Albert Edwards Storms Out Of The Gate With Calls For 450 On The S&P, Sub-1% 10 Year, And $10,000 GOldSubmitted by Tyler Durden on 08/29/2013 11:07 -0400
"The emerging markets "story" has once again been exposed as a pyramid of piffle. The EM edifice has come crashing down as their underlying balance of payments weaknesses have been exposed first by the yen’s slide and then by the threat of Fed tightening. China has flipflopped from berating Bernanke for too much QE in 2010 to warning about the negative impact of tapering on emerging markets! It is a mystery to me why anyone, apart from the activists that seem to inhabit western central banks, thinks QE could be the solution to the problems of the global economy. But in temporarily papering over the cracks, they have allowed those cracks to become immeasurably deep crevasses. At the risk of being called a crackpot again, I repeat my forecasts of 450 for the S&P, sub-1% US 10y yields and gold above $10,000."
The twenty-first-century economy has thus far been shaped by capital flows from China to the United States – a pattern that has suppressed global interest rates, helped to reflate the developed world’s leverage bubble, and, through its impact on the currency market, fueled China’s meteoric rise. But these were no ordinary capital flows. Over the last decade, the vast quantities of short-term capital that were being pumped into China’s banking system drove commercial banks and other financial institutions to expand credit substantially, especially through the shadow-banking system, leading to a massive credit bubble and severe over-investment. Given this, in the event of a crisis, China would most likely have to begin selling off its massive store of US debt - and indeed it is. After spending years attempting to insulate the US economy from the upshot of its own banking crisis, the Fed may ultimately be forced to bail out China’s banks, too.
In a somewhat shockingly blunt comment from the mouthpiece of Chinese officialdom, Yao Yudong of the PBoC's monetary policy committee has called for a new Bretton Woods system to strengthen the management of global liquidity. In an article in the China Securities Journal, Yao called for more power to the IMF as international copperation and supervision are needed. While comments seem somewhat barbed towards the rest of the world's currency devaluers, given China's growing physical gold demand and the fixed-exchange-rate peg that 'Bretton Woods' represents, and contrary to prevailing misconceptions that the SDR may be the currency of the future, China just may opt to have its own hard asset backed optionality for the future; suggesting the new 'bancor' would be the barbarous relic (or perhaps worse for the US, the Renminbi). Of course, the writing has been on the wall for China's push to end the dollar reserve supremacy for over two years as we have dutifully noted - since no 'world reserve currency' lasts forever.
According to media reports, the People's Bank of China is considering phasing out the dollar as the reference currency or peg for the yuan, and to start using gold as the reference point.
The reports have not been confirmed officially, but there has been official comments to that effect in recent years and Chinese academics have advocated backing the renminbi or yuan with gold.
Beijing's possible move to back the yuan with gold would be a strategic move in order to, lessen the risk of inflation, increase the yuan’s attractiveness as an investment medium and create faith in the yuan as a reserve currency.
The PBOC just announced that China will scrap its bank lending rate floor and controls on bill discount rate. It will also allow banks to set lending rate based on commercial preinciples with a goal of promoting economic restructuring. China will continue differentiated lending policies for housing sector and will leave unchanged lending floating rates for home buyers.
Jim Rickards on a September Tapering; And His Reaction to Our Chinese Currency Bait and Switch TheorySubmitted by EB on 07/14/2013 14:13 -0400
Tired of tapering talk? We couldn't resist. Then, on to more pressing matters. Seems an investment in China might just not be what it seems to be. Think Three Paddy Hat Monty.
Following the most recent shift 'away' from a USD-centric world (with the China-Australia direct currency convertibility), it seems the possibility of China's Yuan as the next global reserve currency is getting closer. The Brits, Germans, and now the Swiss (who just signed a free-trade-agreement with China) are all actively vying to become Europe's Yuan trading hub as it seems the long line of developments to internationalize the currency over the past two years. As Bundesbank board member Joachim Nagel noted in a speech entitled "Reniminbi as a potential reserve currency" this week, "the Chinese currency is well on its way to becoming one of the future global reserve currencies." He noted that, although the USD is still the most commonly-used currency for settling trade with China; from virtually zero in 2010, the Yuan is used to settle over 12% of trading transactions now - and is likley to increase further.
- Fashionable 'Risk Parity' Funds Hit Hard (WSJ)
- No 1997 Asian Crisis Return as China Trembles (BBG)
- Greece Faces Collapse of Second Key Privatization (FT)
- China Bad-Loan Alarm Sounded by Record Bank Spread Jump (BBG)
- Iranian official signals no scaling back in nuclear activity (Reuters)
- Asmussen Says Any QE Discussions at ECB Not Policy Relevant (BBG)
- Flat Japanese consumer prices aid Kuroda (FT)
- Vietnam Devalues Dong for First Time Since ’11 to Boost Reserves (BBG)
- World Bank Sees ‘Vulnerable’ Food System on Climate Change (BBG)
- Fed big-hitters seek to quash QE fears (FT)
- EU Leaders Set to Slow Support for Ailing Banks (BBG)
Things have been a little erratic lately here in US, but not really headline-worthy. The economy continues to grow, sort of, houses continue to sell and stock and bond prices fluctuate but can’t seem to follow through in either direction. We are not, in short, engulfed in any kind of crisis. But out in the world, especially in once-hot emerging markets like Brazil and China, the story is very different. So can the US stay placid when the rest of the world turns chaotic? Highly doubtful. There’s a market phenomenon in which one investment play blows up and forces those on the wrong side of the trade to dump their liquid assets to raise cash. Which causes the high-quality assets to fall as much or more than the junk. As Noland notes, the world’s premier liquid asset is the Treasury bond. If the developing world’s need to raise cash is a factor in the recent spike in US interest rates, this implies a feedback loop in which rising US rates further destabilize emerging markets, forcing the sale of more Treasuries, and so on.
