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The REAL Big Story for Financial Markets Today… Which No One is Talking About
You have to
read between the lines on this one.
Few
commentators realize what the BIG story is for the financial markets today. The
BIG story is not the mortgage fraud, the corruption, or the computerized
trading (although the last one dominates US stock markets’ daily action).
No, the big
story is the monetary actions of the massively indebted US vs. the credit
cooling China.
Indeed,
while Bailout Ben Bernanke and several his cronies at the Federal Reserve have
been braying for additional QE and currency weakness, China has been
aggressively restricting credit lending, raising interest rates, and generally
making moves to cool its overheated system.
In plain
terms, this is a conflict between the world’s old superpower (its largest
debtor nation) and its rising new superpower (its largest creditor nation). It
represents the largest conflict in global financial markets as well as THE most
significant development to watch for those looking to successfully trade the
markets.
Don’t
forget, this was ALSO the big story dominating the financial markets in 2008 as
well. I know, the banking Crisis took the headlines. But it was China’s
stockpiling of commodities that created the massive “inflation trade” imbalance
which saw oil at $150 a barrel, commodities across the board exploding higher,
and the US Dollar hitting a 20 year low.
Remember how
that played out when the trend reversed? Commodities and equities collapsed
across the board as the US Dollar exploded higher. This, in turn, kicked off
the Dollar short-covering explosire, which began the chain of events leading
into the Autumn of 2008.
Now,
consider that we are in precisely the same environment today. Once again, talk
of the US Dollar collapsing is everywhere. The whole world is piling into commodities, especially Gold.
And US traders are actually MORE bearish on the US Dollar today than they were
in 2008.
The reason I
bring all of this up is that I am beginning to pick up on signs that the US and
China may in fact be trying to reach some kind of backroom deal on the
“currency” issue. Given the current lopsided balance of the financial markets,
you can imagine the impact this deal would have if my suspicions prove correct.
Let me
explain.
As you no
doubt are aware, over the last six months, the US has routinely vilified China
as been a currency manipulator and the source of our financial and economic
woes. China, in turn, has responded to these claims by pointing out that the US
Federal Reserve is damaging the world financial balance… while also making
veiled threats of the dreaded “nuclear” option (China actively dumping US
Treasuries).
This
essentially is an oversimplified version of the dialogue occurring between the
two countries for most of 2010. Then, suddenly, the US does a 180 with Treasury
Secretary Tim Geithner stating that the world currencies are “roughly in
alignment” and that there is no need to “devalue the Dollar” but to maintain a
“strong Dollar” policy.
Granted,
these comments are coming from one of the biggest stooges in history. But they
DO represent a sudden dramatic change in Geithner’s rhetoric. And given their
close proximity in timing to China’s first interest rate hike in three years, I
can’t help but wonder if something is going on “behind the scenes” between the
US and China which most analysts (AND the markets) are not discounting.
Indeed, the
US Dollar is giving hints of this,
putting in what could be a potential bottom and reversal. Of course, it
could be a GIANT head-fake, but the bounce from the multi-year trend line is
something we need to take seriously in the context of Geithner’s and China’s
recent statements/ moves.
Have China
and the US struck a “backroom” deal in which the US will drop the anti-China
rhetoric and make moves to potentially halt a collapse in the US currency in
order to calm its largest creditor (and THE one player whose moves ALL US bond
holders are watching closely)?
If so, then
the lopsided inflation trade could be in for a SEVERE reversal which would see
commodities and stocks collapsing as the US Dollar rallied a la 2008. Could
Gold and Copper be telling us this is the case? Both commodities are seen as
terrific discounters of future inflation. And both have reversed as of late and
look to be potentially correcting.
Right now,
all of the above is mere conjecture based on me noting a sudden change in the
mood between China and the US. We’ll only know for sure on November 3 when the
US Federal Reserve announces whether it will be implementing a MASSIVELY
anti-Dollar QE 2 program or something smaller and less destructive.
If it’s the
latter, then you can bet that the US financial markets will undergo a SEVERE
mood change and reversal. Remember, ALL of the actions since mid-August has
been fueled by speculation that the Fed is going to issue a HUGE QE 2 program
on November 3. If traders are
disappointed and the Fed announces something small or doesn’t announce anything
at all, then my theory of a China/ US deal gains a lot of weight… and the
markets are in for a rude surprise.
