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"Ignore This Measure Of Global Liquidity At Your Own Peril", Albert Edwards Warns
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 printing of currency to buy US dollar denominated assets in an effort to prop us “mercantilist export-led growth models [is] no different to the Fed’s QE,” Edwards says, explicitly equating EM FX intervention with the asset purchase programs employed by the world’s most influential central banks in the years since the crisis.
Via Soc Gen:
Clearly when the dollar is declining sharply, global FX intervention accelerates as the Chinese central bank, for example, needs to debauch its own currency at the same rate. Conversely, when the dollar rallies strongly, as is the case now, FX intervention rapidly dries up and can even reverse, exerting a massive monetary tightening on emerging economies and ultimately the entire over-inflated global financial complex...
The swing in global foreign exchange reserves is one key measure of the global liquidity tap being turned on and off ? with the most direct and immediate effect being felt in emerging economies.
Given the above, we should expect to see global foreign exchange reserves falling…
… with the most pronounced move in EM reserves…
Edwards goes on to note that even as China dials back the market’s expectations for Chinese GDP growth, a look at the variables that Premier Li Keqiang himself has said are a better proxy for economic growth in the country (electricity usage, rail freight volume, and credit growth) suggest GDP growth in China may actually be running below 4%...
… and Chinese industrial profits paint a similar picture…
One problem, Edwards notes, is that the yuan’s dollar peg and easing efforts aimed at devaluing the currency are currently working at cross purposes:
We have long believed that China?s growth and deflation problems will necessitate a devaluation of the renminbi in a strong dollar environment. There is mounting evidence that this process may already be underway as the currency falls to a 28-month low against the dollar…
In the current deflationary environment the Chinese authorities simply can no longer tolerate the continued appreciation of their real exchange rate caused by the dollar link.
Indeed, the currency’s REE looks to be closer to $5.60…
…and according to Barclays, the yuan is the second most overvalued currency in the world…
The solution, Barclays notes, is devaluation:
As the USD has risen against global currencies, the market has likely become more concerned that China eventually will have to allow more CNY weakness versus the USD in order to tame REER appreciation. As we argued in CNY:Deflation, downturn and the deepening monetary dilemma, 12 February, amid slowing inflation and rising outflows, the costs of limiting CNY weakness are growing – including the unintended effect of placing more stress on CNY market liquidity and interest rates, rendering liquidity easing efforts less effective.
But it’s not nearly that simple because, as we said Friday, excessive devaluation at a time when corporates are increasingly choosing to hold their export profits in currencies other than the yuan may hasten capital outflows. The irony of course is that failing to act aggressively to arrest REER appreciation risks cutting into those very same profits or, as we put it previously, “devalue too much, and the capital outflows will accelerate, not devalue enough, and the mercantilist economy gets it.” We know where this ends:
...an ongoing deterioration in Chinese economic conditions, coupled with a weaker, but not weak enough, currency, will result in the PBOC first going to ZIRP, and then engaging in outright QE.
In other words: more cowbell.
So while the PBOC joins the global central bank race to the bottom, the stronger dollar will ultimately mean that the liquidity tap is cut off for EMs across the globe.
Here’s Edwards again:
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. Traditionally these periods of dollar strength are highly disruptive to emerging markets and often end in the weakest links blowing up the entire EM and commodity complex and sometimes much else besides! Investors ignore this at their peril.
We leave you with the scariest chart of all, which shows an anomalous (to an epic degree) decoupling between EM asset prices and global FX reserves:
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What FIRE creates a market fire can destroy.
It's a global economy.
Is it not interesting how so many formerly silent prognosticators are suddenly coming out of the woodwork to spotlight the insanity?
Helmet head (echoing Noodleman):
“F**k the EM”
I'd characterize it more as 'NIRPing' or 'ZIRPing' as opposed to INTERESTing.
the money goes to the black hole of deflation a bankers nightmare as all that debt becomes precarious. ha, the moar they try to right the mess they created the moar fucked up it gets. ha again, the dumb mutherfuckers. but, we the people pay for it in quality of life demise, all thanks to the rothchild dynasty...
