There has been much speculation recently about whether or not China is or isn't dumping its holdings of US Treasurys. Spoiler alert: it isn't. At least not outright. After all, it still is not a self-sustaining economy and as such relies on what's left of the US middle class to purchase its production. In fact, according to the latest TIC data, after 5 months of declines, Chinese UST holdings increased in April 2011. The problem with TIC is that it is woefully late. It is also terribly unpredictable and subject to annual adjustments which see hundreds of billions adds or subtracted from estimated holdings. Furthermore much has happened in the period between April and the first week of July. Namely the end of QE2. Furthermore many will note that there has been little if any change in market sentiment to Treasury paper now that QE2 is over (which is actually very much untrue after last week we saw the biggest percentage blow out in the 5 Year in history). But for the best indication of what non-US based buyers of Uncle Sam's paper think about the desirability of said paper, we went to the source, and compiled all Auction issuance data since the June 2009 bidder reclassification rules. The result is quite striking. Over the past 2 years, foreign demand, expressed by the final take down as a percentage of total auction size across the entire curve (2,3,5,7,10, and 30 Year) has plummeted from 55% to just below 35% as of the last auction.
With each passing day bringing us closer to the end of the world's reserve currency, and everyone coming up with their soapbox theories about what happens tomorrow and the day after, perhaps the best way to analyze the future is by looking at the past, which is what Grant Williams has done in his latest TTMYGH letter. It begins: "What exactly IS ‘The Dollar’? There are currently 47 countries or territories that use the ‘dollar’ as their currency, from the obvious names such as the United States, Australia and Canada to the more esoteric such as Suriname, Tuvalu and Guyana, but where did the word ‘dollar’ come from?" Williams proceeds to analyze the full history of the greenback, and its primary function, to provide an alternative to gold, as the defacto world currency. The truth is that every time the dollar appeared like it was on the verge of irrelevance, a gold standard of some form was reestablished, however briefly. We are now at one such crossroads. Yet only fools know for a fact what will happen hours from now, let alone years. Which is why as Williams concludes, " Whatever happens from here, there are a few of things of which we can be quite certain" :
- To paraphrase Winston Churchill’s quote about America: Governments will always do the right thing - after they’ve run out of every possible way to avoid doing so
- The can will be kicked down the road until we run out of road - and into a brick wall
- The ultimate judge of the success (or otherwise) of every political decision made since Lehman Brothers went to the wall is shiny, yellow and costs about $1,500/oz
"So what exactly IS the dollar?" Read on form some answers.
According to my research, last week's stock market rally was the sharpest such surge since 1644, just before the Ming Dynasty collapsed and Europe was decimated by an epidemic of plague. Perhaps that is coincidence, perhaps not. The Status Quo always tries to brighten the outlook just before things fall apart, and nothing cheers flagging spirits more than a sudden rise in wealth. The rally in barley in Babylon during the last week of December 1748 BCE was almost as robust, a peculiar coincidence given the next sharpest rally on record was the rebound in Dutch tulip bulb contracts which also occurred in the month of December, 1636. Shares in the South Seas Company recovered much of their initial losses in a similar rebound in London, September, 1720, a welcome respite for all the investors who were about to be wiped out by the 80% decline in share value when that bubble popped. More recently, condos in Florida saw a sharp uptick of sales and prices fetched in August, 2007, just before that market collapsed in a great heap. You see the pattern: the sharper the rally, the closer the market is to the bubble's end-game.
It had been widely expected that Chinese CPI would come in smoldering in June, with some predicting a print of 6% or just over. Few, however, expected 6.4%, a blistering spike compared to May's 5.5%, which is the highest inflation recorded in China in 3 years, and depending on how one looks at GDP (and the government's way is certainly modestly flawed to say the least), China may well be approaching the revolutionary point where real interest rates turn negative, and purchasing gold becomes a costless opportunity, which in turn would send the price of gold well north of $2,000. China Daily, the government's official mouthpiece comes with the usual Douglas Adams advice: "We don't have to panic about the June CPI figure," said Zhang Liqun, a macroeconomic analyst with the State Council Development Research Center, China's top government think-tank....Of the 6.4-percent CPI growth in June, 3.7 percentage points were contributed by the carryover effect of price increases last year, the NBS said in a statement on its website. "A CPI growth above 6 percent doesn't mean the inflation situation is worsening in China, because 3.7 percentage points of the increase were contributed by the carryover effect," Zhang said." See: inflation is transitory. First in the US now everywhere. Elsewhere, expect more RRR hikes to follow in the coming weeks in the aftermath of the just announced general interest rate hike as the PBoC, contrary to its own advice, starts panicking.