Good
Investing!
Graham
Summers
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the chinese want more commodities for themselves, in the rush to build a modern economy they haven't built reserves of anything, oil, or gold. they need all the stuff they can keep, and will NEVER sell them to America on the cheap. They didn't stop selling rare earth minerals as one out. There will be more of that, and Congress will have something to say, but they are words not actions. of course they (China) are upset with the unofficial weak dollar policy, and a backroom deal to strenghten the dollar (or tell Bernanke to keep his bazooka in his pants) may just be part of some bargaining, BB threatens massive QEII, pulls back in deference to Chinas need for a less weak dollar.
Your point is good, even when made in less dramatic terms. BB has been overselling QEII to gain a bit of bargaining room. Meanwhile Mr Market gets a free ride for few months, gets over the seasonal hump, and into the Xmas season with a bit of momentum. And there is a sellers boycott, hopefully. The bears are scared, so BB might have pulled it off, taken care of his political clients, headfaked the Chinese. The only thing is, maybe he isn't fooling anyone, the Chinese, the stock bears, or the voters, (remember when W Bush pulled down gas prices ahead of the 2006 midterms to try and save GOP seats. It didn't work, even Joe Sixpack knew he was full of shit, and most people see right through the dark side of Bush as well) They can't fool nobody. Its a new age.
Oil, gold, silver, copper etc etc China can buy, but how many USD can the Mandarins print and how much can the Emperor grow to feed the masses en mass?
New Internet Age until the cybersecurity bill passes?
The only QEII we'll see is the mass purchase of toxic assets to prevent BofA and JPM going bankrupt (mark to real value is such a bitch, dontcha know?)
The only backroom deal I could see with China would be where the Fed monetizes all debt China holds ( in other words maturity dates are cancelled and China walks away with a bag of cash instead of debt which would then be used to buy things in the US or where ever without printing new debt . If the US monetized that debt as well as japans and saudi's into cash it might change . I will finish mty thinking out on this later gotta run
or monetize it with gold, and my personal feeling is if they can pay off China in gold it will the greatest financial fleecing in history.
What was the US total gold holdings? $250 billion or something? Yea that will pay off a lot, not even good for a few weeks worth of POMO Q/E manipulations.
Their only next step is to seize all 401K's and pensions, the greatest transfer of wealth is basically complete so there's no use to perpetuate the illusion any longer. Enjoy the next 2 weeks before the fear and panic ass kickings resume.
BIS, Central Banks and IMF have 29,000 tonnes of gold = 7 years of supply.
Settling out even some of the lopsided trade deficits with gold could easily drive gold down -50% or more in little time. It is a thinly traded market, less than 1% of global markets including derivatives.
The market may be signalling something like this.
The US Dollar in Gold bottomed out on Thor's Day 14 October 2010.
http://stockcharts.com/charts/gallery.html?s=%24usd%3A%24Gold
Meanwhile Fed Treasury gold = 8133.5 tonnes, backing 72.1% of us Forex Reserves,
third only to Portugal's 79.6% and Greece's 76.5% of Forex, [Surprise],
versus 15.1% in [Secure] Switzerland and 1.5% in Mercantilist China, hello.
In ounces, Fed Treasury Mint Gold = 286,900,700.
US Reserves in dollars with Official $47/oz gold = $13,484,332,900.
With $1300 market gold = $372,971,001,000, more than enough to move markets.
This year the IMF sold gold acquired well below $850 to Bangladesh, Mauritius, India and Sri Lanka at market prices to increase currency loan reserves and take profits.
http://www.imf.org/external/np/exr/faq/goldfaqs.htm
Incidentally, the IMF does not appear to pay taxes.
http://www.imf.org/external/pubs/ft/ar/2010/eng/pdf/ch5.pdf
It would not be surprising to see the Feds sell gold to China, formerly mercantilist in dollars, forex and treasuries only.
That much gold on the market might well reduce gold's price by half while dollars rise to 115 or more.
http://stockcharts.com/charts/gallery.html?s=%24usd
Selling gold short in size and driving the price down to cover at a profit.
