Notes From Underground: It’s March and We Hear the Wind Blowing

Do you have to be a weatherman to hear the wind blow? There are many cross currents alive in the investment world as the LTRO is behind us, ISDA defaulted on its role as a referee on global financial issues in the face of political threats from the EUROCRATS, and the Bernanke FED looks to be waiting for a new crisis to erupt before undertaking another further easing. March is always a difficult month for trading YEN as the JAPANESE CALENDAR YEAR ENDS MARCH 31 so repatriation of corporate profits is always a wildcard for any short YEN positions.

Japan has massive overseas investments and it has been the repatriation of money that has kept the YEN BID FOR SO LONG AS GLOBAL UNCERTAINTY COUPLED WITH EXTRAORDINARY LOW INTEREST RATES HAS KEPT THE MONEY FLOWING BACK HOME. THE BOJ/MOF NEW POLICY MAY CURTAIL THAT AS INFLATION TARGETING WITH ZIRP CAUSES LARGE JAPANESE FUNDS TO BE REINVESTED IN FOREIGN VENUES.

Again, many variables in play so trade with nimbleness and be ready to readjust thinking at any moment. Add in the dynamics of European politics and March appears to be that much more volatile. NO, YOU DON’T NEED A WEATHERMAN TO KNOW WHICH WAY THE WIND BLOWS, but have a good grasp of the technicals or having a GOOD TECHNICIAN WILL CERTAINLY HELP.

***Something to watch: The AUSTRALIAN 2/10 curve continues to flatten as it closed at 32 basis points on Friday. The curve has been lying down, which is an indication that the RBA may be too tight. A flattening curve tends to be a bullish element for a currency, but with the AUSSIE DOLLAR pushing up toward recent highs the Reserve Bank of Australia may begin cutting rates to ease the pressure on the curve, especially if it believes that China’s economy is softening.

There are many long AUSSIE positions so it is important to watch for any signs from the RBA that they are concerned about the AUSSIE economy and the flattening yield curve. There is an RBA meeting Monday night with a monetary policy statement due to be released at 9:30 pm (CST). The bank’s statements are always a good read about the GLOBAL ECONOMY … and this one should be especially so.

***The battle for Europe’s soul continues as the news over the weekend contained more concern about the issue raised by BUNDESBANK PRESIDENT JENS WEIDMANN. Chancellor Merkel praised the work of Mario Draghi in providing the necessary liquidity to stem the impact of a massive deleveraging on the European debt crisis. Merkel’s comments in direct opposition to the concerns raised by Jens Weidmann, who, prior to his becoming Bundesbank President, was Merkel’s economic adviser. The political discussions in the core nations of Europe are just beginning to take center stage. The peripheries will become a mere sideshow.

***This is a THOUGHT FROM NOTES FROM UNDERGROUND AND IS NOT A POSITION PROMOTION. Sometimes the world just provides a backdrop for what seems to be an obvious opportunity. As China looks to unload its huge stockpile of U.S Treasuries, it seems like a logical step would be for the Chinese Investment Corporation to offer to swap some its U.S. DEBT HOLDINGS for the U.S. Treasury’s stake in AIG. The bailed out insurance giant is returning to profitability and it is looking for ways to pay off the U.S. government and escape from its control.

AIG has a huge Asian presence as the company was founded in Shanghai in 1919 by Cornelius Vander Starr. It has a long history of selling insurance in China and would be a solid acquisition for the Chinese sovereign wealth fund.T he Chinese would be buying a cleansed global financial institution at a very low price and with a growing middle class and 300 million drivers, AIG is the perfect acquisition. It is a no brainer from my seat: U.S. Treasuries versus the unlimited upside potential of AIG. Hey Warren Buffet, this should be on your radar screen. While others are asleep, it is time to seize the day.

[NOTE: AIG said in a statement distributed today, it’s selling shares of AIA to help repay the bailout, Bloomberg reports.]

In the abstract form Carmen Reinhart’s and M. Belen Sbranica’s “The Liquidation of Government Debt”:

“Low nominal interest rates help reduce debt servicing costs while a high incidence of negative real interest rates liquidates or erodes the real value of government debt. Thus, financial repression is most successful in liquidating debts when accompanied by a steady dose of inflation.”

Hmmm, what a SWAP: U.S. TREASURIES FOR 80% of AIG and a profit for the U.S. Treasury.

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4 Responses to “Notes From Underground: It’s March and We Hear the Wind Blowing”

  1. Eric Says:

    Hi Yra,

    On that front, AIG spun off AIA and it trades on the Pinksheets as well as overseas. They had a hard time selling AIA outright so publicly listed it.

    http://en.wikipedia.org/wiki/Aia_group

    Cheers!

  2. yra Says:

    Eric–on the AIA–if memory serves correctly,Prudential U.K. put in a very solid bid that was rejected by a shareholder vote ,as the price being offered was considered high because of the ultra tumultuous times.But it is a good point and see what else we can learn about Prudential’s previous bid.

  3. yield curve Says:

    “A flattening curve tends to be a bullish element for a currency” …

    can you explain why this is? I actually thought the opposite…

  4. yra Says:

    Yield Curve—I learned this the hard way.When the curve starts to flatten to invert investors rush to lock up funds and await the central bank’s response to what is the beginning of a slowing economy.Prior to the economy heading into a recession there is the need to take advantage of what is deemed to be an overly tight monetary policy—why do you think that flattening curves are currency negative because of impending economic slowdown?

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