The Debts of the Lenders: Russia Warns Against Capital Inflows

First Brazil. Now Russia. Only 2 more BRICs to go (China and
India).

"We need to correct the rules so that it is less interesting for
speculative capital to come running into Russia," Mr Putin told journalists while on a trip to Vladivostok, in the far east of Russia.

He said: "It flows in quite well, works here, but creates problems, because if crisis hits, it leaves quickly."

http://www.ft.com/cms/s/0/1cb8df02-f4e2-11de-9cba-00144feab49a.html

The Debts of the Spenders: Bond Vigilantes Target 2 Year Treasuries

In recent days, the US bond vigilantes have been speculating on the Fed raising interest rates in 2010. Speculative volume as well as poor auctions have resulted in yield spiking dramatically higher.

But bond bears beware, they are pushing against resistance on the weekly chart.

The Debts of the World: Bond Vigilantes Place Bets on US Treasuries for 2010

The US bond vigilantes are adding to their bets by placing shorts against treasuries:

http://www.bloomberg.com.au/apps/quote?ticker=USGG2YR%3AIND

http://www.bloomberg.com/apps/quote?ticker=USGG30YR%3AIND

The most interesting story for the beginning of 2010 is the dollar and its correlation w/the safe haven trade of US treasuries. Everyone knows how the dollar has traded inversely to commodities. But the real story is to be found in the dollar-bond relationship. Normally, dollars and bonds rise in tandem as a flight to safety trade. But as the economic data improves (we can argue about all day about the validity of the official data but ultimately the official data is what moves the market and successful traders long ago figured not to fight the tape) so has the dollar's strength!

This means we can have a higher dollar and weaker bonds at the same time. But don't weaker bonds mean automatically higher stocks? Not necessarily. After the global equity indices explosive rally this year, there isn't much room left to grow.

The following comments goes towards my point earlier this month about EUR/USD.

I predict that fund flows from major institutions will be sloshing around the global financial system in a quest to figure out which country is weakest and thereby short that nation's bonds. The dollar, by virtue of its reserve currency status, will benefit from this comparative weakness. This means we can see market corrections among the most popular carry trades like AUD/USD and BRL/USD w/spillover effects in weaker commodity prices as well as gold.

But in the short term, as the 2-10 year spread approaches record steepness, it may be time to become a bull for the longer end of the curve. Especially after stories like this hit the media.

Further out, I have been considering placing bear put spread trades against the longer end of the curve by buying closer otm strikes on 30 year puts (LEAPs) while selling the same month strike further otm on the same expiration. 2011 and 2012 look like interesting bets w/2012 obviously safer because theta works in the call buyer's favor.

The Debts of the Spenders: Latvian Court Says Its Ok for the State to Go Bankrupt

Little Latvia wants the same benefits that larger countries in the West (the USA and UK) have long managed to enjoy - namely the ability to ring up huge debts without being able to pay for any of it. Unfortunately, since the Latvians are not members of the OECD and do not enjoy the benefits of being "too big to fail" (e.g. capital markets large enough to lure in enough suck-I mean investors), then their ministers are faced with the small problem of finding enough money to somehow repay their debts.

However, the Latvians are also members of the EU and have tied their economic fortunes to the bureaucratic stodginess of Brussels thousands of miles to the west. The resulting Eurozone bailout (all but certain) will result in only more joy for USD/EUR bulls.


DJ Latvian Court Overturns Pension Cuts; Threat To IMF Bailout

RIGA, Latvia (AFP)--Latvia's constitutional court Monday struck down pension cuts that form a key plank of an austerity drive, casting doubt on a crucial International Monetary Fund and European Union-led bailout for the recession-hit Baltic state.

"The decision to cut pensions violated the individual's right to social security and the principle of the rule of law," the court said in its judgment, which cannot be appealed.

It said while the government could tighten its belt at a time of crisis, agreements signed with
international lenders "in and of themselves cannot serve as an argument about the limiting of basic rights" and lawmakers who approved the rushed-through cuts had "not evaluated carefully the alternatives."

The court said the cuts--in force since July, and clawing back between 10% 70% of a pension depending on an individual's status--were illegal and parliament must by March 2010 have measures in place to rescind them.

The cut money itself must be paid back no later than 2015, the court ruled in the case brought by 9,000 individual pensioners. The government won a similar case in November over its decision to stop linking pensions to inflation.

Welfare Minister Uldis Augulis said Monday the government would have to find almost 184 million lati (EUR258 million) to refund unpaid pensions and resume full payments at pre-cuts levels.

