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Mass Confusion: Fate Of US Treasurys Is Great Unknown Amid China Dumping
This morning, we got the official data out of the PBoC which shows that China liquidated around $94 billion in FX reserves during the month of August. Taking the FX valuation effect into account the actual drawdown was probably more along the lines of $115 billion. The numbers confirm what we tipped weeks ago - namely that the pace of China’s Treasury dumping increased dramatically in the wake of the August 11 devaluation.
As we’ve been at pains to explain, China’s reserve drawdowns are simply the most dramatic example of a larger phenomenon that began with the death of the petrodollar. This phenomenon - the across-the-board liquidation of USD assets on the part of imperiled emerging economies - was characterized by Deutsche Bank as the end of the “Great Accumulation,” and as we noted earlier today, it has serious implications not only for investors’ collective perception of market stability, but for yields on core paper, for global liquidity, and for US monetary policy.
The problem is that currently, no one is quite sure what those implications actually are. We know, for instance, that the massive liquidation of USTs will have a tightening effect on global liquidity. We began discussing this late last year in the context of the petrodollar, noting that for the first time in ages, exported petrodollar capital was set to turn negative in 2014 (i.e. a net draw on liquidity from petro states). Logically, this should put upward pressure on UST yields and will, all else equal, work at cross purposes with DM central bank QE.
But all else is never really equal or, to put it differently, this isn’t happening in a vacuum and it could very well be that if China’s FX reserve liquidation serves to destabilize markets and trigger risk-off behavior, the resultant flight to safety could offset the EM USD asset sales. Of course it’s impossible to know exactly what precise mix of FX reserve liquidation and safe haven buying would net out and in the meantime, the markets for USTs, JGBs, and German bunds are prone to bouts of extreme volatility so don’t be surprised if the VaR shocks don’t return with a vengeance.
To get an idea about the extent to which everyone is utterly confused, look no further than the following excerpts from SocGen (note the dates):
From Sunday, September 6:
Foreign official sector holdings of US Treasuries stand at just over $4tn, and the bulk is held by emerging central banks. All else being equal, any large scale FX intervention to defend depreciating national currencies should thus put upward pressure on Treasury yields, dismantling Bernanke’s “savings glut”. But all else is not equal. Current market tumult is more likely positive for “safe- haven” Treasuries. Moreover, additional QE from the ECB and BoJ are set to drag down on yields.
From Monday, September 7:
During the subprime crisis of 2008/2009 and the eurozone debt crisis in 2010/2011, investors sought a safe haven by investing in US treasuries or German bunds. During the first crisis, yields moved down by 170bp in the US and by 90bp in Germany. In the second, they moved down by roughly 110bp and 90bp respectively. But this is not what we have observed since mid- August as a result of China’s turmoil. Equity markets have plunged by 5% to 15%, but bonds haven’t reacted much. This highlights the fact that QE policy makes the usual safe havens such as bonds unattractive.
And if you think this is hard for the sellside, just imagine how confused a PhD central planner is...
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All this does is make me laugh....
suck it Janet
So does this mean that the Shimetah has been called off? I'm confused.
Capital markets work best when you don't fuck about with them.
Bending the rules and shifting the sands just leads to titanic misallocation of capital. The primary function of capital markets is to give TRUE price signals to capital allocators so that they can manage their own ends. Without free markets, you are certain to end up with either supply shortages or oversupply, here in our economy we have multiple instances of oversupply just look at the commodities index.
The world has invested an enormous amount of our childrens future earings into ventures that are not economically viable. There is no hope of that money being repaid to our children from these bad ventures. All to preserve the paper wealth of todays plutocrats.
Monetary expansions only work when they INCREASE the velocity of money. Stuffing money into Scrooge McDuck style vaults has ZERO benefit to the eonomy.
Now we have an entire generation robbed of opportunity and robbed of savings growth. This is the worst thing that has happened since WWII, and it's still happening, silently, before our eyes.
"this isn’t happening in a vacuum and it could very well be that if China’s FX reserve liquidation serves to destabilize markets and trigger risk-off behavior, the resultant flight to safety could offset the EM USD asset sales"
What a ridiculous sentance.
So treasury sales from.emerging.markets will cause a flight to safety, which will cause EMs to buy those same treasuries?
Dollar is toast.. Nother chem.plant exploded today. Hmmm
China sold. Who bought?
"Who bought?"
Those seeking "high quality" collateral.
Must keep Ponzi going...
Get this in everybody's face!
Dow, Inflation Adjusted
http://patrick.net/investing/Dow%2C+Inflation+Adjusted
Why does God give a shit about the stock markets again....?
