ratings

Gold To Rise On $14.3 Trillion U.S. Debt Limit Increase – Bloomberg Chart of the Day

The Bloomberg Chart of the Day (see above) shows how gold in dollars is correlated with increases in the U.S.’s debt limit, particularly in the last 10 years. Julia Yoo, a Seoul-based analyst at Korea Investment told Bloomberg that “gold’s rally is quite explosive.” “Increasing the debt limit means you print more dollars, which will weaken the dollar and consequently lift the gold price,” adding to gains this year that were driven by demand from countries including China.”

Exposing China's Mysterious Multi-Trillion Shadow Banking System

Precisely a year ago, a summary report by Fitch shone the first, if relatively weak, light on the massive Chinese securitization industry which had for years allowed the country to fund its housing bubble without forcing the banks to actually take much if any of the loan risk associated with this unprecedented expansion. At the time of the Fitch report, the securitization discrepancy was not deemed to be excessive and at about RMB 1 trillion in annual issuance it was promptly swept under the rug. Nonetheless the key statement remained: "Fitch believes the vast majority of these transactions are not publicly disclosed by Chinese banks, and few, if any, traces of the loans remain in financial statements." More recently, and long overdue, Moody's took a refresh look at the same problem and on July 4 released a rather disturbing report which found "that the Chinese audit agency could be understating banks' exposures to local governments by as much as RMB 3.5 trillion." At 10% of GDP, the number sure is starting to get larger. Today we present what we believe is the most comprehensive report we have seen to date on the matter of the Chinese "Shadow Banking" industry courtesy of SocGen. For those who enjoy putting things into perspective, SocGen quantifies the total shadow banking system in China to be as large as RMB10 trillion (or 55%, of the Total Social Financing of RBM18 trillion): nearly USD1.5 trillion. While the number is not massive (considering that the most recent corresponding shadow banking number for the US is well higher at about $16 trillion), it keeps increasing as a portion of GDP. Why is this important? Because as SocGen's Wei Yao says, "The currently unsupervised development of the informal financing market delays the intended impact of monetary policy tightening, but adds to the risk of precipitating a liquidity crunch of the entire financial system later." So it this Chinese shadow banking system a potential monetary time bomb, destabilizing the PBOC's efforts at normalization and adding materially to systemic risk? Read on.

Moody's Warns That Any Fluff Deficit Reduction Plan Will Likely Result In Downgrade

Since we don't have minutely Europe headlines, instead we get US ones. And here is the first official reaction to the McConnell plan from a rating agency. Since this Plan B is far more concrete than the Gang of Whatever Plan, Moody's will have absolutely the same to say about the previously noted 5 page talking points memo.

Guest Post: You Want To Fix The U.S. Economy? Here's A Start

A simple 8-point plan would restore both the banking and the real estate sectors, and end the political dominance of the parasitic "too big to fail" banks. Craven politicos and clueless Federal Reserve economists are always bleating about how they want to fix the U.S. economy and restore "aggregate demand." OK, here's how to start...

Guest Post: Doing The Global Currency Shuffle

In mainstream financial circles, the concept of a global currency is often spoken of only with an air of caution. It is approached always in hypothetical terms. It is whispered of as some far off dream; a socio-economic moon landing in the far reaches of fiscal space. Perhaps in 2015, or 2020, or maybe 2050, but certainly never just over the horizon, or right around the corner posing as an innocuous trade asset created over 40 years ago and used only on rare occasions. Unfortunately, the development of a centralized global security representing the creation of a supranational economic body is much closer than many would care to admit…

S&P Puts News Corp On CreditWatch Negative; Will News Corp Buy McGraw Hill Next?

S&P, bored with taking the axe to various insolvent European governments, just went after the man, the myth himself. Next steps: News Corp. expands it media empire by purchasing McGraw Hill (soon to be followed by a tack on acqusition of former-Buffett darling MCO)? "The CreditWatch action reflects, in our opinion, the increased business and reputation risks associated with broadening legal inquiries. Since our last research update on July 13, the U.K. legal process has expanded and pressure from U.S. lawmakers has increased for an FBI probe. In an interview with Bloomberg Businessweek in reference to phone-hacking allegations at "News of The World," an FBI official for the agency's New York office said, "We're aware of certain allegations pertaining to possible phone hacking by News Corp. personnel and we're looking into those charges." In our opinion this and other recent developments materially increase the reputational, management, litigation, and other risks currently faced by News Corp. and its subsidiaries. The last several days have been marked by the resignations of the chief executives of News International and Dow Jones, the issuing of summonses to key company executives to appear before Parliament on July 19, the arrest of a former senior company official, and a weakening of the company's executive bench strength."

