Tuesday, March 31, 2009
The pictures speak for themselves. Junk continues to trade as junk while even the investment grade (IG) or highly rated stuff has seen a pullback off the "January Effect" fund manager recovery level of 500 basis pts spread or so. I feel that I must explain things more.
For those who do not already know - the way to read these charts is simple.
#1) Go to the bottom of this web page.
#2) You will find a CMBX indices link there. Click it.
#3) Now you can see the basis pt spreads! In general the HIGHER the basis pt spreads the WORSE the underlying situation. The spreads are listed on Markit's web site but it helps for visual purposes to be able to see the graphs. Some of these indices have been trading at near bankruptcy levels for a while now (especially the HY, high yield - aka junk bonds) . But others are more closely watched and have been very volatile in recent months (for ex. the AAA stuff).
To be sure, this is not the first swap of its kind. So far, China has entered into 6 BILATERAL deals w/other nations since late 2008. Most of these deals have been w/other Asian nations and remain focused on trade finance. In other words, the currency conversion would be basically useless outside the relatively narrow realm of specific trade terms and factors. But this is an important step in establishing China's growing geopolitical role outside of the G-8 political and economic dominance.
Why Argentina though? First some background.
Well, Argentina has long been the pariah state of international economics. Buenos Aires defaulted on its international debt at the beginning of the decade and sparked a series of rather violent political changes. To this day international relations remain strained between Western creditors (bondholders) and the Argentine market.
Into the breach stepped China, whose government has shown a remarkable ability to do business w/any kind of government - tinpot dictatorships (N Korea), genocidal generals (Burma and various Central African despots), recovering Communists (Russia), and democratically socialist (USA). Back in early 2008 and all of 2007, the focus was on China's expansion into Africa in a search for commodities.
So, what does Argentina have to offer besides tango music and some very well dressed people?
Agriculture. Argentina is one of the largest exporters of beef and grain (including soybeans) in the world. China's population of 1.3 billion people and growing still need to be fed. And China's leaders have done a fine job of devastating their environment through intensive pollution. It is a sad but true fact that China now has to import more rice and wheat than it grows domestically.
DJ HEARD ON THE STREET: Towards Swapping China's Currency
By Andrew Peaple A DOW JONES COLUMN
When it comes to getting the world to stop thinking just in dollar terms, Beijing's trying to do more than just talk the talk.
It'll be a while before the U.S. Treasury needs to be concerned, though.
Since December, China's central bank has signed bilateral currency swap agreements with six different countries, worth $650 billion in total.
Lately, those deals have gone beyond the country's Asian neighbors to include Belarus this month and Argentina this week. Talks are underway with other countries as well.
The aim here is to lay a foundation for the yuan to become more widely used in global trade.
The idea behind the swaps themselves is to provide central banks with yuan to inject into their own financial systems. Firms importing goods from China can then pay for them with yuan borrowed from domestic banks. This also reduces Chinese firms' transaction costs.
Great in theory. But China has more to do to make these swaps practically useful, rather than just political gestures of goodwill.
Chinese exporters can't invoice in yuan today. Rather, they still have to be paid in dollars, mostly, or some other currency.
This will all take time. Meanwhile, most of the countries that have entered swap agreements with China haven't utilized them yet. The yuan they receive has little use to them outside of trade finance anyway, because it can't be traded outside China. So a country like Argentina, say, couldn't sell the Chinese currency to defend its own currency, a normal use for a country's foreign exchange reserves, although the swaps could free up dollars for that purpose.
The Chinese are nothing if not patient. But this is one project that's going to take some time to bear fruit.
(Andrew Peaple, a Columnist on Dow Jones' Heard on the Street team, has been a financial journalist since 2003. Currently based in Beijing he has also covered the U.K. economy and financial services, and is a U.K.-qualified chartered accountant. He can be reached on +86-10-6588-5848, or by email on firstname.lastname@example.org)
(END) Dow Jones Newswires
Friday, March 27, 2009
Japanese politicians continue to destroy the yen's safe haven status through highly inflationary actions. Their latest proposed gamble involves the purchase of up to 1 trillion yen, or roughly $10 billion, of commercial real estate held by domestic REITs through cheap loans and the establishment of a fund to acquire properties.
The ruling coalition hopes to have Japan Post Bank invest in the proposed fund by purchasing bonds issued by the DBJ, Nikkei [the Japanese business newspaper] said.The postal bank, a unit of the government-owned Japan Post Holdings Co., is not allowed to directly take stakes in investment funds.Other investors in the fund would include such private-sector companies as real-estate developers, as well as the Organization for Promoting Urban Development and other public institutions. The ruling coalition aims to encourage commercial banks to make loans to the fund, the news report said.The fund would acquire real estate held by REITs, which then would use the proceeds they pocket to reinvest in other properties, said Nikkei.
Sounds promising right? Not really when you compare it to the black hole of US bailouts (TARP, TALF, etc.). And those have been sterling successes!
Could this lead to another "bear market rally"? Maybe.
To answer that question let us look at history. Attached you will see how the Nikkei reacted after similar bailout(s) attempts in the early 2000s. The results were not pretty.
Thursday, March 26, 2009
Daniel Hanna, a MEP from the opposition Conservative party, delivered a scathing address to Gordon Brown, the UK Prime Minister.
"The truth Prime Minister is that you have run out of our money! . . . Every British child is born 20k pounds in debt."
3 cheers for Daniel Hanna - the Ron Paul of the UK.
Wednesday, March 25, 2009
While I have a very bearish bias, it would be remiss of me not to include some bullish analysis.
Here we can see that the AAA CMBX spreads continue to decline - a remarkable drop of almost 200 points since Monday, the beginning of the week!
Of course this is ONLY AAA. And the figures might be skewed juuuuust a little bit by Bernanke's "Cash for Trash" program of exchanging Treasuries for "AAA rated securities" (translation: the stuff that the issuers bribed Moody's and Standard and Poor's the most to rate highly).
