Notes From Underground

As everybody tuned into some form of media knows, Hu Jintao, the President of China, is in Washington for high-level meetings with President Obama. After all the pageantry and display of hospitality, the U.S. President took the effort to admonish the Chinese leader on human rights within China, or rather, the lack of human rights. Mr.Obama also lectured the Chinese leadership on the importance of a world power acting responsibly on the world stage, hence the need for China to be a partner in opposing Iran’s development of nuclear weapons and, of course, in leashing the North Koreans.

The Chinese retort to the “tongue lashing” was that the U.S. needs to treat the new Asian power with mutual respect. Hu Jintao was clear in reminding Obama that just was a nation in flux and undergoing great social and economic changes. The U.S. policy makers need to be reminded that “GREAT TRANSFORMATIONS” are never an easy process and always take place with great strife and stress. President Obama was quick to remind the Chinese that the U.S. NAVY made the Chinese transformation more comfortable by ensuring the sea lanes for easy access to oil and the trade routes for their exports. Perhaps the Chinese should remind the U.S. that the NAVY also did its best to keep China isolated during the COLD WAR, as well as maintaining the rule of Chiang Kai Shek. Hmmm, seems there are many ways to look at past events but I would advise don’t diminish the Chinese emphasis on the term “MUTUAL RESPECT.”

The fertilizer stocks (MOS,CF,POT,TNH … et al) sold off hard as CARGILL announced that it was going to sell off its remaining $25 billion worth of shares in MOSAIC. The market had an AOL-TIME WARNER moment, as it interpreted the Cargill move as a signal that fertilizer values have become over extended. I call it an AOL moment because the NASDAQ made its high the day of the announced AOL/TWC merger, thus finally finding a way to value the DOT-COM boom. Interestingly, the market is forgetting the soon-to-be-felt impact of the merger of Uralkali and Silvinit, the Russian potash producers that will control 40 percent to 45 percent of the global potash trade.

Now it must be said that CARGILL is a brilliant privately held company and is not one to readily oppose, but there may be more to the Cargill move than the market is sensing. I would advise looking at the technicals and finding support levels for if the market rushes to disgorge its holdings there may be opportunities to play in the global food production arena at much better valuations. Just something to stay attuned to if the market corrects further.

Tuesday, the Bank of Canada held rates as BOC governors noted the impact of the LOONIE’S strength as a drag on Canadian exports. Carney also cited “poor productivity performance” as another restraint on Canadian exports. The BOC is watching the U.S. carefully to see if the recovery has legs and will carefully consider further rate hikes on the health of the global recovery.

Today, as expected, the Brazilian Central Bank raised rates 50 basis points to 11.25 percent. This was widely expected as the BANK is worried about the increased domestic spending and a growing budget deficit. Finance Minister Montega has been warning against REAL appreciation so it is important to watch how the market deals with the increased short-term rates. How will Brazil prevent a rising REAL when the BANK is on an aggressive path? While on the subject of interest rates, it is time to review the global 2/10 curves to sense what is going on in the various financial markets. The U.K.’s 2/10 is 233 basis points. Germany’s is 195 basis points. The U.S.’s is 278 basis points and the Australian’s is 56 basis points.

Yes, in a world of steep interest curves the AUSSIE is considerably flatter reflecting that the RBA is the one developed nation that is ahead of the inflation curve. The U.S. is the steepest as the Bernanke-led FED is continuing its battle against deflation. I remind everyone that it is my humble opinion that flat curves are bullish a currency while not beneficial to a country’s equity markets. However, the timing of the effects of a flattening is not immediate but it is a cautionary flag. Australia can still have a long period of robust growth because it sells raw materials to the global market, which are presently in great demand and creating huge capital investment in Australia’s raw materials sectors.

When I look at these curves, it helps to understand how the rally in the equity markets are sustained. In the U.S., the steepness of the curve will remain as long as the FED remains uneasy about the jobs pictures. Remember, they have a dual mandate. To further complicate the U.S. yield curve picture, a story in Wednesday’s Financial Times by Michael Mackenzie highlighted the fact that the Chinese and Russians were net sellers of U.S. Treasuries. It seems that $85.1 billion of Treasuries and stocks were bought in November but official foreign investors were a net seller of $40.8 billion. I wonder what private investors were replacing that huge net official selling, and, as I have argued since the start of QE2, the FED is letting the Chinese out of their Treasury holdings at premium prices. Oh wait, my MODEL SAYS THAT IS NOT POSSIBLE.

Tags: Aussie, Bank of Canada, Bernanke, Brazil Central Bank, Cargill, China, Cold War, Fed, Hu Jintao, Loonie, Mosaic, NASDAQ, Navy, RBA, U.K.

This entry was posted on January 19, 2011 at 9:03 pm and is filed under Australia, Canada, China, Debt Market, 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.