Monetization

Several months ago we pointed out something not fully grasped by the broader public: the Chinese corporate debt bubble is the largest of any developed and developing country, and at 151% of GDP (and rising rapidly) is the biggest in the world. What is better known is that corporate debt is just one part of the total debt picture, which also includes consumer loans, government debt and other "shadow debt" credit in the case of China. So how does China's true debt picture as a percentage of debt look? As the chart below from Goldman shows, in 2013 the total credit outstanding in China is expected to rise to a whopping 240% of GDP, and continue rising from there at an ever faster pace.

For the fourth day in a row, Japanese bond futures markets were halted due to significant (and rapid) price movements. Three of the four halts have been on downside shifts (with the upside surge driven by the BoJ's first attempt at monetization). The daily ranges in longer-dated JGBs are incredible and certainly the last word one would use to describe the quadrillion Yen Japanese bond market since the BoJ's announcement is 'orderly'. As Kyle Bass noted, the volatility in JGBs will be the gauge of the market's qualitative perception that Abenomics can succeed; for now it appears, with longer-dated JGB yields at pre-BoJ levels, having exploded 30-40bps off the lows, and short-dated JGB yields soaring to 11-month highs, things look a little out of control.

It has been well known for years that PIMCO's Dr. Jekyll and Mr. Gross, the original bond king in charge of Allianz' $1+ trillion bond portfolio, has been a vocal critic of QE even in the face of his daily tweet barrage, which often recommends positions in complete contradiction to what said king opined on in his expansive monthly essays. What will come a great surprise, however, is that the "other" fund, which is just as big, is run by Wall Street's shadow king Larry Fink, and which has been advocating to go all in stocks for over a year (preferably using ETFs) interim drawdowns be damned (after all everyone by now should have an infinite balance sheet) - BlackRock - just went all out against QE.  As the FT reports, BlackRock's fixed income guru, formerly at Lehman Brothers, Rick Reider, "has called on the Federal Reserve to rein in its programme of quantitative easing, saying its bond-buying tactics are a “large and dull hammer” that have distorted markets and risk stoking inflation." Why, it is almost as if we wrote that... Oh wait, we did. Back in 2009.

It is hard to make sense of the markets these days. For instance, gold showed no support while the geopolitical situation in Asia deteriorated, Japan embarked in the mother of all monetization programs, and a member nation of what is supposed to be a monetary union was imposed controls on the movement of capital. Or take the case of the Euro, which jumped from $1.2750 to $1.2950 on the day of one of the most confusing and embarrassing press conferences the president of its central bank ever gave. However, in a faraway land, where there is no shadow banking, leverage or even capital markets, economic fundamentals still hold, which can help us, inhabitants of the developed world, visualize a dynamics lost in the shelves of our collective memory. The land we are referring to is Argentina, but not Argentina of 2001. Today, we want to write about Argentina of 2013, and no, we will not discuss their legal battles with Mr. Singer.

Following Friday's epic collapse, snap-back, and circuit-breaker halt in JGB Futures, it appears that investors cannot get enough of Japanese bonds today. From the JPY144.02 close, JGB Futures traded up at the open, oscillated and then gapped higher (on heavy volume) to JPY145.25 before the TSE halted trading once again (on a volatility-based circuit-breaker limit) due to 'rapid price fluctuations. The quadrillion JPY cash JGB market appears very illiquid as we scan the benchmark issues with the 30Y yield higher by 4bps, the 20Y lower by 14bps, and the 10Y lower by 3bps as it appears the futures are the weapon of choice. Since the halt ended, JGB Futures have slipped back notably. It seems pretty evident when and where the BoJ monetization took place but desk chatter was that it was poorly run.

Succinctly summarizing the positive and negative news, data, and market events of the week...

This is your QE on Bernanke: $85 billion per month or $1 trillion per year.

This is your QE on Japanese monetary drugs: $200 billion per month or $2.4 trillion per year.

Witches Brew: Part 4 - Reality Bites

• The Specter of Things to Come

The road to ruin is on plain display and the playbook is easily seen at this juncture. Let’s take a look at how that playbook will unfold. Contrary to popular outrage of the SOLUTION being IMPOSED it is the correct one once the insured depositors where PROTECTED.  In this edition the elites suffered FIRST followed by the private sector depositors who foolishly believed false BALANCE sheets which were POLITICALLY CORRECT but PRACTICALLY incorrect fictions approved by fiduciarily (regulations and regulators allowed ONGOING insolvent operations rather than protect the public by ending and prohibiting them) challenged governments (work for the banks and crony capitalists not for the public at large).

We all know how this will end: with higher inflation/ costs of living and now very likely with a market crash. Every bubble the Fed has blown has resulted in disaster. This time will be no different.

Over the past four years one of the dominant "deflationists" has been Gluskin Sheff's David Rosenberg. And, for the most part, his corresponding thesis - long bonds - has been a correct and lucrative one, if not so much for any inherent deflation in the system but because of the Fed's actual control of the entire bond curve and Bernanke's monetization of the primary deflationary signal the 10 and certainly the 30 Year bond. The endless purchases of these two security classes, coupled with periodic flights to safety into the bond complex have validated his call. Until now.

The key point here is that European Crisis is now accelerating right as Germany becomes increasingly uninterested in funding additional bailouts.

Mario Draghi delivered the mother of all head fakes, first hinting at providing unlimited bond buying for EU sovereign bonds in June 2012, before officially stating that this would be the ECB’s policy is September 2012.

No, it wasn't Ben Bernanke or Alan Greenspan, it wasn't Jean-Claude Trichet or his successor Mario Draghi, nor was it Mervyn King, Carney, Shirakawa, or Hildebrand. The answer, as shocking as it may sound, was...

So, one has to ask one’s self… if the ECB (along with the IMF and Germany) has thus far failed to manage, let alone solve, Greece’s problems (a country which comprises only 2% of EU GDP and whose bond market was just €350 billion), how is it now going to solve those of Greece, Spain, Ireland, Portugal, Cyprus, and Slovenia all at once?