Yesterday saw something quite unusual in the New York trading session. The Hong Kong Monetary Authority bought $715 million (selling HKD) in the FX markets to manage its currency peg, injecting the money into the banking system (and expanding its balance sheet) to prevent HKD from rising above its permitted range. HKMA projects its balance sheet to grow to the end of July, but as Simon Black (of Sovereign Man blog) notes, this could well be the start of a bigger shift - an end to the US Dollar peg..."The US is no longer the undisputed superpower it once was. The US dollar is dragging them down. Hong Kong is easily strong enough to stand on its own."
The trend of the end of the dollar hegemony continues to slowly creep through the world's financial systems (no matter how many mainstream media 'king dollar' stories we see). The Swiss National Bank and the People’s Bank of China reached a currency swap agreement this week. While this is not a huge trend changer in the near-term, it demonstrates the continued rising roled of China as the largest economy and to be the next financial capital of the world when Europe and the USA blow themselves apart with defaulting socialism.
This week, 70 years after Bretton Woods, leaders from China, Russia, India, Brazil, South Africa, and several other nations are hard at work in Fortaleza, Brazil creating a new development bank that will compete against the US-controlled World Bank. This is a major step in an obvious trend towards a new financial system. Every shred of objective data is screaming for this to happen. It’s a different world. Everyone realizes it except for the US government, which is still living in the past where they’re #1 and get to call all the shots.
When we broke the story of China's "secret" money laundering into US real estate scheme, we said "So what happens next? Assuming there is the anticipated resulting backlash and crackdown on Chinese banks, which will finally enforce the $50K/year outflow limitation, this could well be the worst possible news not only for Chinese inflation, which suddenly - no longer having a convenient outlet for the unprecedented liquidity formed in the country every month - is set to soar, but also for the ultra-luxury housing in the US. Because without the Chinese bid in a market in which the Chinese are the biggest marginal buyer scooping up real estate across the land, sight unseen, and paid for in laundered cash (which the NAR blissfully does not need to know about due to its AML exemptions), watch as suddenly the 4th dead cat bounce in US housing since the Lehman failure rediscovers just how painful gravity really is." What we forgot to add is that virtually every other financial mainstream outlet would promptly pick up on the story even as the original source back in China took its secrets to the grace. Metaphorically speaking, we hope...
Gold has meaning to China in the same way that gold has meaning (or should have meaning) to Western investors. Not as an inherent store of value or some timeless monetary standard... but as a symbol of failed confidence in Western central bank control over market outcomes. To both investors and China, gold is an insurance policy against Western central bankers losing control of their massive monetary policy experiment. The difference is that China has the power to do something about it.
Felix Zulauf, James Montier and David Iben: Three legendary investors share their views on financial markets. Everything is pricey ("we will continue to swim in a sea of liquidity; but there might be other events and developments that may not be camouflaged by liquidity which could cause a change of investor expectations.") the European periphery is a bubble ("The Euro crisis is not over...the European economies are not going to change for the better for years to come despite all the cheating and breaking of laws"), Value investors need to venture to Russia ("when you look at today’s opportunity set, you’re left with a set of assets where nothing looks attractive from a valuation point of view") or buy gold mining stocks (" The down cycle could be much bigger than anybody believes if the market realizes that all the actions taken in recent years do not work.") Summing it all up, "there is no question that [sovereigns] lack the fundamental economic base to finally service their debts," trade accordingly.
- Bond Anxiety in $1.6 Trillion Repo Market as Failures Soar (BBG), as reported first by Zero Hedge
- As Food Prices Rise, Fed Keeps a Watchful Eye (WSJ)
- Yellen’s Economy Echoes Arthur Burns More Than Greenspan (BBG)
- Draghi’s $1.4 Trillion Shot: Silver Bullet or Misfire? (BBG)
- Israel's Netanyahu phones father of murdered Palestinian teen (Reuters)
- Ukraine says forces will press forward after taking rebel stronghold (Reuters)
- Goldman Sachs Brings Forward Rate Forecast as Treasuries Drop (BBG)... you mean rise?
