recipients have no intention of every paying back. Sounds familiar - the ECB has now directly taken a page from the official PBOC playbook on how to keep the ponzi dreams alive for one more day. As the narrators points out simply: "more and more Greeks are finding themselves unable to pay back their loans." The surge in NPLs is demonstrated by the chart of loan performance over the past two years, comparing the 5% in NPLs in 2008, jumping to 7.7% in 2009, and hitting 8.2% at Q1 2010. And since banks are all about hiding the true impact of deteriorating assets, one can bet the true level of NPLs is will in the double digit range. And guess what - all these eventual charge offs will have to be funded by the ECB-IMF rescue mechanism, which means that sooner or later America, via its primary contribution to the IMF's various rescue facilities, will end up having to bail out the Greek debtor class. And as austerity is only expected to make things worse, the only possible (flawed) resolution is to do what the Cajas in Spain did: a massive wave of consolidation, so that those bigger banks provide some capitalization buffer for the smaller insolvent firms, until such time as the entire market is comprised of just a few TBTFs, which will nonetheless still be in need of bailing out.

Moody's is out with a surprisingly frank appraisal of the Chinese banking system's precarious capitalization trend, by looking at the recent RMB 54 billion capital raise in the interbank market by the domestic arm of the Chinese Sovereign Wealth fund (CIC), which was "the first part of an RMB 187.5 billion overall fund-raising
program mainly to provide additional capital to the three largest
state-owned banks, a policy lender, and a policy insurance company." As Moody's oh so correctly concludes: "Recapitalizing banks with bond proceeds from banks is credit negative
because it increases the effective leverage of the banking system. The
transaction’s impact on the system is limited in this case because the
increased leverage is not significant, but it would be problematic if
effective leverage continues to increase and China’s economic growth
stalls." Moody's stops one step short of calling this transaction what it is: using debt purchased by other banks to recapitalize deteriorating loans on the banks' asset side: "the increases in assets and equity are artificial and without real
economic substance: the increase in reported equity on banks’ balance
sheets enables the banks to lend more and effectively leverages up the
system. Assuming banks fully deploy the capital raised, the resulting
increase in the risk-weighted assets would be RMB 187.5 billion divided
by 11.5% (the minimum capital requirement)." What is also not said, but is glaringly obvious, is that the Chinese sovereign wealth fund is likely in a major need of recapitalization, courtesy of its extensive US financial sector equity holdings.

Nothing good to report out of the Dallas Fed, today's last key economic data point, which came in at -13.5%, missing expectations of -10.0%, although a modest rebound from the prior disastrous plunge to -21.0% in July. Special question comments included in the current survey demonstrated ongoing deterioration, especially in current perceptions of business conditions, with an emphasis on the hit to businesses due to the recent deepwater drilling moratorium.

Last night's lack of intervention by the BOJ is finally being appreciate for the strategic bluff it was. When even an incremental QE dosage is unable to put a dent in your currency, and has in fact strengthened the JPY ever since the announcement, investors are now flocking to all safe currencies, first and foremost the CHF, which has just breached the critical 1.3000 barrier and immediately took down all stops all the way down to 1.2980. This means that the BOJ very strategically left the intervention card to the next currency debaser down the road, i.e. the Swiss National Bank, whose boss Phillip Hildebrand is now staring at his Bloomberg terminal in shock knowing full well he has no choice now but to intervene yet again. Once again, Shirakawa shows how it's done.

With concerns about surging food prices recently inflamed courtesy of the series of fires in Russia and the halt of grains exports out of the country, several heavy hitters have come out recently to discuss their views. One among them is the man with the best YTD performing macro hedge fund according to Bloomberg, Hugh Hendry, who appeared on BBC's ever-informative Newsnight to discuss potash, food prices, and other scarce resources.

Hurricane Earl has just been upgraded to a Category 3 storm, and the National Hurricane Center now predicts that after striking the Carribean islands of Barbuda, St. Barthelemy, Anguilla, and St. Maartin in the northernmost Lesser Antilles Islands tonight and Monday morning, the storm is likely to graze the Eastern seaboard from Virginia all the way to Maine, including New York, beginning on Friday and continuing into Saturday.