But perceptionis reality in this market. In fact commercial real estate MAY (see legal disclaimer on side panel) be a good contrarian play in the coming weeks - if only because the Feds will guarantee payment.
I have been saying for a while now that it is NOT about the taxpayer - it is about the bond seller(s). Remember folks, the basis for the economic "recovery plan" is built upon a debt engine - an engine where the consumer taxpayer is already in the hole for $50 trillion or so, a government addicted to red ink deficits, and an insatiable military-industrial complex.
US officials talked up the dollar this morning in a desperate attempt to deflect Chinese and Russian criticism of American fiscal profligacy. Secretary of the Treasury Geithner even managed to strike a vaguely conciliatory tone in his latest diplomatic communique w/the Chinese - at once defending the dollar but also acknowledging China's concerns.
This was an abrupt change from his tone yesterday when he refused to consider the idea of the Chinese SDR "Super Reserve Currency." Dollar bulls like Obama and Geithner have been astoundingly arrogant in their defense of King Dollar. Their assertions rest on the assumption that China is too economically tied to its mercantilist trade policy of cheaply manufactured goods for Treasuries.
Well, Rome did not fall in a day but eventually collapsed due in part to currency depreciation. US leverage has been slowly dwindling due to a decline in Chinese exports. Similarly, once past a certain point in consumer purchases have been reached, Chinese officials see no further benefit to continue subsidizing America's deficits.
But perhaps I am being too kind to Geithner.
Kathy Lien, forex commentator, had this to say:
Even though President Obama said that the dollar is strong and there is no need for a reserve currency, Geithner suggested this morning that the U.S. is “quite open” to China’s suggestion of moving towards a Special Drawing Right (SDR) linked currency system. But just as quickly as he made those comments, he retracted them probably because an aide told him that the U.S. dollar is tanking. Minutes later, Geithner said there is “no change in dollar as world’s reserve currency and likely to remain so for long time.”
These contradictory statements are clearly the act of an amateur Treasury Secretary that is forced to eat his words.
=DJ UPDATE: WORLD FOREX: Dlr Off Lows As Geithner Clarifies Remark
By Riva Froymovich Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--The dollar, which fell to session lows against the euro and yen Wednesday morning after U.S. Treasury Secretary Timothy Geithner said he is open to considering a new global reserve currency, came off those lows after Geithner clarified his remarks.
The secretary said the U.S. will act to keep the dollar the key reserve currency.
"The dollar remains the world's dominant reserve currency. I think that's likely to continue for a long period of time," Geithner said. "As a country we will do what is necessary to make sure we are sustaining confidence in our financial markets" and economy, and that will support the dollar.
The issue of a new global reserve currency to replace the dollar has built up steam lately, after both China and Russia proposed expanding a Special Drawing Rights, or a unified basket of currencies issued by the International Monetary Fund. An independent expert panel convened by the United Nations is also expected to recommend an expanded SDR this week.
Geithner earlier Wednesday said he hasn't yet read China's proposal, but that he was "open" to considering expanding an SDR. He also said he believes the market may have gotten ahead of itself in interpreting the Chinese proposal as a move to unseat the dollar as the world's primary reserve currency.
This contradicts comments he made Tuesday, when along with Federal Reserve Chairman Ben Bernanke, he denounced the idea of a new global reserve currency. President Barack Obama also reaffirmed his belief in the strength of the U.S. dollar at a prime-time press conference at the White House Tuesday night. Obama said that global investors still looked upon the dollar as a safe investment, and the U.S. economy as more stable than others around the world.
-By Riva Froymovich, Dow Jones Newswires; 201 938-5063; email@example.com
(Michael S. Derby in New York contributed to this report.)
(END) Dow Jones Newswires
Copyright (c) 2009 Dow Jones & Company, Inc.
This is not the first time the Chinese have blocked Youtube. Earlier blocks had been placed before and during the 2008 Olympics to prevent "seditious" information about Tibet, Uighurs, and/or the Dali Lami from reaching sensitive eyes and ears. Those blocks remain in place and/or are heavily monitored.
But now the Chinese government has moved to block Youtube entirely - no doubt for its access to on the ground reports by citizen bloggers about the economy. True figures are hard to access because of the government's tight control over the media. But million of migrant workers have lost their jobs in the industrial cities of the east (many w/o pay or even advance notice) and are circulating restlessly around the countryside. Police continue to jail and beat those figures who too stubborn to learn their lessons - not even bothering w/the pretense of re-education camps anymore.
Goldbugs have also been speculating that the latest Peter Schiff goldbug videos (translated of course) have been circulating that warns ordinary Chinese of their eventual economic fate: bagholders of Treasuries. No paradigm lasts forever - and that includes the Treasuries for cheap labor model adopted by the US and China over the past 15 years.
The Chinese government has apparently moved to block YouTube once again.
The Wall Street Journal is reporting that the government began blocking the site slowly over the past 24 hours. Quoting a Google spokesman, the Journal reported that the company has not been given a reason for the ban.
A Chinese official was asked about the ban during a press conference on Tuesday and said the "Chinese government has taken up management of the network according to the laws," the Journal reported.
Tuesday, March 24, 2009
In this case, a lot of hedgie and mutual fund money is pouring into preferred bank stocks, corp bonds backed by the Fed, GSE debt (FNM and FRE bonds), and even municipal bonds.
This means FEWER buyers for Treasuries.
Leaving the Fed as one of the the biggest buyers (the other being China and Japan).
It may be too early to tell but it seems that the bond speculators have already left the boat. After all, why should investors lend money to Uncle Sam at <4% interest for 30 years when they can get better returns in other debt that is DE FACTO or explicitly guaranteed by the federal government?
Say hello to higher bond yields in the future. Of course the Fed can expand its purchases of longer dated issues but that is a very inflationary action.
Monday, March 23, 2009
Sorry goldbugs - the new proposed system is not backed by gold.
