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Is This The Most Important Chart In Global Finance?
First, we present the chart, followed by some brief color and analysis.
Over the past two weeks, the world has begun to understand that, as Citi recently put it, EM FX reserve drawdowns do not "happen in a vacuum." That is, when emerging economies are forced to liquidate billions in USD assets to offset capital outflows, defend their currencies, and/or plug yawning budget holes, it puts pressure on those assets and works at cross purposes with the expansion of the Fed’s balance sheet.
This dynamic is unfolding rapidly at present across EM. It began last November with the quiet death of the petrodollar and has now culminated with the liquidation of more than $100 billion in USTs by China during the last two weeks of August. The story, reduced to its simplest possible form is as follows. Saudi Arabia’s move to keep crude prices depressed in an effort to bankrupt the US shale space and tighten the screws on Moscow exacerbated a commodities downturn, sparking capital outflows from EM assets and pressuring EM currencies. In this environment, the yuan’s REER appreciated to the tune of 15% thanks to the RMB dollar peg, a situation which ultimately proved to be untenable for China amid decelerating economic growth. Apparently failing to realize that, as SocGen notes, the only way to have a stable currency is to either exercise absolute control or no control at all, China chose a half-measure and now, frequent open FX interventions are draining the country’s UST holdings (for more, see "Why It Really All Comes Down To The Death Of The Petrodollar").
In the end, what started last November with the beginning of the end for the petrodollar, has created a situation where USD reserve assets are being liquidated across the emerging world with the two focal points being China and Saudi Arabia which have, respectively, the first and third largest stores of FX reserves on the planet. Needless to say, if both the Saudis and the Chinese continue to drawdown these reserves, the Fed would be forced to implement a massive round of asset purchases to offset the pressure on USTs and in turn, on the US economy.
Given the above, it would likely be no exaggeration to say that perhaps the most important chart in all of global finance is the one shown above: the yield on the 10Y Treasury bond versus the combined FX holdings of China and Saudi Arabia.
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Ah yes...the need to raise capital by monied foreigners.
That should do it. Now Fed will surely QE just to ensure "proper bond market liquidity," and to help our trading "parterns" sell they certificates.
The Petrodollar didn't die, it was put in the insane asylum and is being given massive doses of hopium.......
a.) everybody already knows this
b.) you could leave out the Saudi and Chinese reserve figures and it wouldn't change anything
Yeah right, just like everyone knows about stock market bubbles. Most everyone "knows" yet most everyone is shocked and ill-prepared when the reckoning happens. Group-think is a powerful force, even for the more intelligent. Efficient markets my ass.
The slope with which the Treasury yield curve returns to normal rates matters greatly
nah. the most important and most highly correlated chart is the one plotting the S&P where inflection points are noted with yellen, evans, or bullard.
Let me be clear, there is no Fed equity market put...
William C. Dudley
US deficts will be faked, as we usually do, so that the need for selling Treasuries by the US will be reduced. So lower supply will entail lower prices and lower yields to keep the US ponzi going:
“I told them the real (2014) deficit was $5 trillion, not the $500 billion or $300 billion or whatever it was announced to be this year. Almost all the liabilities of the government are being kept off the books by bogus accounting. .
“If you take all the expenditures that the government is expected to make, as projected by the Congressional Budget Office (CBO), all the spending on defense, repairing the roads, paying for the Supreme Court Justices’ salaries, Social Security, Medicare, Medicaid, welfare, everything and take all those expenditures into the future . . . and compare that to all the taxes that are projected to come in, and the difference is $210 trillion. That’s the fiscal gap. That’s our true debt.”
http://usawatchdog.com/financial-system-will-collapse-just-a-matter-of-w...
Ahhh, the curse of deflationists everywhere!
Stagflation is so much better than deflation. LOL.
The FED is still smoking hash.
A war over bond yields?
Wow, really pathetic.
Any notes from JPM for todays close Tyler??
I still think this move was forced by the FED. They, in my opinion were going to raise rates in September. However the politicle pressure forced them to choose plan B. Forced sale in EM of UST. Now no rate increase, less and falling foreign ownership of UST (less to screw us with), increase in UST rates, more of the collateral that the FED was so desperatly seeking, and added bennifit if the sell off is bad enough well QE4 to save the day.
correlation is not causation. Pretty sure we've already established that its flow that drives price action, not stock....
So, they'll start showing this every morning on CNBC Before the Bell, right?
The aim of QE was to stimulate spending by having the Fed buy USTs. Didn't work. Interest rates got slammed to near zero, but the tapped-out consumer didn't spend.
Now EM central banks are stressed by dollar strength, capital flight, fantasy budgets, etc. and have to sell USTs. Result: the Fed has to buy USTs.
Question: how is this current manouever any different than QE in its net effect?
I don't think it is, except the FED now starts with at least a $4.5T balance sheet, which could grow a massive amount more. Unwinding that balance sheet will be impossible.
IMO the aim of QE was to get fiat in the hands of those chosen to receive it. Allowing them to buy real things with nothing,
and leave the plebes to pick up the tab and hold the bag when it falls apart. Long tinfoil and dual citizenship passports.
Not really. U haven't checked the weather lately, have U?
Confiscate all Saudi treasury holdings for them taking down the WTCs and nuke their palaces. Problem 1 fixed.
Problem 2 boycott all Chinese products, close down Walmart and Target and confiscate China's treasury holdings because there ain't no more money to be made by committing treason against the United States of America so it doesn't make sense sending jobs there; people will work here for food just the same as there. Problem 2 solved.
But we can't do nothing with bankster globalists around so we have to get rid of them first somehow.
911 was orchestrated by elements of CIA/Mossad
Because gas lines and massive unemployment are fun and so good for the US economy.
Lulz.
I mean this question in all seriousness.....
Is there a chance someday we might see an 1987-styled crash in US government bonds? Where one day we wake up and see bonds lose something like 10-20% (which in many ways is far worse that it happening to stocks)??