The Treasury, apparently dissatisfied with the speed of indirect bank and/or Fed-inspired monetization of its exponentially rising debt-load at ever-cheaper costs of funds, decided in June 2011 to allow the Chinese, with their equally large bucket of USDs to bid directly for US Treasuries. As Reuters reports, China can now bypass Wall Street when buying U.S. government debt and go straight to the U.S. Treasury, in what is the Treasury's first-ever direct relationship with a foreign government. The documents, viewed by Reuters, indicate that the US Treasury has given the PBOC a direct computer link to its auction system - which was first used in the 2Y auction of June 2011. Perhaps this helps explain the massive spikes in direct bidders July and August 10Y auctions (around the US downgrade). Interestingly, Primary dealers are not allowed to charge customers money to bid on their behalf at Treasury auctions, so China isn't saving money by cutting out commission fees; instead, China is preserving the value of specific information about its bidding habits. By bidding directly, China prevents Wall Street banks from trying to exploit its huge presence in a given auction by driving up the price. This, after the 2009 discovery (and relaxing of other reporting requirements to cover this) that China was using special deals to hide its bond purchases, seems like more pandering to the large-holder-of-Treasuries as "direct bidder status may be controversial because some government officials are concerned that China has gained too much leverage".
I had the privilege of seeing Roger Waters perform ‘The Wall’ to a live crowd of over 40,000 fans at the LA Coliseum on Saturday night– the second time I’ve seen the show on this tour. It was an amazing production– I wholeheartedly recommend the experience as it’s something that no DVD or album recording could possibly reproduce. At one point, Waters paused his set and began telling the audience about Jean Charles de Menezes, a 27-year old Brazilian national who was shot *8-times* by British police several years ago at a south London tube station after being mistakenly identified as a terrorist. The police, adhering to the ‘shoot first, ask questions later’ model of peace enforcement, have never been held accountable for taking the life of an innocent man at point blank range. “If we stand at the top of the slope and give our governments, and particularly our police, too much power, it’s a very long and dangerous slippery slope to the bottom,” Waters said. The crowd went berserk, roaring with approval.
The standard Keynesian narrative that "Households and countries are not spending because they can’t borrow the funds to do so, and the best way to revive growth, the argument goes, is to find ways to get the money flowing again." is not working. In fact, former IMF Director Raghuram Rajan points out, today’s economic troubles are not simply the result of inadequate demand but the result, equally, of a distorted supply side as technology and foreign competition means that "advanced economies were losing their ability to grow by making useful things." Detailing his view of the mistakes of the Keynesian dream, Rajan notes "The growth that these countries engineered, with its dependence on borrowing, proved unsustainable.", and critically his conclusion that the industrial countries have a choice. They can act as if all is well except that their consumers are in a funk and so what John Maynard Keynes called “animal spirits” must be revived through stimulus measures. Or they can treat the crisis as a wake-up call and move to fix all that has been papered over in the last few decades and thus put themselves in a better position to take advantage of coming opportunities.
The reality is that — with the exception of Obama — Americans have again and again opted for a candidate who has paid lip-service to small government. Even Bill Clinton paid lip service to the idea that “the era of big government is over” (yeah, right). And then once in office, they have bucked their promises and massively increased the size and scope of government. Reagan’s administration increased the debt by 190% alone, and successive Presidents — especially George W. Bush and Barack Obama — just went bigger and bigger, in total contradict to voters’ expressed preferences. The choice between the Republicans and Democrats has been one of rhetoric and not policy. Republicans may consistently talk about reducing the size and scope of government, but they don’t follow through.Today Ron Paul, the only Republican candidate who is putting forth a seriously reduced notion of government, has been marginalised and sidelined by the major media and Republican establishment. The establishment candidate — Mitt Romney — as governor of Massachusetts left that state with the biggest per-capita debt of any state. His track record in government and his choice of advisers strongly suggest that he will follow in the George W. Bush school of promising smaller government and delivering massive government and massive debt.