Plausible deniability Cog. See, I told you (says the maestro after, causing it in the first place)
Global Boom = Global Bust = Global War....Brilliant!
"We will lead freedom's advance. We will compete and excel in the global economy. We will renew the defining moral commitments of this land. And so we move forward — optimistic about our country, faithful to its cause, and confident of victories to come"
"Imagine what it's like to be a young person living in a country [the USA] that is not moving toward reform...While your peers in other parts of the world have received educations that prepare them for the opportunities of a global economy, you have been fed propaganda and conspiracy theories that blame others for your country's" shortcomings.
January 31, 2006
The BushWhacker
My too. I have a no liquidity right now. zilch...
I attribute the lack of the world liquidity to the fact that the West can't pump money out of the Russia and China any more...
Filling in the Blanks: A Genuine Putin Policy Timeline
With the world on the brink of a major confrontation or even all out war, reason dictates balance. Since no complete timeline of Vladimir Putin policy currently exists, here's one reasonable attempt
http://russia-insider.com/en/2015/03/08/4206
Or as Rockmaster Scott once noted: The roof. The roof. The roof is on fire. We don't need no water let the mother fucker burn. Burn motherfucker, burn.
all true, but be carefull what you wish for, i could end up being yours or my house!
Hey kudos and an extra arrow up for the "Roof is on Fire" lyric. Sometimes I catch myself singing it unconciously at work. Is someone trying to tell us something? Hmmmmmm, guess not..
Where have all these geniuses been the past 6 years.
What difference does it make?
http://www.politifact.com/wisconsin/article/2013/may/07/context-hillary-clintons-what-difference-does-it-m/
/sarc
seasmoke, gaming the game and getting filthy rich.
they are position themselve to gain on the downstroke of their making. stay clear or ???
Kicking the can down the road, green weeds. New World Order control handled by a few indivduals masked as demockrocy
Could someone explain how kicking the can for another 5 years is possible?
Sure, look at Japan or, the last 5 years here.
Don't forget, "markets can remain irrrational longer than we can remain solvent".
Let me see if I understand this: This is a case of worse money chasing out bad money? No?
This is a case of system failure. Dollar system is DEAD, dead as silent grave.
Our esteemed elite Lords, Ladies and Sanctimonious Higher Ups have run this little economic train slam off the tracks in their quest to "do something" at the behest of every social subgroup and special interest. We have not yet begun to feel the pain of the system-level failure of which you speak.
You can look at Ukraine, good example. They have destoyed economy 1 year ago and they have 300% inflation only now.
The global economic system is more inertial
Lowering BANKS FX reserves means more money in circulation that increase liquidity not lowering. Is it me or someone else think the title should have reverse meaning
liquidity was burned up as you would papers dollar notes. They used money for nothing, money is gone, it's not like the water and 2 glasses
this touches on 2 things i try to tell you antisemitic morons to keep the global financial enterprise going the fed has to devalue the dollar i can't save and grandma has to eat cat food what you morons with your omnipotent jew world view don't get is the fed and its leadership will fail sell your gold morons
Evil Putin's fault.
Bullish.
With Apple's stock buy back program and Apple also in the DOW index components now - and the planets biggest CBs printing more and faster than ever - better get used to another 25% rally alone this year.
Only a major shock (aka ekm: triple lehman, again Putin's fault) will stop this insanity.
Until then (DOW > 30K) all sane poeple will look like complete idiots.
Heck, 36,000 DOW was laughed off the bookstands 15 years ago or so but represents only a 100% rise from here. 100% with worldwide QE to infinity is just a milemarker. Sane people don't rule the world, elite asshole sociopaths do.
Goldilocks, bitchez.
Moar cowbell!
I've got a fever and the only thing that's going to cure it is moar cowbell.
