Posts Tagged ‘India’

Notes From Underground: Good Grief, a Chinese Rating Agency Downgrades U.S. Debt

October 17, 2013

Can a centrally directed economy spawn a neutral credit rating agency? Readers of NOTES have long been aware that I hold Chinese data releases in the lowest regard. My disdain is based on the inability of GOOGLE to operate freely in China and provide a forum for the “free” flow of ideas and critical thinking. There is no free and open society (Karl Popper). So I find it tragic that the markets paid attention to a downgrade of U.S. debt by the DAGONG  rating agency. It is bad enough that the U.S. rating agencies are tainted by the desire for profits and are paid by the sell side of the street. But a sense that a Chinese rating agency could be independent of state influence is enough to upgrade the U.S. arbiters of credit … to well, AAA.


Notes From Underground: You Put Your IMF in; You take your Geithner Out … That is the Hokey Pokey

October 16, 2011

The G-20 meeting in Paris seemed to yield agreement that the Europeans need to come to a vibrant resolution of the Sovereign debt issue and some plan as to how to recapitalize its problem banks. The G-20 COMMUNIQUE read like an alphabet soup of global regulatory groups (IIF, YNFCCC, MDB, IOSCO, IMF, WEB, FSB, GSIFI, SIFI, BIS … you get the idea). The Communique opens: “We welcome the adoption of the ambitious reform of the European economic governance.” This is a very brazen statement for I have not read where Europe has taken any such measures, such as fiscal unification.

The communique also noted that the G-20 nations agreed, “Those with large current account surpluses will also implement policies to shift to growth based more on domestic demand. Those with large current account deficits will implement policies to increase national savings.” Coupled with this was the vacuous words: “All countries will undertake further structural reforms to raise potential growth.” The concept of growth seemed to have been the most significant issue but when you cut through the platitudes I just cannot imagine from where the growth is going to be generated. If the SURPLUS NATIONS INCREASE DOMESTIC DEMAND WHILE THE DEFICIT NATIONS INCREASE SAVINGS IT SEEMS THAT THE EFFECT TO GLOBAL GROWTH WILL BE NEUTRAL.

The KEYNESIANS in the Obama administration cannot possibly accept this at a time when the push is for greater fiscal stimulus to generate the economic growth that FED policy has been unable to do by itself. Another area of UNCERTAIN AGREEMENT is the issue of SECRETARY GEITHNER pushing for the Europeans to use the ECB as a guarantor of European sovereign bonds. Geithner continues to pursue the Henry Paulson game plan but he fails to realize that the ECB just does not have the same legal authorities as the U.S. Treasury and FED.

Ambrose Evans-Pritchard reported that the Geithner push was rejected out of hand. Evans-Pritchard reported that Josef Ackermann, head of Deutsche Bank and the chairman of the IIF, said plans to leverage the EFSF may be illegal. “We cannot allow a rescue fund of this magnitude. The [constitutional] court wouldn’t permit, and nor would the people.” (Sunday’s London Telegraph). The main area of agreement from the G-20 is that the IMF is going to play a very large role in the financial rescue of the peripheries and most probably Spain and Italy. Christine Lagarde was pushing for increased IMF funding but Geithner and other heads of developed nations believed that the $390 BILLION IMF was a large enough war chest to deal with Europe’s problems.

It seems that Geithner believes in the IMF‘s larger role but wants to withhold further funding until the Eurocrats come up with a COMPREHENSIVE PLAN. Geithner let it be known in a Bloomberg interview on Oct. 11 that the European debt crisis is affecting U.S. growth and the “U.S. is going to do everything we can to make it more likely that they move as aggressively as they need to.” The EU is the second largest market for U.S. exports, trailing only Canada. The Obama administration is very worried that a slowing European economy will scuttle all of its economic stimulus plans, making President Obama’s reelection possibility an uphill battle.

Clarification: Readers of Notes From Underground are very aware that I have pushed for the IMF to enhance its war chest by issuing GOLD-BACKED BONDS, thus utilizing its GOLD hoard. Presently, the IMF has 90.5 million ounces of GOLD with a market value of $164.1 billion at market prices on August 31,2011. The IMF does not carry the GOLD on its books at market prices so I am confused by the $390 billion war chest to which Geithner and Lagarde refer.

More important though, under the Second Amendment of theARTICLES OF AGREEMENT IN APRIL 1978, the “IMF DOES NOT HAVE THE AUTHORITY UNDER ITS ARTICLES TO ENGAGE IN ANY OTHER GOLD TRANSACTIONS SUCH AS LOANS, LEASES, SWAPS, OR USE OF GOLD AS COLLATERAL…” (from the IMF website). Thus, my proposal is now laid to rest unless the IMF and its member nations wake up to the 21st Century and find a way to utilize all its assets. If the IMF is to become a bigger player in the developed world it needs to become much more creative in how it looks to stabilize the world in times of great systemic risk.

An Aside: THE GERMAN/FRENCH 10-year-note spread widened to a record 92 basis points on Friday, not a healthy sign for France.

On the other side of the world the Chinese 2/10 spread was a positive 32 points and the 2/10 spread in India was +33 points. These are very flat curves in the two largest BRICS, indicating that money is too tight in both those nations. Just something else to keep an eye on as so much uncertainty exists in the world.

