Brazil

All you need to read.

Every year in February, the Treasury department releases its adjustment to foreign purchases of Treasury bond holdings as of the previous June (with revised and overriding estimates for all the intervening months in the interim, as well as previous monthly forecasts). It did that earlier today. And while many may have been expecting the revision to show that contrary to Zero Hedge claims China has in fact been building up its Treasury stake (following the now traditional transfer of UK purchases to China), the reality is that not only has China indeed been dumping US exposure (first reported by us previously when we observed the plunge in holdings in the Fed's custodial account), selling over $100 billion in Treasurys in December alone (bringing its total to $1152 billion, and down 12% from its June total of $1307 billion) but that probably far more curiously, the UK is no longer a shadow buyer of Chinese bond accumulation and instead has become a secret accumulator of Russian holdings.

• Germany Crisis Role in Focus After G-20 Rebuff (Bloomberg)
• G20 to Europe: Show us the money (Reuters)
• Draghi’s Unlimited Loans Are No Panacea (Bloomberg)
• Geithner says Europe has lowered risks of "catastrophe" (Reuters)
• Gone in 22 Seconds (WSJ)
• Gillard beats Rudd to stay Australian PM (FT)
• Brazil Will Continue Reducing Interest Rates, Tombini Says (Bloomberg)
• China to Have ‘Soft Landing’ Soon: Zoellick (Bloomberg)
• China To Be Largest Economy Before 2030: World Bank (Reuters)
• Obama pressed to open emergency oil stocks (FT)

Overnight sentiment is significantly negative, with stocks, bond yields, risk currencies lower after G-20 over the weekend refused to increase IMF funding. The result is an end to the buoyant market sentiment of recent days which has seen the Dax down 1.2%, bund, UST yields lower, and US futures lower. As many had expected, the G-20 has rebuffed EU leaders' request for more assistance, which in turn has placed the onus on Germany to find a way to resolve its internal conflict vis-a-vis a Greek bailout, ironically as many believe that it is Germany who more than anyone wants Greece out. This happens as the Bundestag votes today on second aid package today; Merkel’s government must decide whether to back plans at this week’s summit to combine EFSF and ESM. In other news, tomorrow the ECB will call for bids for the second 3 Year LTRO tomorrow, with results announced on February 29. And with the ECB's deposit facility at €477 billion, it is rather clear that the banks will park the bulk of new proceeds with the ECB once again, where it will continue to be a negative carry trade, earning 0.25% at a cost of 1.00%. And somehow this is favorable for the European sovereign bond market, which continues to ignore the various layers of subordination it is now working under. We expect the market revulsion to this flaw to be violent when it comes, and will result in a rapid and sudden divergence between the various subordinated tranches of sovereign bonds.

Last week saw dramatic dispersion among the major FX pairs as global and local influences caused significant moves in most of the key crosses. Goldman takes a look back at the key drivers of that volatility and then focuses on the week ahead as the EU Summit at the latter end is the main event risk while ongoing macro developments will be focused on the incessant rise in Crude oil prices and whether we start seeing knock-on impacts in the real economy.

There is nothing new in this interview of Spiegel magazine with Ken Rogoff, but it is refreshing to listen to a person who has at least some standing in the arena of grand self-delusion (i.e., economics and capital markets), telling it like it is. While he rehashes all the old points, these bear reminding as the key one is what happens to Germany as the can kicking becomes a new default exercise in preserving bank "solvency" at the expense of the last stable economy: when asked if in 2015 the Eurozone will be the same, his response: "It may well be the case that all current members remain in the euro zone, and that Germany keeps on shouldering the ever-increasing debts of other countries. But the price of such a scenario is very high for all involved: southern Europe would become embroiled in permanent stagnation and the German economy would eventually be dragged down to a slower growth trajectory." So even though everyone knows that Europe is doomed in its current configuration, let's all just pretend things shall be well, and keep the even more doomed banks alive for a few more quarters? Is the loss of a banker bonus truly such a great catastrophe to society that countries have to remain in a state of perpetual misery until it all finally unwinds? Judging by today's market action the answer is yes.