Nice trade if Benny and Timmy can pull it off.
http://en.wikipedia.org/wiki/Official_gold_reserves
The second the US sells its gold reserves (assuming there actually are any left) to China in exchange for China's USD holdings, I predict the PRC takes the Yuan off the dollar peg and sticks it onto gold.
That takes care of their 'production overcapacity' instantly by suddenly making hundreds of millions of Chinese savers wealthy enough to buy their own manufacutred goods.
JMHO, natch.
The Chinese are shitting FRN's,so its ok to go long on feces now?
Extend and pretend applies not just to the real estate mess but more importantly, to the currency and trade imbalance problems. If a deal is struck between the US and China (which would appear to be a reasonable assumption), it will be short lived over a period of maybe six months and really is nothing more than a tool to buy time to figure out how to fix the bigger mess which is a massively indebted USA (as well as Europe). At some point, be it in 2011 or 2021, the world will just be able to absorb any more USD's or more importantly, UST's. You simply just can't keep exporting paper promisses for real goods as eventually, the only way for the US to repay its debt will be to produce more and consume less. This has to happen over the long-term in order for the system to rebalance. And what this means to the average US citizen is simple. Our standard of living will decrease as in one form or another, we repay for years of over consumption.
China and the US can play whatever games they want this weekend or next or on 11/2 or 11/3 or whenever but they both realize the long-term structural problems present are going to result in a reduced value of the USD and increased value of the Yuan and/or other Asian/creditor countries. Just like a company on the verge of bankruptcy attempts to work with its creditors to buy time and develop a restructuring plan, so to is the US.
The only question left in my mind is very simple. Will this rebalancing be orderly or forced? We're going to end up in the same place by 2010 as the market forces of supply and demand win (as they always do). So in the short-term while the world governments and central banks attempt to "manage" the situation and give the appearance that we're working together and all is well, one can not underestimate the almighty influence of the laws of supply and demand. Just too much supply of US debt (UST's or USD's) and not enough demand. The Fed's purchase of US debt (either directly via the POMO or indirectly through the banks, hidden offshore resources in the UK and other locations, etc.) should be telling you everything you need to know.
As for the conclusion drawn from this article, I would agree with the short-term position of the markets being disappointed in early November and pressure being placed on equities and commodities. We've seen this run out of risk and into safety before (if you really believe the USD and UST's are safe). The power's that be can't let them run away too fast so giving a good old bitch slap every now and then should be expected. But in the end, the weekend's party will achieve nothing more than putting on a good face to pretend all is well, no currency war is occuring, and a plan is in the works to solve the problems.
So for the short-term traders and speculators, stay on your toes as the coming two weeks could see some very violent moves (and take the advice from this article very seriously). As for the long-term investors also stay on your toes as if values in real assets come under pressure over the next 30 days, entry points will be open (as I always enjoy taking US paper assets and exchanging them for something real).
And one final comment, even if QE2 is toned down, limited, or put on hold, don't be fooled. QE2 is already happening right before your eyes via the banks, offshore tools, intimidation, and/or other hidden tactics.
"And one final comment, even if QE2 is toned down, limited, or put on hold, don't be fooled. QE2 is already happening right before your eyes via the banks, offshore tools, intimidation, and/or other hidden tactics."-- True, but it is the announced QE2 that will impact the markets short term.
Problem is, about $5 trillion worth of QE has already been priced in 2 months ago, now they want to put the pin back in after theyre already thrown the grenade? These people have no plan, theyre just cheap grifters.
hi larry junior
blah blah blah .... hate stupid IDIOTS WHO KNWOS NADA...
# China has been aggressively restricting credit lending, raising interest rates,
hey asshole check out chart of SSEC.. it was best performing
index in the world.. gains +30% last couple months..
dont you think you are smarter all those guys who were buying..
STOP #UCKING BLUBBERING and try make it on the street..
alx
Do you have to work at being a prick, or does it come naturally?
I would add a couple of more points:
- Lowering the Dollar may help the large multinationals but hurts small businesses who dont export much but rely on imported raw materials etc. Given that historically small businesses have accounted for the bulk of job creation - a lower dollar may actually hinder job creation.