Iran Test Fires Two Long-Range Missiles Into Mouth Of Indian Ocean Where Two US Aircraft Carriers Are SituatedSubmitted by Tyler Durden on 07/09/2011 - 12:03
Today for the first time, Iran's IRNA news agency reported that the country had fired two missiles with a range of 1,900 km, coupled with TV coverage, into the mouth of the Indian Ocean. As PressTV reports, "Commander of the Aerospace Division of Iran's Islamic Revolution Guards Corps (IRGC) Brigadier General Ali Hajizadeh said that the long-range missiles were fired in the Iranian calendar month of Bahman (January 21 to February 20). He said that the missiles, fired from central Iran towards the Indian Ocean, successfully hit its designated targets, IRNA reported Saturday. Hajizadeh said that Iran's missiles have a range of up to 2,000 kilometers, adding that “Iran has the ability to produce longer-ranged ones (missiles) but presently there is no need to produce them." The purpose of the test firing was all too clear: "Our desired targets and the country's threatening us are located well within the reach [of our missiles]," he said. In other words: any US-based invasion of Iran will most certainly see prompt retaliation against US national-interests in the region. This is especially concerning since the US currently has two aircraft carriers, amusingly the Bush and the Reagan, both sitting side by side at the straits of Hormuz, with LHD 4 boxer backing up the rear in a zone that is now quite explosive. Had these test firings been perceived by a provocation, and lately it appears that the US is actively seeking one, it may have been quite a mess.
While it is by now clear that despite a few headfakes, the economy largely sputtered in the second quarter, with the only positive data point coming from a major inventory build up that led to a better than expected manufacturing ISM, the question now is how did the global weakness over the past 3 months translate into corporate earnings. Next week we will start finding out as 4% of the S&P500 companies report, but the peak of reporting will hit in the 3 weeks following when 83% of all companies hits the tape. Oddly enough, while there has been a material number of downgrades, especially in the financials sector, preannouncements have once again been largely missing, especially in the industrials space. As Dylan Grice pointed out, the game whereby analysts lower EPS forecasts for companies only so hey can beat by about a cent has started in earnest. The biggest question is whether the "farce that is reporting season" will simply be a modest drop in EPS even as the government resumes its corprate friendly approach, or, with advance indicators now tumbling, is this the inflection point? Recall that corporate margins have now peaked: the only saving grace for the corporate sector will be if companies are once again laying off people in droves and cutting overhead (an event which should lead to massive layoffs at ADP for example). Anyway, here are some observations from JPM and Goldman on what to expect and how to fade the big banks' calls on what is coming.
Guest Post: Deconstructing Algos 3: Quote Stuffing As A Means Of Restoring Arbitrageable Latency; Or Is The CQS TRYING To Crash The Market?Submitted by Tyler Durden on 07/08/2011 - 22:08
In a recent article Nanex has shown that quote stuffing can slow down the updating of series of stock prices, bids and asks. The article was less clear about why one might do that. There could be arbitraging opportunities. One of the first games these clowns got into was latency arbitrage. HFTer offers a number of shares for sale at one price, and at the first sign of interest, pulls all of the offers and resubmits them at a higher price. The latency comes into play because as another player send his orders in to fill HFTer, and these orders all find their ways to the market via differing routes, each of which has a different latency (lag time)--so instead of all arriving at once, they arrive singly, giving HFTer time to pull the rest of his bids....Saturating the quotes on individual lines will change the time lags (latency factor) during the intervals the quotes are generated. For Thor to work properly, it has to estimate by observation the precise lag between sending an order and having it arrive on each market. Randomly changing the lags for the different lines would confound RBC's (and others) attempts at ensuring all its orders arrive on all markets at the same time. And curiously all of this comes just days after the CQS decided to increase the cross-system capacity for quote stuffing in the market from 750,000 quotes per second to 1 million.... Almost as if someone is urgently trying to recreate the market instability that sent the Dow plunging by 1,000 points in seconds.
The IMF is delighted to announce that it just approved a €3.2 billion disbursement of cash for Greece, its fifth, as part of the €12 billion in money that Greece needs in order to continue operating in the months f July and August. And just for what purpose will this money be used, one may ask? Well, as explained a few weeks ago, in Greek Math: €12 Billion In, €18.2 Billion Out the entire amount will be promptly recycled by global financial institutions in the form of debt maturities and interest payments, which amount to €18.2 billion in the months of July and August. Simply said ECB, EU and IMF money in, money owed to bankers out. The kicker: 17.09% of the money coming from the IMF, comes from, that's right dear US taxpayer, you (and since 21% of the quota contributions allocated to the IMF are deemed "non-usable", the actual number funded by the US is likely much higher). But this plot has a bonus kicker: as we reported on Wednesday, the actual Greek debt is no longer owed by European banks to the extent it had been previously expected: a development that threatens to scuttle the entire second Greek bailout plan as currently proposed. So as the banks have been selling Greek debt, who has been buying? Mostly hedge funds, such as everyone's favorite John Paulson. So to recap: US taxpayers have just paid out about $780 million of the $4.6 billion in order to fund interest owed to... hedge funds.
