Notes From Underground: Did Dudley DO RIGHT on his mounting a possible expansion of monetary easing?

First things first. The Financial Times ran a weekend front-page story revealing that Sarkozy and the Chinese have been holding secret meetings for the last year on the issue of global currency stability. It was unclear what efforts Sarkozy was pursuing but he was looking to get Chinese support for whatever he is going to try to accomplish when he gets the leadership post of the G-20. The French have been trying to replace the U.S. DOLLAR as the world’s reserve currency since the days of DeGaulle and Jacques Rueff. We have warned that Sarkozy is desperate to make a grand play on the international stage as his political support in France has badly eroded. Wen Jiabao is in Europe this week for talks with the EU on many issues.

Wen issued a statement on Saturday, ahead of the meeting, that the People’s Bank of China would be willing to buy Greek BONDS when Athens begins issuing them again. It was rumored last weeek that the Chinese were buyers of Spanish bonds at the auction. This makes perfect sense as it was the Chinese who forced the collapse in Greek bond prices last December when they walked away from a 25 billion EURO BOND offering by the Greek government. The Chinese are buying euro DEBT with several hundred basis points return and a cheaper EURO. We are beginning to see the power of the Chinese sovereign wealth funds and central bank having the ability to have a large impact on global asset values. We believe this is the new NORMAL.

The head of the New York Federal Reserve Bank joined the QE discussion with poignant remarks that basically made a new round of large-scale asset purchases inevitable. The dissonance of FED members last week was apparent but with Boston and New York both pushing for more FED action it seems that the Bernanke gang has the upper hand for more QE. The Dudley speech put the DOLLAR bears in control and also gave further support to the equity markets as stocks are certainly addicted to belief of continued FED support for all sorts of money infusion.

U.S.economic history is being stood on its head as it is the east coast money-centered banks pushing for an easy FED while THOMAS HOENIG of Kansas is more hawkish and trying to get the FED to change its extended ease policy. The western financial interests have historically been more inflation prone as agricultural interests always carried a great deal of debt and wanted higher prices for crops and land to ease the debt burden. William Jennings Bryan must be spinning in his grave!

Two quick hits:

The Brazilian elections wound up in a runoff as LULA’s handpicked successor DILMA ROUSSEFF failed to win an outright majority in the first round, but her victory in round two is all but certain.

This week brings many central bank meetings. Monday night we will get the word from the RBA and there is a 80 percent probability of a raise from 4.5 percent to 4.75 percent built into yield futures and currency values. The surprise will be if the RBA holds rates in lieu of recent strength in the AUSSIE DOLLAR.

The Japanese also meet on Monday and Tuesday. We will watch to see if the BOJ has any new tricks up its sleeves. There is a feeling in Japanese financial circles that BOJ independence is under severe pressure from politicians and this could lead to the BOJ being more compliant to the MOF’s demand for a weaker YEN or a higher inflation policy.

Later in the week we get the ECB and the Bank of England. Beware of increased volatility as we get into the details of bank policy. The ECB is one to watch as EURIBOR rates rose 15 basis points last week as the economic data showed signs of improvement. With the FED pushing the need for lower rates and other banks moving to get ahead of the curve, it is of little wonder why the DOLLAR has a September FALL.

Tags: , , , , , , , , , , , , , , , , , , , , , ,

7 Responses to “Notes From Underground: Did Dudley DO RIGHT on his mounting a possible expansion of monetary easing?”

  1. Paul M Says:


    Had to chime in.

    Sarkozy’s comments are a mere forbearance of what is to come. As you have mentioned, the implication of the FT article is that he has been pushing a point of view with more than the standard political nod and glance. I am of the opinion that the meddling of the French president is decidedly biased by the fact the cookie jar is within reach, and is playing into ongoing efforts by the Chinese not solely related to hedging their FX holdings.