It wasn't immediately clear how Latvia's embattled center-right government would meet the challenge, nor what the impact would be on the international rescue package that has been helping keep the country afloat.

Finance Minister Einars Repse said the government may have to ask parliament to amend the budget. He said the government would have to find the money within spending limits agreed with lenders.

The Debts of the Spenders: US Commercial Real Estate in 2010

And the search for yield continues. . .

http://nationalmortgageprofessional.com/news15182/2010-rei-outlook-real-estate-investors-planning-buying-commercial-properties-its-2005

The Debts of the Lenders: China Bears on the Dollar

No surprises here. It used to be that central bankers would never discuss the value of currencies, particularly the dollar. But nowadays, everyone from the Japanese, Americans, Russians, Europeans, and Chinese are making currency notations part of public discussion. The latest salvo fired from the Chinese concerns their long term, fundamental views of the US dollar. The statement was issued in response to the House of Representatives approval of the latest increase in the debt ceiling.

“When the U.S. has to fund its deficit through the combination of issuing more Treasuries and printing more dollars, it is inevitable that the dollar will continue to weaken,” Deputy Governor Zhu said at a forum in Beijing today.

Even disgraced former central banker, Alan Greenspan, had this to say about the dollar:

WASHINGTON (Dow Jones)--Former Federal Reserve Chairman Alan Greenspan said in prepared testimony the threat to U.S. fiscal stability is larger than ever, mostly because of rising medical costs.

Averting a situation where the U.S. struggles to finance unprecedented budget deficits "is more urgent than at any time in our history," he said in testimony Thursday before the U.S. Senate Committee on Homeland Security and Governmental Affairs.

Greenspan argued that the problem of large projected shortfalls in Medicare and Medicaid can't be wiped away with more appropriations from Congress. "It is a physical resource crisis," he argued, which will suck more of the U.S. labor force and capital investment into the medical sector.

http://www.bloomberg.com/apps/news?pid=20601080&sid=aLHD8QY9fQsU

The Debts of the Spenders: Santa Rally and TED

The January Effect/aka Santa Rally is a seasonal effect marked by low volatility and light volume. The dearth of active trading days make for a time when fund managers try to lock in their gains for the calendar year by selling their winners and dumping their losers (for various tax related reasons). The market bias has historically been bullish but here is something that traders might want to pay attention to: the TED spread.

In a low interest rate, weak dollar environment it is easy to fall into the trap of thinking that markets will continue trending higher. But watch for sharp corrections. Clues can be found in the money markets.

For recent history, traders should be aware of the early November high of .262 as well as the September lows of .163. Personally, if the market returns to a test of September lows, I will view that as a contrarian signal and buy some protection against volatility in the form of stock puts or Vix calls.

Adventurous traders can try to time a return to bullishness if they believe the market is due to continue its ascent higher by going long Vix puts at a re-test of the November high.

The Debts of the Lenders: Yen To Resume Carry Trade Status in 2010

If I had to make a bet (and I am), I would say that the Federal Reserve will raise interest rates sometime in 2010 despite macro-economic slack in jobs and capital lending. The beneficiary of such changes would be the founders of the carry trade, the deflationary demagogues of Asia, the Japanese.

There’s at least an 88 percent chance the U.S. will raise rates in 2010, up from 78 percent on Nov. 24, futures on the CME Group show. Prices indicate a 46 percent likelihood of an increase by June, up from 30 percent on Nov. 30. By contrast, overnight interest-rate swaps traders see no chance that the BOJ will increase its benchmark next year, Bloomberg data show.

http://www.bloomberg.com/apps/news?pid=20601087&sid=aIf0OWDzVKMM&pos=7

Another beneficiary of interest rate uncertainty will be interest rate futures and options on futures powerhouse, CME Group, whose exchange business suffered from quantitative easing this year. A Federal Reserve committed to low interest rates left the trading environment in a monogamous, one way trading environment. With few parties willing to take the other side of the bet, the exchange suffered from lower volume. If the US economy's outlook begins to improve (however skeptical observers may be of the statistics), then policy makers will be pressured to tighten. Moreover, massive budget deficits are attracting the attention of the bond vigilantes who have been quietly sharpening their proverbial knives in expectation of treasury sell-offs from higher supply concerns. This renewed interest in interest rate speculation may prop the firm's fortunes up again.