And who is this God person anyway?
Capital markets work best when you don't fuck about with them.
The more you interfere the more damage you do.
Sure, but there has been some major fucking going on since 1971 and the FRN still stands, WTF?
Confucius ...............Fucking with the USA
Wanna buy some tulips? They are rare and valuable, hard to get also and you can always get your money back by selling them.......
"So I told her to put the roses on the piano and tulips on the organ."
Badip smash!
How can anyone be confused? LOL!
What is China?
Dumping
hmmmmmmmmmmmmmmm
It was just "profit taking" I'm sure. lol
I have an idea. Some retired generals should create a faction of the NATO military and storm the central bank, take over operations and eventually hand those functions over to the public via an open source banking system.
careful now!
Nice idea, but there still needs to be an unwind of QE and overaccumulation.
As I said before the only effective way I see is a healthy dose of helicopter money and rate increase with repo activity. One thing that is thingling my spidey sense is what if Janet actualy does lift off. And this causes USD strengthening to 1:1 to Eur and this causes further risk, causing more USD strength. It's gonna be nice for some US tourists, but otherwise there is going to be lots of deflation in US or main street failures due to strong USD. Swiss decreased prices when this happened in their ski resorts and citizens started buying stuff in France and Austria causing a loss on taxes and money outflows. Stocks will be crashing as well if USD strengthens too much as their relative price to other currencies will not be right. Especially for those doing business outside of US.
Here it comes, only not bullets, but fresh printed wads
https://www.youtube.com/watch?v=nCU0_QHUO-M
It would be cool if someone editied this to show Yelen droping cash :D
I used to think the term 'repo' meant 'Repossession' - you know, like 'Repo Man'. And I always thought it fitting for the fiscal/monetary chicanery that is U.S. policy, and its eventual comeuppance... So imagine my incredulity when I come to find out it means 'repurchase'. Talk about 'deflating' - I was crushed...
That's a great idea! Now here is how it can be implemented. You're welcome
http://freekeene.com/2007/12/26/free-audiobook-the-market-for-liberty/
https://mises.org/library/market-liberty-1
For a sale, there has to be a buyer.
Who's buying what the Chinese are selling?
Rhymes with dead, which would explain the smell.
How can you afford your rock n roll lifestyle?
$1,000 bills. That's all a T-bill is now since it pays no real interest. Is it really a treasury obligation? Not really. It is a defacto Fed obligation. You buy one with a Federal Reserve note and you get paid when you sell with a Federal Reserve Note. When you sell a T-bill, you are simply asking someone to make change. Its like breaking a $1,000 bill. You don't get gold from Ft. Knox, treasury dollars, Morgan silver dollars or bitcoin. You get FRNs. So what is the difference if the Fed buys all that China sells? All its going to do is get a fatter balance sheet. If it gets out of hand, we'll just call in Marie Osmond to put it on a diet.
Fate the Magnificent
"Push the Button, Max"
ass clowns
This is actually a boon for the Fed as it gets more stuff to buy to its balance sheet.. QEn+1
And Dr. _D and Sophist are exactly right. This is QE International. Krugman's creaming in his jeans. Eventually all this "change" has only one place to go and that's to buy U.S. assets. It's likely, however, that all this deflation will be long over at that point and a six pack of Hostess Twinkies will be an even trade for a T-Bill. Even a true collectible, like a "Free Hillary Clinton " get out of jail card, will likely garner $500 FRNs or more. Get Ready. The Fat Lady....ummm Janet, is warming up.
Fate the Magnificent
"Push the Button, Max"
Why does anybody think that China selling will do anything to US Interest rates? The FED will buy any and all bonds. Period. This has been done countles times in past history as well as during the 'dumping' of Treasuries in 2014. It's not like they cannot print the money...
AND, Interest rates on the Govies will stay low as the dollar crashes. Why is this so hard....
. . . and if the Fed "prints" money to buy these Treasuries, they are truly liquidated; and depending on the flow, it gets reflected in prices. What will emerging markets buy?
Well, right now they are buying dollars.
"well, right now they are buying dollars."
sign out side of pawn shop 3yrs ago---"we buy gold" translation "we are selling dollars"
sign out side of pawn shop now---"gold sold here" --translation "we are buying dollars"
go figure---
that bitch is just itching to buy some moar junk off da boyz
Both China and Russia have realized that they need to take strong action to de-decouple themsevles from the (economic) fate of the West. China is doing it by selling their UST's ... which coincides with the need to devalue their currency. Russia is doing it by invading countries and building their Energy Empire.
