Thursday, January 24, 2013

The Petro Dollar and the road to war

Tuesday, September 11, 2012

Helicopter Ben to the rescue.....

Well the market is cock-a-hoop because our old friend Helicopter Ben might just announce that the FED is going to buy even MORE U.S. Treasuries with newly printed USDs. And boy are there are a lot of newly printed USDs around already. Printed by the FED, of course. And what does all that money printing actually achieve? Well in the first place it helps create the illusion that there are buyers out there for next year's wallpaper (aka U.S. Treasuries). Only there aren't.

The TIC data, the releases of which rarely get much of a mention these days in the pro-USD press, clearly show that new and willing buyers for ALL THOSE U.S. Treasuries have failed to show up. This is something of a problem when you have this massive ongoing need for finance and a shrinking tax base. All those wars, all that military.... somebody's got to pay for it.

So Ben rides to the rescue. Well sort of. But he's not rescuing the USD (which is tanking). Ben's job is to keep the U.S. Treasury market from imploding, which might just scare all those offshore holders of U.S. Treasuries. The U.S. might not be able to find any more willing buyers of U.S. Treasuries but they sure as hell don't want to see existing holders start selling. So Ben is helping. QE3 won't help the economy, or the U.S. job market but at least it might help maintain the status quo on the U.S. Treasury market. Ben is helping to keep up appearances. At some point there will be no point doing even that.

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Thursday, June 14, 2012

The Role of Ratings Agencies

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Ratings Agencies: Criminal Intent and Criminal Investigation

The Rating Agencies continue to downgrade anything that moves in Europe but something is afoot. Pier Ferndinando Casini, an Italian politician, has already suggested that these moves might not be entirely legitimate.

"The decision by Moody's this morning is of unprecedented seriousness. Today we need to re-propose the idea of a European ratings agency. Yesterday the Ratings Agencies were inattentive, today they risk being a part of a criminal plan against Europe and Italy. It is a disgrace that without any new information, except for the economic downturn which impacts every country in the world and in Europe, today our banks have been downgraded. It is an assault on this country's economy and we believe that the loss of credibility of the Ratings Agencies from today is total. This is why it is important to begin as quickly as possible, and without further discussion, the creation of a European Ratings Agency."

And a criminal investigation of the actions of the Ratings Agencies in Italy has already begun. Consob, Italy's stock market regulator, will now decide if these Ratings Agencies will be able to operate in Italy in future.

This is just starting to get interesting. Stay tuned.

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Monday, March 07, 2011

If at First You Don't Succeed

EUR/USD 1.3985 Hi 1.4035 Low 1.3955
USD/JPY 82.09 Hi 82.38 Low 81.94
AUD/USD 1.0119 Hi 1.0184 Low 1.0116
EUR/JPY 114.80 Hi 115.25 Low 114.54

Moody's downgraded Greece again today. By a lot, I think. But I can't be bothered to look it up. Why would you? It's not like it actually matters or had much market impact. They got a couple of headlines on some U.S. based financial newswires but otherwise the markets didn't react. I think a Greek official dutifully expressed outrage or something. Because like Moody's is important. Ha. Ha. Well some of these Greek officials certainly like to play-up the issue, make a big deal, bang on about things and try to create a crisis. So you know, they got a few half-line headlines and maybe the Financial Tabloids will carry a story tomorrow. Not that it will matter.

The U.S. based rating agencies are playing a dangerous game. It's not looking stupid or biased or incompetent that's the problem. The real problem is that they become merely irrelevant. And then the game is up. No-one will care if they rate anything anywhere. Already this year they downgraded Japan. The net result? Well, embarrassing really.... for the ratings agency. The Japanese Yen fell for half a day or so. It was a minor fall, a half day correction really. And then? Well nothing. The Japanese Yen recovered and remains strong and the world went back to trying to figure out what is really going on.

Today the EUR/USD started out slightly weaker and then.... continued to climb. There was nary a sign of any USD safe haven buying. Not that there has been since all these supposed revolutions got going in North Africa. In fact the USD and the U.S. Treasuries just keep getting sold. I'm not sure what Plan B is? Do they think that maybe WWIII will trigger a rush into USDs? Maybe more downgrades? Lots of them? How many more can they do?

They could have another shot at it I suppose. They could downgrade every country, with the exception of the U.S. and the U.K. and other favoured nations, whoever they are, the only problem is that no-one will care. Which is nice really. Do a bad enough job for long enough and you become just another screaming loony confined to the edge of the markets. We have lots of those.... nutters with one theory or other that doesn't add up but sounds scary or interesting for a while. But markets are markets and if you lose people money often enough then you lose following/relevance..... whatever. You become just another nutter at the edge of the market. So nice work guys. Now you just look sort of boring and silly.