Why The Latest European Bailout, Aka "The Debt Buyback" Plan Is Also DOA, And Why The CDO At The Heart Of The Eurozone Is About To Become Extremely Toxic

Over time many have wondered why the ECB, in order to "extend and pretend", does not simply do an episode of QE and monetize bonds outright? Well, in addition to Germany's flashbacks to hyperinflation which have so far kept Trichet from pursuing an all too aggressive bond buyback program in the primary market, the ECB does have the Securities Market Programme (SMP) which however since inception has bought only €74 billion (this week the number is expected to rise, or, if it doesn't, it confirms that now China is directly buying European bonds in the secondary market). The problem with the SMP is that it was conceived as a modest marginal debt buying program, never intended to surpass much more than a few dozen billion in debt. Alas, by now it is becoming all too clear that the ECB will need to monetize hundreds of billions of insolvent PIIGS debt in order to extend and pretend forcefully enough so that a new bailout is not needed every other week. But how to do it without monetizing debt on the ECB's books? Enter the EFSF, or the off-balance sheet CDO "at the heart of the eurozone" which according to the latest iteration of the European rescue package (Remember that most recent DOA plan to rollover debt? Yep - that's dead) is precisely the mechanism by which Europe's own open market QE is about to take place. "European Central Bank Executive Board member Lorenzo Bini Smaghi suggested the EFSF be allowed to provide funds for a buy-back of bonds from the market, where prices have in some cases fallen 50 percent from levels at which the debt was issued. "This would allow the private sector to sell bonds at market prices, which are currently below nominal value. At the same time, the public sector could benefit monetarily," Bini Smaghi told Sunday's To Vima newspaper in an interview." Translated: another market clearing perversion courtesy of the same structured finance abominations that brought us here. The problem, unfortunately, is that Moody's announced nearly two and a half years ago that the whole distressed debt buyback approach is... a dead end, and will lead to the same "event of default" outcome that all the prior bailout plans would have achieved as well (we correctly surmised that Bailout #2 was DOA, about a month before the "efficient" market did). Here is why.

The Debt Ceiling Farce Is Ending... Or Is It?

It may be time to rebrand Congress as the new CTU, although when it comes to who in D.C. should play agent Jack Bauer we are still unsure. The reason is that this morning we get two diametrically opposing fictions about the latest reality on the debt ceiling. On the one hand we read in the LA Times that, "Republican leaders in the House have begun to prepare their troops for politically painful votes to raise the nation's debt limit, offering warnings and concessions to move the hard-line majority toward a compromise that would avert a federal default. For weeks, GOP conservatives, particularly in the House, have issued demands about what they would require in exchange for their votes to increase the debt limit... Unwilling to risk the economic and political consequences of a federal default, which could come as early as Aug. 2, they have started the difficult process of standing down." That, however is not what The Hill heard: "House Republican leaders have missed a 36-hour deadline President Obama set during a Thursday meeting for lawmakers to give him a plan to avert a national default. The deadline came and went Saturday morning without a response from House Speaker John Boehner (R-Ohio). Instead, Boehner and House Majority Leader Eric Cantor (R-Va.) plan to move the Cut, Cap and Balance Act on the floor next week, which would require passage of a balanced budget amendment to the Constitution before the debt limit is raised. A House GOP leadership aide said at noontime Saturday that Boehner and Cantor did not send Obama a revised proposal to raise the debt-limit, as the president requested." So which is it? And has M. Night Shyamalan been retained to write the surprise twist ending to this nail-biter? We doubt it. Unfortunately, we are still convinced the republicans, under the "wise" defection of Mitch McConnell will fold, Obama will get what he wants, and the republican tough stance will go up in a puff of smoke leading to an even great loss of credibility for the GOP. There is less than 168 hours in which we can be proven wrong. We hope we are, but we doubt it.

Moody's Downgrades 7 Portuguese Banks

Moody's which is already not all that loved in Portugal, is about to make some more friends after it just downgraded the 7 biggest Portuguese banks, all of which, incidentally, passed the Stress Test that nobody remembers any more.