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Obrigado Brazil!
Submitted by Nic Lenoir of ICAP
We have complained over the past few months that there is simply way too much liquidity in the system, and that this is creating asset bubbles all around the globe. While this is quite obvious looking at the performance of the S&P 500, no matter what you may hear on CNBC or from your mutual fund manager about fundamentals supporting this move, the phenomenon has been exacerbated in emerging markets. It makes sense after all. Given that the crisis was rooted in the US and many issues haven't been seriously dealt with other than putting a little bit of lipstick on the occasional pig, a lot of money has been going abroad with the USD weakening, and emerging or commodity currencies screaming higher.
I pointed out Brazil on several occasions. While a lot of money has been funneled into Chinese markets via ETFs, after a 100% rally the Shanghai composite has been struggling to go higher since August and has corrected modestly, especially compared to the magnitude of the advance preceding the correction. The Bovespa has been rallying furiously too, up 125% since last October as of last night and showing no signs of slowing down. And this is when something unbelievable in modern economic policy happened: the Brazilian government imposed a tax on foreign investments to stem the ramp up of the Real. This is not only surprising, as demonstrated by the 4.5% sell-off today in Brazilian equities, but it is more importantly a great step.
I am not arguing whether taxing investments was the right solution to the problem, there are many people that will debate theoretical considerations over and over in a much more literate way than I could. The point is that for once someone said loudly enough to the Federal Reserve and other accommodative central banks: "your liquidity is no longer welcome". There are many people who have argued that the policies currently experimented in the U.S. will have very nefarious consequences in the future, but the best form of protest has been to buy gold, which in itself is a carry trade and is permitted and encouraged by those same policies of excess liquidity... The dog is biting its tail a bit with this strategy, especially since if the government did what the investors criticize it for not doing, then the trade would lose massively. Not very satisfactory morally, and it correlates to pretty much every other risky asset but with less beta so it underperformed quite massively a lot of the other carry trades.
This is why this move by Brazilian authorities is such a good thing. With more actions like this one maybe we will not have to chose between carry risky assets against a low yielding currency as the only trading strategy with a viable horizon beyond 24 hours. It is also interesting to note that this comes hardly two weeks after the Chinese government raised the ceiling of allowed investment in domestic shares by foreign institutions, basically the exact opposite measure. And many other governments who have been complaining about the excess liquidity of dollars flooding all markets showed no better common sense than borrowing in USD by issuing USD-denominated bonds, thereby proving they don't believe or understand the message they are trying to convey in their official speeches, and they have learned absolutely nothing from last year's funding crisis. So for having the courage of its aspirations, we salute Brazil!
In terms of markets it is hard to tell whether this is the beginning of a sizable correction or not. We have no dented enough into the profts of the carry positions to really have some stumbling around the exit doors just yet. If we could take out the 50-dma in EURUSD and USDJPY it would be a start. Testing the 50-dma in AUDUSD would alost be a victory in itself, as sad as it is to say. But this move by the Brazilian authorities could be the first of several by other governments. A friend pointed out to me last week on a couple occasions that New Zealand is very uncomfortable with the NZD where it is, and that rates expectations there are grossly overstated. Apparently he was citing some discussions with central bank staffers there, and his arguments were very convincing. Maybe this kind of news will embolden them to take matters into their own hands.
In the meantime I will be watching carefully trend following indicators to assess the level of pain of carry traders. After all we are only overdue for some payback! As per our trade update yesterday and this morning it seemed the Dollar Index was due for some short-term strength and equities for a retracement. We haven't even breached the intermediary support at 1,082 in S&P futures, and the DXY is a touch short of our short-term target of 75.80. Our short-term entry was good, but there is little reason to get too excited just yet. So let's take a few minutes to thank Brazil and remain vigilant.
Good luck trading,
Nic
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Tyler, dude, lay of the amphetamines for a day or two, it is impossible to catch up with all of your posts.
Come on CB, Tyler is on a roll. It's almost to the point of critical mass as more & more folks wake up to what the central banks are doing. Keep 'em coming!!
I now completely depend on TD for my daily reading!
Careful. This is how addictions start.
Before you know it, you'll be hunched in front of your computer on a Friday night praying to the Gods that Marla fires up radio ZH. If she does, you then pull an all nighter and are useless for the rest of the weekend.
Welcome to your best nightmare. Personally I believe the comment section is often as good as the articles. I have never belonged to a (on line or otherwise) community with the intelligence, whit and awareness this one has. The fact that so many of the top commenter's can laugh at themselves as easily as others is what gives ZH it's true power.
ZH is fearless and it all starts at the top. Everyone is welcome but if you're going to argue a point, you better be using facts that can be substantiated or you will be skewered.
Simply amazing. :>)
Liquidity and crime...target practice for Olympics...
Hi Cheeky...;-)
hey sqworl, how are you *insert question mark*
Im good Cheeky! Running round Gotham doing the TWT with my best from BH. Interesting, watching all these ppl out and about and nobody has any shopping bags???
Shopping bags are so 8th derivative. Stick to the script of 2nd derivatives improving. :>)
CD: just an observation from the 5th Ave deck!! Lots of ppl, no bags..unless you count Lloyds wife?
