The Debts of the Spenders: Bond Traders Remain Skeptical of Equity Rally

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).

The Debts of the Lenders: China Enters Yuan Currency Swap w/Argentina

In a sign that the Chinese are growing increasingly disillusioned by dollar hegemony, Beijing entered into a currency swap deal in YUAN w/Argentina this weekend. This is the first swap of its kind that China has entered into w/a Latin American country.

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 andrew.peaple@dowjones.com)


(END) Dow Jones Newswires
03-31-09 0715ET

The Debts of the Lenders: Japanese Politicians Mull Real Estate Bailout

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.


http://www.marketwatch.com/news/story/
Japan-ruling-coalition-mulls-fund/
story.aspx?guid=%7B1DE0DF01-6863-45A0-8B61-E83BAAC9B404%7D

The Debts of the Spenders: Daniel Hannan Blasts UK Prime Minister

The hits keep on piling on the UK. Just days after the "market commentators" (permabulls cheerleading the establishment), British bond vigilantes delivered a sharp kick to the UK gilt market in its first ever bond failure [Edit: in several years].

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.

http://www.youtube.com/watch?v=94lW6Y4tBXs

The Debts of the Spenders: AAA CMBX Update

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.

Source: http://www.markit.com/information/products/
category/indices/cmbx.html

The Debts of the Spenders: Geithner Continues Amateur Hour In Response to China's Dollar Bashing

This will certainly put a dent into Obama's stimulus plans!

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.

Source: http://www.kathylien.com/site/forex-blog/
geithner-needs-to-learn-his-lesson

=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; riva.froymovich@dowjones.com
(Michael S. Derby in New York contributed to this report.)


(END) Dow Jones Newswires

03-25-09 1055ET
Copyright (c) 2009 Dow Jones & Company, Inc.

The Debts of the Lenders: China Bans Youtube To Prevent Economic News From Reaching Viewers

Censhorship is nothing new for the Chinese administration. Need I remind readers that China - for all its modern advances and gleaming new infrastructure (restricted mostly to the eastern seaboard big cities) - remains a police state.

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.

http://news.cnet.com/8301-1023_3-10203146-93.html