Counter invading.not invading, a big difference.
The real aggressor is the USA,not Russia,
That may change, but it is what it is, for now.
We were in an economic war with China and Russia and now it is progressing to other wars:
PREDICTION: Watch for yet more war posturing, currency devaluation moves, debt dumping attacks, cyber warfare, strategic hacking and “unexplained” explosions throughout the remainder of 2015. These are not random events. They are all part of the war with China that has already begun.
http://www.thedailysheeple.com/chinas-covert-war-with-america-heats-up-w...
With what? US$ That makes no sense.
Why is there a picture of Boris Johnson at the bottom of this article?
China "dumping"...
well, they have a way to go yet...
http://www.treasury.gov/ticdata/Publish/mfh.txt
So they dumped US Treasuries and got freshly printed US Dollar bills, which they then used to buy Yuan to support it.
The net effect is the exact opposite of China and US engaging in a currency swap - fewer Dollars and Yuan are owned by their respective foreigners.
So if you already have plenty of Yuan to buy Chinese exports then get ready to spend them. If you want some more Yuan to spend then to buy those Yuan you have to offer something of value. And that thing of value isn't Dollars because any Dollars you use to buy Yuan will promptly be spent on buying back a similar amount of Yuan from someone else.
Yes, more stimulus for China, paid for by U.S. taxpayers via the Fed.
seriousley there is no QT without QE, someone is buying
So China sells UST, gets USD for them, then uses those USD to buy Yuan....so USD liquidity is unchanged...and now the FED has more UST supply on the open market to buy from...avoiding the problem that the ECB and BOJ might run into due to lack of supply?
its long past time ordinary folk had acquired some physical PM as some form of protection..September is shaping up to be a disaster
www.teamramgold.com/about-us
so--are you trading your gold for those valuable Yuan or are you trading it for those worthless dollars that everybody has too many of?? ---just asking---
seems simple to me. supply excess or not, met demand at around UST 10 @ 2.2%.
Also crickets on the collateral shortage issue....
shouldn't this move increase said collateral?
Isn't Saudi dumping treasuries too? Isn't Brazil on deck? Isn't the collapse of the oil price going to necessitate more selling by oil exporting countries? Can this really all be covered?
Given the devaluation going on in Europe I'd expect China to be dumping Euros first.
She still looks like twiki from buck rogers to me.
Is that you Gil Gerard?
BeeDee,BeeDee,BeeDee.
We know, for instance, that the massive liquidation of USTs will have a tightening effect on global liquidity.
Marketplace liquidity, global or otherwise, has to do with trader's willingness to make trading promises and get them certified.
The tightening effect described here is unnatural constraint on this certification process.
True tightening comes when traders can "not" see clear to deliver on their trading promises so they don't make them in the first place. Only in an improperly managed MOE process does "liquidation of USTs" (or delivery on any other trading promise ... which is what USTs are) have anything to do with the marketplace.
Remember, USTs are "promises to complete a trade" which are made and certified by the US Government. They only have value if they are delivered-upon as promised. The US Government "never" delivers on its trading promises. It only rolls them over ... and that is default. On average this leak in our marketplace has been 4% since 1913 (as measured by gold ... which is a bogus measure ... but that not withstanding ... we should have been measuring defaults, which for some reason we have never measured).
Defaults "must" immediately be reclaimed through interest collections in any MOE to guarantee zero inflation.
The relation is: INFLATION = DEFAULT - INTEREST = zero.
When people "cash in" their treasuries for dollars (i.e. make the receiving trader be someone else), they are saying this government imposed inflation is going to make dollars worth less in the future. And people buying new treasuries will only do so if the discount (i.e. interest collection paid in advance by the seller ... the US Government or the traders selling) covers the inflation this MOE process mismanagement is guaranteed to produce.
Treasuries are a way of putting MOE under a rock. With zero inflation of the MOE, this is prudent. With non-zero inflation, this is stupid. There are only two reasons for taking treasuries out from under the rock: (1) The dollars they represent are needed for consumption; (2) The dollars they represent are being counterfeited and thus their value is leaking. Further, in a properly managed MOE process, the idea of treasuries is non-sensical on its face anyway. It is just an unnecessary packaging of the MOE itself. It is an object of the capitalist's fraud.
This interest collection pressure has been suppressed by the USG because it makes all their other trading promises obviously impossible to deliver on too. Frankly, they're just plain "cooking the books".