What really needs watching is stocks. The stock markets have all their ducks lined up: the end of fiscal stimulus, tighter monetary policy just around the corner pretty much everywhere, or at least no likelihood of easier monetary policy or further fiscal stimulus, the end of Ben Bernanke's little experiment with money printing, slowing world economic growth, higher oil prices, ongoing problems in the U.S. job market and a still collapsing U.S. housing market.... well find me some good news (and please don't bang on about mergers and acquisitions). So the next shoe to fall is, er, maybe already falling. It was nice while it lasted.

OIL 105.75
GOLD 1,434.40

The Middle East and North African unrest is giving the speculators an excuse to take OIL higher.
So expect more record profits from Exxon and their kind. It's nice to know that some people make money no matter how much trouble there is in the world, or rather precisely because there is so much trouble in the world.

And GOLD, the anti-USD, the new global reserve currency, or rather the oldest global reserve currency ever.... keeps seeing safe haven buying. And this is a surprise? I think not.

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Wednesday, February 09, 2011

How Thin is the Ice?

EUR/USD 1.3672 Hi 1.3681 Low 1.3610
USD/JPY 82.43 Hi 82.66 Low 82.24
AUD/USD 1.0107 Hi 1.0151 Low 1.0091
EUR/JPY 112.72 Hi 112.80 Low 112.06

Well the narrative remains cool, calm, collected. We had that, you know, crisis thing but well, we threw a lot of (taxpayer) money at it and now things are coming along. Signs of economic recovery are everywhere, not least in the steady upward rise in U.S. Treasury Bond yields. Which is great. Really. Because it means that this Quantatitive Easing thing is working because, er, obviously now confidence is back and these, er, previously low long term rates have maybe fostered confidence and encouraged, er, borrowing and lending and all that groovy stuff that keeps the economy ticking over. You can tell this because er, U.S. Bond Yields are rising and this is a sign of confidence. QE was meant to get Bond Yields higher, right? Oh maybe not, but it doesn't matter, now that they are higher then we better figure out a way to explain why this really is a good thing and nothing to worry about. So higher Bond Yields means one thing and one thing only: a stronger economy. OK?

I like this as a narrative because it's the best that can reasonably be done with some pretty scary data.

Somehow, somewhere during this new era in global economic history the U.S. lost the foreign investor. You know all those nice, friendly, naive foreigners who believed the spiel about the USD being an international reserve currency and the safest place to put your money and blah, blah, blah. If you want proof then just follow this link, scroll down the page and click on Quarterly Analysis and Charts. That takes you to a nice little table which gives you some pretty scary numbers.

Something is up.

The U.S. Federal Reserve has been buying U.S. Treasuries like crazy over the past few months.
So much so that according to the most recent data while China holds $896bn and Japan owns $877bn of U.S. Government debt, “By June [the Fed] will have accumulated some $1,600bn of Treasury securities". But the mad rush by the Fed to buy more Treasuries than, gulp, Japan and China combined, has failed to keep U.S. Bond Yields from rising. That is: all that Fed buying has failed to keep the U.S. Government Bond market from selling off. Net selling doesn't appear to be a flood quite yet but buyers have pretty much disappeared altogether and the U.S. Government keeps issuing paper.

But what does it mean?

Here's a clue: if you have been living off the largesse of someone else (read foreign investors) and if that someone else turns off the money tap (for whatever reason) then your standard of living is likely fall. How far and how fast it falls depends on how dependent you came to be on the money flow.

Right now the U.S. is going with the idea that it doesn't matter if foreign investors have turned off the money tap because all the FED has to do is print money. This is the Weimer Republic approach to money management. It's not like it hasn't been tried before. It's just that it doesn't work.

The next stage in this fabulous strategy is to send buckets of money to people in the post. I mean why bother doing anything at all if you can just print money? Why work? Why produce? Why save? Why invest? Why have an economy at all? All you need is a printing press and all your problems are solved.

Which is true actually if you can get foreigners, who are still working and producing, to hand over their goods in exchange for what you have been printing up willy nilly. And it worked pretty well for a while. But the game is up. Foreigners don't seem quite so happy to play the game any more.

Meanwhile with Helicopter Ben in charge back at the Fed, a surreal episode of the Hitchhikers Guide to the Galaxy is unfolding before our very eyes.

OIL 87.22
GOLD 1,363.10

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Wednesday, June 30, 2010

It's the Euro Debt Crisis, Stupid

EUR/USD 1.2226 Hi 1.2238 Low 1.2165
USD/JPY 88.59 Hi 88.71 Low 88.38
AUD/USD 0.8536 Hi 0.8560 Low 0.8463
EUR/JPY 108.31 Hi 108.53 Low 107.67

Well, what you gotta love about the FT is it's remarkable consistency. As a paper they are there to paint a picture, to create a narrative. And they do. The facts are secondary but the narrative is crystal clear: whatever economic problems there may be out there in the world there is one unifying theme: it's all the fault of the European Sovereign Debt crisis.

