Last week, beleaguered Illinois Comptroller Leslie Geissler Munger admitted that, thanks to the bitter budget battle going on in Springfield, the state would miss a $560 million pension payment in November. Now, in a move that shouldn’t exactly surprise anyone, Fitch has cut the state’s GO rating citing the budget impasse. The move affects some $27 billion in debt.
While to many Quantitative Tightening is a novel concept, the reality is that China (+ Euroclear) have been dumping Treasurys and liquidating reserves since January when total holdings peaked at $1.6 trillion last summer, and have since declined to $1.38 trillion. It means that China has sold a quarter trillion dollars worth of Treasurys in the past year, in the process offsetting what would have been about 25% of the Fed’s QE3.
Brazil’s economic recession is likely to be deeper and longer than Fitch’s earlier expectations and its performance has diverged materially from those of its rating peers. Medium-term prospects also look weak compared to peers and most other large emerging markets. Fitch forecasts that Brazil’s economy will contract by 3% and 1%, respectively in 2015 and 2016 before recording modest growth in 2017, with risks skewed largely to the downside.
The Fed has managed to kill two birds with one stone: it no longer provides a simple, one-stop-shop way to reconcile the total US credit stock, and it quietly boosted total US consolidated credit by $2.7 trillion to $62.1 trillion as of June 30, 2015.
“Investors” are so desperate to hold on to short-term paper that they paid $100 for a 3-month Treasury-bill at today’s auction. That is a 0% yield – for the first time ever – lower even than the auction right after Lehman’s bankruptcy in Nov 2008.
Following yesterday’s collapse in the Nikkei, when a 4% drop pushed it red for the year below 17,000, down 20% from a high of 21,000 hit just over a month ago, we had just one question for Japan’s pension fund “fudiciaries” who have been “greatly rotating” out of bonds for the past few years as the primary sources for BOJ debt monetization, dumping trillions in fixed income yen, and promptly buying up equities: equities which have gone nowhere in 2015, and which have posted massive losses in the third quarter. The question was:
What are Japan’s pension fund losses after the Nikkei wipeout from 21k to 17K?
— zerohedge (@zerohedge) September 29, 2015
Less than 24 hours we got the answer, when moments ago Nikkei reported thatQ3 losses at (at least one) pension funds were just under JPY 10 trillion in the third quarter. Continue reading »
Moving on, but it only gets better because suddenly, out of the blue, a new Treasury bond market analyst emerges: none other than disgraced former CIA head David Petraeus, who somehow avoided treason charges when it was revealed that he had a mistress to whom he had leaked confidential material resulting in his prompt termination from the CIA, only to reemerge several years later…. as a Treasury market expert (as well as being recently hired by KKR, of course, just so the private equity company can scrub all of his formerly confidential knowledge before giving him the boot in the nearest future).
CNN introduces him as follows: “Petraeus is one of America’s brightest minds on matters of national security. He served as a top military commander in charge of troops in Iraq and Afghanistan before becoming director of the CIA in 2011.”
Leaving aside the laughable assertion of the first statement, after reading some of his comments we can only imagine he, as a member of the “intelligence community”, is a devoted subscriber of the abovementioned “Strategic Intelligence” newsletter.
Because here is the one statement from Petraeus that we read, read again, then kept rereading for one simple reason…
“There is no shortage of customers for the purchase of U.S. Treasuries,” said Petraeus…. “Given the relative strength of the U.S. economy and the prospect of the Fed raising interest rates at some point in the months ahead, I suspect there will continue to be very keen interest in U.S. Treasuries,” Petraeus said.