    When one talks of both limiting global capital flows and encouraging exchange rate stability, it is a mincing of words and confusion of principles. Exchange rate instability stems largely from internal policy malpractice that is made manifest through the mechanism of capital flows, though it is also on occasion triggered by peripheral events. The appearance of aberration and instability are indicative a reallocation of capital to correct the primary imbalance–thus, to prevent this reallocation is to fruitlessly preserve the initial imbalance. Herein, it appears Sarkozy is more likely to constrain the Western world to a moribund rate of growth than he is to begin chipping away at the block of insanity known as Western central banking and public policy.

    Moreover, I would assume that they (the Chinese) are in no hurry to correct the policy errors driving the West off course, for it would diminish the advantage to be had by Asia as a result of foreign capital inflow. When the opportunity to establish a major trade currency and benefit from said inflows exists, simply put, you do not wait for it to come knocking. Concurrent USD and EUR weakness in the form of dramatic exchange rate volatility would support this agenda, and would provide an opportunity for ongoing empirical verification: AUD, CND, and CHF strength, as the relative remaining Western havens. This has been the last six months, and seems likely to continue for at minimum the next six.

    I believe the two central questions illuminating how this unfolds, the first of which you have previously commented on, are as follows:

    1. To what length will a diminutive, politically wounded French President go? (Would he risk inciting a currency crisis in Europe?)

    I hold this as a serious consideration, given that exceptional euro weakness is likely to dawn upon us prior to June (as a function of an inter-cyclical reversal in US real-estate that takes place in tandem with a severely oversold dollar). Throw in a medley of other factors ranging from the frailty of European bond auctions to significant overexposure of European and US banks in the IR derivative market, and it becomes clear why it is unwise to allow Sarkozy to hold his political rally in a porcelain shop. Instead of the writing on the wall saying “LIBOR” as it did in 07/08, we can now see, printed in clear bold face, “EUR/USD 10-Year Yield Spread”.

    2. Is China’s meeting invitation to France expressly for the purpose of encouraging a stable global exchange rate environment, or has it been extended merely under this guise, but is in reality to establish an inter-Asian unit (internationalized Yuan) as a beacon of global exchange stability?

    The difference between the two is immense in terms of relative advantage.

    Here, the fact that Dominique Strauss-Khan has been left to stand in the rain speaks volumes. Geithner’s apparent lack of tact toward China’s Yuan policy may in fact possess a basis of strategic imperative after all. This may reduce to speculation, but it appears that exposure to a couple trillion in foreign treasuries is a rather minor consideration when one is largely hedged, and you have the infrastructure and strategic plan to become future issuer of that converted number by a tenfold factor.

  2. Paul M Says:

    Political rally in a China* shop is much more fitting.

  3. Arthur Global Practice Says:

    Very interesting. Questions. Why the Chinese want to buy Greek Bonds now? What has changed from last December?

    Related to the “currency wars”. Sorry if it is a basic question but why the Dudley speech put the dollar bears in control? I mean, the Fed wants a weak dollar, right? Thomas Hoening wants a strong dollar?

  4. yra Says:

    Arthur–the point on China is now they see a much higher reward for the risk they will /if they take so the Greek bonds make sense and also gives them some political heft as they look like they are aiding the European peripheries .Does Hoenig want a higher dollar—can’t answer that –but he wants the FED to avoid the greenspan trap that has led the fed and the economy into the stressful situation we are now in

  5. Arthur Global Practice Says:

    OK. Very clear. Thanks Yra.

  6. yra Says:

    Paul–read Charles Dumas –the bill from the china shop.You will enjoy it and it is very succinct.Also I agree with you on the question and issue of what is the Chinese motive–do they desire a yuan asian zone –maybe but they better improve relations with their neighbors.Yes we agree that Sarkozy is getting desperate and that is a complication and the Chinese are playing to his EGO—in one of the best quotes we can remember–Jimmy Breslin in talking about rudy guiliani said that he was a small man in search of a balcony—-well if the shoe fits let sarkozy wear it.

  7. Paul M Says:


    Thanks for the recommendation – listed to do.

Leave a Reply

%d bloggers like this: