Yuan

Debt always matters because it must always be paid for by someone - even if the borrower defaults, of course, the debt is simply “paid” by the lender. As China Financial Markets' Michael Pettis notes, this is why the fact that debt in China seems to be growing much faster than debt-servicing capacity implies slower growth in the future. The author of "Avoiding The Fall", explains that if the debt cannot be fully serviced by the increase in productivity created by the investment that the debt funded, unless it is funded by liquidating state sector assets it must cause a reduction in demand elsewhere, most probably in household consumption. Therefore, in spite of all the hope among global stock-buying hope-mongers, this reduction in demand implies slower growth in the future and, of course, a more difficult rebalancing process.

Why China DOESN'T WANT the Yuan to Become the Reserve Currency

• U.S. spy chiefs face Congress amid spying rift with Europe (Reuters)
• Deutsche Bank income hit by €1.2bn of legal provisions (FT)
• China's second tapering attempt fails: China central bank seeks to reassure money markets after rate spike (Reuters)
• UBS Takes Action Against Staff in Foreign-Exchange Probe (WSJ)
• Saudi Arabia frees man jailed for Mohammad tweets (Reuters)
• Tax Revolts Hit Hollande as Farmers, Soccer Clubs Protest (BBG)
• German parliament to meet over U.S. spying scandal (Reuters)
• Google Nears Smartwatch Launch (WSJ)
• How to end gridlock in DC? Pork projects (Reuters)
• UBS ordered to increase capital reserves (FT)

For those curious what Bernanke's market may do today, we flash back to yesterday's AM summary as follows: "Just as it is easy being a weatherman in San Diego ("the weather will be... nice. Back to you"), so the same inductive analysis can be applied to another week of stocks in Bernanke's centrally planned market: "stocks will be... up." Add to this yesterday's revelations in which "JPM Sees "Most Extreme Ever Excess Liquidity" Bubble After $3 Trillion "Created" In First 9 Months Of 2013" and the full picture is clear. So while yesterday's overnight meltup has yet to take place, there is lots of time before the 3:30 pm ramp (although today's modest POMO of $1.25-$1.75 billion may dent the frothiness). Especially once the market recalls that the NOctaper FOMC 2-day meeting starts today.

Just as it is easy being a weatherman in San Diego ("the weather will be... nice. Back to you"), so the same inductive analysis can be applied to another week of stocks in Bernanke's centrally planned market: "stocks will be... up." Sure enough, as we enter October's last week where the key events will be the conclusion of the S&P earnings season and the October FOMC announcement (not much prop bets on a surprise tapering announcement this time), overnight futures have experienced the latest off the gates, JPY momentum ignition driven melt up.

• Contractors describe scant pre-launch testing of U.S. healthcare site (Reuters)
• Carney Says BOE Revamp Offers Wider Access to Cheaper Funds (BBG)
• Help wanted in Fukushima: Low pay, high risks and gangsters (Reuters)
• Merkel and Hollande to change intelligence ties with US (FT)
• Twitter IPO pegs valuation at modest $11 billion (Reuters)
• NSA monitored calls of 35 world leaders after US official handed over contacts (Guardian)
• Officials alert foreign services that Snowden has documents on their cooperation with U.S. (WaPo)
• Scottish Nationalists Lose Vote After Plant Threatened With Axe (BBG)
• Fernández contemplates a train wreck in Argentine elections (FT)
• Irish Government will consider ‘best options’ for bailout exit (Irish Times)

The reason why the Chinese Shanghai Composite again can't catch a bid (and why the Baltic Dry is sliding and will continue sliding from recent highs) is the same as the main event yesterday: the concerns that while the Fed punchbowl is and will continue to be filled beyond the point of overflowing, China - where inflation has once again taken a turn for the worse as it did this summer when after much repo pain the PBOC killed it early on in order to not repeat the scary episode of 2011 - may be actively engaging in monetary tightening. And like yesterday, when the PBOC refrained from adding liquidity via reverse repos, so today for a third straight auction the Chinese Central Bank refused to inject short-term funding into the system. The immediate result: China’s one-month Shibor rose 59 bps, most since June 25, to 5.4000%; three-month Shibor rose to 4.6876% from 4.6843% yesterday, while the key 7-Day Repo Rises 63 Bps to 4.68% hitting 5% prior, which was the biggest jump since July.