… everything in it is dead wrong. Continue reading »
“And just like that Weimar 2.0 is born.“
Last Friday, we posted what we thought was a watershed report by Australia’s largest investment bank Macquarie, one which openly called for central bank funding of fiscal spending, aka “helicopter money”, by directly monetizing treasuries. Ironically, the bank made the call despite admitting that it would not work in the long run, leading to even more stagflation and deflation. This was the gist:
As velocity of money globally continues to fall, conventional QEs have to become exponentially larger, as marginal benefit declines. If public sector is not prepared to step aside, what other measures can be introduced to support nominal GDP and avoid deflation? Continue reading »
– “Junked” Brazil Is Falling Apart At The Seams; Cancels Bond Auction (ZeroHedge, Sep 10, 2015):
Exactly one month ago, in the aftermath of the Chinese devaluation announcement, we made a simple prediction. “Biggest immediate loser from China’s devaluation: Brazil” Today, following the overdue, long anticipated, and yet “shocking” downgrade of Brazil by the S&P to junk, this prediction is coming true.
– Brazil Cut To Junk By S&P, ETF Falls 5% Post-Mkt (ZeroHedge, Sep 9, 2015):
Brazil, whose economy officially slid into recession in Q2 – a quarter during which Brazilians suffered through the worst inflation-growth outcome (i.e. stagflation) in over a decade – and whose efforts to plug a yawning budget gap are complicated by political infighting and a growing public outcry against embattled President Dilma Rousseff, has been cut to junk by S&P.
– Mystery Buyer Of US Treasurys Revealed (ZeroHedge, Sep 8, 2015):
While we already knew that China was selling – and following the record selling of FX reserves in August, so does everyone else – an even more interesting question emerged: who is buying? Thanks to the WSJ we now know the answer: “A little-known New York hedge fund run by a former Yale University math whiz has been buying tens of billions of dollars of U.S. Treasury debt at recent auctions, drawing attention from the Treasury Department and Wall Street.
But the biggest risk by far is that now that the “mystery buyers” has been exposed, it won’t take long for the other, much bigger players – i.e., all the central banks who have been desperate to push yields lower to “confirm” the self-fulfilling narrative that the economy, and inflation, are growing – to inflict the proverbial “max pain” upon Element. In fact, if Talpins is indeed very long TSYs, and has lot of leverage embedded in the trade, one may expect a concerted shorting effort to find out just how much leverage is incorporate in the trades, and push it to the point of breaking. After all, hedge funds exposed with massive positions rarely survive an onslaught by their peers who seek to do just that – inflict “max pain” (see Ackman and Herbalife). Continue reading »
The data point everyone has been waiting on is out and, just as we tipped weeks ago, China liquidated nearly $100 billion in USD assets during the month of August in support of the yuan.
– The Numbers Are In: China Dumps A Record $94 Billion In US Treasurys In One Month (ZeroHedge, Sep 7, 2015):
Shortly after the PBoC’s move to devalue the yuan, we noted with some alarm that it looked as though China may have drawn down its reserves by more than $100 billion in the space of just two weeks. That, we went on the point out, would represent a stunning increase over the previous pace of the country’s reserve draw down, which we began documenting months ahead of the devaluation (see here, for instance). We went on to estimate, based on the projected size of the RMB carry trade unwind, how large the FX reserve liquidation might need to be to offset capital outflows and finally, late last week, we suggested that China’s official FX reserve data was set to become the new risk-on/off trigger for nervous, erratic markets. In short, the pace at which Beijing is burning through its USD assets in defense of the yuan has serious implications not only for investors’ collective perception of market stability, but for yields on core paper, for global liquidity, and for US monetary policy. Continue reading »
– Is China Dumping German Paper Now? Bund Prices Are Collapsing (ZeroHedge, Aug 31, 2015):
German bonds are under significant pressure again this morning – despite equity weakness and US Treasury strength. This raises the rather interesting question of whether – after decimating Treasuries last week, is China turning to its Bund holdings and liquidating them to raise cash?
– The Great Unwind, China Begins Dumping Treasuries (Sprott Money):
Behind the scenes is an event unfolding that has the market shaking in its boots. Yet you don’t hear this discussed by the mainstream media, let alone investment bankers.
The reason? It is an event that has been talked about throughout China’s rise to prominence. It has been pondered and feared by Western bankers and politicians. The event I am talking about is the dumping of US treasuries by China. Continue reading »
– It’s Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington (ZeroHedge, Aug 27, 2015):
As Bloomberg reports, “China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter. Channels for such transactions include China selling directly, as well as through agents in Belgium and Switzerland, said one of the people, who declined to be identified as the information isn’t public. China has communicated with U.S. authorities about the sales.”