BEIJING, March 23 (Reuters) - China's central bank chief on Monday proposed a sweeping overhaul of the global monetary system, outlining how the dollar could eventually be replaced as the world's main reserve currency by the Special Drawing Right.
The SDR is an international reserve asset created by the International Monetary Fund in 1969 that has the potential to act as a super-sovereign reserve currency, Zhou Xiaochuan, governor of the People's Bank of China, said in remarks published on Monday on the bank's website, www.pbc.gov.cn.
"The desirable goal of reforming the international monetary system, therefore, is to create an international reserve currency that is disconnected from individual nations and is able to remain stable in the long run, thus removing the inherent deficiencies caused by using credit-based national currencies," he added.
Sunday, March 22, 2009
While his bullishness for commodities has been dented in the short term, Jim remains confident that the fundamentals - low supply and growing demand - continue to grow better. Moreover, as Mr. Rogers is constantly fond of saying, the Feds are on a 1 way course towards debasing the dollar. *
*All opinions expressed are Jim Rogers' views and not necessarily my own. Please do your own research before committing to a financial position. I do not have any affiliation or financial connections to Jim Rogers or his funds.
March 23 (Bloomberg) -- Young Japanese retail investors are turning to gold purchasing plans at an unprecedented rate as they seek to protect their finances amid a deepening recession, an official at the nation’s largest bullion retailer said.
“We’ve never seen anything like this,” said Noriyuki Abe, an executive at the precious metals division of Tanaka Kikinzoku Kogyo K.K. The company has signed up more than 4,000 customers a month for its gold accumulation plan since October. Previously “the tally wouldn’t exceed 1,000,” he said in an interview.
Financial turmoil has boosted bullion demand worldwide, increasing sales of Austrian Philharmonic gold coins and driving holdings to all-time highs in the SPDR Gold Trust, the biggest exchange-traded fund backed by the metal. Rising interest in long-term investment plans by customers in Japan aged from 20 to 40 “stood out,” according to Abe at Tanaka Kikinzoku.
Japanese people in their twenties have shown “stronger tendencies to save money” over the past two years, according to surveys by advertising agency Hakuhodo DY Holdings Inc. “They don’t own cars because they are expensive to maintain, don’t drink much, and don’t go on trips abroad,” said Yohei Harada, a researcher at Hakuhodo’s research and development division.
Saturday, March 21, 2009
Geithner's TALF plan resembles buying OTM call options.
Small upfront risk. Big reward.
The max gain is POTENTIALLY enormous in terms of near unlimited theta.
The problem is w/vega or volatility. In this case that would mean transparency.
As some commentators already said, the "option writers" have a perverse incentive to enter the bidding process thru a back door so they can take both sides of the trade and pay a small premium to offload big losses onto the sucke- I mean taxpayers.
This collusion would drive away REAL BUYERS who would not want to participate in such a disgusting game.
After all the sellers would just be dumping their most toxic, underperforming assets (stuff that while it may have a cash flow "now" is unlikely to have one in the future).
Please remember we have the same people in power - GS flunkies in all levels of government for ex - to ensure maximum corruption. Keep in mind who is running the show here. And then ask yourself if they have any reason to be impartial.
The more things change the more they stay the same:
"Prior to joining the Bank in 2007, Mr. Dudley was a partner and managing director at Goldman, Sachs & Company and was the firm’s chief U.S. economist for a decade. Earlier in his career at Goldman Sachs, he had a variety of roles including a period when he was responsible for the firm’s foreign exchange forecasts. Prior to joining Goldman Sachs in 1986, he was a vice president at the former Morgan Guaranty Trust Company. Mr. Dudley was an economist at the Federal Reserve Board from 1981 to 1983."
Will the revised TALF plan work?
There is a limit to how much the Fed can monetize. That is why they are floating this plan to alleviate public spending. Remember the goal is to keep the ABS basis pt spreads narrow.
Pictures are worth a thousand words.
As you can see on the diagram above, the CMBX spreads have barely budged during the last 2 weeks bear rally (e.g. short squeeze rally). The higher the chart the lower the underlying value or put another way, the bigger the spread the more distance there is between buyers and sellers. The buyers represent hedgies and private equity buyout firms while the sellers represent investment banks and insurance companies w/$trillions of mark to market junk on their balance sheets.
And this is from the "AAA" rated tranches - the stuff that the Fed is swapping for Treasuries! Is it any wonder that foreign creditors such as the Chinese have openly voiced their concerns about US fiscal stability?
The hope is that the private sector can narrow the spread w/o the Fed having to resort to the very inflationary measures of directly buying the securities.
The problem w/this strategy is that the Fed is explicitly guaranteeing losses. And it does nothing to address the underlying issue of real estate (both residential and commercial) supply and demand. I have written many many posts on the problems of commercial real estate here - feel free to go through the archives.
There is simply not enough demand to meet the glut of supply currently on the mkt - not to mention the wave of newer completed projects due to hit soon. Then there are the fantasy projections that banksters used in their models such as real estate would rise 5% every year forever or luxury retail stores would continually be able to sell $300 jeans. This is commercial real estate so don't get me started on the "NINJA" (no income no job and asset) Heloc loans that have been tranche'd together w/commercial loans into an unholy Frankenstein monster.
For more information, I recommend the always inimitable Tyler Durden over at Zero Hedge:
Traders remain sceptical of the Fed/Treasury's plan. I encourage readers to regularly check the CMBX spreads on Markit's web site in order to assess the (lack of) progress. Or if you are an ABS trader, just turn on your Bloomberg terminal and see it in real time.
*Like many of you reading this, I am NOT an ABS or corporate bond trader so ALL this stuff was self-taught. Instead my background is as a trader of EXCHANGE floated issues such as stocks, bonds, and options on futures for the above. The esoteric and arcane world of CMBX is something that I had to piece together from reading and communicating w/varied sources. Special credit goes to Zerohedge, Accrued Interest, and Karl Denniger.