Notes From Underground: The peripheral nations are trying to get ahead of the inflation curve … with CAUTION

July 29, 2010

Last night, the Reserve Bank of New Zealand raised the overnight interest rates as expected from 3.00 percent from  2.75 percent. This was no surprise as the market widely had anticipated it. The move by the Central Banks of India and Israel was also expected, although the probabilities of the Israeli move were less than the others. So New Zealand raised rates and the currency was sold off, which has significantly weakened on the crosses. The market had a very negative reaction to RBNZ Chief Alan Bollard’s very cautious comments about rates going forward. With KIWI inflation running at an annualized rate of 2 percent, the RBNZ feels it is now ahead of inflation and will watch global growth and see how it effects New Zealand. Bollard expressed concern about the recent strength of the Kiwi and in his statement said:

“The New Zealand dollar has appreciated in recent weeks.This appreciation is inconsistent with the softeningin the New Zealand’s economic outlook …”


Notes From Underground: 2+2=5 is more beautiful than all the models in the universe

December 22, 2009

An interesting piece appeared in the Wall Street Journal yesterday by Zachary Karabell. Its basis of the piece is that the Fed will return to their models in search of some answer to prevent the return of the crisis from which we are beginning to emerge. Karabell maintains that the Fed did their best work when they abandoned the models to do crisis management. We are always happy to read when others criticize the models that reduce the world to a simple formula.

As many people have pointed out for many years, the Fed models have been flawed and that is where the credit saga begins. Model builders are like bad traders for they become so in love with their models that they cannot admit that their results are wrong–very much like a trader that says he doesn’t use stop losses for she is in it for the long term. In a similar vein, Binyamin Applebaum and David Cho in yesterday’s Washington Post bring to the fore in vivid detail how Bernanke made several mis-statements prior to and in the midst of the sub-prime crisis. Why? Because he depended on the faulty output of the Fed’s beloved models. When questions about the problems in California, Bernanke said he had heard it all before. However, the Fed’s models did not concur. The entire financial system rests upon badly flawed models and that is why we have systemic risk.

We will heed the advice of the smartest man who is not listened to by the movers and shakers of Wall Street: Paul Volcker. The savior of the global financial system in the early 80s is pushing for the seperation of lending banks from trading banks. We couldn’t agree more and below is a letter we wrote to the FT on August 30th, 2002.We don’t often blow our own horn at Notes but this time we have to join the battle.

LETTERS TO THE EDITOR – Profit centres too big to fail.
30 August 2002
Financial Times

(c) 2002 The Financial Times Limited. All rights reserved

From Mr Yra Harris.

Sir, John Plender (“How banks got in a mix”, August 21) correctly identifies the systemic dangers that accompanied the passage of the Graham-Leach-Bliley act. The repeal of Glass-Steagall has pushed the US banking system to the brink of “moral hazard”. The conglomeration of all financial services under one roof has entangled banks in numerous ethical conflicts. Additionally, Graham-Leach-Bliley has made several institutions so large that the Fed cannot allow them to fail.

A single institution’s deep involvement in every facet of financial dealings does not create greater synergy but greater risk. These large, private profit centres know they are too big to collapse. This realisation adds great uncertainty to the entire financial landscape. Rewarding private profits while socialising the risk is a pathway to disaster. Glass-Steagall should never have been repealed without a bank forfeiting its right to Federal Deposit Insurance Corp insurance.

The DOLLAR and equities continued rising together today, confounding the pundits yet again. The market now appreciates the convergence of low rates with a potential growth story which is causing the short term unwinding of the powerful DOLLAR carry trade. The stress in the European debt markets eased a bit as the German/Greek spread eased to 246 basis points from 276 yesterday. This did not give a bid to the EURO though giving more credence to the power of the carry trade unwind.

Chinese Central Bank Governor Mr. Zhou commented on the need for China to raise reserve requirements to curb incipient inflation. This strategy is not new for the PBOC (People’s Bank of China) as they have repeatedly used the reserve requirement tool to curb speculation. It is interesting that the Chinese are talking about inflation after the PBOC failed to buy the IMF gold that went to INDIA. The Chinese are trying to squeeze the long gold positions that raced in and drove the market away from the Chinese–we really believe that central Banks have become educable.

The fact that central banks have become traders supports our views on the importance of being nimble and flexible when operating in the investment world. The buy and hold strategy is being called into question, due to the fact that S&Ps are lower over the last decade. This is a main theme of ours and will be repeated ad nauseam. Again we caution to watch the Chinese closely for their actions will be far more important than words. The Chinese forward market was bid today as Mr. Zhou also alluded to the power of the International Balance of Payments to cause inflation. Some interpreted this to be a hint by the bank to curb the inflows of hot money.

Will the Chinese allow the Yuan to appreciate to put an end to some of the inflows? This has not been the Chinese way but we will be on the alert for any policy actions directed that way. If we listen to the FED’s concern of a negative output gap, we have to wonder what the Chinese are thinking about with their huge amount of excess capacity funded by foreign money and  the forced lending habits of Chinese state-directed banks.Inflation—hmm, we will have to wait to see with that unused capacity overhang.