The Debts of the Lenders: Chinese Minstry Denies Inflation is Occurring Even As M2 Rises 29%

If that were the case, then why is the government increasing purchases of food stocks (the most volatile component of inflation - especially for emerging market nations). In other news, the Fairy Godmother is leaving coins under children's pillows.

China NDRC: Money- Supply Growth Unlikely To Stoke Inflation

The recent rapid growth in money supply is unlikely to stoke inflation despite a rise in agricultural-product prices, the National Development and Reform Commission, the country’s economy planning agency, said Monday.

“In a situation where overall demand is insufficient, particularly one where there is relatively severe excess capacity in some industries, the possibility that a fast increase in money supply would by itself lead to inflation in the real economy is rather small,” the commission said in a
statement.

At the end of November, M2 money supply was up 29.7% from the level a year earlier. Domestic grain and edible-oil prices are unlikely to fluctuate much as government has sufficient reserves, it said. “The government has decided ...to continue to increase the minimum purchase
price for rice and grain in 2010,” the commission said as it vowed to keep buying soybean and corn next year.

The commission also said soybean imports will reach a record high in December, but didn’t provide a detailed forecast. It isn’t necessary to adjust domestic oil-products prices, it said, as the 22-day moving average of a basket of international crude prices is up only 1.85%.

Source CME News For Tomorrow

The Debts of the Spenders: ISM Report Predicts US Growth in 2010

All jokes aside as to what the US manufacturing sector does produce, the nation's supply chain executives see positive growth for 2010. There are some interesting charts in here. I encourage readers to pour over the data.

http://www.ism.ws/about/MediaRoom/NewsReleaseDetail.cfm?ItemNumber=19911

The Debts of the Spenders: Bond Vigilantes Place Bets on Eurozone

It is a universal truth that nearly everyone enjoys the benefits of government spending but balks when the bill arrives. Here is a spotlight on 2 of the Eurozone PIIGS (Portugal, Italy, Ireland, Greece, and Spain) the group containing the fiscally weakest EU members.

Despite harsh spending cuts Irish bond yields are creeping higher. The situation in Greece however, continues to worsen.

The Irish government announced draconian spending cuts of 6 billion Euros in order to stave off a debt crisis in the worst modern-day downturn in the nation’s history. Even so, Irish government bond yields have been rising relative to German government bond yields, the benchmark for the Eurozone. Over the past five years the spread had averaged about 40bps. Now it is 170bps. But, the Irish seem to be making the necessary cuts forced on them by lower tax receipts and currency union.

The Greek government, on the other hand, is not taking the same tack. Witness comments by the country’s Premier as reported in the Telegraph by Ambrose Evans-Pritchard:

Salaried workers will not pay for this situation: we will not proceed with wage freezes or cuts. We did not come to power to tear down the social state.

http://www.creditwritedowns.com/2009/12/greece-risks-financial-armageddon-while-ireland-makes-cuts.html

The Debts of the Spenders: The Top 10 Countries Most Likely To Default

No surprises here for those following current events. You might be surprised by the inclusion of others.

http://www.businessinsider.com/the-worlds-greatest-sovereign-risks-2009-12

The Debts of the Lenders: Chinese Consumers Increase Spending

While the Western consumer - particularly in the USA and the UK - continues to save, his/her Chinese counterpart has increased spending. Of course a lot of this spending is fueled by a government debt bubble. Unlike their American, British, or EU counterparts, Chinese banks are being FORCED to lend by their government (one of the hallmarks of an authoritarian, semi-command and control economy is that officials can have their wishes implemented almost immediately).

The other interesting part of the equation which the article does not address is the potential for a US export boom. As the dollar continues to depreciate from fundamental factors like immense budget deficits and a lack of political will to control spending, US exports become more competitive in the global economy. But the shift from a manufacturing to a service based economy means immense financial and personal turmoil for the unprepared. The much vaunted service economy conceived by Ivory Tower academics has actually resulted in the stratification of society into the haves and have nots.

The Chinese market is “on full tilt — booming is an understatement these days,” said John Bonnell, the director of Asia vehicle forecasting at J.D. Power & Associates.

China is pulling ahead at this particular moment partly because Americans, debt-laden and worried about their jobs, are pulling back. After decades of gorging on consumption, Americans are saving. And the Chinese, whom economists thought were addicted to saving, are spending more.