Friday, March 20, 2009
=DJ Landlords Suffer Consequences Of 2005 Bankruptcy-Law Change
By Rachel Feintzeig Of DOW JONES NEWSWIRES
Three years after succeeding in a long-standing quest to gain more control over their leases during bankruptcy proceedings, landlords may now be finding that too much power can, in fact, be a bad thing.
Their lobbying efforts have inadvertently exacerbated the toughest real-estate market in years, according to a number of experts, by propelling companies in bankruptcy toward rushed liquidations that have left hundreds of stores dark. And the irony has not been lost on those in the bankruptcy community.
"Be careful what you wish for," said Richard Levin, a partner in Cravath, Swaine & Moore LLP's restructuring department. "You may get it."
(This article also appears in Daily Bankruptcy Review, a publication from Dow Jones & Co.)
When Congress overhauled the Bankruptcy Code in 2005, big landlords and mall owners pushed for a provision that set a 210-day deadline for companies in bankruptcy to decide whether to assume a lease, incorporating that location into its reorganization efforts, or to reject it, in which case it must pay to free itself from the contract.
Many restructuring experts, including bankruptcy lawyers who represent debtor companies, tried to block the change, arguing that retailers needed to get through an entire business cycle - including the critical holiday shopping period - to decide which stores were worth salvaging.
But landlords were growing tired of being strung along by retailers who dallied in Chapter 11, delaying the decisions on their leases and leaving property owners in limbo. Mall operators in that situation couldn't actively seek new tenants, but they had to constantly brace for the possibility that their monthly rent checks would stop coming with little notice.
The landlords succeeded in getting Congress to add a provision to the Bankruptcy Abuse and Consumer Protection Act that requires companies to make a decision on their leases within 210 days, after which point bankruptcy courts are powerless to intervene with additional extensions. The lease-rejection deadline was a huge win for landlords, or so they thought in 2005.
"We were writing a Bankruptcy Code at that time in a lending environment where liquidity was aplenty and access to capital and funds was easy and cheap," said Jack Williams, the resident scholar at the American Bankruptcy Institute. "[The landlords] were thinking if [tenants] don't pay me, there are 100 retailers out there that will fill that space just as quickly as they can."
Now, with retailers drowning in bankruptcy, prominent members of the corporate restructuring community are asking Congress to roll back the change.
"Nobody could have predicted what was going to happen," said Richard Pachulski, an attorney with Pachulski Stang Ziehl & Jones LLP.
The financial crisis that started in 2007 with the collapse of the subprime mortgage market took down the real estate and retail industries in 2008. A steep decline in consumer spending coupled with plunging real-estate prices have dealt shopping centers across the country a one-two punch. Malls have seen a record number of store closings - 6,913 in 2008 alone, according to the International Council of Shopping Centers.
Big landlords are now finding that they're the ones in financial trouble. General Growth Properties Inc. (GGP), which owns and manages more than 200 malls in the U.S., is negotiating with its creditors to stave off bankruptcy and to restructure its $27 billion debt load out of court. Malls owned by Westfield Group are reducing business hours in an attempt to counteract sinking demand.
"I don't think they thought through this process," Williams said of the landlords who lobbied for the changes.
General Growth and Simon Property Group Inc. (SPG), another big mall operator, declined to comment. Representatives for Westfield didn't return calls seeking comment.
Liquidation has claimed a long list of big retailers over the past year. The carcasses of retailers like Circuit City Stores Inc. (CCTYQ), Linens 'n Things Inc., Steve & Barry's and Sharper Image Corp. (SHRPQ) litter nearly every mall and shopping center in America. And by speeding up the liquidation process, some say the 210-day deadline has come back to haunt the property owners that lobbied for it.
Faced with the new time constraints, retailers are casting off properties they're unsure of rather than taking a chance in a recession. The lease deadline, combined with other pro-creditor
Bankruptcy Code changes, is causing already skittish lenders to insist on restrictive bankruptcy-loan terms that may prematurely force some retailers into liquidation.
Some lenders are requiring retailers to hit high sales targets or to find a buyer at breakneck speed. Experts say lenders are taking such precautions to ensure they'll be able to liquidate their collateral, the inventory, within the 210-day period if an attempt at reorganization fails - as most have recently. After all, a retailer needs to stay in its stores to conduct a successful going-out-of-business sale; out-of-store liquidations yield far lower recoveries for creditors.
That means lenders are keeping retailers on a leash, giving them just a short amount of time - much shorter than the 210 days officially allotted by the Bankruptcy Code - to save a sinking ship.
"What [the landlords] didn't anticipate was that people were going to take this ultimate limit on the lease assumption and back up at least 90 days," said Holly Etlin, a turnaround professional with AlixPartners.
Pachulski said lenders have latched on to the reduced timeframe because it's the perfect pretense for speeding up a bankruptcy case. Banks are "looking to any excuse to force a liquidation," he said.
The landlords insist that they're willing to be flexible; it's the banks, they say, that are making restructuring more difficult. David Pollack, an attorney who frequently represents landlords in retail bankruptcy cases, says most property owners are willing to extend the 210-day period. In the Linens 'n Things bankruptcy, for example, 93% of the company's landlords granted extensions. But the home-goods retailer went out of business anyway.
"The landlords are going to be realistic," said Pollack, a partner at Ballard, Spahr, Andrews & Ingersoll LLP. "The question is if the lenders are going to be realistic."
Like most of the landlords he represents, Pollack opposes rolling back the 2005 revisions to the Bankruptcy Code. "Things don't need to change," Pollack said. The amendments, he says, have "absolutely nothing" to do with retailers' struggles in bankruptcy court.
But prominent members of the bankruptcy and restructuring community disagree and are urging Congress to roll back some of the 2005 changes, including the 210-day lease deadline.