Today, consistent with their mandate, the FT is leading with not one but two "Euro doom-and-gloom headlines". The first, in nice big bold letters is: Markets tumble on ECB loan fears. Right. No mention of the plunge reported yesterday in U.S. Consumer Confidence, which is probably attributable to the European Debt Crisis anyway. No mention of the major correction on the Chinese stock market. No mention of the strong rally which European stock markets registered Monday this week; a rally which was not replicated on U.S. markets...... No, the poor performance of global stock markets Tuesday was entirely the result of the dire state of the eurozone.

The Financial Tabloid's second (slightly smaller headline) today was: What will save the euro? Well nothing to worry about there, the FT's Wolfgang Munchau has the answer: Only a closer union can save the eurozone. Phew, glad they have the answers up their sleeve, I was beginning to think the Euro was a lost cause.

Now it doesn't bother me overly that these people continue to produce ponderous, all-knowing articles about the "crisis" in the eurozone after completely missing the imminent and obvious Anglo-Saxon "Credit Crunch" until well after the global economy was splattered all over its windscreen. What really bothers me is the lack of reporting of the basic facts. Basic facts are important. Opinions are a dime-a-dozen, largely superficial and of no great import to anybody. But facts count.

So let's get to some facts. As part of the FT's leading front-page article our friends Oakely, Mulligan and Atkins note that the euro tumbled "to an eight-and-half year low against the Japanese yen" yesterday. Well yes, indeed. And the USD/JPY hit another major low too. In fact the USD/JPY has been on the slide since the Credit Crunch started and looks likely to hit an all-time record low soon. So the low seen on the EUR/JPY is probably not that significant. Not that you'd notice from reading the FT.

One of the interesting little tidbits that I garnered from an ocean of opinion in another article yesterday, which was trying to make the point that Greek debt troubles parallels the subprime crisis (it was a laboured point and the parallels were shaky), was this: in June 1992 five year bonds in Greece yielded 8.25%. The government deficit was 11.5% of annual GDP and debt was 110%. Greece's rating at the time was triple B minus. Right. Sixteen years later in June 2008 the Greek deficit was 5% and accumulated government debt was 98% of GDP, even though Greece had been running government deficits in the interval.

HUH ???
How did they manage that? Well it happens all the time actually. Same thing happened in Italy. In Italy government debt to GDP ratios have been up around the 100% level for decades. It's part of the furniture.

And why were these basic facts on Greece interesting? Well for all the talk of "this is not sustainable", this will end in disaster etc. etc. etc. ad nauseum, it seems that even with relatively high yields, a massive level of accumulated government debt and ongoing deficits the Greek "situation" was sustainable in 1992 and, in fact, the history shows it was sustained.

You can, of course, make the case that: this time it's different but then we are right back to opinion and conjecture. The naysayers can have their opinions but the facts are facts and they speak for themselves. Please no more back-of-the-envelope calculations. No more straight-line projections, opinions and general blatter. Can we get back to reporting at least the data, maybe even the history and some facts.

Friday we have Non-Farm Payrolls. The market is not expecting good news. Yesterday when U.S. Consumer Confidence came out well under market expectations the markets sold the EUR/USD, which makes sense. Not. Well it didn't last. Everything, everywhere is not the fault of the European debt crisis. This boring refrain will run into trouble sooner or later. Euro bears beware.

OIL 76.11
GOLD 1,243.70

No new news

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Tuesday, June 29, 2010

Scardey Cat and Boo

EUR/USD 1.2189 Hi 1.2290 Low 1.2150
USD/JPY 88.43 Hi 89.40 Low 88.27
AUD/USD 0.8540 Hi 0.8702 Low 0.8506
EUR/JPY 107.80 Hi 109.86 Low 107.30

The Financial Times led today with a photo on page one. A nice big photo of a lightening strike hitting a Greek monument on a scary, dark night. This particularly informative piece was accompanied by a three line caption: Investors signalled alarm at Greece's planned return to capital makets next month. One economist said it was "a very odd thing to do" and warned that the high yields charged "could undermine confidence not just in Greece, but across the eurozone".

The caption does have a point. It is an odd thing to do, unless of course your real goal is to create a crisis. As part of a larger strategy aimed at undermining the Euro and Euro credit markets this "odd" auction makes perfect sense. And let's be perfectly frank: so far the Greeks have done a rather good job of messing up European debt markets. So credit where credit is due. For a small country with a relatively unimportant debt market, Greece has been extremely successful in creating a much wider European debt "crisis". Not, it appears, that they are happy with their success so far. So now they are having another shot at it.