- Lowering the Dollar further from this point will certainly trigger mercatilistic behavior - and hurt world trade broadly - again not helpful for economic growth.
You and I are on exactly the same page. Milestones
I stopped at the suggestion that $150/bbl oil was caused by China. WTF? It was asshole speculators in the US trying desperately to save either Bear or Lehman or both.
+
i didn't see the chinese as a key catalyst in that mess either, but i'm likely to miss a lot from my window.
i agree w/ mr graham that the 'boyz' are talking in the backrooms, though. it's all they have left.
perhaps our boyz are helping the commodities (gold) drop again for a while, so the 'lever' holders (china) can acquire some more - as a form of extortion, rather than dump their Ts. what fun.
from what I remember oil spiked to $150 in the first half of 08. The Dollar was hitting its lows, the US looked like shit, the decoupling trade was in full swing, and China was getting ready to host the Olympics in August. From the reports I remember hearing China was gobbling up massive amounts of raw materials in preparation of their coming out party.
Great article. I would add that there have been articles and speeches in the last few days making the following points about QE2:
- Will compress corporate profit margins as input costs rise and output prices cannot be raised in a stagnant economy.
- Will do nothing to reverse what increasingly looks like a structural unemployment problem.
- Will do nothing to revive the property market which currently has other problems ( foreclosuregate etc) that a slightly lower mortgage rate will not solve.
- Is taking 700Bil ( one estimate) a year away from granny and giving it to the banks - due to the artificial zero rate on deposits. This is taking away 700bil from folks who would spend it if they had it.
- QE2 , by increasing inflationary concerns will mostly have the effect of raising oil prices and food prices . Not great in a stagnant economy.
- Given all these seem pretty reasonable points - the question arises - why do any QE2? It certainly did not help th real economy the first time and there are good arguments for why the Fed's actions are actually hurting the real economy and pushing it further into a depression. Unless of course the Fed does not actually care about all that - and is pursuing other priorities.
the problem is "tranferring the money from Social Security to the health plan." are banks important in that? well, let's see here...i think it's called "direct deposit" right? in other words, "no bursar asking why you thought did for that money." so, yeah, "the banks kinda matter"? of course the answer is "them Republicans is gonna cut off your benefit check! them Republicans gonna cut off your benefit check!" Really???
'Pursuing other priorities' yep. Even the FED lunatics can see their stock pumping has produced the opposite result as they were hoping for, that is creating a stock buying bubble mania. So the FED now sits on $trillions in equities with no one to sell to. Now they need diversions, so the party is about to get real interesting.
agreed. no one came to their party except maybe the HFT team. So Sir B-Boy will have to ooze their paper equities back into this market a little at a time like a poison IV...that combined with a far overdue $USD rally should make for some interesting trade days ahead. Short the snot out of it...hold nothing overnight unless well-hedged.
Amazing huh? Pouring more drano down the throat not reviving the patient much.
People want to paper over the fact that Q/E2 has already been massively leveraged into this market since Sept 1, or 1,300 DOW points ago.
Now the game is to ignore that little fact, try to bury it like a turd and move onward and upward as if it didnt happen??
Ridiculous, I dont care what your degree says, you cant have a cake and eat it too.
I believe your last sentence is the most likely.
Ben Talks QE2 up. Timmy talks it down. The prez just talks.
Ask yourself: what happens if QE2 doesn't happen, who stands to lose the most? Or: who does QE2 benefit?
Alternative: Ben says "no QE2", but is lying and it continues unabated,
Ben ponders,
"If a quadrillion trees fall in the forest to print fiat currency and no one sees it, do I have to say anything?"
Regards
+7.62
Something to look out for.
OTM puts on AUDUSD, correlated 78% over a year w/ the SPY but with 20% less volatility so the options are cheaper. If commodities go, no more shrimp on the barbie mate.
China will step on the Hot money cockroaches when they please and not until they are ready on there terms. Maybe tough love is unwatched here but not there.
I disagree. I think the "currency manipulator" statements have abated because China decided to stop exporting REEs.