Remember one simple truth, 91.8% of ES Futures daily volume is attributed to day traders and computer algorithms. And since not one single person within that group uses macro data for their intraday trades then it is safe to say the market in the short term has little to do with pricing in macro economic data. Remember how the SPX peaked two months before the great recession actually began. That is not forward looking. Market participants are already analyzing today's afternoon rally as a sign that this market is resilient, that the economy is still headed for a soft patch and that the bull is alive and well. I beg to differ but instead would rather highlight two important aspects of this market I suspect is dictating price. Shorts are scared and longs are delusional. Bernanke not only taught investors to buy every single dip he even has them convinced the removal of the Bernanke put (i.e. QE) has no downside risk to the market. The move the past two weeks was foreseen by no one and hurt a lot of shorts while making longs feel smart yet again. Even a lot of macro bears were capitulating on the economic data the past two weeks. That is until today.
Much hollow rhetoric has been uttered about the vast existential threat presented by Greek CDS. As we have reported, Greek CDS is the least of Europe's problems. When it comes to the stability of the European dominoes, it is and has always been about Italy, which is not only the second worst country in Europe after Greece on a debt/GDP basis, and also the country with the largest amount of nominal debt, but more importantly has the largest amount of net CDS outstanding. All this is summarized on the Bloomberg chart below.
Now that every carbon-based trading life form has long since left the building, and only the robots and Brian Sack's NYU interns are left loading up bags, the good old ES-RISK divergence has once again opened up to the same 10 point spread which prompted us to advise for a compression trade yesterday. Sure enough, like clockwork, the vacuum tubes come crawling with limited dry powder, and can only bid up ES while leaving everything else in the dust.A compression bet here will likely close the same way it always closes once some rationality returns and the PPT steps back.
Folks… you just can’t make this stuff up. On July 6th, just two days ago, at least a dozen busybody Congressmen sponsored the introduction of HR 2411, the “Reduce America’s Debt Now Act of 2011.” They always come up with fantastic names for these pieces of legislation… and rest assured, the better/more patriotic the name, the more ominous the bill. This one follows the pattern. HR 2411 states that every worker in America should be able to voluntarily have a portion of his/her wages automatically withheld and sent directly to the Treasury Department for the purposes of paying down the federal debt. “Every employer making payment of wages shall deduct and withhold upon such wages any amounts so elected, and shall pay such amounts over to the Secretary of the Treasury…” That’s right. Uncle Sam is so broke that he wants to give all the good little Americans out there the opportunity to contribute an even greater portion of their paychecks to finance government largess. Desperate? Hmmm…. Don’t worry, it gets better.
Despite the endless din from the clueless economist brigade attempting to couch the impact of the Birth Death adjustment on actual non farm payroll numbers, there is a workaround which confirms that of the 1 million "job gains" in the past year, well over 50% of these have come from the statistical fudge factor known as the Birth Death Adjustment. We wonder when anyone in the administration will mention that of the 1 million jobs "created" in the past year, 606,000 have been purely the product of overzealous excel models.
The Bernank has already gone too far and there is no turning back. There will be QE to infinity until the point where the system collapses on itself, which is probably not too far off once the next round of official QE is started. What form this may take is anyone’s guess but as I mentioned in a recent email, the whole rate cap idea makes the most sense since it will allow infinite QE to occur without having to announce subsequent iterations. The simple fact that they tried to pretend QE would end and then tried to raid commodities to create the justification for it later on demonstrates to me how much trouble we really are in. If The Bernank had merely gone ahead and continued the program he had a CHANCE of perpetuating Disneyland for a little longer at least. Instead, he is praying that the economy can stand on its own, which of course it can’t and so then when he launches into QE3 after the economy weakens and proves QE1 and QE2 did nothing to create a self-sustaining recovery the entire mindset and understanding going into the next money printing party will be entirely different from a psychological standpoint. QE3 will not lead to confidence or anything even similar to the last rounds. Rather it will be used to basically “keep the lights on.” More than anything it will serve as that proverbial “bell” that will ring and in the minds of the savviest and wealthiest people on the planet to get the hell out of the system while they can. This is inevitable. It is already happening. The stampede is yet to come. But come it will. It is time for everyone to take additional steps whatever that may mean for you personally. I know I am. Don’t get gorged.