| Canadian Dollar, Australian Dollar Not Safe Havens; Expect Continued Rally in US Dollar Posted: 21 Sep 2011 11:29 PM PDT Following the announcement of "Operation Twist", US dollar strengthened, equities sold off, and the US dollar rallied. Suffice to say, those are not reactions the Fed wanted. Moreover, commodity currencies are in the tank and have been since topping mid-summer. Here are a few currency charts. US Dollar Index Euro
 Australian Dollar Canadian Dollar Those who think the Australian dollar or the Canadian dollar are some sort of safe haven will find out otherwise. - China is in a credit bubble and when it pops it will take commodities and commodity producing currencies down with it.
- Australia's property bubble has already popped, and a commercial real estate implosion will follow with a lag, just as happened in the US. Canada will join the implosion party as well.
- The Canadian and Australian central banks will respond with liquidity measures or interest rate cuts, sending the currencies lower.
There is no reason to like the Euro, the Yen, the Australian dollar, or the Canadian dollar. For that matter there is no reason to like the US dollar except things are about to get worse than expected everywhere else. That coupled with a messy default setup in Europe and a Fed that did "less than expected" on Wednesday are sufficient reasons to expect a rising US dollar. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Operation Twist a "Visual" Success: Yield on 30-Year Treasury Drops 17 Basis Points, Flirting with a Break of 3%; Alas Patient Will Die Posted: 21 Sep 2011 12:19 PM PDT Curve Watchers Analysis is following the Operation Twist Story. Operation Twist Early Results Yields Rise at Short End, Sink on Long End Yields are behaving as the Fed wanted. Note that the 30-year long bond is flirting with a sub-3% print. However, much of the move in long-term rates was front-run. Nearly everyone expected this move (even 70% of economists). I am wondering what the other economists were thinking. The one-day results are a spectacular success visually as depicted in the above charts. Unfortunately, none of this can possibly do much of anything for the real economy, and the patient will die. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Let's Twist Again (and Not Much More) - Treasuries Rally on FOMC Decision - Fed Out of Bullets Posted: 21 Sep 2011 11:34 AM PDT It's Operation Twist as Most Expected Please consider the Federal Reserve Press ReleaseRelease Date: September 21, 2011
Information received since the Federal Open Market Committee met in August indicates that economic growth remains slow. Recent indicators point to continuing weakness in overall labor market conditions, and the unemployment rate remains elevated. Household spending has been increasing at only a modest pace in recent months despite some recovery in sales of motor vehicles as supply-chain disruptions eased. Investment in nonresidential structures is still weak, and the housing sector remains depressed. However, business investment in equipment and software continues to expand. Inflation appears to have moderated since earlier in the year as prices of energy and some commodities have declined from their peaks. Longer-term inflation expectations have remained stable.
Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee continues to expect some pickup in the pace of recovery over coming quarters but anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Moreover, there are significant downside risks to the economic outlook, including strains in global financial markets. The Committee also anticipates that inflation will settle, over coming quarters, at levels at or below those consistent with the Committee's dual mandate as the effects of past energy and other commodity price increases dissipate further. However, the Committee will continue to pay close attention to the evolution of inflation and inflation expectations.
To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee decided today to extend the average maturity of its holdings of securities. The Committee intends to purchase, by the end of June 2012, $400 billion of Treasury securities with remaining maturities of 6 years to 30 years and to sell an equal amount of Treasury securities with remaining maturities of 3 years or less. This program should put downward pressure on longer-term interest rates and help make broader financial conditions more accommodative. The Committee will regularly review the size and composition of its securities holdings and is prepared to adjust those holdings as appropriate.
To help support conditions in mortgage markets, the Committee will now reinvest principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities. In addition, the Committee will maintain its existing policy of rolling over maturing Treasury securities at auction.
The Committee also decided to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through mid-2013.
The Committee discussed the range of policy tools available to promote a stronger economic recovery in a context of price stability. It will continue to assess the economic outlook in light of incoming information and is prepared to employ its tools as appropriate.
Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Sarah Bloom Raskin; Daniel K. Tarullo; and Janet L. Yellen. Voting against the action were Richard W. Fisher, Narayana Kocherlakota, and Charles I. Plosser, who did not support additional policy accommodation at this time. Let's Twist Again (and Not Much More) as I expectedThere were a lot of expectations regarding numerous options the Fed might take today. I did not expect the Fed would risk trying them. See Six Things the Fed May Announce Tomorrow (But Likely Won't); Would Any of Them Matter? Gaming the Reaction for details. The Fed said "Let's Twist Again" and not much more other than throwing a bone at mortgages. Neither will work and the Fed is out of bullets. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Euro Flight Continues: Lloyd’s of London Pulls Euro Bank Deposits; Dollar Swap Premium Highest in 3 Years Posted: 21 Sep 2011 08:55 AM PDT Major mistrust of European banks continues. Since the ECB will not publish banks needing emergency cash, all banks might be considered suspect. Then again, it's hard to keep stories quiet, and most know which banks have received emergency funding. Regardless, the run continues as Lloyd's of London Pulls Euro Bank DepositsLloyd's of London, concerned European governments may be unable to support lenders in a worsening debt crisis, has pulled deposits in some peripheral economies as the European Central Bank provided dollars to one euro-area institution.
"There are a lot of banks who, because of the uncertainty around Europe, the market has stopped using to place deposits with," Luke Savage, finance director of the world's oldest insurance market, said today in a phone interview. "If you're worried the government itself might be at risk, then you're certainly worried the banks could be taken down with them."
The ECB today allotted $500 million to one bidder in a regular seven-day liquidity-providing operation at a fixed rate of 1.07 percent. Last week, the Frankfurt-based ECB loaned $575 million to two euro-area banks, the first time financial institutions had requested the currency since Aug. 17. The ECB doesn't identify the banks it lends to.
Today's loan "is the rolling-over of previous lending of dollars and isn't very significant," said Christoph Rieger, head of fixed-income strategy at Commerzbank AG in Frankfurt. "The three-month dollar lending offered by the central banks is taking the edge off this problem to some degree."
The premium European banks pay to borrow in dollars through the swaps market is close to the highest level in almost three years. The cost of converting euro-based payments into dollars, as measured by the one-year cross-currency basis swap, was 95.6 basis points below the euro interbank offered rate, or Euribor, at 11:13 a.m. in Frankfurt, indicating a premium to buy the dollar. It widened to as much as 112.5 basis points earlier this month, the most since Dec. 2, 2008, according to data compiled by Bloomberg. Siemens Pulls €500 Million from Société Générale or Crédit AgricoleThe €500 Million rollover is to support Société Générale or Crédit Agricole, highly likely the former. Société Générale share prices have crashed by 70% since February. Please consider The Corporate Bank Run Has Started: Siemens Pulls €500 Million From A French Bank, Redeposits Direct With ECBIn a shocking representation of just how bad things are in Europe, the FT reports that major European industrial concern Siemens, pulled €500 million form a large French bank, which is not BNP and leaves just [SocGen|Credit Agricole] and deposited the money straight to the ECB. The implications of this are quite stunning, as it means that even European companies now refuse to work directly with their own banks, and somehow the ECB has become a direct lender/cash holder of only resort to private non-financial institutions! As Bloomberg reports further on the FT story, in total, Siemens has deposited between 4 billion euros and 6 billion euros, mostly through one-week deposits, with the ECB, FT says, cites the person. It isn't clear from which bank Siemens withdrew its deposits, per the FT... but it is hardly difficult to figure out. BNP Paribas isn't the bank involved, FT reports, cites unidentified person familiar with the bank. This story should be having far more impact on the EURUSD than any rumors about Greece lying it will fire all of its public workers only to make sure Eurobanks can survive one more day. There is no reason to trust European banks and that is exactly what Lloyd's of London and Siemens have decided. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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| Misleading Indicators - China's Growth Won't Last; Chanos on Chinese Property Bubble and Growth Posted: 21 Sep 2011 12:03 AM PDT Fund manager Jim Chanos spoke to Bloomberg TV's Carol Massar about China's economy, debt and real estate market. Chanos said that growth in China may be zero and that China has "European kind of numbers" when it comes to debt. Bloomberg TV link to Chanos Interview if video below does not play. Partial TranscriptsOn how a Chinese property bubble will play out:
"I think that will be the surprise going into this year, and into 2012 - that it is not so strong. The property market is hitting the wall right now and things are decelerating. The CEO of Komatsu said last week that he is having trouble getting paid for his excavator sales in China. Developers are being squeezed. They're turning to the black market for lending, this shadow banking system that is growing by leaps and bounds like everything in China.