America, as a nation and a culture, is now being held hostage and tortured into submission on a grand scale using economic terror by the elitist establishment which dominates BOTH major political parties.  The goal?  To push our society to conform completely with the concepts of globalization, bureaucratic micro-management, and greatly reduced living standards.  We are being conditioned to accept defeat and failure, and like children, to cry out for a parental authority to save us in our state of helplessness and fear, even if that authority was the cause of our fear from the very beginning. With so many near misses culminating so close together, it may be wise to consider what could happen in the the next three months while we wait for debt debate theater part deux.  Like a prisoner in Abu Ghraib, America is trapped, waiting for the next humiliation, the next degradation, or the next session of pain.  Are we merely being acclimated to the idea of incessant crisis?  Are we learning to become apathetic at the edge of the chasm?  Or, are we being driven to madness, mass-madness, by a concert of  elitist interrogators seeking our acquiescence? Again, the central purpose of torture is to acquire consent.  Not just extorted consent, but voluntary consent. The globalist establishment wants us to beg them to save us from the tortures they create.  If we never give them this, they will never win.

• Top China Banks Triple Debt Write-Offs as Defaults Loom (BBG)
• PBOC suspends open market operations again (Global Times)
• Eurozone bank shares fall after ECB outlines health check plan (FT)
• O-Care falling behind (The Hill)
• Key House Republican presses tech companies on Obamacare glitches (Reuters)
• J.P. Morgan Faces Another Potential Huge Payouta (WSJ)
• Yankees Among 10 MLB Teams Valued at More Than $1 Billion (BBG)
• Free our reporter, begs newspaper as China cracks down on journalists (Reuters)
• Peugeot Reviews Cost-Saving Alliance With GM (WSJ)

Following the past two days of reports in which we noted that both the broader Chinese housing market was overheating and reflating at an unprecedented pace as 69 of 70 cities posted Y/Y home price gains, while a separate report showed a blistering 12% price increase in Shanghai new homes in one week, it was only a matter of time before the PBOC resumed its tighter policy posturing, which infamously sent short-term repo rates to 25% briefly in June and nearly led to a collapse of the already fragile local banking system, in an attempt to pretend it is still in control of what is now the world's fastest growing credit bubble and of course, Chinese inflation which is now impacted not only by record domestic credit production but by hot money flows from both the Fed and the BOJ.  Predictably enough, as reported overnight by the Global Times, the PBOC suspended its open market operations Tuesday without injecting money as usual, a move that analysts said was in response to a surge in foreign capital inflows in September. And just like the last time the PBOC proceeded to "surprise" the market with its own tapering intentions, overnight funding rates soared, with the one-day repo rate surged 67 bps, most since June 20, to 3.7561%; while the seven-day repo rate rose 42 bps, most since July 29, to 4.0000%. This, however, brings us to the far more important story, one reported by Bloomberg overnight, and one which we predicted is inevitable over a year ago: namely that the Chinese banks, filled tothe gills with bad and non-performing debt, are finally preparing for the inevitable default onslaught and as a result have suddenly tripled their debt write offs in what can be best described as preparing for an avalanche of defaults.

• Despite budget win, Obama has weak hand with Congress (Reuters)
• Carney Brings In McKinsey for Bank of England Strategy Rethink (BBG)
• Bill Gates Buys Stake in Spanish Construction Company FCC (WSJ)
• Jerusalem Mayor Barkat Seeks New Term in Race Arabs Sitting Out (BBG)
• J.P. Morgan Aimed to Limit Damage (WSJ)
• EU Lawmakers Reject Draghi Call for Bank Bondholder Clemency (BBG)
• Wall Street Profits May Halve in Second Half (WSJ)
• Petrobras-led group wins Brazil oil auction with minimum bid (Reuters)
• Apple to Refresh IPads Amid Challenges for Tablet Share (BBG)
• Italy plans to offer guarantees on govt bond derivatives (Reuters)
• Berkshire Beats Apple as Favorite Stock of Tiger 21 Group (BBG)

All those who claim there is no inflation, and a tsunami of hot central-bank money flooding the world, are advised to check out the housing numbers reported overnight by UK's property website Rightmove, according to which asking prices in London saw an "unsustainable" 10% month-on-month increase in October. This sent the typical asking prices in the capital to £544,232, a new record high surpassing the previous high set in July by more than £28,000. But if you thought a 10% increase in one month was bad, what is the proper adjective to describe a 12% increase in home prices in... one week!?

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.

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.

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.