"By propping up asset markets, the Fed has created an illusion that wealth is being created. The next step, according to Bernanke’s plan, should be for growth to follow. In fact, there is no reason why the rise in prices of financial assets should lead to actual investments or a rise in the median income. So far, it has not. There has been no real increase in the private sector propensity to borrow, and the danger may be that any further public sector borrowing will hasten the decline because of our “permanent asset hypothesis”. This means that, should the Fed lose control of asset prices (is this what is now happening in Japan?), then the game will be up and the downside move in markets may well be terrifying."
- BIS lays out "simple" plan for how to handle bank failures (Reuters) - Are we still holding our breath on Basel III?
- Deficit Deal Even Less Likely - Improving U.S. Fiscal Health Eases Pressure for a 'Grand Bargain' Amid Gridlock (WSJ)
- IRS Faulted on Conference Spending (WSJ)
- Deadly MERS-CoV virus spreads to Italy (CNN)
- Turkish PM Erdogan calls for calm after days of protests (Reuters)
- Financial system ‘waiting for next crisis’ (FT)
- Russia to send nuclear submarines to southern seas (Reuters)
- China Nuclear Stockpile Grows as India Matches Pakistan Rise (BBG)
Financial markets operate on a number of implied assumptions about growth, policy direction and other factors. Experience tells us that these assumptions often turn out to be erroneous. A modern economy is an incredibly complex entity that involves millions of transactions every day. The notion that this vast and largely self-governing system can be controlled through tools such as government spending and/or an increase in the quantity of money is - to say the least - bizarre. A flood is rarely a cure-all solution to a drought; it just creates new problems for an already suffering population. From 2002 to 2007, we witnessed a massive attempt by central banks to manipulate interest rates and currency exchange rates. The consequences of this action came due in 2008-2009. Criminal psychologists have long known that villains frequently return to the scene of their crime—in the case of western policymakers, they seem to be looking to finish off a caper that went badly wrong at the first attempt. The end result for the broader community is unlikely to be pretty.
- U.S. Bulks Up to Combat Iran (WSJ)
- Taking sides in Syria is hard choice for Israel (Reuters)
- Gold Traders Most Bearish in Three Years After Drop (BBG)
- It's a Hard Job Predicting Payrolls Number (WSJ)
- EU economies to breach deficit limits as economic picture darkens (FT)
- IBM Says U.S. Justice Investigating Bribery Allegations (BBG)
- At Texas fertilizer plant, a history of theft, tampering (Reuters)
- SAC Sets Plan to Dock Pay in Cases of Wrongdoing (WSJ) - "in case of"?
- EU to propose duties on Chinese solar panels (Reuters)
- Billionaire Kaiser Exploiting Charity Loophole With Boats (BBG)
- SEC Zeroing In on 'Prime' Funds (WSJ)
- Apple Avoids $9.2 Billion in Taxes With Debt Deal (BBG)
- China April official services PMI at 54.5 vs 55.6 in March (Reuters)
- The number of bond funds that own stocks has surged to its highest point in at least 18 years (WSJ)
- Clubby London Trading Scene Fostered Libor Rate-Fixing Scandal (WSJ)
- Cheap money bankrolls Wall Street's bet on housing (Reuters)
- Bank of Japan reveals concerns over easing policy (FT)
- iPads and low-end rivals propel higher tablet shipments (Reuters)
- China Cyberspies Outwit U.S. Stealing Military Secrets (BBG)
- Draghi Fuels Bets on Rate Cut With Risk of Limited Impact (BBG)
- China guides renminbi to fresh high against US dollar (FT)
- Japan is preparing to start up a massive nuclear-fuel reprocessing plant (WSJ)
- Apple’s Ive Seen Risking iOS 7 Delay on Software Overhaul (BBG)
- UBS faces calls for break-up at investor meeting (Reuters)
- The Inland Empire bubble is back: BMW to Amazon Space Demand Spurs Rush to Inland Empire (BBG)
- Tamerlan Tsarnaev was on classified government watch lists (Reuters)
- Brothers in Boston Bombing Case Said Drawn to Radicalism (BBG)
- Germany Spurns Calls to Loosen Austerity Stance (WSJ)
- Spain poised to ease austerity push (FT)
- What ever happened to France's voice in Europe? (Reuters)
- U.S., South Korea Reach Nuclear Deal (WSJ)
- U.S. Sees No Hard Evidence of Syrian Chemical Weapons Use (BBG)
- RBA Set to Invest Foreign Currency Reserves in China, Lowe Says (BBG)
- FedEx Wins $10.5 Billion Postal Contract as UPS Shut Out (BBG)