Based on a swap-spread-based model, EURUSD should trade around 1.30, but based on GDP-weighted sovereign credit risk EURUSD should trade around 1.00; so who is right and what are the factors that supporting the Euro at higher levels than many would assume (given the rising probability of a Euro-zone #fail and the 0.82 lows from 2000). UBS addresses four key reasons for the apparent paradox based on the difference between ECB and Fed 'monetization', the EZ's balanced current account (independent of foreign capital flows), and the high-oil-price induced petro-dollar circulation diversifying into Euros (or out of USD). The final and most telling of factors though is bank deleveraging as European financial entities, who remain under pressure to shrink their balance sheets and re-build capital, have been selling foreign assets. They remain EUR dismalists with a year-end target of 1.15 but expect the slide to these levels to be cushioned (absent an imminent break-up) by banks' 'shrinkage'.
All models of non-linear complex systems are crude because they attempt to model millions of interactions with a handful of variables. When it comes to global weather or global markets, our ability to predict non-linear complex systems with what amounts to mathematical tricks (algorithms, etc.) is proscribed by the fundamental limits of the tricks. Projecting current trends is also an erratic and inaccurate method of prediction. The current trend may continue or it may weaken or reverse. "The Way of the Tao is reversal," but gaming life's propensity for reversal with contrarian thinking is not sure-fire, either. If it was that easy to predict the future of markets, we'd all be millionaires. Part of the intrinsic uncertainty of the future is visible in unintended consequences. The Federal Reserve, for example, predicted that lowering interest rates to zero and paying banks interest on their deposits at the Federal Reserve would rebuild bank reserves by slight-of-hand. Banks would then start lending to qualified borrowers, and the economy would recover strongly as a result.
They were wrong on every count.
The latest gambit used by the Eurocrats is that should Greece dare to not follow their sage advice, and leave the EMU, it will burn in hell for perpetuity, where famine and pestilence will join in making Greeks regret they ever dared to not listen to their Keynesian overlords. The only problem is that despite what econo-pundits everywhere claim, the Argentina case study (as well as the Iceland and the Southeast Asian) is a rather optimistic one of what Greece can expect to occur after it finally "just says no" to the biggest vanity experiment in European history. And as JPM's Michael Cembalest shows without any doubt, "there is a morning after." The far bigger problem is that there will be a "mourning after" for all those who are threatening Greece will hell and damnation right about now. Which brings us to a very critical question: why is the IMF not doing what it should be doing, and promising to assist the Greek decision, even if it means exiting the Euro. As JPM's Cembalest says "If the IMF did what it is supposed to do and lend into a devaluation/ structural adjustment (instead of financing a German and French bank rescue), Greece just might have a shot. Within the Euro, they don’t." Which begs the question: just how many pieces of silver did it take for the IMF to join the bandwagon of sell out and rehypothecate its soul, and charter, to the highest bidder?
As we noted last week, the level that would represent the same size drop as triggered globally coordinated central bank easing in November of last year, is around 1285 and sure enough we got close (1287) in futures before today's rally began...is it really this easy?
The catastrophe that is Greece that has spawned the term 'Grexit' for its likely self-abdication (or dismissal) from the Euro remains a long way from being solved. Should the next elections go the way the opinion polls suggest, it seems highly likely that a government vehemently opposed to its own bailout terms and further austerity will stretch the patience of its 'core'-supporters to a breaking point - even though they know the gun they hold is squarely pointed at their own forehead. However, Deutsche Bank's economics team see the potential for a third path - that of running a Greek parallel currency to the Euro (which they dub "GEURO") to represent government issued IoUs to meet current payment obligations. This would enable, in DB's view, Greece to engineer an exchange rate devaluation without formally exiting the EMU. With Greece unlikely to meet primary budget surplus targets envisaged by the TROIKA, and political will inside Greece hardly making an effort to do so - perhaps this is the 'compromise' that meets everyone's needs (in a strange way). Initially there would be a large depreciation (which Germany could use politically to claim - see 'they suffered' - and maintain circular support for the financial system implications of GREXIT) but at the same time Greek authorities would reclaim some semblance of control to stabilize or even strengthen (over time) their own GEURO against the EURO - leaving the door open to a return to the Euro at some point.
Lately there has been a flurry of media reports focusing on America's obesity epidemic, and how costs associated with America's gradual shift to a fat society will inundate the already strapped budget in the form of shadow taxation and other direct and indirect costs, which are, to put it simply, unsustainable. As the first chart below shows, the primary cost center associated with the obese conditions - diabetes - has certainly gripped a substantial portion of the US population, at last count affecting at least 10% of the population. Yet as chart #2 shows, America, with its $23.7 million diabetes cases, actually has it good. Because when compared to countries without a social safety net, such as China and India, the US diabetes problem is child's play. With 90 million diabetes cases in China, and 61.3 million in India, or nearly half of the total 346 million worldwide diabetes cases, perhaps it is time for the developing world to worry how they plan on funding the billions of associated costs, as they assimilate more and more of the worst American habits. Because as the International Diabetes Foundation says, "In developing countries, the looming costs in human lives, healthcare expenditure and lost productivity threatens to undo recent economic gains." However since all of this is in "the future" what's the point of worrying about it now...
Ten months ago, as the latest Grand Plan was being announced, we wrote in detail on just how angry Zee German people might get once they realized what was going on. With the weight of the world increasingly burdened on their shoulders, Michael Cembalest of JPMorgan asks "will Germany spend its accumulated national wealth to save the Eurozone (at least temporarily), and how much might it cost them?" Notably, for the better part of a century, the tendency for conflicts in Europe to coincide with Germany's relative economic might is astonishing, but between backstopping the Periphery, a non-inflationary ECB solution, and five years of support to finance the departure of foreign capital - avoiding social collapse in Greece for example - Cembalest estimates the cost to be around 1 trillion Euros. What is more astounding is that he then goes on to compare this cost to re-unification (over the past 20 years) and notes that even if Germany had to pick up half the trillion-euro tab, its debt-to-GDP ratio would rise above 100% (well over the 90% 'This Time It's Different' tipping point). Just how much does this mean to Germany and Europe? IMF Managing Director Lagarde gave a speech last week in which she highlighted the historical importance of Europe and how the concept of the Euro dates back to Charlemagne in the 800s. True, perhaps; but that has not prevented other European monetary unions from failing in the interim. You can ignore economics, but it will not ignore you.
One can come up with massively complicated explanations for why the Chinese commodity bubble is popping including inventory of various colors, repos, etc, but when all is said and done, the explanation is quite simple, and is reminiscent of what happened in the US with housing back in 2007: everyone was convinced prices would only go up, and underlying assets was pledged as debt collateral at > 100 LTV... and then everything blew up. Precisely the same thing is happening in China right now, where buyers of commodities thought prices could only go up, up, up and instead got a nasty surprise: prices went down. Big. As a result, many are not even waiting for their orders to come in, but are defaulting on orders with shipments en route.
Remember when Jamie Dimon showed the Fed who's boss and preannounced it was starting a share repurchase program? Turns out the Chairsatan will have the final laugh:
- DIMON SAYS JPM IS SUSPENDING SHARE REPURCHASES
- DIMON SAYS SUSPENDING REPURCHASE PROGRAM ISN'T RELATED TO LOSS
- DIMON SAYS SUSPENDING REPURCHASE PROGRAM ISN'T RELATED TO LOSS
- JPM'S DIMON SAYS THERE'S UNREALIZED $8B IN PROFIT FROM CIO
- JPM'S DIMON: DOESN'T SEE INVESTIGATION TO UNVEIL BIG SUPRISES
- DIMON SAYS LOSS IS AN ISOLATED EVENT
And the joke of the day:
- DIMON SAYS FORTRESS BALANCE SHEET REMAINS