– What China’s Treasury Liquidation Means: $1 Trillion QE In Reverse (ZeroHedge, Aug 27, 2015):
The size of the epic RMB carry trade could be as high as $1.1 trillion. If China were to liquidate $1 trillion in reserves (i.e. USTs) in order to stabilize the yuan in the face of the carry unwind, it would effectively offset 60% of QE3 and put around 200 bps of upward pressure on 10Y yields. So in effect, China’s UST dumping is QE in reverse – and on a massive scale.
– Russia Refuses To Participate In Ukraine Debt Restructuring (ZeroHedge, Aug 27, 2015):
War-torn Ukraine has reportedly reached a restructuring deal with a group of creditors headed by Franklin Templeton, according to the country’s finance minister Natalie Jaresko. The terms of the agreement call for a 20% writedown and a reprofiling that includes a maturity extension of four years and an across-the-board 7.75% coupon. Vladimir Putin isn’t interested.
– Devaluation Stunner: China Has Dumped $100 Billion In Treasurys In The Past Two Weeks (ZeroHedge, Aug 25, 2015):
On August 11, China devalued its currency, and in the subsequent 3 days the onshore Yuan, the CNY, tumbled by some 4% against the dollar. Then, as if by magic, the CNY stabilized when China started intervening massively, only this time not through the fixing, but in the actual FX market.
This means that while China has previously been dumping reserves as a matter of FX policy, after August 11 it was intervening directly in the FX market, with the intervention said to really pick up after the FOMC Minutes on August 19, the same day the market finally topped out, and has tumbled into a correction since then. The result was the same: massive FX reserve liquidations to defend the currency one way or the other.
And yet something curious emerges when comparing the traditionally tight, and inverse, relationship between the S&P and the Treausry long-end: the tumble in stocks has not been anywhere near as profound as the jump in yields. In fact, the 30 Year is wider now than where it was the day China announced the Yuan devaluation.
Why is that?
We hinted at the answer on two occasions earlier (here and here) and yet the point is so critical, and was missed by virtually all readers, that it deserves to be repeated once again: as part of China’s devaluation and subsequent attempts to contain said devaluation, it has been purging foreign reserves at an epic pace. Said otherwise, China has sold an epic amount of Treasurys in the past two weeks.
How epic? We turn it over to SocGen once again: Continue reading »
You can’t make this stuff up!
– Paul Krugman “What Ails The World Right Now Is That Governments Aren’t Deep Enough In Debt” (ZeroHedge, Aug 21, 2015):
This was written by a Nobel prize winning economist without a trace or sarcasm, irony or humor. It is excerpted, and presented without commentary.
From the NYT:
Debt Is Good
… the point simply that public debt isn’t as bad as legend has it? Or can government debt actually be a good thing?
Believe it or not, many economists argue that the economy needs a sufficient amount of public debt out there to function well. And how much is sufficient? Maybe more than we currently have. That is, there’s a reasonable argument to be made that part of what ails the world economy right now is that governments aren’t deep enough in debt. Continue reading »
– More Trouble In Turkey As Lira Plunges To New Lows, Bond Yields Soar (ZeroHedge, Aug 18, 2015):
On Monday, Turkey’s lira plunged to new lows against the dollar as coalition talks between prime minister and AK Party leader Ahmet Davutoglu and nationalist MHP leader Devlet Bahceli broke down. The result, AKP won’t be able to form a coalition government after elections in June saw the party lose its parliamentary majority for the first time in 12 years.
In the absence of a coalition, the country will go back to the polls – likely in November – where President Recep Tayyip Erdogan hopes heightened violence between Ankara and the PKK will translate into a stronger showing for AKP.