I just heard all the big banks just passed thier stress test so all is OK now, no?
Buy gold and silver with the stronger dollar until nobody accepts dollars.
You guys used to scare me with that kind of talk, but I've been hearing it for 2 years now and the market keeps going up! UP! UP!! So it's getting kind of heard to take it seriously
thanks for the comic relief : )
Surely there's enough of that fat 7% for everyone to get a slice, I mean if anything bad were to happen, god forbid.
The inevitable Chinese de-peg will have the force of nature behind it, producing huge dislocations and cash flows similar to the recent Swiss franc event, but orders of magitude greater. If the dynamics behind this current (and final) rise in the $FRN were not actually symptomatic of irreversible decay, then the final phase transition would not have to be as violent as we can now expect. However, the conequences of unplugging the yuan from the dollar have been put off far too long by the geopolitics of apparent necessity --given the hidden agendas on both side of the geopolitical fence here. In physically analogous terms, enormous potential energies have been accumulating like coiled springs beneath the superficial status quo. The consequential re-alignment of forces will alter the destiny of nations in a matter of hours.
In a former life, I would not have thought such things possible. But I clearly recall as we all watched in astonishment as the Soviet Union evaporated before our very eyes; so the accelerating instability and imbalance of forces behind what we are seeing unfold today carries profound implications of what is actually possible in the days and weeks ahead.
We are obviously approaching some kind of breaking point. The more sports-minded among us seem to prefer an interpretation in favor of global physical conflict. I disagree. I, myself see a pre-emptive monetary event in the works, whose speed and scope will be of such force as to render the neocon-dominated economy as impotent as that experienced by the former USSR.
Certainly a possibility, and I hope that you're correct.
OK ZH'ers, if you haven't been reading Michael Pettis, ZhD, then you need to Wake The Fuck Up.
His ZH cred is as follows : number 1 of 2
http://carnegieendowment.org/2012/09/16/by-2015-hard-commodity-prices-wi...
NOTE THAT THIS WAS WRITTEN IN 2012.
number 2 of 2 :
http://blog.mpettis.com/2014/10/how-to-link-australian-iron-with-marine-...
You have to read the blog yourself to get to the punch line. But here is a teaser excerpt that supports the "below 4%" statement in this ZH posting:
"...In fact I notice that in a recent paper, Larry Summers and Lant Pritchett have suggested that the arithmetic of previous growth miracles implies that China will grow by 3.9% on average over the next two decades.
Like with my prediction, a number of people have responded to the 3.9% projection with incredulity, but Summers and Pritchett point out, like I have many times, that the same historical precedents that form the basis for expecting much slower growth during the adjustment period also predict that it will be nearly impossible for anyone to believe these lower projections. I have studied most of the major growth miracles of the past 100 years (and directly experienced some), and in every case there have been pessimists that predicted a difficult adjustment process with much slower growth. In every such case, however, these pessimistic predictions were met with general incredulity (and for some odd reason almost always written off as “wishful thinking”) but while I have indeed found that the pessimists have always been wrong, it always turned out that they were wrong because actual growth turned out to be much worse than they predicted. "
the quotes from edwards seem reasonable on their face but the fact that he is with soc gen taints any credibility that his words otherwise might carry.
Beer in europe cheaper!?!?!
Today I paid 5,5 euro’s for a beer, up a euro from last year. That’s getting pretty expensive for a beer you know.
And you really feel it when you’re passing rounds
As long as the world accepts the dollar, the dollar will continue to strengthen. And as it does, it puts more and more pressure on gold. The more gold goes down, the more upward pressure in gold in dollar terms is building. In most fiat currencies, except the dollar and the Swissy, gold has started to go UP, and UP it will go, significantly in all fiat currencies. When the dollar finally devalues (against gold) is will be something to remember for a long time. Till then, stack on, or play the paper shuffle at the risk of missing the opportune moment to get out. Good luck to all.