TWT
is that short for Tactical Warfare Training perhaps
scouting locations...remember its always location, location, location...x
Emerging markets should forget the 2% FDI tax. They shoul instead mandate that X% of the capital gains from the rising tide of FDI be allocated to gold. Allow the rising tide to flow. Isn't china encouraging its citizens to buy gold. Let the Fed work for you
Sorry, but I object to the lipstick on the occasional pig reference. I've been in the business for 15 years, and most of my best friends are pigs, and only some of them wear lipstick.
It was a brilliant move for Brazil. Snuff out speculators in one stroke.
The problem is that the jello of liquidity will pop out somewhere else, where the surface is less resistant, and the US markets remain the best candidates.
When there are bubbles, there will be a collapse. When credit got overextended three years ago, especially in the US, it was $4 gasoline that eventually triggered it... it took the top right off the family budget and mortgage defaults followed.
What will be the next trigger? Will the Oil Cartel do it again?
And what about the French complaining today about the Euro at $1.5,and that it is threatening European recovery(what do they have to export anyway beside some cheese?).And I thought the Italians or the Spaniards will be the first to talk since their olive oil might become as expensive as crude,further improvishing the population who use it for cooking(lol).And to venture into a little politics(behavior sciences affect finance after all),it turns out that Italians were paying off the Taliban for protection(may be the deal was brokered through gs,lol)wich set up the French rotation force who took over from them into a nasty surprise. And you all thought the Euro will survive?carry traders might be in for a nasty surprise of the same magnitude.(of course,one has to mention that Italians has denied those unconfirmed reports)
Listen Tyler, you and your colleagues and your contributors (Nic Lenori you are great!) are rerally doing a wonderful job....keep them coming!!
Brazil tried this a year ago (in Jun/Jul?). After a month they dropped it. I think they're just pretending to have a spine.
That was for fixed income investments only and they dropped it in october right in the middle of the chaos.
I hope this will break some of the tens of hockey sticks I've seen in small caps since 4 months ago.
Mexico (see below) will automatically withhold 3% of all cash bank accounts above 15,000 pesos beginning in 2010. Good luck getting a refund, if you so deserve.
México.- La Comisión de Hacienda de la Cámara de Diputados aprobó hoy reformas a la Ley del Impuesto de Depósitos en Efectivo (IDE), que gravarán a partir de 2010 con 3.0 por ciento los depósitos superiores a 15 mil pesos.
http://www.milenio.com/node/306365
Mexico (see below) will automatically withhold 3% of all cash bank accounts above 15,000 pesos beginning in 2010. Good luck getting a refund, if you so deserve.
México.- La Comisión de Hacienda de la Cámara de Diputados aprobó hoy reformas a la Ley del Impuesto de Depósitos en Efectivo (IDE), que gravarán a partir de 2010 con 3.0 por ciento los depósitos superiores a 15 mil pesos.
http://www.milenio.com/node/306365
Just about time for full cynic-mode; waiting for the DXY selloff to stick save the market EOD.
You're damn right I'll argue about the efficacy of imposing a tax!
If nothing else, this is a trade barrier, it's protectionism, it's no different than that threatened to be applied to tires or steel but now that it is in the form of a tax you're all for it?
Or is ZH so in favor of taxation because of a blind envy or hatred, or both, that causes the opinions expressed to not be based on intellect and reason but rather on insipid emotion?
"Down with America!" is not a tenable rational for investment; neither is taxation based on fear.
Over and over and over (too much so in fact) Adam Smith explains how such import taxes/duties only benefits and encourages smugglers and the government agencies in charge of enforcement while punishing everyone else to a much greater extent than the tax itself, and yet, 200+ years later we continually prove we read without understanding and thus pain to suffer the same mistakes and punishments over and over and over again.
Brazil & China have diametrically opposed policies? Let's watch brazil etfs vs chinese etfs.... which will outperform the other AFTER this market peaks....
? Taxation by Brazil? You fuck off with your free FED approved counterfit money. You are taxing the world with that green blubber you produce. The Euro Sucks but that carrytrade dollar even worse.
Another good reason to buy Brazil ...
http://www.scribd.com/doc/21234759/Lord-Moncton-Obama-Poised-to-Cede-US-Sovereignty
The YouTube video version of Lord Moncton's speech is here:
http://www.youtube.com/watch?v=PMe5dOgbu40
First Cap and Trade and then Tax and Axe ... Conspiracies come alive with Obama
How can Obama be held responsible for Paulson covering Goldmans's billions of swap loss and Bernanke covering over 90% of the world central banks exposure with $6 trillion of new liquidity and buying billions of Pimco's agency holdings? I honestly don't think Obama really cares about any these issues. He will be satisfied with deciding who lives and dies, a real important issue.
"Liquidity", eh? Don't you know your "pal Rosie" says this is another way of saying "I don't really have any idea"?
Oh, and BTW, did you notice how "Rosie" is now being humiliated for revisionist history wrt his bearish calls?
interesting article, bookmarked
bukmacher