Hyperinflation, reset, and collapse will result. And when they do, it becomes time to institute a properly managed MOE process and stop this stupid, opportunistic, destructive, wasteful cycle.
dollars are more liquid than bonds, depending on what the chinese can buy denominated in dollars, including oil. since those dollars earn no interest the holder is inclined to barter them, while the amount of fx increases those dollars in theory at least are worth less. while safe haven buying comes in to buy up new bonds which have a whole 1/4 pt more of interest. 7T worth of foreign held UST bonds are on the wrong side of fed policy. ouch. if america was a noble actor they would just offer the holders of this 7T a bit more vigorish, and we could avoid the game of musical chairs. there was talk some time ago of floating yield bonds, now might be the time to convert that paper and avoid the disconnect, and what the hell is MOE?
MOE is Curly's brother.
and what the hell is MOE?
"Medium" of Exchange or "Media" of Exchange, depending on the context.
None of these progressively more complicated and leveraged financial instruments are useful or necessary in a properly managed MOE process.
I am more concerned about the dollars long term SOV (store of value) than MOE.
what backs the dollar theres your answer
what backs the dollar theres your answer
Nothing backs the dollar. But there's no answer in the knowledge of that.
The dollar's problem is not in the backing of it. It is in the counterfeiting of it. Governments are allowed to counterfeit the dollar putting them in circulation as if they were actually trading promises. Since they are counterfeit, they are never removed from circulation and destroyed. This dilutes the value of "real" trading promises circulating in-process.
As long as the marketplace is very large, this leak appears small (since 1913 averaging about 4% compounded ... known as inflation). However, the government's propensity to cheat is uncontrollable. Thus this inflation will only continue to grow until we have a Weimar, Zimbabwe, Venezuela, Confederate States, Illinois bank notes, ... you name the flawed process ... moment.
Governments are allowed to counterfeit the dollar putting them in circulation as if they were actually trading promises.
The vast majority of currency created does not come from the Federal Reserve banks (or other central banks) but is created by commerical banks in the form of credit through fractional reserve lending. ALL of this "currency" is actually counterfeit as it is created out of absolutely nothing . . . .
But is created by commercial banks in the form of credit through fractional reserve lending.
Wrong. It is created by traders making trading promises and "begging" those banks to certify them. And the banks throttle the economy by doing so, or refusing to do so, and "arbitrarily" charging an interest load under the nonsensical reasoning that it is "the time value of money".
The banks have the privilege of lending out 10x what they have at a 4% spread giving them 40% annual return on their money. In two years, 40% doubles their money. So they take "their" money off the table and leave the rest ride in what they call "capitalist backing of traders delivery promises".
It's their very profitable farming operation ... or more accurately, their ranching operation ... and we are their livestock.
What a ridiculous racket. And our best and brightest are getting PhD's enabling them to spread that word and give it credibility ... or again, more accurately ... to obfuscate and complicate what is really going down. What schmucks we are.
There are only two reasons for taking treasuries out from under the rock:
Excellent points. Am I correct in assuming MOE is "method of entry"?
Am I correct in assuming MOE is "method of entry"?
No.
No MOAR crap MBS to buy? I don't believe it! Think I will ginny some up and offer them to the hedgies. They won't review, just buy. This is going to be fun.
So many suckers on Wall Street. Which to pick on? Why, the big banks where the smart MBAs hang out. Soon to be hung out by thier owners?
China still buying pet rocks too? Hmmm.....guess you can't 3D print gold?
The banksters own the politicians they mayswell print and buy up the whole damn country with freshly printed fiat.
Hey that should be illegal.
The federal government will be more than happy to create a new stack to the moon of treasuries, giving the federal reserve plenty of treasuries to buy.
As the SHTF, do not be surprised to see the statist, fascist, commie, socialist, authoritarian mutants who call themselves democrats to declare a one-year "tax jubilee" wherein nobody needs to pay federal income tax (with 100% refund of federal income taxes paid during the year) to partially offset those treasuries. And what the hey, maybe they'll even add an extra $5,000 to the tax refund to every taxpayer? Simply create a few more treasuries.
Don't laugh too loud... they love to buy elections with fiat, fake, fraud, fiction, fantasy, fractional-reserve debt created out of thin nothing (leaving debt nonetheless).
The end is coming, and the predators-that-be will do anything. ANYTHING. Anything they imagine will help them achieve permanent domination, slavery and security for themselves. The only huge elephant-in-the-room question pending being... do they plan the mass killoff during the next 3 to 18 months, or next time around (~2022)?
Make no mistake, there is a reason the rich predators-that-be have established plush self-sufficient boltholes in the southern hemisphere. The only question is... have they all?