- Super typhoon takes aim at Japan (Reuters)
- Kidnapped Nigerian girls 'escape from Boko Haram abductors' (Independent)
- Merkel says U.S. spying allegations are serious (Reuters)
To complete the French triple whammy offensive against the US Dollar this weekend (first, French central banker Noyer suggesting de-dollarisation; second, French oil major Total's CEO "seeing no reason for the Petrodollar"), French finance minister Michel Sapin says "now is the right time to bolster the use of the euro" adding, more ominously for the dollar, "we sell ourselves aircraft in dollars. Is that really necessary? I don’t think so." Careful to avoid upsetting his 'allies' across the pond, Sapin followed up with the slam-dunk diplomacy, "This is not a fight against dollar imperialism," except, of course - that's exactly what it is... just as it was over 40 years ago when the French challenged Nixon.
Not even we anticipated this particular "unintended consequence" as a result of the US multi-billion dollar fine on BNP (which France took very much to heart):
- NOYER: BNP CASE WILL ENCOURAGE ‘DIVERSIFICATION’ FROM DOLLAR
And, the biggest irony of all is that in "punishing" France for dealing with Russia, that core country of the Eurasian alliance of Russia and China, the US just accelerated the graviation of France (and all of Europe) precisely toward Eurasia, and away from the greenback.
- Obama Decries Big Bonuses at Bank Trading Desks as Risky (BBG)
- India central bank seeks to swap gold to improve reserves quality (Reuters)
- There goes Q3 GDP: Arthur Strengthens to Become First Atlantic Hurricane (BBG)
- Airports Serving U.S. Tighten Checks on Stealth-Bomb Threat (BBG)
- Fear, cash shortages hinder fight against Ebola outbreak (Reuters)
- Brent Declines as Libya Rebels Say Ports Are Open (BBG)
- Shiites Train for Battle in Iraqi Holy City (WSJ)
- Dimon’s Cancer Has 90% Cure Rate With Demanding Therapy (BBG)
- Goldman says client data leaked, wants Google to delete email (Reuters)
- ECB Watchers in the Dark Look to Draghi for Illumination (BBG)
In a QE dominated world - in the Golden Age of the Central Banker - renminbi strengthening has been an unmitigated disaster. Chinese political stability depends on the actual production of actual things by actual people working in actual factories, and the prospects for that real economic growth are made significantly worse the longer the West persists in favoring financial asset inflation and the ossification of a low-growth status quo. While the West may be able to accept, even celebrate, unlimited private wealth – China cannot. Not if it wants to remain a politically unified Great Power. We think this is just the start of a multi-year weakening of the renminbi, a sea change in Chinese monetary policy that will inevitably create broad political tensions with the US and make Japan’s devaluation/inflation course infinitely more difficult to achieve.
If you want to gather honey, don’t kick over the beehive. This was how Dale Carnegie titled the first chapter of his 1936 personal development masterpiece—How to Win Friends and Influence People. But based on the way the US is acting, you’d think they were test-driving an entirely different manuscript - How to Lose Friends and Alienate People. Between FATCA and the BNP debacle, it appears politicians fail to realize how important the US banking system is to holding together the US economy. With all of its debt and all of its money printing, the US banking system was one of America’s last economic competitive advantages; but now we are going to see more and more foreigners curtailing their use of the US banking system... and by extension... the dollar. Without that mass of people to export dollars to, inflation will really kick in back home.
The proof is clear. According to SWIFT, China’s renminbi is now the second most used currency in the world for global trade settlement, putting it ahead of even the euro. It’s happening. And based on the data, it’s completely obvious (as we continued to chronicle) to just about everyone but the US government. However, we were still surprised to see an article in the Financial Times’ banking intelligence subsidiary (‘The Banker’) entitled "The US’s dollar domination is coming to an end." This reality has become obvious to just about everyone... Reserve currencies come and go. So will the dollar. This is nothing new.
Something very dramatic happened overnight when, in a little noticed statement, Gazprom's CFO Andrey Kruglov uttered the magic words:
- GAZPROM READY TO SETTLE CHINA CONTRACTS IN YUAN OR RUBLES: CFO
In other words just as the US may or may not be preparing to export crude - a step which would weaken the dollar's reserve status as traditional US oil trading partners will need to find other import customers who pay in non-USD currencies - the world's two other superpowers are preparing to respond.