Monday, June 30, 2014
Financial Sarcasm Roundup for 06/30/14
Sarcasm is all around us, much like the Force in the Star Wars saga. It permeates everything. All living creatures, inanimate objects, and natural phenomena contain sarcasm. I only address sarcasm in the finance sector.
China removed its foreign currency interest rate cap in Shanghai. That tells me just how excited the PBOC is about enticing foreign investors to prop up Chinese banks. I've covered China's precarious shadow banking system and fragile WMPs in past articles. Foreign investors chasing cash yields in China are suckers. Most conventional analysts will celebrate this move as a successful innovation pioneered in the Shanghai FTZ. They have to cheer on the remaining China bulls in the West. Anyone who forgot the sky-high cash yields available in Cyprus prior to that country's crisis will ignore similar conditions in China.
A US federal judge blocked a payment Argentina was scheduled to make to US bondholders. Sovereign immunity usually prevents these types of maneuvers from creditors but savvy US hedge funds have figured out how to use lawfare to extract full payments from Argentina. The risk these hedge funds take is that blocking a partial payment to all of its bondholders, both exchangers and holdouts, will push Argentina to default. I cannot know whether the holdouts relish the prospect of competing investors in the exchange group getting hurt first, but the thought of hedgies salivating at the chance to destroy competitors is the type of behavior I expect from people used to getting their way. Argentina wouldn't have to worry about committing half their currency reserves to debt service if they hadn't messed up their economy so badly with hyperinflationary policies. Buying debt from countries with a history of default and mismanagement is a fool's game but many fools on wall Street are determined to play it.
The BIS warns central banks that they must end their freewheeling experiments with money. The bank gave the same warning last year and hardly anyone caught it - except me, of course. I even mentioned the BIS's graphics during my talk at the San Francisco Money Show in 2013. The BIS also helpfully names China as the country leaving its borrowers most vulnerable to rates. Go back up to my comments on China's interest rate liberalization to see why they want to attract deposit money so badly. The IMF in particular has made it a point to ignore warnings while it pushes the ECB into stimulus beyond its legal mandates. Central banks playing catch-up behind rising real rates will demonstrate their impotence to stop either higher rates or currency devaluations. There's even a helpful BIS warning about PIIGS home bias for sovereign debt, which will of course come back to haunt those countries when the next crisis hits their banks with more sovereign debt defaults and currency devaluations.
The preppies and trust fund babies running most Wall Street firms all read the above news items to look busy. They don't grok the insights or reduce their exposure to obvious threats. That's okay. I want them all fired and bankrupt when the pro-cyclical policy dysfunctions I've cited above destroy their AUM. The BIS is correct and a lot of stupid people are wrong.