Following a year of threats that the west would kick Russia out of SWIFT, Moscow finally took the plunge and created its own international payment system alternative. And now, seeing how easy and fast it can be done, here comes China next with its own "China International Payment System" or CIPS, as one after another major global powers wave goodbye to a dollar-based, Washington-controlled (and NSA-supervised) international funds-transfer protocol. One that no longer relies on the US Dollar.
With all eyes squarely on the ECB as Mario Draghi prepares to flood the EMU fixed income market with €1.1 trillion in new liquidity starting Monday, Soc Gen’s Albert Edwards reminds us that “another type of QE” is drying up thanks largely to the relative strength of the US dollar. "The bottom line is that in a world of over-inflated asset values, the strength of the dollar is resulting is a rapid tightening of global liquidity as emerging economies (and indeed the Swiss) stop printing money to buy the US dollar. This should be seen for what it is — a clear tightening of global liquidity. Investors ignore this at their peril."
Bubbles arise if the price far exceeds the asset’s fundamental value, to the point that no plausible future income scenario can justify the price
The US had a credit bubble, China has a credit bubble. The US had a housing bubble, China has a housing/investment bubble. Will China eventually have to go down the same path as the U.S., and the Eurozone? The answer: yes.
When we arrived to Bangkok the other day, coming down the motorway from the airport we saw a huge billboard - and it floored us. The billboard was from the Bank of China. It said: “RMB: New Choice; The World Currency”
You wouldn't know it if you looked at the price of oil, but arguably the world's largest economy just unloaded a kitchen sink of fears, warnings, and downgrades on its economy; the most notable being:
*CHINA SETS 2015 GDP GROWTH TARGET AT ABOUT 7% (from 7.5% in 2014)
In a report to be delivered to the government tonight, Premier Li Keqiang warned China may face more economic difficulties in 2015 vs 2014 and downward economic pressure is still growing (despite Western 'analysts' proclaiming China fixed). The currency is weakening on the news and AsiaPac stocks are lower and as Chinese stocks open lower (despite hints at more easing), millions of newly minted "can't lose" Chinese investors begin to worry.
Financial systems that seem robust are more often than not inherently fragile - China is no exception!
"None dare call it a “currency war” because that would be counter to G-10/G-20 policy statements that stress cooperation as opposed to “every country for itself”, but an undeclared currency war is what the world is experiencing. Close to the same thing happened in the 1930’s, a period remarkably similar to what many countries’ policies resemble today.... Negative/zero bound interest rates may exacerbate, instead of stimulate low growth rates in all of these instances, by raising savings and deferring consumption... Asset prices for stocks, high yield bonds and other supposed 5-10% returning investments, become stretched and bubble sensitive; Debt accumulates instead of being paid off because rates are too low to pass up – corporate bond sales leading to stock buybacks being the best example. The financial system has become increasingly vulnerable only six years after its last collapse in 2009.... Central banks have gone and continue to go too far in their misguided efforts to support future economic growth."
And then there were 21. Hours ago on Saturday, the country whose currency is largely pegged to the dollar which itself is now anticipating a rate hike in the coming months, surprised the world by confirming its economic slowdown yet again following a recent rate cut just this past November when it lowered its benchmark rate by 40 bps, after it again cut benchmark lending and deposit rates by 25 bps starting on March 1. Specifically, the PBOC will lower the one-year lending rate to 5.35% from 5.6% and its one-year deposit rate to 2.5% from 2.75%. It also said it would raise the maximum interest rate on bank deposits to 130% of the benchmark rate from 120%.
US stock markets reached record highs last week. Question: does that make them riskier, or less risky? We think the former.
The signals are clear: the world has already entered a downturn in economic activity. Therefore we can expect accelerated money-printing and the imposition of more negative interest rates in a forlorn attempt to avert economic reality.
Everything has to come to an end, sometime...
Very few, it seems...
There is a bull market developing in gold and few are aware of it...