Archive - Jan 9, 2012 - Story

Europe has opened a new week with a modestly schizophrenic session: after hitting a multi year low against the USD and an 11 year low against the Yen, the Euro has seen a constant rise and traded nearly 100 pips higher last at 1.2770 on renewed hopes that today's Merkozy meeting would finally yield success. While that is clearly an utter delusion, with the abosolute record of shorts in the EUR as we pointed out last Friday, the smallest move higher can generate an avalanche of covering, and as we said previously a "potential" margin hike by the CME at any point in Euro contracts would leads to a QE-like surge higher in the EUR. If only briefly. Elsewhere, bond yields were mostly unchanged with the 10-yr Italian yield -3bps to 7.1% after rising as much as 4bps to 7.17% earlier; the 10-yr Spanish yield -5bps to 5.66%; was +1bp to 5.72% earlier; the 10-yr bund yield +2bps to 1.88%, first rise in 3 days. Most importantly, but no longer surprisingly, the ECB Deposit Facility usage soared to a new all time high of €464 billion, an increase of €199 billion since the LTRO hit the bank balance sheets on December 21, which accounts for virtually all the non-rolled cash. Simply said, Europe remains in suspended animation with hopes that a deus ex (now that the aliens have been downgraded from "possible" to "interference") will materalize preventing an allout spread collapse.

Overall, there are both internal structural factors and external global factors, which contribute to the making of an epic hard landing in China. China will be really vulnerable when the US and Europe both unleash the quantitative easing. These are things China has no control of. Nevertheless, the best China can do to avoid the worst is to continue the painful structural adjustment: marketize the “big four”-dominated banking industry to allow for more efficient monetary allocation; Transform the labor intensive low value-added economy to the high value-added knowledge economy; reform the wealth redistribution system to empower the broad consumer base and honor its promise of a consumption-led economy.

While the US enjoys the luxury provided by the dollar’s world currency status and diplomatic alliance with many major trade partners to export its liquidity and inflation, China enjoys none of that. They should look at the dollars in their hands with fear and doubt. So called Beijing consensus makes little sense, because the world is fast changing, pegging a country’s growth to a certain set of policy tools or a certain reserve currency (the US dollar) is equally dangerous. The battle between Keynes and Friedman has long proven the only consensus is to adapt and change. Right now China needs to adapt and change fast. Or this will be the best time in history to short China.