Archive - Jun 22, 2011 - Story

Three days ago we first reported that not all is well in the Chinese unsecured lending market as indicated by the country's interbank lending (SHIBOR) and repo rates. Subsequent to this, the PBoC attempted to restore some sense of normalcy to the market by conducting an emergency reverse repo for CNY50 billion on Monday night, which however as expected, did nothing at all. Alas, as a quick check of the most recent 1 week SHIBOR confirms, the liquidity lock up continues as the market is scrambling over the implications of what ongoing PBoC tightening implies for the market: 7 Day SHIBOR has once again risen overnight, this time by 51 bps, to a nosebleed inducing 8.83%, doubling from a week ago. This means that it costs banks nearly 10% to borrow one week cash from one another, and confirms there is absolutely no excess liquidity in the market. Looking forward, don't look for this number to go down notably any time soon: as Market News reports: "China's economic planning agency said Wednesday that efforts to control prices are having an impact, and that monetary conditions have improved, but warned that consumer inflation this month will likely exceed May's 5.5% y/y." Which means that the only recourse the PBoC will have after reporting a 5.5% CPI will be more RRR and Interest Rate hikes, which means more liquidity extraction, which means that the 1 week SHIBOR will likely pass 10% in the next few days. It is ironic that Europe's fate now rests with China whose interbank lending market is about 8 times more tight than the comparable one in Europe. Will Europe be forced to provide China with unsecured liquidity in exchange for China buying PIIGS bonds? Ah the wonders of a ponzi scheme.

• Overnight the Greek government passed through a crucial confidence vote, however risk-aversion remained the dominant theme today as markets look ahead to next week when Parliament discusses the country's medium-term fiscal plan
• A German government source said that the finance ministry will hold talks today on working group level with banks and insurers over private creditor contributions for Greece
• BoE’s June meeting minutes revealed that some members think it is possible that more QE might be warranted if downside risks materialise

• Poll: 44% of Americans Say Worse Off Under Obama (Bloomberg)
• QE 2 Proves No Silver Bullet (Hilsenrath)
• China’s Money Rate Rises to More Than Three-Year High as Banks Hoard Cash (Bloomberg)... hmm, where have we heard this before...
• Europe’s Threat to Asian Exports May Force Slower Interest-Rate Increases (Bloomberg)
• Fed Frets Over Fiscal Recklessness Behind Calm of 0.09% Yield (Bloomberg)
• Greek Two-Year Government Notes Rise After Papandreou Wins Confidence Vote (Bloomberg)
• Plan to Ease Way for Unions (WSJ)
• PIMCO's El-Erian predicts Greece, others will default (Reuters)
• IMF: Spain needs bolder job-market reforms (Businessweek)

Gold is again being seen in Greece as an essential store of wealth, hedge against inflation and safe haven asset. The Financial Times reports that “Greek citizens are emptying savings accounts and buying gold as they brace themselves for the possibility of a sovereign default and a run on the banks.” Sales of gold coins have soared as savers seek a safer and fungible source of value, says the FT. “When the global financial crisis started, our sales of coins to investors overtook bullion for the first time,” said Harry Krinakis, at Sepheriades, a Greek precious metals trader. “Now the sales ratio has reached five to one.” Tomas, a computer technician, has exchanged his euro savings for gold coins: “I keep them at home just like my grandmother did in the second world war.” Greece is the canary in the coalmine and the likelihood is that what is happening in Greece today, people using their cash deposits in banks to buy gold bullion, will be seen in many other countries in the coming months. Indeed, news from the Perth Mint of record sales of silver coins is indicative that this trend has already begun. Bloomberg reports that “Silver-coin sales from Australia’s Perth Mint, which was founded in 1899 and processes all of the country’s bullion, have surged to a record as buyers seek to protect their wealth with the metal known as poor man’s gold

All that matters today is the Chairsatan's second post-meeting press conference and updated forecasts from the FOMC. And yes, there is no POMO today due to the early FOMC decision.

Just like yesterday's G-Pap vote of confidence was largely a snoozer and a "sell the news" type of event, so today's FOMC meeting and subsequent press conference, will likely disappoint, despite the 2 Year now trading at an Operation Twist 2 "priced in" 0.358%. It is certain that this expectations of at least some modest Fed intervention has slipped into equities. Thus, should Gross' prediction of a tentative QE3 announcement today fall through, and remember that the S&P has to be about 20% lower for the green light in our humble opinion, look for Waddell and Reed to be put under quarantine again at 12:30 when the decision is released.

Remember the whole UK stagflation scare, where the misery index recently hit a 20 year high, as both inflation and unemployment surged to two decade highs, keeping the GBP strong on expectations of rate hikes by the BOE? Well, the stagflation is still there, but according to just released BOE minutes, there has been a sudden 180 within the Monetary Policy Committee, which has now flipflopped, and just as we predicted, has fallen back to the traditional central bank fall back plan, namely "buy more bonds" as despite surging inflation, the country's central planners once again view deflation as a greater threat. As Bloomberg reports: "Bank of England minutes showed some policy makers see a potential need for further bond purchases as the economic recovery struggles and “downside” risks to growth and inflation mount. For the majority of the nine-member Monetary Policy Committee, “the fiscal challenges in the euro-area periphery highlighted the potential for further adverse shocks to demand,” according to minutes of the June 8-9 meeting published today in London. “For some of these members, it was possible that further asset purchases might become warranted if the downside risks to medium-term inflation materialized." So the spin now is not to worry about that surging inflation: it's "transitory"... just as the imminent UK QE2 will be: "While U.K. inflation was 4.5 percent in May, more than twice the central bank’s target, Governor Mervyn King said last week that the current price surge is temporary as he defended keeping the key rate on hold to aid the economic recovery during the government’s budget cuts. Paul Fisher said yesterday that adding to the bank’s bond program remains “very much on the table” as a policy tool." Next up: a major quantitative easing episode out of Japan as the two "peripheral" developed economies attempt to fill the void left by the Fed and fail miserably, at which point Bernanke will have no choice but to get involved as well.

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