And just how "odd" is this next auction? Pretty "odd" actually. Greece has seen no good news recently, indeed it has been downgraded again by one or other of the Ratings Agencies and Greek government bond yields have risen well above the 5% rate guaranteed by the ECB loan package. So the idea that this is the perfect time to test the markets seems, well, a little hard to justify. I have heard no cheering from the Ratings Agencies about how good the Greeks have been in trimming their deficit. Not that that is expected to happen. Ever. That's not the nature of the game. But financial markets don't seem to be cheering either.

That said, despite the rather unpleasant position in which Greece finds itself and the ominous noises about sovereign debt markets generally, the end-of-the world-as-we-know-it scenario has manifestly failed to unfold. Tardy but effective packages put in place by the plodding Euro Team has effectively ring-fenced the Greek crisis. That is, up till now. If the Greek Central Bank decides to by-pass all that and go directly to capital markets to roll over this piddling amount of debt then we could have a problem. With a little more hysteria from well-placed Financial Tabloids and ponderous articles by the usual suspects, not to mention sound bites by that bundle of joy, Nouriel Roubini (has this man the most dismal manner of any still-living human in the universe, or is it just me?) suggesting that the Euro's days are numbered, well, in days, then this next crisis might have legs.

We need the "odd" Greek auctions to go off badly, which is not that unlikely, and then we need at least some of the corporate press to run around screaming and waving their arms around about how awful it all is. Which is what they do best, at least of late. The Financial Times has become a tabloid and Rupert Murdoch now owns the Wall Street Journal. Expect more photo-journalism from both.

And in the midst of all this doom-and-gloom there are, of course, consolations. The Americans can and actually have tried to pin the failure of their economy to show signs of autonomous life on the "European sovereign debt crisis". In addition, if investors can somehow be persuaded that the Euro is doomed then maybe investment flows will shift towards that obviously fabulous safe-haven: the USD and more particularly the U.S. Treasury market.

Some success has been reported. Though there have been little sign of Japanese or Chinese buyers stepping up to finance Uncle Sam, of late U.K. buyers of U.S. Treasuries have shown a spike. Not much of a trend when you think about the state of the U.K.'s government deficit, not to mention the U.K.'s huge external deficit (ie. it's own savings deficit). We are not talking about a real and enduring source of cash here, but it's a start. Maybe.

But let's be optimistic. In July the Euro Zone will start to move into Summer mode. (Nice timing by the Greeks.) Volumes on financial markets are likely to fall and you never know what you can get away with in thin markets. It's worth a shot. Now the only problem with this strategy is the possibility that the Euro Team gets off it's collective backside and actually decides to turn up at said auction in order to stave off a further crisis in credit markets which would roil the banking sector, further disrupt credit markets generally and create a real economic crisis which, so far, despite all the valiant efforts of our heroes has actually failed to be created thus far. And I know you wouldn't know that from the headlines and the ponderous articles which have all been doom-and-gloom, particularly where the Euro Zone is concerned. The European economic recovery continues and, provided the Euro Team does not ignore the risks inherent in this new Greek move, then a gathering in the speed of recovery can be expected into year end.

Currency markets have been interesting. The real mover has been the JPY. Expect more of the same. My target for USD/JPY is 80.00 by year end. And what that tells you is that Japan as a source of finance for deficit nations is going the way of the dodo. Nothing is likely to change that particular fact and this is bad news for countries and/or currency areas which are running an external deficit. (Note to Euro doom-and-gloomers: the Euro is not running an external deficit.)

OIL 76.46
GOLD 1,235.40

With global economic growth looking strained the outlook for commodities remains ugly. OIL is unlikely to see strength. Assuming, of course, that we don't engineer another war in a sensitive area located somewhere in an OIL producing region. If OIL falls too far, there is always the attack on Iran which can be pulled off the shelves, dusted down and put into action. But there has to be quite a lot more massaging of public opinion to be done before we get there. For now the outlook for OIL is clouded at best.

GOLD, however, is another story. It's not inflation. We don't have any of that. The driving force behind the GOLD move is the rush to diversify away from the current international reserve currency: the USD. No other currency wants this dubious status because of the chronic currency over-valuation which results. So we haven't found one. Everyone is happy to talk about 'a basket'. The Chinese have been doing it and so have the Russians. But until someone, somewhere actually comes up with a basket the shift out of USD and into GOLD continues. A little diversifying into JPY might be in order. After all it is chronically under-represented in Central Bank holdings and the intellectual justification for it's absence is flimsy.

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