Notes From Underground

The State Administration of Foreign Exchange (SAFE), which administers the vast CHINESE foreign reserves, said it would not go the “nuclear option” and dump U.S. treasuries in a one-off move to reallocate its holdings, but SAFE called upon Washington and other governments to pursue “responsible” policies. The SAFE official told the world that during the last four months they’ve been accumulating Japanese government bonds at a record rate, which has recently pushed the YEN to new highs. Also, the Chinese officials said they would not be purchasing GOLD as the market was too thin and volatile. Plus, whatever the Chinese purchased would not be enough to truly diversify their portfolio.

First, let’s deal with the idea of the call for “responsible” action on the part of Washington. The Obama administration, led by Geithner and company, will not act responsible if the Chinese mean fiscal austerity. Geithner was adamant at the G-20 about removing any form of stimulus until the U.S. economy was on a more robust growth path. And, with Europe becoming more austere, the U.S. will not risk a further slowing of its economy, thus we are mystified by what the Chinese mean by “responsible.” If the U.S. goes to a second round of QE, how will the Chinese respond?

Second, we have solved the riddle about why the Japanese yen was rallying even when equities were rising and risk was the flavor of the day. When the S&Ps made highs above 1200 and the EUR/YEN cross stayed offer, it left many traders questioning why the barometer of the risk-on trade was failing to confirm the global equity rally. We now know that the Chinese were buying huge amounts of JGBs and other Japanese debt. This will not sit well with Tokyo as the YEN appreciation is affecting Japanese exports as the Japanese corporates are direct competitors with the Germans for high-end consumer and industrial products. The impact is important because it shows the huge impact that Chinese portfolio allocation can have on global financial markets. The Japanese got a free pass in Toronto from the G-20 but after the upcoming Japanese elections we shall see if we get a response from the KAN government.

Third, we find it interesting that the Chinese did not inform the world of its Japanese purchases but are quick to tell us that they will not be buying GOLD for it will not have a large enough impact on portfolio diversification. Well, if the Chinese pass on gold buying, we are sure the Indians and Russians have the desire to fill that role as they have both been actively buying gold so as to diversify their foreign reserve holdings. Now that the BIS has been active in the GOLD SWAP market, we would suggest that the IMF utilize its GOLD holdings to float an IMF GOLD-BACKED BOND–2% 5-year notes backed by GOLD–that may attract Chinese investment.

In a late story, we get word that President Obama is setting up an export growth panel constructed of the CEOs of major exporting U.S. corporations. We wonder what policies will be put forward by this “august'” group. If they were so good as promoting exports, then why haven’t they done it. And, if they had some secrets, why would they share them with competitors? If the National Association of Manufacturers has a seat at the table we know they will be pushing for a depreciation of the DOLLAR for that is the hymn they have been singing for decades. Some will probably push for corporate tax reform but we don’t see this administration signing on as they have not exactly been a business-friendly group. So we await what formula they concoct for doubling exports during the next five years.

In an article that appears in tomorrow’s Financial Times about this panel, Brad DeLong, a Berkeley economist that we hold in high regard for his global macro analysis, comments about the proposed panel:

“If they talked to political scientists, they would know that in an election year the health of the economy determines the voters’ mood and right now that mood is looking ominous.”

We talked about the Obama administration’s fear of weak unemployment and a possible panic by the FED,well, appointing a panel is not a panic but just Washington’s way of saying we feel your pain outside the Beltway and we are trying. When will they ever learn? When will they ever learn? When Brad DeLong uses the word “ominous” we pay close attention for he has more influence with the Obama group then most economists. And you wonder why 2+2=5 .

Tags: BIS, Chinese, Dollar, Eur/Yen, Fed, G-20, Geithner, Gold, Gold Swap, IMF, Japan, JGB, Kan, Obama, QE, SAFE, SPS, Yen

This entry was posted on July 7, 2010 at 8:51 pm and is filed under China, Countries, Currency, Federal Reserve, Gold, Japan, United States. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.