China

There are two key datapoints to present in this week's Fed balance sheet update: the surge in excess reserves, and the comparative Treasury holdings between the Fed and other foreign countries. But first the basics: the total Fed balance sheet hit a new all time record of $2.5 trillion. The increase was primarily driven by a $23 billion increase in Treasury holdings as of the week ended February 23 (so add another $5 billion for yesterday's POMO) to $1.214 trillion. With rates surging, QE Lite has been put on hibernation and there were no mortgage buybacks by the Fed in the past week: total MBS were $958 billion and Agency debt was also unchanged at $144 billion. The higher rates go, the less the QE Lite mandate of monetization meaning that the Fed will be continuously behind schedule in its combined QE2 expectation to buy up to $900 billion by the end of June. Yet most notably, as we touched upon yesterday, the Fed's reserves with banks surged by $73 billion in the past week, as more capital was reallocated from the unwinding SFP program. As noted previously, we expect the total bank reserves held with the Fed to jump from the current record $1.29 trillion to at least $1.7 trillion by June.

What could possibly be the most important unreported news from the weekend comes out of China, where quietly Internet postings have circulated, calling for disgruntled Chinese to gather on Sunday in public places in 13 major cities to mark the "Jasmine Revolution" spreading through the Middle East. The postings, many of which appeared to have originated on overseas
websites run by exiled Chinese political activists, called for protests
in Beijing, Shanghai, Guangzhou and 10 other major Chinese cities. And while there has been some speculation this latest "social network" protest is nothing more than performance art, the Chinese authorities sure are taking it seriously: "The calls have apparently led the Chinese government to censor
postings containing the word "jasmine" in an attempt to quell any
potential unrest. "We welcome... laid off workers and victims of
forced evictions to participate in demonstrations, shout slogans and
seek freedom, democracy and political reform to end 'one party rule',"
one posting said." Just like surging prices (which however are either forcefully adjusted to not be reflected or eliminated entirely from the data stream) caused virtually all prior Chinese social revolts, will they succeed again? And more improtantly, will China demonstrate to the US that the only way to prevent a 'twitter revolution' is to wrest control of the internet entirely? If so, how many days before Big Brother is actively scouring through every single 100Base TX for daily keywords of choice with HBGary patiently waiting in the corridors to unleash a destructive DDOS at a moment's notice?

In yet another very unsurprising event, Ben Bernanke was speaking at the Banque de France Financial Stability Review Launch Event, where per his prepared remarks he once again defended easy money policies so critical at keeping the S&P a few thousand points above fair value over the past two years. Making it once again clear that Bernanke has no clue about how economics works, the Chairsatan was quoted as saying that "The rest of the world has an interest in the U.S. recovery that my policies are spurring." Of course by pursuing his ZLB/ZIRP policies (see, we can name drop too), the Fed is doing nothing but exporting inflation to those countries least capable of handling it, which tends to lead to such inevitable events as government overthrows and revolutions.

Inflation in China is inevitable. You cannot pack 25 years of growth into 3 years and expect not to pay the piper!

The war of words between Muddy Waters and alleged Chinese fraud company, China MediaExpress Holdings escalates as the company that exposed RINO for the fraud it is, issues its latest update on the situation. Bottom line: "We reiterate our Strong Sell rating on CCME, and stand by our conclusion that CCME management is significantly inflating its revenue and earnings in order to generate management earn-outs and inflate the stock price so insiders can sell."

Once again China shows how it's done. Instead of continuing to issue it vastly manipulated national property price index, the Chinese statistics agency has simply decided to stop publishing this highly regarded (if completely irrelevant) metric. From the WSJ: "China's statistics agency said it will stop publishing the country's much-watched official index of national property prices." The reason: even armed with Moody's GIGO spreadsheets to "calculate" the data and provide "output", the country was unable to mask the surge in property prices, resulting in a build up of popular anger. Alas, this move which is nothing but an act of massive condescension, and is supposed to get unpleasant data "out of sight and out of mind", will achieve precisely the opposite, as one billion Chinese know too well just how rapidly surging Chinese inflation is first hand.

Lightening the weight of food in inflation calculation still rendered China's consumer inflation at +4.9% year over year. The more telling number is the producer wholesale inflation, which spiked 6.6% year-over-year in January.

There is little that can be said about the December TIC data, as all the same (troubling) trends continue. In summary, net foreign purchases of long-term U.S. securities were $76.8 billion.
Of this, net purchases by private foreign investors were $66.3 billion,
and net purchases by foreign official institutions were $10.5 billion. The bulk of purchases was Treasurys at $54.6 billion, and $10.2 billion in corporte stocks (a fourth straight monthly decline), with token purchases of both Mortgages and Corporate bonds. Net foreign acquisition of long-term securities, taking into account adjustments, is estimated to have been $41.8 billion. Yet the most notable data continues to be the interplay between the formerly largest holder of debt (soon to be third), and that locus for bond laundering- the UK. Total Chinese holdings declined by $4 billion, as a result of $9.4 billion in Short-Term debt declines, offset by Long-Term purchases. China continues to dump agency securities like there is no tomorrow, and December is the 6th month in a row in which China has seen its agency holdings decline, but that should come as no surprise to anyone: after all they made it somewhat clear they are on the verge of liquidating the bulk of their GSE holdings recently. On the other hand, the "UK", which is either the Fed's "direct bidder" bond bonzi scheme, Chinese indirect purchases, or recycled petrodollars, just can't get enough of US debt: in December UK holdings increased by $30 billion. It has gotten so bad, that at $541 billion the "UK" is now just $350 billion away from China's total holdings ($892 billion). And Japan is now just $8 billion behind China in total US debt holdings! Of course none of this matters: The Fed will soon be more than double the next two holders (China and Japan) combined, with all the interest collected on the Fed's debt to be promptly converted to Treasury "revenues."

And some bad news for the world's worst car maker (recently bankrupt), which has bet its entire "growth" platform as per the recent IPO on the one market that is so far unfamiliar with said carmaker's "quality" reputation. In January, the Shanghai-based China Passenger Car Association reported that sales of passenger cars fell 10.3 percent in January from the month before to 965,238. Per Manufacturing.net: "Chinese bought 13.7 million passenger vehicles last year, up by a third
from 2009. But that robust growth is forecast to cool this year due to
the expiration of tax incentives for some vehicle purchases and a
renewed effort by cities to bring traffic under control."Is the recent collectivist action to cool off purchasing actually going to have an adverse impact not only on GM's margins but its sales as well? Why yes. But the market will be stunned when this is publicly announced shortly.

Inasmuch as one can trust any data coming from centrally-planned governments, following last night below consensus CPI reading, China continues to telegraph that monetary growth is once again under control (at least for the time being): in January commercial banks extended CNY 1.04 trillion in Loans, up from CNY 480.7 billion in December, which however was well below the consensus of CNY 1.2 trillion. Outstanding CNY loans grew by 18.5% yoy in January, down from 19.9% yoy in December (market consensus: 18.7% yoy). Additionally, the just as "credible" Chinese M2 printed at 17.2% growth yoy, down from 19.7% in December (19.% consensus). The M/M seasonally adjusted annual growth fell to 1.5%, down from 14.5% in December.

The consensus expectation for Chinese CPI was 5.4%. Zero Hedge's expectation based on just announced manipulated CPI data was 4.9%. Guess who was correct... In the meantime, Chinese food prices are not increasing by 5% every ten days, or over 400% annualized. Or at least, they are not doing so on rice (most likely fake) paper.

As we speculated earlier, China has just lowered the weighting of food in its CPI. The reason: the nearly 5% surge in food prices in the past 10 days. Turns out the US can still learn a thing or two about data manipulation from the Chinese...

Unless we are reading this just released 13G from the China Investment Corporation wrong, Morgan Stanley has just gotten a new second largest holder of its stock. According to the 13G, CIC now owns 150,782,379 shares, or 9.97% of the outstanding stock, compared to 34,719,468 as of August 9, 2010, which in turn was a sneaky decline of 1.6 million shares from the prior period. Instead of buying our bonds, are the Chinese now looking at purchasing our banks directly? The attached chart shows how MS' holdings looked just before this 13G filing. CIC is now the top 2 holder of MS stock, just behind State Street with 163.7 million shares.

When scientists get further along with epigenetics, they may discover the Chinese have two unique DNA: a gambling gene, and another for hospitality. The first, of course, explains why Macau is odds-on favorite for replacing Vegas as No. 1 world gambling champion. The second suggests why few escape the lure of a Chinese campaign to win visitors’ hearts and minds.

China, as an investment, is important for three reasons. They are:

1) The Chinese economy is believed to be leading the world into recovery
2) The Chinese stock market has lead the S&P 500 for years
3) The Chinese/ US monetary relationship

I’ve covered #’s 1 & 3 several times before and I’ll providing an update of my analysis in tomorrow’s edition of Gains Pains & Capital. So today we’re focusing on #2.