"Regulators over there are really trying to get their hands around the problem. In the meantime, local governments have every incentive to just keep the game going. So they will continue with these projects, continuing to borrow as the central government tries to rein it in."
Chanos on his long and short positions:
"We are short Chinese banks, the property developers, commodity companies that sell into China, anything related to property there is still a short."
"We are long the Macau casinos. It's our long corruption, short property play. We feel that there's American management and American accounting. They are growing at a faster rate even than the property developers."
On the IMF lowering growth estimates for China:
"A lot of people are assuming that half of all new loans in China are going to go bad. In fact, the Chinese government even said that last year relating to the local governments. If we assume that China will grow total credit this year between 30% to 40% of GDP, and half of that debt will go bad, that is 15% to 20%. Say the recoveries on that are 50%. That means that China, on an after write off basis, may not be growing at all. It may be having to simply write off some of this stuff in the future so its 9% growth may be zero." Misleading IndicatorsPlease consider China Stocks Advance Most in Four Weeks as Leading Indicator Shows GrowthChina's stocks rose, sending the benchmark index to its biggest gain in four weeks, after a gauge of economic indicators signaled growth is withstanding Europe's debt crisis and faltering expansion in the U.S.
"Valuations have reached a bottom, leaving limited room for further declines," said Mei Luwu, a fund manager at Lion Fund Management Co., which oversees more than $7.8 billion. "Volatility will rise in the market as investors bet on the timing of a rebound."
The index "signals a continuation of economic expansion through the end of this year," Jing Sima, the board's New York- based economist, said in a statement. "The rate of economic growth will be slower in 2011 than last year."
The IMF estimates the Chinese economy will grow 9.5 percent this year, down from a forecast of 9.6 percent in June, and 9 percent in 2012. The fund lowered its estimate for world growth this year to 4 percent from the previous 4.3 percent forecast. Expect Huge China SlowdownDevelopers not getting paid, coupled with excessive and unsustainable credit growth, trumps alleged leading indicators. For another view on the coming slowdown in China, please consider Michael Pettis: Long-Term Outlook for China, Europe, and the World; 12 Global Predictions. Pettis, unlike Chanos does not foresee a China "crash" but at a minimum, those expecting huge growth certainly will not get it. Here are 12 predictions by Pettis (Please see article for detailed explanations regarding China). To summarize, my predictions are:
- BRICs and other developing countries have not decoupled in any meaningful sense, and once the current liquidity-driven investment boom subsides the developing world will be hit hard by the global crisis.
- Over the next two years Chinese household consumption will continue declining as a share of GDP.
- Chinese debt levels will continue to rise quickly over the rest of this year and next.
- Chinese growth will begin to slow sharply by 2013-14 and will hit an average of 3% well before the end of the decade.
- Any decline in GDP growth will disproportionately affect investment and so the demand for non-food commodities.
- If the PBoC resists interest rate cuts as inflation declines, China may even begin slowing in 2012.
- Much slower growth in China will not lead to social unrest if China meaningfully rebalances.
- Within three years Beijing will be seriously examining large-scale privatization as part of its adjustment policy.
- European politics will continue to deteriorate rapidly and the major political parties will either become increasingly radicalized or marginalized.
- Spain and several countries, perhaps even Italy (but probably not France) will be forced to leave the euro and restructure their debt with significant debt forgiveness.
- Germany will stubbornly (and foolishly) refuse to bear its share of the burden of the European adjustment, and the subsequent retaliation by the deficit countries will cause German growth to drop to zero or negative for many years.
- Trade protection sentiment in the US will rise inexorably and unemployment stays high for a few more years.
Valuations Not at BottomIn the face of coming writedowns, alleged "cheap" valuations will likely get much cheaper. As Minyanville's Peter Atwater is fond of saying "At the top of every credit cycle, the Income Statement is the Past, the Balance Sheet is the Future" Atwater's statement applied to "financial institutions", but Ponzi financing is everywhere you look in China and the ripple effect will hit every company just as happened in the US credit bust (soon to be resumed). Income only counts if you get it. Developers not getting paid is a huge warning sign. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com
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