Last week, the House Judiciary Committee's Subcommittee on Commercial and Administrative Law heard from a few of these lawyers and advisers to troubled companies at a hearing on the collapse of Circuit City. Some argued that the lease change helped put the massive retailer out of business and put more than 30,000 people out of work as a result.
Harvey Miller, who heads the bankruptcy practice at Weil, Gotshal & Manges, said the "balancing of interests" enacted by the Bankruptcy Code more than 30 years ago has been upset by the amendments fought for and won by special-interest groups, like landlords.
The 2005 changes "fulfilled a long-standing desire on the part of special-interest groups to limit the discretion of the bankruptcy court and thereby reduce the flexibility of the court to meet the needs of rehabilitation and reorganization of a debtor," Miller said in his written testimony to Congress.
But Developers Diversified Realty (DDR) President Daniel B. Hurwitz says the impact of the 210-day deadline "has been insignificant." Hurwitz testified at last week's hearing on behalf of the International Council of Shopping Centers, which is opposed to eliminating the 210-day lease deadline.
"The greatest impact to the retail landscape today is the lack of liquidity from lenders and onerous terms from vendors," Hurwitz said in a statement provided to Dow Jones after the hearing.
Many restructuring professionals remain convinced the landlords know the provision is hurting them but can't bring themselves to give up their hard-fought victory.
"I think it's part of the human condition, once you got something and you only got it a few years ago, it's hard to give it up," said Williams, who's also a professor at the Georgia State University College of Law.
Cravath's Levin agreed, suggesting that the landlords are willing to let some of their own suffer to keep their newfound control.
"They may be trying to sacrifice a few to save the principle," he said.
-By Rachel Feintzeig, Dow Jones Newswires; 202-862-1358; firstname.lastname@example.org
(END) Dow Jones Newswires
Thursday, March 19, 2009
MOSCOW, March 19 (Reuters) - China and other emerging nations back Russia's call for a discussion on how to replace the dollar as the world's primary reserve currency, a senior Russian government source said on Thursday. Russia has proposed the creation of a new reserve currency, to be issued by international financial institutions, among other measures in the text of its proposals to the April G20 summit published last Monday.
Calls for a rethink of the dollar's status as world's sole benchmark currency come amid concerns about its long-term value as the U.S. Federal Reserve moved to pump more than a trillion dollars of new cash into the ailing economy late Wednesday.
To be sure, the USD will continue to remain the world's dominant reserve currency for many years to come. But nothing lasts forever. Steps are already being taken to diversify away from the status quo towards a basket of currencies. Whether that will lead to the much hyped "Amero" or derivatively named currency thereof is another question entirely.
Desperate for new customers, Chinese factories have been bombarding Josef Jelinek with e-mails everyday. One wants the British businessman to order a shipment of whirling toy helicopters. Another touts a multimedia gizmo called the V-disk.
"They've been coming thick and heavy over the last few months. This never happened before," he said.
Jelinek has no interest in toys or electronics. His main job is scouring China for lead pipes and other construction materials for a shopping mall project in Cairo.
The blind, mass-mailing approach targeting him, however, highlights the growing anxiety among Chinese exporters as they near a crucial period -- the time when they get the bulk of their orders for the summer season and Christmas.
Wednesday, March 18, 2009
Bernanke and other key Fed figures had been coy about the extent of quantitative easing they would resort to up until the FOMC results were released. The market had been pricing in further ABS purchases in a slow but steady attempt to narrow the basis pt spread. Just look at their track record. Even if they did nothing but continue to buy ABS it would be bad for the dollar.
However, the market was surprised when the Fed announced that it WILL begin buying treasuries and reacted accordingly. No doubt the Fed was motivated to act based on several exogenous factors such as China's bombastic attacks questioning the value of their treasury holdings and the mispriced TIC forecast I wrote about in an earlier post.
Sounds like a great plan right? What could possibly go wrong?
Well. For one thing the Fed just invited a lot of speculative money into Treasuries. Unlike government investors (such as China and Japan) that have more of a "buy and hold" mentality the specs could care less about sacrificing the bottom line for political posturing.
Speculators are TRADERS and take profit accordingly. Traders are also considered "nervous money" and are more prone to become bond vigilantes that punish profligate spending by selling in the face of large government deficits. Moreover not all traders are longs. While the Fed may have succeeded in punishing the Treasury shorts they are bound to return - especially as the pace of government auctions picks up in the following weeks.
In fact, a key metric to watch would be the UK's own bond market which engaged in quantitative bond easing earlier this month. However, the UK is economically WEAKER than the US and should foreshadow a sign of things to come. The UK is a nation built on overleveraged finance,
a serious lack of manufacturing capacity, and rapidly depleting North Sea oil.
When the UK bond rally falters examine it for WHY and HOW it lost strength. The same factors will appear in the US since the 2 economies are very similar.
Then the treasury shorts will re-appear in full force. If things get bad enough, there will only be 3 large (bag)holders of treasuries: China, Japan, and the US taxpayer. Debt monetization will result in double digit interest rates and the US will enter the hyper-inflationary stage that goldbugs salivate over.
For more details on this dire scenario:
A more likely result is that the US will enter hyper-stagflation or a period of high interest rates w/decidely little to no economic growth and continued wage depression. Hyper-stagflation is reminiscent of the late 1970's except Obama will become known as "Jimmy Carter II."
Monday, March 16, 2009
From a projection of NET +44 BILLION vs. a reality of -43 BILLION. That is a complete 180.
After reviewing the TIC data, it looks like China sold SOME treasuries. But the biggest sellers were in Europe and the Caribbean.
Total Europe -11,706
Total Caribbean -23,623
China, Mainland -3,450
These are just some highlights. For the complete data:
No wonder the Chinese were so angry last week. They were afraid of becoming bagholders.
Unsurprisingly, the Japanese continue to demonstrate their colonial mentality by blindly buying US bonds. The same goes for Mexico and Brazil. All 3 nations have strong trade ties to the US and faced large stock market routs earlier in the year.