Among China’s 1.3 billion people, rising incomes are finally making large numbers of Chinese prosperous enough to make big-ticket purchases.

http://www.nytimes.com/2009/12/10/business/economy/10consume.html?_r=2&ref=business

The Debts of the Lenders: Japan's Actions Do Not Match Words On Latest Stimulus Plans

Japan recently unveiled its 4th stimulus plan since 2008 thus placing it in the dubious ranks of the world's most indebted nation. Japanese politicians have publicly fretted about the need to reign in spending and reduce the amount of bond issuance in 2010. However, bond traders are unconvinced and have pushed up short interest in JGB's (Japanese government bonds) up to their highest levels ever.

Watch this video:

http://www.youtube.com/watch?v=nf0uBXXQubM

The Debts of the Spenders: Congress Eyes (Higher) Gas Tax to Close Budget Deficit

Can blood be squeezed out of stones? When one can only spend their way out of a deficit new means of raising cash must be found. Pundits predict that the US Congress is planning to hit an already overstretched consumer with gas taxes. Of course, given the US government's rate of spending, closing the budget deficit has about the same likelihood of reverting to Glass Steagall or overturning NAFTA.

Transportation chief Ray LaHood predicted the federal government's gas tax of 18.4 cents per gallon would not be enough to offset the nearly $500-million gap between how much revenue is available and how much money the department hopes to receive next year.

That dilemma, he said, would present Congress with two choices: Cut some programs or consider increasing fees, including the federal gas tax -- an idea LaHood discussed, but did not explicitly endorse, during Monday's conference.

http://thehill.com/blogs/blog-briefing-room/news/69815-lahood-gas-tax-one-way-to-pay-for-transportation-budget

The Debts of the Lenders: Asian Emerging Markets Face Food Inflation from Rice Rally

US Rice futures are up 25% in recent months.


Emerging Asia’s Growth Outlook May Get Clipped On Rice Rally

By and large, emerging Asia investors aren’t paying much attention to the rising price of rice. Perhaps they should start. Rice prices have recently surged, nearing the record highs of 2008 as India appears set to become a net importer for the first time in more than 20 years on the
weakest monsoon season in 37 years. The government expects its summer-sown rice output to fall 18%.

The Philippines, one of the largest global rice importers, has also suffered production shortages this year that could increase the country’s demand. On Thursday, prices prompted the Philippines to raise its budget by 21%. Meanwhile, rice futures traded in the U.S. have
increased by about 25% in recent months.

The director general of the International Rice Research Institute Global, Robert Zeigler, underlined the concerns last week in announcing a campaign to raise $300 million over the next
five years to finance research for increasing rice output.

If the cost of rice, the food mainstay of most of Asia, continues to rise relative to other goods and services, the impact on growth in emerging-market Asia, which is expected to lead the world next year, could be crimped. Higher prices would give people less disposable income, and could effect political and social stability.

Food security has become as a major socio-political issue in Asia in recent years due to demand-supply imbalances—a problem expected to grow with increasing populations and potential
climate change.

And rice is not alone. Prices of other food stuffs including sugar, cocoa, tea and Chinese garlic, have been gaining, too.

“Asia’s current recovery is still driven to a large extent by domestic demand and especially household spending,” according to a research report by Frederic Neumann, senior Asia economist at HSBC in Hong Kong. “But, rising food (read: rice) prices could conceivably put such a consumption recovery at risk.”

Aggregate consumption, after all, stalled in 2008 when rice prices soared. Neumann found that the weight of rice on consumer prices even exceeds the impact of energy in some Asian markets.
But a concurrent rise in energy prices could increase the growth impact from rice prices.
Several economists and money managers aren’t yet concerned.

“A rise in rice prices might make me mark down expectations in growth,” said Carl Weinberg, chief economist at High Frequency Economics. “For the moment, that’s not high on my list.”
Simona Mocuta, a senior economist for Asia at Global Insight in Lexington, Mass, added, “By and large, we don’t see the same type of inflationary pressures that we saw in the early part of 2008.”

Source CME News For Tomorrow

The Debts of the World: Will High Grade Corporates Eventually Supplant Government Bonds?

Will high grade corporates eventually supplant government bonds?

The once unthinkable state of affairs - that ultra safe government debt commands a lower yield than private capital - might soon be reversed. Deteriorating fiscal conditions in the UK, USA, and other countries (primarily the Eurozone but feel free to throw in other culprits) might lead to a reversal of fortune for governments.

In particular, I have been looking at the Gilt market for UK government debt. It is possible that the authorities may be forced into a corner over the next year when the BOE's bond purchase program ends in January 2010.