The political turmoil, rising violence, and general EM malaise have hit the country’s currency hard and on Tuesday, Turkey’s central bank left rates unchanged prompting further weakness in the lira which had already fallen earlier in the session after Emine Nur Gunay, Davutoglu’s chief adviser, hinted that a rate hike was not in the cards.
Meanwhile, 10-year yields have spiked to their highest levels in nearly a year and a half. Continue reading »
– Yuan Devaluation Sparks Biggest Crash In US Corporate Bonds Since Lehman (ZeroHedge, Aug 16, 2015):
Just two days ago we warned of the dramatic disconnect between equity insurance and credit insurance markets – at levels last seen before Bear Stearns collapse. As the Yuan devaluation shuddered EURCNH carry traders and battered European assets, US equity markets stumbled onwards and upwards, impregnable in their fortitude with The Fed at their back no matter what. However, US corporate bond markets were a bloodbath…
“China, Australia, Brazil, Canada, Sweden – it is beyond us how anyone can declare the crisis isn’t spreading. Be prepared – there are going to be lots of opportunities to both make and lose money. But first, you have to recognize what is happening.”
– The Crisis Is Spreading: China, Australia, Brazil, Canada, Sweden… (ZeroHedge, Aug 15, 2015):
Earlier today, we posted an excerpt from IceCap Asset Management’s latest letter to investors focusing on the farce that is the Greek bailout #3, which can be summarized simply by the following table…
… and Keith Dicker’s assessment which was that “for Greece, it’s mathematically impossible to repay its debt” and that the Greek “economy continues to plummet to deeper depths and is now -33% less than where it was in 2008.”
But the truth is that for all the endless drama, Dicker continues, “the Greek debt crisis isn’t THE crisis. Rather it is simply a symptom of a much larger global debt crisis.” Continue reading »
– Study: Germany made €100bn profit on Greek crisis (Keep Talking Greece, Aug 10, 2015):
What? I don’t believe it! Rea-lly? Germany made a 100 billion euro profit on Greek crisis? No, kidding? HA! And yes, so it is! A study conducted by a German Economic Institute has shown that every time investors got bad news about Greece, they rushed to Germany’s ‘safe haven’ with the effect that the interest rates on German government bonds were falling!“Greece’s biggest creditor Germany has made a huge profit on the country’s debt crisis over the last 5 years as it saved through lower interest payments on funds borrowed amid investor “flights to safety.”
Each time investors got bad news about Greece, they rushed to the ‘safe haven’ of Germany, with the interest rates on German government bonds falling, according to the study from the private, non-profit Leibniz Institute of Economic Research, Agence France-Presse reported Monday. Continue reading »
It’s a controlled demolition.
– When A Train Wreck Is No Accident (International Man):
“In spite of all the rhetoric, we will go deeper in debt, the Fed will print more money, and the value of the dollar will continue to plummet.” – Ron Paul
Never in history have the economic and political structures been so manipulated by those who are responsible for their safekeeping; never has so much been at stake, in so many countries, and facing collapse, all at the same time.
The great majority of people in the First World recognise that the world is passing through an economic crisis. However, most are under the impression that there are some pretty smart fellows running the show and all they need to do is tweak the system a bit more and we’ll return to happy days.
Not so. The “smart fellows” who are in charge of fixing the problem are in fact the very same people who created it. Continue reading »
– Here Comes The Next Crisis “Nobody Saw Coming” (ZeroHedge, Aug 7, 2015):
When borrowing become prohibitive (or impossible) and raising taxes no longer generates more revenues, state and local governments will have to cut expenditures.
Strangely enough, every easily foreseeable financial crisis is presented in the mainstream media as one that “nobody saw coming.” No doubt the crisis visible in these three charts will also fall into the “nobody saw it coming” category.
Take a look at this chart of state and local government debt. As we noted yesterday, nominal GDP rose about 77% since 2000. So state and local debt rose at double the rate of GDP. That is the definition of an unsustainable trend.
As noted earlier in the week, state and local taxes have soared 75%. While this would be no big deal if wages and salaries had risen by 75% in the same time frame, but earnings have barely kept pace with inflation (38% since 2000). Continue reading »