Definitely worth some consideration. And isn't the PRC saying that they may be reducing Ag exports by 40%? Harder and harder these days to come up with physical delivery to cover egregious short positions, it seems.
Also, I can't see the Chinese gov't getting involved in any schemes that would deliberately devalue Au/Ag too much, seeing as their population have allegedly been stocking up; that would get dangerous for them right smartly, no?
PS. In fact, if the dollar was to strengthen and threaten the value of the Chinese peoples' precious metals I think the PRC will continue to see any dollar strength as an opportunity to divest themselves of USD while the divesting is good...after all, they have the power to flood the market with USD themselves should they wish to do so.
Regards
but "aren't the PRC people moving in the wrong direction"? if they dump the dollars that would be catostrophic, yes, yes? dumping treasuries? we already know via "Chandler Inc" on SA that "there's been once heck of a diversification out of Treasuries. I think perhaps a default setting of "there's no such thing as the PRC either" might be in order just like "we in the USA might be better off if we were simply a collection of states rather than an entity commandeered by a central committee."
"...if they dump the dollars that would be catostrophic, yes, yes? "
Depends on what they get for them, and what they do immediately following...
Regards
What does the US have in abundance besides a printing press for USD and agriculture?
Simple answer is more of both than China, dickhead.
What's your point, exactly? China will have to develop its domestic agricultural industries, or import less monstrous santa food from the US and more from other countries? Someone like you may find this hard to believe, but I have it on good authority that there are at least several other nations in the world other than the US that have advanced agricultural production capabilities.
Or did you simply see this as an opportunity to spew angry/fearful jingoist blather?
Possible.
It is politically unfeasible to maintain the massive trade deficits with China when our U6 is so high. Since they hold massive amounts of treasuries, and we threaten to devalue them by 25-30% by printing $$, it would make sense for them to try something else. Whether the Chinese actually do anything and if it works, well, that remains to be seen.
The world may have also told Timmy to tell Ben to hold off for a while.
High stakes poker for sure. Putting our future in Benny and Timmy is not all that comforting ... :-)
sschu
Seems to me you could be on to something. A collapsed stock market immediately after the election allows the current administration to say, "See! The Republicans have already torn apart the economic fabric of the country!!". Pure politics played the old fashioned way.
Anything seems possible at this point, but the US/Fed still finds itself in a rather hogtied position - its taken 2+ trillion over the last 2 years to keep up barely hobbling along - while other issues have only grown larger as we limp along. There may be a difference between what would be chosen all else equal and what can be chosen all else being unequal.
we've done more than that. we've added "the ulitmate unfunded liability" known as "healthcare." what will the benefit be? what will the benefit be.....
Do you believe a collapsing equity market would be just fine with the Administration?
I don't think so.
Seems like they've spent a lot of time and freshly printed money attempting to achieve exactly the opposite since 2008.
I can't see why they'd do a 180 degree turn on that policy now. Would Obama relish the thought of standing on the White house lawn and telling the public not to worry about the 50% drop in their 401(k)s, look how strong the dollar is!
It is simple really. There would have been no way to get healthcare, financial regulation, close gitmo and cap and trade with a collapsing economy.
Now that the big two are done, HC and FINREG/Frank&Dodd, the only industry left to take over is....
Obama's not running for relection. That's two years from now.
with few exceptions they run for re-election from the time they are elected.
After the World Economy OD's on Collapsin, Obamatron will be found hiding in a "spider hole!"
Quintus remember what the plan is- 1 world govt 1 world currency, seize 401K's, microchip you. Have you missed all these hundreds of articles?
.
Forget the Administration, They will do what they are told and will go along with whatever the Fed does... If the Fed and their puppet masters REALLY want to effect regime change, they would start to leak stories of a QE 2 Lite now (This post puts into perspective some of the recent Fed public comments on the scope and likelihood of QE2)... This would assure a Rethug landslide and assure O of being a 1 term president and cast him along side Carter and Hoover.
yes. that and the fed truly is between a rock and a hard place: trying to support wildly overvalued stock and home prices in a deflationary depression using low interest rates and the increased deficits of a government which already hugely increased its debt throughout the expansion/credit cycle 1982 to 2007.
Election Day November 2. FED announcement November 3.