The Chinese yuan has reached 20-year highs versus the U.S. dollar. It's a significant development with potentially huge ramifications for China and the world.
With the debt ceiling debate/government shutdown now behind us, at least until the end of the year, we can now return to normal programming. Next week will be a rash of economic data that was pent up by the government shutdown from employment to inflation data. However, in the meantime, here are four things to ponder over this weekend...
The public sphere has been effectively stripped of everything but corny, irritatingly hammy political theater. The players, bereft of talent and inspiration, chosen for their blind obedience to those benefiting from the eradication of ideas and the replaying of tiresome charades, are blind to the poverty of their performance and political theatrics. Will the audience ever tire of this cheesy Theater of the Absurd? It seems the appetite of the American public for this sort of play-acting entertainment is essentially bottomless. As a result, so too is our poverty.
While 20-year highs for the CNY may be enough for many to question the USD's ongoing reserve status, it is clear that there are many other plans afoot that undermine the dominance of the greenback. On the global financial stage, China is playing chess while the U.S. is playing checkers, and the Chinese are now accelerating their long-term plan to dethrone the U.S. dollar. You see, the truth is that China does not plan to allow the U.S. financial system to dominate the world indefinitely. Unfortunately for us, the U.S. debt spiral cannot go on indefinitely. Our debt is growing far, far more rapidly than our GDP is, and therefore our debt is completely and totally unsustainable. The Chinese understand what is going on, and when the dust settles they plan to be the last ones standing.
In one sense, the past couple of weeks’ debt ceiling debate was just one more in a long line of annoying-but-otherwise-pointless pieces of bad political theater. But in another sense it was a turning point, one that may have put the democrats completely in charge. Once the civil war costs the republicans control of the House of Representatives (November 4, 2014), the democrats will be relieved of the need to fool the middle about their commitment to fiscal sanity. The incoming Clinton administration and its congressional majorities will ramp up domestic spending and finance it with higher taxes, more borrowing and way more money printing. Janet Yellen (the perfect Fed chair for this transition) will expand QE and make it permanent. The Fed’s balance sheet will grow in trillion-dollar chunks as it buys up all the bonds issued by the government and the mortgage packagers and pretty much anybody else with paper to sell. Could there be a better environment for gold?
But I never thought it wise to sell it, because for central banks this is a reserve of safety, it’s viewed by the country as such. In the case of non-dollar countries it gives you a value-protection against fluctuations against the dollar, so there are several reasons, risk diversification and so on.
The whole fulcrum of the bloated American state is beyond ready for a radical deconstruction. The same goes for most nation-states in the West. The continual borrowing, serviced indiscreetly by an accommodating central bank, has made an entirety of the populace fat and happy off of debt. This is no realistic method for operating any institution. Something has to give eventually. Any conservative who places high value on civil society over the intrusion of government should balk at the prospect of a higher debt load. It makes certain that the ruling political class will not cease in their effort to infiltrate private life. Unfortunately it appears as if some otherwise sharp minds have fallen prey to the liberal device of alarmism.
While the downward Q4 GDP revisions were inevitable courtesy of the government shutdown scapegoat (making a joke out of the sellside exuberance in late 2012 which had seen 3% growth some time around now,) starting first at Goldman, and shortly after at JPM both of which cut their Q4 GDP forecasts by 0.5% to 2.0%, we had yet to see the persistent bullish bias spill over into 2014. That just changed following an overnight cut by Bank of America of Q1 2014 growth estimates from 3.3% to 2.8%. Certainly, this is the first of many as once again optimism proves unjustified. But who can blame it: after all there will have been "only" 5 years of QE, and the Fed's balance sheet will be only $4 trillion at December 31, 2013, implying a S&P of 1800.
