China has just cornered the Fed: not just diplomatically, as observed when China's PBOC clearly demanded that Yellen's Fed not start a rate hiking cycle, but also mechanistically, as can be seen by the acute and sudden selloff across all asset classes in the past 3 weeks. Now Yellen has about 365 days or so to find a solution, one which works not only for the US, but also does not leave China a smoldering rubble of three concurrently burst bubbles. Good luck.
Having recently explained (in great detail) why QE4 (and 5, 6 & 7) were inevitable (despite the protestations of all central planners, except for perhaps Kocharlakota - who never met an economy he didn't want to throw free money at), we found it fascinating that no lessor purveyor of the status quo's view of the world - Citigroup's chief economist Willem Buiter - that a global recession is imminent and nothing but a major blast of fiscal spending financed by outright "helicopter" money from the central banks will avert the deepening crisis. Faced with China's 'Quantitative Tightening', the economist who proclaimed "gold is a 6000-year old bubble" and cash should be banned, concludes ominously, "everybody will be adversely affected."
Iif there is one currency in the world that “deserves”, so to speak, ultimate execution it is that of the Japanese. The Bank of Japan has done more than any other central bank for far longer to kill it, but like any horror movie villain it seems immune to any reckoning or even the laws of financial sense. In the bigger picture, that is as much a damning indictment as a tale of orthodox resilience. It shows that monetary redistribution is nothing but a trap, an incredibly narrow and locked economic existence that can and will be permitted by any sustained apathy.
"The PBoC’s actions are equivalent to an unwind of QE, or in other words Quantitative Tightening. The potential for more China outflows is huge [and] the bottom line is that QT has much more to go. It is hard to become very optimistic on global risk appetite until a solution is found to China’s evolving QT."
The private economy and its millions of savers exist for the convenience of the apparatchiks who run the central bank. In their palpable fear and unrelieved arrogance, would they now throw millions of already ruined retirees and savers completely under the bus? Yes they would.
The size of the epic RMB carry trade could be as high as $1.1 trillion. If China were to liquidate $1 trillion in reserves (i.e. USTs) in order to stabilize the yuan in the face of the carry unwind, it would effectively offset 60% of QE3 and put around 200 bps of upward pressure on 10Y yields. So in effect, China's UST dumping is QE in reverse - and on a massive scale.
Since the GFC, 'The Great Wall of Money' that Bretton Woods II has furnished via its vendor-financing relationship, has masked the deleveraging of our world economy. The Great Wall is about to collapse and fall.
Global markets are puking at the prospect of higher yields in the U.S. There are many reasons for global markets to melt down, but one that doesn't get enough attention is the strong dollar. In effect, global markets are telling the Federal Reserve: don't raise rates--the strong dollar is killing us.
So now comes the era of gluts, shrinking profits and a drastic deflation of the giant financial bubble that the world’s central banks have so foolishly generated. And this time they will be powerless to stop the carnage. Yet the beleaguered central bankers will launch desperate verbal and market manipulation ploys to brake the current sell-off and thereby preserve the bloodied remnants of their handiwork. When in response the gamblers make their eighth run at buying a dip that is now rapidly turning into a crater, it will be an excellent time to sell anything in the casino that isn’t nailed down.
Carnage Continues Across European Stocks; EURUSD Surges Above 1.1500 As WTI Crude Tumbles To $38 HandleSubmitted by Tyler Durden on 08/24/2015 05:02 -0400
Germany's DAX is now down 15% since the "China doesn't matter" devaluation began with most European borses down 3-5% from Friday's close as the day started off with a modest bounce only to test new lows. EURUSD is now up 500 pips in 4 days back to 7 month highs. European bond risk is surging with Portugal up 50bps since China's debacle began. And finally crude continues to get battered, now testing the $38 handle for the first time since Feb 09.
...and it just promises to get worse!
On Friday, ahead of the closing stock rout, we forecast that the biggest risk for anyone staying long over the weekend was a disappointment out of China, where the sellside had gotten so excited that a 50-100bps RRR cut was imminent, that the lack of one would surely send futures sliding. Sure enough, as we noted earlier today, much to everyone's surprise and disappointment, the PBOC did nothing (for reasons we speculated upon earlier). Which bring us to this evening's S&P futures, which opened for trading minutes ago, and as expected, gapped by over 0.6% after the Chinese disappointment, down 13 points to 1958 and looking quite heavy.
The carnage continues to roll around the world as Asia and Europe react to US weakness which reacted to China weakness and now US is retumbling on fresh China weakness as the global carry trade unwinds across every asset class...
There is an economic and financial trainwreck rumbling through the world economy. Namely, the Great China Ponzi. In all of economic history there has never been anything like it. It is only a matter of time before it ends in a spectacular collapse, leaving the global financial bubble of the last two decades in shambles. The resulting deflationary spiral will suck the global economy into its vortex. And Wall Street will go down for the count because this time the Fed will be utterly powerless to reverse the tide.
Despite 2 significant interventions to stall what is likely an avalanche of wrong-way carry trade unwinds (or perhaps to stop the boat swinging to the other side too much), offshore Yuan has continued to depreciate since China closed and now implies another 1% devaluation is looming (having been up to a 2.6% discount earlier in the day).