However, the government has a potential ace up their sleeve - the imposition of higher regulatory capital among bank balance sheets. The FSA and its sister agencies in the US and the Eurozone have been contemplating lower leverage ratios among insurance companies, banks, and other private sector financial entities. They have hinted that the "safest" form of capital in terms of liquidity are government bonds as opposed to commercial paper. The sudden demand for government paper could flatten yield curves.

The Debts of the Spenders: GS Upgrades the Grains

Disclosure: No position in the grains as of now. But I am a bull longer term. GS' recent statement on agricultural prices gives rise to concern though b/c one always wonders if their client services and trading divisions are aligned.

Goldman Sachs Sees Big Upside In Corn Prices In 2010

Corn has the most upside potential of the agricultural commodities in 2010, investment bank Goldman Sachs said Thursday. U.S. use of corn for ethanol is a major factor in the market’s bullish outlook, the bank said in a commodities note.

Low stocks and higher energy prices “suggest material upside” to corn prices, said Goldman.
The bank forecasts Chicago Board of Trade corn futures prices to rise to $4.75 a bushel by the end of 2010 and average prices of $5 a bushel in 2011.

In other grain markets price forecasts, the bank is more neutral. The large 2009-10 world wheat crop and “comfortable” stock levels, combined with minimal demand growth, indicate the wheat market will be well supplied in the coming year, said the bank.

Goldman increased its 12-month Chicago wheat price forecast to $6 a bushel from $5.50 a bushel, with the bullish outlook for corn providing spillover strength. “The potential for corn prices to exceed our expectations would also present upside risk to wheat prices, as feed substitution between wheat and corn has historically kept the wheat/corn ratio within a relatively limited range,” Goldman said.

The 12-month forecast for Chicago soybean futures was revised up to $11 a bushel from $10 a bushel due to growth in demand from emerging economies.

Source CME News For Tomorrow

The Debts of the World: Panama Canal to Replace Long Beach?

Interesting. Long Beach, California is THE entry point into the US for the majority of imported goods - particularly those from China and Japan. However, merchants have long been frustrated by the eternally squabbling Longshoremen's Union that represents dock workers. A little secret - these tradesmen already have some of the highest paid, blue collar jobs in the country (well over 6 figures) but they still want more!

Instead, recent developments in the Colon Free Trade Zone in Panama have re-opened the possibility of an alternate channel into the continental US that links the Far East w/burgeoning ports in Miami and along the Louisiana/Texas coastline.

Moreover, an improved channel spells faster turn around time for the most dynamic trade of all - the Latin America/China trade route that sends raw materials and food supplies to the factory cities and workers lining the East China sea.

http://logisticstoday.com/global_markets/shippers-panama-canal-alternative-west-coast-ports-1103/

The Debts of the World: US Cargo Volume Gives Retail Bulls Hope

I was bullish on a rebound on world trade earlier this fall. Spot freight rates are up and so is container volume according to two industry data sources.

Bulls have hope according to two industry sources that see higher container volume and spot freight rate increases:

http://www.nrf.com/modules.php?name=News&op=viewlive&sp_id=837

http://www.businesswire.com/portal/site/home/permalink/?ndmViewId=news_view&newsId=20091123006101&newsLang=en

The Debts of the Lenders: Japan Embarks on Another Round of Quantitative Easing

Dumb and dumber (US and Japan) compete for carry trade flows. Now, the BOJ, pioneers of quantitative easing, have taken a lesson from Bailout Bernanke by accepting "a wide range of collateral" in exchange for ultra cheap money. Nikkei bulls and export starved manufacturers have gotten the green light to go up another few hundred points on the stock index.

But, in the process, each country is debasing their currency and accruing billions (trillions, gazillions, who knows any more?) in debt for future generations to pay off.


TOKYO (Dow Jones)--Japan's central bank unveiled a surprise monetary easing effort Tuesday that could inject up to $115.7 billion into an economy facing deflation and a soaring currency, but it failed to impress financial markets or economists eager for bolder action.

The Bank of Japan's move, which followed increasing political pressure from Japan's new government, underscores the pessimism surrounding the Japanese economy. Japan has posted two straight quarters of economic growth and seen a resurgence in demand for its exports. But declining consumer prices and the yen's strength against the dollar have raised concerns that Japan could slip back into recession.

At an emergency meeting Tuesday, the BOJ adopted a new lending program to provide 10 trillion yen worth of funds for three months at a rock-bottom rate of 0.1%, taking in exchange a wide range of collateral from government bonds to deeds on loans. But the bank stopped short of lowering its key policy rates, also at a low 0.1%.

Source: DJ Newswire