- Republican Civil War Erupts: Business Groups v. Tea Party (BBG)
- Budget fight leaves Boehner 'damaged' but still standing (Reuters)
- Madoff Was Like a God, Wizard of Oz, Lawyers Tell Jury (BBG) - just like Bernanke
- Republicans press U.S. officials over Obamacare snags (Reuters)
- Brilliant: Fed Unlikely to Trim Bond Buying in October (Hilsenrath)
- More brilliant: Fed could taper as early as December (FT)
- Russia Roofing Billionaires Seen Among Country’s Youngest (BBG)
- Ford's Mulally won't dismiss Boeing, Microsoft speculation (Reuters)
- China reverses first-half slowdown (FT)
- NY Fed’s Fired Goldman Examiner Makes Weird Case (BBG)
While the US economic data reporting machinery slowly starts churning again following the "reactivation" of government, last night it was China 's turn to report a slew of goalseeked economic items. Q3 GDP (+7.8% yoy), Industrial Production (+10.2% yoy), Fixed Asset Investments (+20.2% YTD yoy) and Retail sales (+13.3% yoy) for September all came in broadly in line with market consensus. The economy grew at a faster pace on a sequential basis with Q3 growth being 0.3ppts higher than Q2. Nonetheless, many observers forecast yoy Q4 GDP growth to decline due to the end of inventory restocking and the fade out of a major credit stimulus in the prior quarter, even as total Chinese debt continues to push ever higher into bubble territory.Speaking of China, however, it is worth noting that overnight the Chinese Yuan rose to the highest level against the dollar in 20 years. This happens as the USD tumbles to nearly a year low, which incidentally is the theme of the overnight session: the ongoing dollar poundage is reverberating across the globe, and the resulting unleashing of global funding carry trades looks set to take the S&P (and everything else) to fresh record highs on the back of even more generous Fed Kool Aid expectations.
The U.S. is engaged in fiscal and monetary policies that are akin to a Banana Republic.
In addition to electronically creating out of nothing $85 billion every month to buy its own debt in the form of bonds, the U.S. is also borrowing more money than it is authorized to borrow, from itself again.
Today there is a great sense of relief that has swept the nation as news flowed through the media that the government shutdown had come to an end. After all, during the 16 days of the shutdown, there was great hardship inflicted on the average American as the stock market rose by 2.4%, government workers that were furloughed received a 2+ week paid vacation and interest rates fell from a peak of 2.65% on October 1st to 2.59% on October 17th. Outside of the financial markets, which were never concerned of a "default," the reality is that the government shutdown did likely clip up to 0.5% off of 4th quarter's GDP. While that clip to economic growth created by the government standoff is temporary - the ongoing persistant weakness of economic growth is another issue entirely. This is the focus of this discussion. The most disturbing sentence uttered during the debt ceiling debate/government shut down, that should raise some concerns by both political parties, is: "We must increase our debt limit so that we can pay our bills."
Last night, after more than two weeks of utterly embarrassing theater, the government in the Land of the Free inked a deal to kick the can down the road a few more months. And in doing so, they set a very dangerous precedent. As part of the bargain codified in HR 2775 (which President Obama signed into law), the Treasury Department is authorized to SUSPEND the debt ceiling. In other words, for all intents and purposes, there is now NO LIMIT government borrowing. This limitless borrowing authority will expire on February 7, 2014. But it sets the precedent that dismissing the debt ceiling is a perfectly viable course of action. Congress has effectively removed their handcuffs… so you can almost assuredly bet down the road that this provision will be extended, and ultimately become permanent.
The chart shows dollars spent on entitlements for every dollar spent on non-defense discretionary spending (NDDS). This latter category includes education, infrastructure, energy R&D, law enforcement and a wide range of other things that affect the productivity and the general well-being of the US economy (see table), not just today but into the future. The entitlements-to-NDDS ratio is already at an all-time high, and is headed for the stratosphere during the next few years according to CBO projections.
While the stock bubble rages, and the E-mini is solidly in green territory, some are wondering why that is the case on a day in which even the hardcore bulls expected a sell the news event. The reason: the dollar has rightfully regained, much to China's delight, its position as the world's whipping currency, on expectations that the Fed will now not taper purchases until Q1 or even Q2 of 2014, coupled with the realization that the debt ceiling fiasco is set to repeat in another three short months. As a result, the prime broker carry traders are having a field day, shorting their USD-denominated excess deposits and ploughing proceeds into risk assets. But not only: as the chart of the 10 Year yield bond shows, there has been a buying spree in the 10 Year since yesterday's deal and moments ago we dipped below 2.6% for the first time in two weeks. So do your patriotic duty: kill the dollar and buy paper assets: after all the country that issues the "reserve" currency has not defaulted! And whatever you do: don't sell. Keith Alexander may be leaving soon but he is still in charge, and is carefully monitoring all those who dare to hit the sell button. For all of them, the NSA has three simple letters: IRS.