July US Personal Income comes in at 0.2%, on expectations of 0.3%, and a previous print of 0.0%. Yet making less money does not prevent consumer from purchasing (i.e., not paying their mortgages), coming in at 0.4%, higher than expectations of 0.3% (previous 0.0% as well). And it appears consumers may have jumped the shark on the economic "improvement" just as we double dip, with the savings rate declining to 5.9%, compared from a revised 6.2% in the prior month (6.4% initially). Other news: US PCE Core M/M at 0.1%, inline with expectations, the same as the PCE Deflator, which came at 1.5%.

• Bank of Japan’s Moves Fail to Contain Yen (WSJ)
• ECB Likely to Extend Emergency Bank Support (FT)
• Which leads to the following - European Economic Confidence Highest in Two Years (BP) all on life support
• Bernanke Faces Scepticism on Policy Tools, May Need Fiscal Aid (Bloomberg)
• The Uncomfortable Mathematics of Monetary Policy (Reuters)
• Bubble at any cost - China Fortifies State Businesses to Fuel Growth (NYT)
• An end-of-summer puzzle for investors (Reuters)
• As nationalism rises, will the European Union fall? (WaPo)

• Bank of Japan expands bank-loan program as Yen's climb threatens expansion.
• ECB likely to extend emergency banking industry aid: reports.
• European markets rose in early trade, tracking gains in Asia.
• Fed confronts further signs of slowdown amid skepticism on policy tools.
• Pace of UK's GDP growth will slow sharply over the medium term: Comm Chambers.
• UK house prices fall most in 16 months as market hits 'repricing' phase.
• Singapore tightens loan limits to cool housing market.

The past three days of Risk On market action are all gone and forgotten, as the 250 pips of "BoJ FX intervention" have to be eliminated. As a result the USDJPY is 130 pips tighter compared to 8 hours ago, down to 84.6, and the AUDJPY and futures have followed suit. On the other end of the risk spectrum, the EUR is dropping like a rock, across every currency in the world, is testing 1.27 against the dollar, and is back down to a 1.30 handle vs the CHF. Elsewhere, Bund stops were triggered as the German bond futures hit fresh all time highs. All those who were expecting the rotation out of bonds and into stocks to begin, and bet accordingly, our condolences. Feel free to blame the BoJ.

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 30/08/10

As our economy hurtles towards its meeting with destiny, the political class seeks to assign blame on their enemies for this Greater Depression. The Republicans would like you to believe that Bill Clinton, Robert Rubin, Chris Dodd, and Barney Frank and their Community Reinvest Act caused the collapse of our financial system. Democrats want you to believe that George Bush and his band of unregulated free market capitalists created a financial disaster of epic proportions. The truth is that America has been captured by a financial class that makes no distinction between parties. These barbarians have sucked the life out of a once productive nation by raping and pillaging with impunity while enriching only them. They live in 20,000 square foot $10 million mansions in Greenwich, CT and in $3 million dollar penthouses on Central Park West. These are the robber barons that represent the Age of Mammon

The BoJ just released a decision to extend the 3 month lending program to 6 months, to expand the 6 month fixed rate facility to 30 trillion yen from 20 trillion, extended the maturity of QE, and kept the benchmark rate at 0.1%: in essence a nothingburger extension of QE, which has done miracles for the past 20 years. The key item, however, is that there was no direct mention of FX intervention by the BoJ, which was the silver bullet many had hoped for. As a result, the Yen is currently surging.

A few days ago, BNY's Nicholas Colas was kind enough to share his perspectives on why traffic congestion and market structure are comparable, especially in the context of record high cross-asset correlations. Continuing on this series of roadside analogies, today the BNY analyst compares the economic double dip to a traffic violation, and specifically the probability of getting two speeding tickets in the span of one day. "What are the odds of being caught speeding twice in one day? One in five? One in ten? Pretty remote, one would think, given that the ratio of police to motorists on most roads is 1,000:1 or greater. I can tell you from direct and personal experience, however, that the odds of that event are much, much higher than you think. I had my driver’s license suspended for 30 days in 1997 for two tickets, issued on the same day and only a few miles apart. Here’s the thing: most people, after receiving one ticket, will drive more carefully immediately thereafter. But I, working through the math I referenced above, thought “No… The odds are actually in my favor now. I can, in fact, speed with impunity.” This proved to be an error. As it turns out, going substantially faster than the general flow of traffic will gather the attention of the law. This offsets the theoretical odds against discovery, and then some. Oh, and driving a bright yellow car. I should have mentioned that, too." And once again, the specter of market uncertainty raises its ugly head, this time in the form of spiking implied volatility, which has jumped for every asset class in the past month... except gold.