Notes From Underground: The Use of Swap Lines … HMMMM

After Secretary Geithner told the CNBC audience that he was going to Poland as an observer of the ECOFIN meeting on Friday, it seems he changed his mind. U.S. policymakers have woken up to the fact that the European credit crisis is the real deal and risks sending the entire global financial system into a period vicious cycle of asset liquidation. The Obama administration has come to realize that a severe credit crisis can certainly undermine the JOBS PROGRAM AND ANY OTHER STIMULUS PROGRAMS IN THE WORKS. If the world frets of a U.S. renewed recession, then imagine the global trepidation of a simultaneous credit crunch in Europe. A EUROPEAN MELTDOWN WOULD BRING THE U.S. TO INCREASED UNEMPLOYMENT AND A CERTAIN DEFEAT FOR THE OBAMA ADMINISTRATION.

The summer vacation in Europe is over and it is time to SOUND THE TRUMPETS calling for renewed vigor from the world’s financial authorities for massive amounts of liquidity. Swap lines were the jolt from the defibrillator of economic therapy as the ECB and others try to halt the arrest of the European banking system. Of special interest is that the FED, SNB, BOE and the BOJ were the central banks named as the providers of DOLLAR SWAPS for Europe–the Canadians were missing from the list of usual suspects. Again, it seems that the G-7–with White House prodding–wants it to appear that policy makers are attempting to get ahead of a potential financial calamity in the European banking system. The DOLLAR SWAPS will also buy the ECB some time and room for maneuver as it relieves some of the pressure on ECB bond purchases.

It was noted that there has been very little use of the present seven-day swap facilities but the authorities seem to be more worried about end-of-year funding problems and thus moved to provide a 90-DAY FACILITY. It was noted in a WSJ article that the swap lines have been underutilized as European banks were using private deals to borrow DOLLARS by pledging DOLLAR ASSETS to U.S. banks. If there was plenty of DOLLARS available, then today’s announcement was an example of Hank Paulson pulling the “bazooka” and letting the markets know that the global policymakers are serious about Europe. Any liquidity addition of a SYMBOLIC NATURE in a zero-rate environment should boost all asset prices, and, once the FOG OF WAR clears, WIND UP PUTTING A NEW BID TO GOLD.

Imagine that it is possible for both GOLD and STOCKS TO RALLY. Time to examine the GOLD/CURRENCY charts as the fear of deflation causes all the world’s central banks to throw monetary caution to wind created by helicopter rotors. The SWISS NATIONAL BANK HAS ESTABLISHED A NEW LEVEL OF INTERVENTION FOR THE ENTIRE FINANCIAL SYSTEM. EUROPE entered the arena today, which makes me wonder what the quid pro quo will be for Japan’s cooperation: Will the BOJ get the nod of approval for a new effort to drive the YEN lower? With a G-20 meeting next week in Washington the markets will be on heightened alert.

Quick Hitter: An article in today’s London Telegraph by Ambrose Evans-Pritchard is a must read (“China to ‘liquidate’ US Treasuries, not dollars”). The bottom line is that China will demand securities as they begin to sell BONDS. Will the U.S. authorities allow the Chinese SWFs to purchase U.S. corporate assets as they sell off their treasury holdings? This has been an issue of NOTES for a long time and we look for it to surface again as the BOND market reaches ridiculous levels.

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10 Responses to “Notes From Underground: The Use of Swap Lines … HMMMM”

  1. Notes From Underground: The Use of Swap Lines …HMMMM « Jim Sinclair's Mineset Says:

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  2. Peter Says:

    Yra – Your stuff is great (Sinclair is a saint – we are grateful he has put you and others on). Yes, I read the Evans Pritchard piece about the Chinese. They are totally in the right to threaten to sell treasuries, and they are damned right to demand access to US stock assets as a minor courtesy for all the racist abuse they receive from clueless US politicians (and others). Yes, I am a Chinese American and proud of it (4 generations).

  3. Roger E. Boswarva Says:

    Peter above is quite right. Sinclair is a saint, and you a genius, Yra. I’m an Aussie, and proud of it as Peter is of being of Chinese parentage . . . and I wholeheartedly agree with him on the issue of the Chinese he refers to. The US politicians need to stop lying to and shafting their own people about the Chinese issues.

  4. silverphoenix2012 Says:

    To Peter and Roger,

    From a proud American to both of you….our government lies to us about everything, not just Chinese issues. When our currency crisis hits, and the truth about OTC derivitives is exposed, the whole world will hate the U.S. more than they do today. 🙁

  5. USIKPA Says:

    When one looks at the rate of return on treaseries over last few years, one must deduce the Chinese must be in heaven, prasing their wisdom to stick to hoarding the US government paper. Why ask for more risk when one has the least? What is the story with the growth underlying ANY US assets now?

    I wonder just what assurances did Joe Biden deliver on his recent trip to the Mandarines in support of the dollar?..

  6. stan Says:

    I belive the only way out for europe and the usa is to go back on a gold standard gold will be pegged at some very high # 15,000 maybe 20,000 maybe higher but this will give support to the amount of dollars now out there and limit the growth of new supply of dollars
    it will put controls on the goverments .also the USA should change there politicial system so they dont have manditory elections that drive policy for re-elections.they need to stop the big banks from doing non banking and have investment firms not do banking mixing the two is very dangerous just my thought

  7. yra Says:

    USIKPA–Biden couldn’t give any assurances as the Chinese laughed at Geithner when he presented assurances.The CHinese have been rewarded in the short term by the QE programs and the lack of growth in the developed economies but I think that as Evans-Pritchard makes clear it is time to start winding down the bonds and start purchasing equity;if CIFIUS allows the Chinese to partake of the U.S. equity markets in a meaningful way—as many of the best bond analysts opine–it is only a matter of time until the bond vigilantes begin to hold sway as the U.S. opens whatever floodgates it has at its command to insure some growth regardless of the inflationary impact—Rogoff wishes for 4-6% inflation

  8. USIKPA Says:

    Yra, you sure make it look like you are WORRIED by the prospect of the Chinese choosing less liquid and more risky dollar assets over the more liquid and less risky ones (however unbeleivable that is)!

    Well, what would the sellers of US equity to the Chinese do with these HUGE dollar amounts? Any guess where it would wind up? Treasury market, by any chance?

    I dare think Rogoff is wrong in so far as, given where we are now, the economy is likely to reach 6% inflation MUCH FASTER then any meaningful underlying growth to justify it. Wouldn’t it be THE END of Fed’s credibility?

  9. yra Says:

    USIKPA–I think you are right on the FED’s credibility–but that is what I think is the real strength to GOLD–not present inflation but the FED throwing away its credibility to stop deflation at any price–conjecture for sure but that fear explains alot.

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