• Europe Demands More Greek Budget Controls in Bid to Forge Rescue (Bloomberg)
• Moody's Warns May Downgrade 17 Global Banks, Securities Firms (Reuters)
• Officials at Fed Split on More Bond Buys (Hilsenrath)
• Greek deal delays pressure periphery (Reuters)
• Talk, but No Action, to Break US Grip on World Bank Job (Reuters)
• Greek Rhetoric Turns Into Battle of Wills (FT)
• Greece Seeks Monday Bailout Deal, EU Questions Remain (Reuters)
• US Lawmakers Announce Payroll Tax-Cut Deal (Reuters)
• China Leader-In-Waiting Xi Woos and Warns US (Reuters)
• China's FDI falls 0.3% in Jan (Reuters)

S&P just downgraded 34 of the 37 Italian banks it covers. Below is the full statement. And so get get one second closer to midnight for Europe's AIG equivalent: A&G. As for S&P, this is the funniest bit: "We classify the Italian government as "supportive" toward its banking sector. We recognize the government's record of providing support to the banking system in times of stress." Even rating agencies now have to rely on sovereign risk transfer as the only upside case to their reports. Oh, and who just went balls to the wall Italian stocks? Why the oldest (no pun intended) contrarian indicator in the book - none other than permawrong Notorious (Barton) B.I.G.G.S.

Much has been made of today's Reuters story how "Iran turns to barter for food as sanctions cripple imports" in which we learn that "Iran is turning to barter - offering gold bullion in overseas vaults or tankerloads of oil - in return for food", and whose purpose no doubt is to demonstrate just how crippled the Iranian economy is as a result of the ongoing US embargo. Incidentally this story is 100% the opposite of the Debka-spun groundless disinformation from a few weeks ago that India was preparing to pay for Iran's oil in gold (they got the asset right, but the flow of funds direction hopelessly wrong). While there is certainly truth to the fact that the US is actively seeking to destabilize the local government, we wonder why? After all as the opportunity cost for the existing regime to do something drastic gets ever lower as the popular resentment rises, leaving the local administration with few options but to engage either the US or Israel. Unless of course, this is the ultimate goal. Yet going back to the Reuters story, it would be quite dramatic, if only it was not the case that Iran has been laying the groundwork for a barter economy for many months now, something which various other analysts perceive as the basis for the destruction of the petrodollar system. Perhaps regular readers will recall that back in July, we wrote an article titled "China And Iran To Bypass Dollar, Plan Oil Barter System." Specifically, we wrote that "according to the FT, China has decided to commence a barter system in which Iranian oil is exchanged directly for Chinese exports. The net result: not only a slap for the US Dollar, but implicitly for all fiat intermediaries, as Iran and China are about to prove that when it comes to exchanging hard resources for critical Chinese goods and services, the world's so called reserve currency is completely irrelevant." Seen in this light the fact that Iran is actually proceeding with a barter system, something that had been in the works for quite a while, actually puts the Reuters story in a totally different light: instead of one predicting the imminent demise of the Iranian economy, the conclusion is inverted, and underscores the culmination of what may have been an extended barter preparation period, has finally gone from beta to (pardon the pun) gold, and Iran is now successfully engaging in global trade without the use of the historical reserve currency.

And so the legend of the once invincible "hedge fund titan" Phil Falcone, often the target of mockery and ridicule on the pages of Zero Hedge, ends, after his now irrelevant hedge fund which peaked in the tens of billions back in 2006/2007 is forced to borrow a secured loan from Jefferies at a 15% rate. The reason - the firm's all in gamble in satellite communication company LightSquared, which is also pretty much finished following today's announcement by airline carriers who said that LightSquared would "ruin US aviation." That, and pretty much everything else that Falcone invested in in the past 5 years. Check and mate. This also answers our question from August 2010 "Is Phil Falcone's Mega Bet On [LightSquared] Going To Be His Last?" It is.

Mohamed El-Erian, CEO and co-chief investment officer of bond fund giant PIMCO, said investors should be underweight equities while favoring "selected commodities" such as gold and oil, given the fragile global economy and geopolitical risks. Over the long term gold will reward investors who own gold as part of a diversified portfolio. Trying to time purchases and market movements is not recommended – especially for inexperienced investors.  New research from Credit Suisse and London Business School entitled ‘The Credit Suisse Global Investment Returns Yearbook 2012’ continues to be analysed by market participants. The 2012 Yearbook investigates data from 1900 to 2011 and looks at how best to protect against inflation and deflation, and how currency exposure should be steered. The chief findings are that bonds do well in deflation and benefit from currency hedging, and equities are not a perfect inflation hedge, but benefit from international diversification.  The report shows that gold offers a timely inflation hedge and long term holders of gold should expect a positive correlation to inflation – gold is one of only two assets since 1900 to have positive sensitivity to inflation (of 0.26). Only inflation-linked bonds had more - 1.00, as expected. By contrast, when inflation rises 10%, bond returns have fallen an average 7.4%; Treasuries fell 6.2%, and equities lost 5.2%. Property fell by between 3.3% and 2%. Importantly, gold managed to increase its value across both extreme inflationary and deflationary scenarios. The academics from LBS analysed 2,128 individual years in 19 major countries (1900-2011), finding gold rose 12.2% in the most deflationary years - when average deflation was 26%.

In contrast with better news from macro data, the negotiations about the next Greek package intensified and this will likely remain the key focus in the upcoming week. On one hand, the present value reduction in a PSI has still not been formally agreed. On the other, the Greek Government still has to commit to more reforms in order for the Troika to agree to a new program. A key deadline for this commitment is on Monday at 11am local time in Athens. Eurogroup President Juncker has talked openly about the possibility of a default on Saturday in the German weekly Der Spiegel. Beyond the ongoing focus on Greece, the week sees a relatively heavy concentration in central bank meetings, including the RBA, ECB, BOE, Poland, Indonesia and a few others. On the data side, the focus is likely on the December IP numbers due in a number of countries, including in some key Eurozone countries (Germany, Italy, France).

Mike Krieger submits: "I’ve always loved history. Even all the way back to grade school I remember it being my favorite subject. Very early on I noticed certain patterns in history and I wondered why they occurred. When I was first exposed to European history, I recall being absolutely floored by how certain countries could become so rich and powerful and then subsequently collapse so stunningly and rapidly. The one that really boggled my mind was Spain - the homeland of my maternal grandfather who I never met. Here was a country that conquered and viciously looted essentially all South America other than Brazil (thanks to the pope being magnanimous enough to grant that part of the world to Portugal in the Treaty of Tordesillas), Mexico, Central America and parts of the United States. The gold and especially silver that was taken back to Spain was the stuff of legend, yet almost at the same time they had defeated the native peoples overseas their kingdom at home was crumbling. Not to bore anyone with too much history, but by the mid 1500s the Spanish had essentially conquered the Aztecs (Mexico) and the Incas (Peru). At the time, the Aztec capital, Tenochtitlan was estimated to be larger than any city in Europe. Despite these tremendous “successes” and the riches that came with them, the battle of Rocroi in Northern France in 1643 less than one hundred years later marked the end of Spanish dominance in Europe. What is so fascinating to me is that while the conquistadors were out raping and pillaging halfway around the world the domestic economy was experiencing economic crisis. There were episodes of major currency debasements in the homeland as the crown was forced to fight wars on their borders as well as fund the excursions abroad. It is important to note that the collapse came pretty quickly as it was only in 1627 when things were still looking pretty good for the empire that The Count-Duke Olivares famously stated: “God is Spanish and fights for our nation these days.” Does this story sound familiar?"

With harsh long-term consequences for the heavily indebted countries.

One of the laments of the uberdoves in the world over the past several years has naturally been the fact that interest rates are bound by Zero on the lower side, and that the lowest possible rate on new paper is, by definition, 0.000%. Which is what led to the advent of QE in the first place: in lieu of negative rates, the Fed was forced to actively purchase securities to catch up to a negative Taylor implied rate. This may be about to change, because as the just released letter from the Treasury Borrowing Advisory Committee, or as we affectionately called the JPMorgan/ Goldman Sachs Chaired committee, the "Supercommittee That Runs America", simply because it alone makes up Tim Geithner's mind on what America needs to do funding wise, demand, "It was broadly agreed that flooring interest rates at zero, or capping issuance proceeds at par, was prohibiting proper market function. The Committee unanimously recommended that the Treasury Department allow for negative yield auction results as soon as logistically practical." And what JP Morgan and Goldman Sachs want, JP Morgan and Goldman Sachs get. And once we get the green light on negative yields at auction, next up will be the push for the Fed to impose negative rates on all standing securities, which means that coming soon savers will be literally paying to hold cash. And that will be the final straw.