Again, the world is given a Christmas “surprise.” Last year, the U.S. Treasury was nationalized Freddie Mac and Fannie Mae on Christmas Eve when no newsrooms were stirring with even a click of the mouse. This year, the Chinese Central Bank took center stage and announced a rate increase of 25 basis points. Now, I am convinced that this rate increase is NEGLIGIBLE to say the least. The world financial news is going to make this rate increase into an effort by the Chinese authorities to combat inflation but that is pure NONSENSE. The benchmark lending rate was raised 25 basis points to 5.81 percent and the benchmark deposit rate increased to 2.75 percent from 2.75 percent. The economic impact won’t even register.
The question has to be asked: If we used a TAYLOR RULE formula to calculate where Chinese rates ought to be, it seems that with 9 percent GDP and using a conservative inflation rate of 4 percent, then the back of the envelope calculation would be more than 10 percent. If we were to believe CHINESE DATA, which we don’t, then Chinese rates would be way too low relative to some type of TAYLOR RULE analysis. The pundits will be noting the significance to the global economic growth story, but NOTES FROM UNDERGROUND ain’t buying.
As always, the markets will tell the real story so it is important to see how global EQUITY markets and COMMODITIES react and close by the end of the day, or more importantly, at the week’s end. From my PERSPECTIVE, the Chinese raised rates on Christmas so as to let the world know that the rules of the game are changing. The Asian economies have THROWN OFF THE YOKE OF ITS COLONIAL PAST AND COULD CARE LESS ABOUT THE NICETIES OF THE JUDEO-CHRISTIAN WORLD. The rate move was well-timed in that regard and the global powers should prepare for many more sea changes in long-held customs.
Would the FED refrain from raising rates during the CHINESE NEW YEAR? The dynamics of the 21st CENTURY are in flux and new rules and sensibilities are being introduced by the EMERGING ACTORS. The symbolic move on the part of the Chinese is meaningless in economic terms but of great impact as a statement on how the TIMES ARE A’CHANGING. If the Chinese were serious about slowing their economy, the POLITBURO could rein in the excesses by exerting the command they have over the entire STATE. Twenty-five basis points is a silly gesture reminiscent of the previous FED chairman. Let 100 BASIS POINTS BLOOM.
Before I was interrupted by China, it is important to note that the FED has three auctions this week. There will be a 2-year note auction for $35 billion; a 5-year auction for $35 billion; and a 7-year auction for $29 billion. The importance will be in how the market digests a large amount of new DEBT in a holiday-thin market. If the markets can absorb this large amount and regain its balance, it will be a good sign for FED and allow BERNANKE to hold his powder on more QE. Also, it is important to see if the TREASURY AUCTIONS PUT MORE PRESSURE ON THE EUROPEAN DEBT MARKETS. Global DEBT markets are fragile so this week will be a test about the fears of inflation and fiscal profligacy.
ADDING to the debt market woes for the U.S. was a BLOOMBERG piece about how FOREIGN CENTRAL BANKS sold TREASURIES at the end of November and have slowed their buying of U.S. DEBT, resulting in a decrease in holdings.
I have warned that the FED‘s QE policy was allowing the CHINESE to dump its “excess” U.S. Treasuries at a very rich price and allowing them to escape from the trap of “IT’S OUR CURRENCY BUT YOUR PROBLEM.” As the FED pursues QE, I will continue to wonder who is selling the loads of paper, especially as U.S. investors piled into BOND FUNDS. It seems that FOREIGN CENTRAL BANKS are availing themselves of a wonderful opportunity to cut their U.S. exposure. If I was a nervous central banker, that is exactly what I would do: Sell questionable assets for artificially supported PREMIUM PRICES.
Another BLOOMBERG piece that caught my eye was news that Brazilian farmers increased their borrowing to buy equipment for planting and harvesting. Loans for the needed implements jumped 64 percent from last year. As the Brazilian farming season progresses, it will be important to see how such expenditures have led to increased supply of so many different grains and other crops. The huge borrowings have kept pressure on loan rates, which have led to tight credit in the non-ag economy. High rates have supported a very strong real. The Brazilian government has instituted mild capital controls in an attempt to curb REAL appreciation.
New Brazilian President Dimla Rousseff takes office on January 1 and she seems to be receptive to Brazilian industry and unions that have been burdened by what they argue is an overly strong REAL. It will be important for EMERGING markets if the Brazilian government undertakes a more concerted effort to weaken its currency … and so it goes.
Tags: Bob Dylan, Brazil, central banks, China, Commodities, Dimla Rousseff, equity markets, Fed, GDP, interest rates, QE, Real, Taylor rule, U.S. Treasuries
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