As for the massive dumping in the Caribbean and Europe, I can only attribute that to hedgie payout redemptions and/or hedgies that got caught on the WRONG side of the trade (e.g. net short in the 1st half of the month and then net long in the latter half after European banks collapsed under the FTSE short ban expiration catalyst in the mid-month).
Sunday, March 15, 2009
1) Westerners (US and Europe)
2) Asia, Middle East, and Russia
#1 needs to continue selling bonds to #2 in order to finance their fiscal stimuli programs.
In order to accomplish this goal, #1 needs to coordinate their bond selling. The chances of initiating such a program(s) continue to deteriorate b/c the US and Europe are in danger of "crowding out" each other from the bond markets. Each has an incentive to capture market share from the other.
Anyone familiar w/the old "Prisoner's Dilemma" strategem from game theory knows how difficult coordination can be. The solution to coordination is to establish a central, supra-national body that can punish those who stray. Unfortunately for #1, pride and nationalism continue to rear their ugly heads under the guise of sovereignty and jurisdiction.
In fact, the European noise about reducing the need for fiscal stimuli programs is only a marketing trick to attract #2's investment funds by presenting themselves as more responsible spenders. There is some truth to such statements but it is merely a matter of degree when compared against the biggest profligate spender of the world, Uncle Sam.
Saturday, March 14, 2009
Apparently option-ARM condo flippers and retards who took out 13% HELOC loans get the benefits of bankruptcy, truth in lending, right to refinance, fair debt and collection practices, adherence to usury laws, and statute of limitation protections.
What do the young people get who are actually supposed to pay for this bailout AND social security, medicare, medicaid, and other baby boomer benefits?
None of the above.
In fact, if yours truly were hit by a car and got S.S. disability, the lender could garnish benefits.
I have never even bought a house before. It is both morally and economically unsound to penalize those who are supposed to support the older generation of spendthrifts at a time when the young need to build their careers and establish their own nests.
Sign the petition here to let Congress know your voice! If moral hazard can be thrown out the window for irresponsible purchases of flat screent tv's, vacations, condos, vacation homes, $200 jeans, and other consumer discretionary items, then there is certainly room for student loan forgiveance. Unlike all of the above, education is an INVESTMENT in the future. Not just on the debtor but those he or she is supposed to support.
Outside of the fantasy arena of the equity markets, CFOs of smaller companies - including those which are privately held - have increased their bearish tone. Bankers and other commercial lenders are turning up the screws on preexisting debt covenants and other business terms more strictly. Unlike the chosen few on Wall Street, they have to secure loans under more onerous terms such as loans as much as 300 to 400 points above LIBOR.
for a contrarian analysis.
Here is the original story (w/update):
White House objects to UN calling US 'deadbeat'
1 day ago
WASHINGTON (AP) — The White House objected Thursday to U.N. Secretary-General Ban Ki-moon's description of the United States as a "deadbeat" donor to the world body.
Ban used the phrase Wednesday during a private meeting with lawmakers at the Capitol, one day after he met with President Barack Obama in the Oval Office.
White House press secretary Robert Gibbs said Ban's "word choice was unfortunate," given that the U.S. is the largest contributor to the United Nations.
The United States pays 22 percent of the organization's nearly $5 billion operating budget but is perennially late paying its dues.
Asked whether Ban should retract his comment, Gibbs said some recognition by Ban of the U.S. role would be appropriate.
"I think given the contribution that the American taxpayer makes, I do think it would be appropriate to acknowledge that role," Gibbs told reporters at his daily briefing.
Ban, apparently concerned about his choice of words, issued a statement late Wednesday saying the U.S. "generously supports the work of the U.N., both in assessed and voluntary contributions." Ban also said he enjoys "an excellent working relationship with the United States and appreciates the many ways that it supports the United Nations."
Copyright © 2009 The Associated Press. All rights reserved.
Friday, March 13, 2009
All they need to do is invite the bond vigilantes back in and chase the treasury bulls into equities.
This can be easily accomplished by increasing the size of the stimulus programs 10x. China can help out by dumping their treasuries.
Hmm. Oh wait. That scenario has several problems associated with it....
I'm curious to know how the Fed intends to keep interest rates low AND trigger an equity rally. After all, how can they tie benchmark interest rates like Libor and TED to rising yields?
Housing isn't going to recover anytime soon - not when ppl are being laid off left and right.
Thursday, March 12, 2009
BEFORE the start of a busy Treasury auction schedule, US naval ships engaged in provocative actions off the Chinese coast by spying on a naval base. The issue of whether the US was legally "correct" in staying w/in international waters is moot. As the largest foreign creditor of the US, China has the financial leverage to make its point clear in no uncertain terms.
Do you recall a similar incident earlier this year when Treasury Secretary Geithner launched a bombastic attack against China accusing it of currency manipulation?
Well, I said then that China responded w/actions - not words.
Treasuries sold off hard immediately after the harsh exchange and Geithner was humiliated into a retraction. Moreover, Obama was forced to send a diplomatic "damage control" mission to Beijing to apologize and re-assure China that treasuries were still a sound investment.
China is THIS close to sending another financial message to the US. Again.
From the AP newswire:
Rising navy, assertiveness behind US-China flap
By CHRISTOPHER BODEEN – 41 minutes ago
BEIJING (AP) — China's Defense Ministry has demanded that the U.S. Navy end surveillance missions off the country's southern coast following a weekend confrontation between an American vessel and Chinese ships.
In its first public comment on the Sunday episode, the ministry repeated earlier statements from the Foreign Ministry that the unarmed U.S. ship was operating illegally inside China's exclusive economic zone when it was challenged by three Chinese government ships and two Chinese-flagged trawlers.
"The Chinese side's carrying out of routine enforcement and safeguarding measures within its exclusive economic zone was entirely appropriate and legal," ministry spokesman Huang Xueping said in a statement faxed overnight to reporters.
"We demand the United States respect our legal interests and security concerns, and take effective measures to prevent a recurrence of such incidents," Huang said.
Despite the sharp remarks, Chinese Foreign Minister Yang Jiechi and U.S. Secretary of State Hillary Rodham Clinton met in a private meeting Wednesday in Washington D.C. to say the countries agreed on the need to reduce tensions and avoid a repeat of the confrontation.
But neither side yielded in their conflicting versions of events, even as they prepare for a much-anticipated first meeting between Hu and President Barack Obama at next month's G20 summit in London.
Wednesday, March 11, 2009
=DJ FOCUS: Dubai's Palm Sees Property Prices Sink As Hype Fades
By Stefania Bianchi Of ZAWYA DOW JONES
DUBAI (Zawya Dow Jones)--Dubai's Palm Jumeirah, the self-proclaimed 'eighth wonder of the world', has become a symbol of the emirate's economic vulnerability as plummeting real estate prices unravel its boom town image.
Leading brokers say that prices on the development have slumped 50% since September, while local newspaper classifieds list hundreds of luxury villas and apartments on its 16 fronds as owners try to off-load unwanted homes. A four-bedroom garden home now lists for 6.5 million U.A.E. dirhams ($1.8 million), down from AED14 million last July.
"Palm Jumeirah was one of the catalysts of the Dubai real estate boom," said Edward Carnegy, a surveyor for CB Richard Ellis Middle East. "But the gap in the prices investors were willing to pay, say in mid-2008, compared to the finished article was huge and needless to say, unsustainable."
Once the best-known symbol of Dubai's recent, explosive growth, Palm Jumeirah now looks to be one of the biggest victims of the emirate's property slump.
Dredged from the seabed of the Persian Gulf at a cost that rose to more than $12 billion, the vast Palm Island project helped catapult Dubai into the ranks of the world's most desirable locations.
That status is now under threat as real estate prices plummet and the government struggles to cope with $80 billion of debt.
Last week, some brokers said prices on Palm Jumeirah dipped below AED1,000 per square foot for the first time since prices began to fall last year.
At the height of the boom, some of island's signature villas sold for $12 million, while a penthouse in the planned Trump International Hotel & Tower reportedly sold for a Dubai record of more than $30 million in June.
Since then, the $1.1 billion hotel and apartment tower, being built in partnership with U.S. real estate magnate Donald Trump, has been put on hold, leaving a gaping construction hole at the center of the Palm's trunk.
And as the value of properties on the Palm sink, so to do the fortunes of its developer, government-owned Nakheel. The company, part of the vast business empire of Dubai's billionaire ruler Sheikh Mohammed bin Rashid Al Maktoum, is being forced to take drastic action to keep its business afloat.
Recent steps to cut costs include cutting 10% of its workforce and delaying construction work at two other offshore developments - Palm Jebel Ali and the Palm Deira. The company denies that Palm Jumeirah is suffering any downturn from the global economic crisis.
"Palm Jumeirah is one of Dubai's most recognizable icons; its success as a residential community and tourist destination will continue to grow," says Johann Schumacher, Palm Jumeirah's managing director.
By Stefania Bianchi, Dow Jones Newswires; +971 4 3644967; email@example.com
Copyright (c) 2009 Dow Jones & Co.
Tuesday, March 10, 2009
Monday, March 9, 2009
The commercial real estate environment continues to deteriorate with remarkable rapidity. Not even the AAA rated tranches have been immune. GE's slide in the past few weeks has been due in part or whole from its exposure to commercial real estate including such stellar acquisitions as British and Southern California real estate. More detailed graphs can be found at:
"A team of FDIC agents prepared to seize a bank outside Chicago. They checked into a hotel under a fictitious name, CB and Associates, to prevent a run on the bank. They didn't want anyone to know who they are or why they were in town.
Cheryl Bates and Arthur Cook are in charge of the operation that had been given the code name "HAPPY," strange considering what they were about to do.
"Do not discuss outside this room, what is going on, what we're here for," Cook instructed team members in a meeting at the hotel. Cook is the receiver-in-charge for the FDIC, who will take control when the bank is shut down. Bates is the closing team manager. "
Saturday, March 7, 2009
These economic emigres leave their respective nations' borders in search of better paying jobs in other countries. The Mexican diaspora is limited mainly to the United States while the Philippines is more diverse and stretches throughout all of Asia, Australia, the Middle East, and the United States/Canada.
Remittances are economic transfers (usually money but can also include physical goods) that are sent back home and constitute a major source of foreign income for both nations.
While many Filipinos and Mexicans have managed to achieve a modicum of success in higher paying skilled or professional jobs, the majority work in labor intensive, low wage service sector occupations. By nature, they serve "at will" and are in danger of losing their jobs at any time. Frequent complaints of unpaid or delayed wages, physical/sexual abuse, threats of deportation, and legal harassment from the authorities have done little to deter the emigrants from leaving their countries.
If you have ever visited the Manila or Mexico D.F. slums then you will know why.
This economic paradigm has been flourishing for decades and is unlikely to stop anytime soon. Indeed, both the Filipino and Mexican political leadership ACTIVELY ENCOURAGE exporting their people overseas as a way of deflecting potential troublemakers.
From time to time, there have been economic and political disjunctions that temporarily disrupt the delicate inter-balance. But none so serious as now. Emmigrants are sending less money home and some are even voluntarily returning to their native lands.
Both the Mexican and Filipino peso sold off hard in the fall of 2008 and early months of 2009. The dollar cross trades directly benefited from these sell-offs as panicky natives rushed to convert their holdings into cold, hard cash. Their medium-long term outlooks remain very grim.
(Are you paying attention goldbugs? The people of the 3rd world could care less about your elitist fashion statements. They recognize value when they see it. The dollar has its flaws but the total amount of wealth destroyed far exceeds anything the government printing presses can churn out. Just look at global stock markets to see just how bad the extent of the damage).
I will focus on Mexico since that is a more liquidly traded market.
Mexico's problems are particularly acute since they are magnified by an ongoing drug war, slackening tourism, and the looming bankruptcy of the Detroit automakers that have extensive operations in the border zones. Of these 3 threats, the drug war has the most potential to destabilize the nation. The druglords are extremely wealthy, well armed, and politically influential. They have managed to wage a bloody war of attrition all over the country - including w/in tourist zones - against first the local police, then federal agents, the army, and of course against each other.
These disruptions are reflected in the peso which is currently trading in the 15/1 range against the dollar. The peso has lost 33% of its value since last summer thus making the short peso trade one of the most profitable of the credit crisis.
Bernanke's swap lines to Mexico were enacted last fall to stem the tide of a rising dollar and allow the Mexican central bank room to stop the debasing of their currency. Since October 2008, the Mexican central bankers have been blowing $400 million/PER DAY to defend their currency. And none of it has worked.
When - not if - GM or F are to go bankrupt then the maquiladora factories lining the border will become ghostowns occupied by narco-terrorists. Also don't forget. The Spring Break travel season is coming up. Cancun and the Riviera Maya should be basically empty.
Friday, March 6, 2009
. . . if I had started off w/a $100 million and listened to CNBC's advice."
Here is the clip:
PS For those who don't already know, shorting CNBC - and especially Cramer - is a great way to make money. In fact, I often use them as contrarian indicators for my own personal trades. However, please make sure that your technical analysis and other fundamental research align w/the trade.
Thursday, March 5, 2009
But now America's largest lender is floating its own issues for the purpose of quantitative easing.
March 6 (Bloomberg) -- Chinese companies have applied to sell 100 billion yuan ($14.6 billion) in bonds to help spur economic growth, following the sale of 130 billion yuan of such debt since Sept. 30, the nation’s top planning agency said.
More than 50 Chinese companies have applied to sell the bonds via a financial system designed to help raise funds to cover spending included in the nation’s stimulus package, Zhang Ping, head of the National Development and Reform Commission, said at a briefing in Beijing today. About 45 enterprises sold debt since the fourth quarter, he said.
The bond markets - like CDS - are relatively illiquid. With the exception of sovereign debt (e.g. treasuries) and large corporate issues (e.g. GE), the bond markets remain a relatively illiquid realm of slothful, secondary transactions. The muni bond market comes to mind here w/its history of flagrant abuses in underwriting, rating agency payoffs, political posturing by state authorities, and other sleazy tactics that obfuscate transparency. As for the rating agencies believe them at your own peril. After all, the concept of rating agencies seems to be pointless when a Aaa rated issue has its bond CDS trading at Fff status.
I am not against the concept of a CDS per se.
However, it is more than obvious at this point that the CDS market is is serious need of more regulation and transparency.
A CDS exchange would accomplish the goals of creating much needed transparency. The CDS exchange would post a schedule of rates for each rating grades AS SET BY THE MARKET. Trades would be marked to market on a DAILY BASIS. Funds would also settle quickly such as within 2-3 business days. And finally, a central authority would ensure that there is an actual counterparty capable of resolving outstanding issues.
I rarely talk about trading on this blog since this is more of a macro-economic focus here. However, I have to bring in examples from my own personal trading experience in order to adequately explain the disjunction.
The futures and options exchanges operate on a model of transparency. The shenanigans that brought down the OTC derivatives desks of AIG, Lehman, Bear Sterns, Citigroup, and other former Masters of the Universe would NEVER be tolerated in the futures pits. Imagine being able to postpone assignment for an entire quarter! W/barely any government supervision!
It is also a tragedy that NON-OTC traders (such as equities and futures) working in other divisions had to suffer for the mistakes of their fellow employees.
That is what the CDS contract writers are essentially doing. They wrote a whole bunch of naked options and are now being assigned. Unfortunately, the payout amounts far exceed anything available in their coffers through the magic of leverage. Futures and options brokers would have issued thousands of margin calls by now and driven bankrupt companies into true insolvency. Instead in the CDS fantasy universe the taxpayers . . . are forced to pay for the gambling debts of undead financials.
As a futures and options trader I DO NOT expect others to pick up my trading losses. The entire concept is alien to me and to other non-OTC traders. Leverage is certainly available but the central clearinghouse and mark to market ensure that few traders get out of hand. There are also firm regulatory bodies in place such as the SEC and CFTC to ensure a modicum of responsibility. Those that push the boundaries get punished swiftly - if not by the authorities then by the markets.
The reason why CDS exchanges do not exist yet is because they threaten to make the ratings agencies redudant. After all, what is the point of having fictitious ratings when traders aka THE MARKET can determine price?
A CDS exchange also threatens to reveal the true extent of governments' fiscal profligacy by stripping sovereigns of their fictitious ratings. If we had a CDS exchange, California would be trading at junk bond status now and the USA barely behind. A true CDS exchange would thus encourage fiscal responsibility from politicians by curbing reckless spending. While the authorities have been publicly supportive of such a measure, the blueprints for a CDS exchange(s) remain on the drawing board.
Wednesday, March 4, 2009
President Obama is calling stocks a "potentially good deal" and telling Americans to go out and buy stocks.
This is criminal behavior at worst while facetious at best. Let us take a look at where the stock market is before listening to such nonsense:
Consider the following precedent:
Tuesday, March 3, 2009
The Great Depression is just getting started. The graph to the left displays the 1930s bank failures vs the bank failures of 2008-2009.
The government does not have enough money to bail out all the bank shareholders. Not when the FDIC is running out of money and printing additional funds would lead to inflation.
Remember, at this point the government NEEDS to keep interest rates low in order to re-finance its flood of stimulus packages. The time will come when the US can stiff China and Japan on its treasury bill. Not now. American debt remains in demand because of its reserve currency status.
- ► 2011 (58)
- ► 2010 (53)
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- ▼ March (38)