China Eats Into Its Foreign Exchange Reserves

China's government and central bankers should worry about running out of money. More specifically, it is running down its reserves of other countries' currencies stored up after years of current account surpluses. December's monthly drawdown was the biggest ever. Continued reserve declines reflect an increasingly futile campaign to support the yuan's value. China's private sector takes note and reduces its US dollar-based liabilities. Private companies do not wish to be stuck with debt denominated in US dollars that will be more costly to repay as the yuan sinks.

The yuan's membership in the IMF's list of reserve currencies is a privilege for economically successful countries. It is not an entitlement based on a country's share of the globe's human population or land area. Beijing secured the yuan's status with the IMF after years of publishing very questionable economic statistics that inflated its national track record. Sustaining the yuan's new status requires spending forex reserves to stall its depreciation. Beijing is now in a race against time it cannot win. Its currency reserves will probably run out before it can build both honest statistics and truly consumer-driven economic growth.

The People's Bank of China is now learning the same painful lesson its Swiss counterpart learned in recent years. The difference is that the Swiss tried to drive their currency's value down while the Chinese are holding their own currency up. Switzerland's attempt to suppress the Swiss franc's value was not worth the effort of buying other currencies. Currency market interventions have ruinous effects on central bank balance sheets. Central banks only have so much ammunition to expend in currency wars, and they now fight losing battles against the rest of the world.

The Haiku of Finance for 07/25/15

When stocks roll over
Central banks will try to pump
All to no avail

The Haiku of Finance for 06/10/15

New Zealand rate cut
High speed stimulus rolls on
Hurts Kiwi dollar

The Limerick of Finance for 04/26/15

Central banks will continue to meet
Policy is no longer discreet
Growth cannot be pumped
Hyping stocks to be dumped
Stimulus only helping Wall Street

The Haiku of Finance for 02/02/15

Monetary dance
Central bank jiggle routine
Worse moves than "left shark"

The Haiku of Finance for 01/22/15

Central bank nonsense
Claiming fear of deflation
Come to your senses

The Haiku of Finance for 11/22/14

Flagging stimulus
More central bank pump action
Snap-back gonna hurt

The Haiku of Finance for 09/24/14

China bank head doubt

Political reshuffle

Blunting reform way

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.  

The Haiku of Finance for 06/17/14

Central bank "Plan B"
Hope for growth while raising rates
Not a solid plan

Financial Sarcasm Roundup for 03/10/14

You may not be ready for my sarcasm, but my sarcasm is definitely ready for you.  If you miss the LOLpics of animals, you're welcome to make your own.  LOLcats may reappear when needed.  True sarcasm needs no artificial additives.

One Chinese bank regulator says China should allow more corporate bond defaults.  Good for him.  He's one of the few honest people in the Chinese banking system.  The bad news is that more corporate bond defaults will destroy the wealth management products that rolled them up as part of their portfolios.  Bring on the cascading defaults.  China's non-emerging middle class is going to get hit in the wallet and learn very painful lessons in risk assessment.

The BIS is dropping hints that central bankers' forward guidance on policy isn't worth very much.  I don't expect the world's central bankers to take the hint.  The bankers in the developed world love the media attention they get from making policy promises.  The ones in the developing world need to reassure local policy elites if they want to keep their jobs.  Fed watchers have too much time on their hands anyway.  They would be more productive calculating the Fed's probability of going bankrupt if it loses control of the yield curve's short end.

China blames lunar new year celebrations for its trade deficit.  Wow, that's a new one.  American executives like to blame the weather when they have a bad quarter.  Now Chinese policymakers are picking up on blame-shifting tactics.  Hey China, maybe the rest of the world is catching on to the fact that your exported products are low in quality.  Maybe the world is getting sick of Chinese IP theft and doesn't want to invest in Chinese value-added manufacturing.  Whatever.  China isn't the juggernaut some Western analysts fear.

The Obama Administration is cracking down on high-income earners' Social Security strategies.  It's about time.  The bipartisan Bowles-Simpson commission warned us about entitlement programs that would destroy the federal government's solvency.  Chipping away at excess benefits one option at a time is better than nothing, although this one proposal probably won't make much difference.  I would hardly describe the ability to manipulate an unfunded liability as a preferred financial planning tool.  Financial advisers who consider Social Security to be the equivalent of an annuity or other collateralized income stream need to find a new line of work.  Acclimatization to entitlement checks is hard to unwind, but unwind it must.

I refuse to be sarcastic about current events in Eastern Europe.  That action deserves sober analysis.  

Financial Sarcasm Roundup for 01/27/14

The turmoil in global markets that began last week is wonderful news, from my perspective.  This means I can't afford to let up on the sarcasm directed against anyone who went all-in on any asset class this month.

Argentina is liberalizing its restrictions on foreign currency.  IMHO that signals the beginning of that country's hyperinflation end game but we're nowhere near the denouement.  Argentina would have to reduce the currency transaction tax to zero and allow other currencies as legal tender to truly end its crisis.  The Fernandez administration isn't ready to throw in the towel on its failed micromanagement of Argentinians' economic choices.  Argentina could have been a contender for world domination a century ago with its rich agricultural resources but its potential has been comatose since after World War II.  Maybe it's all the fault of the bizarre Peronist combination of incompatible ideologies.

Central bankers at the WEF in Davos are warning banks to quit playing games with rate benchmarks.  Global regulators are promising us even better benchmarks.  Well, sheesh, if they would have invited me to Davos I would have sold them on my idea for GIBOR as a benchmark.  These people need to appreciate my genius.  It's easy for banks subscribing to one benchmark to manipulate it, but a benchmark of benchmarks like GIBOR would be harder to peg.  I'm way more awesome than these global bank regulators.

The global elite confab is studying more than just rate benchmarks.  The Davos crowd sees broader risks in the emerging market sell-off.  They give themselves too much credit.  The crowd in the eye of the pyramid may be blind.  The biggest risk right now is the lack of confidence investors have in the transparency of markets and the trustworthiness of institutions.  The inability of elites to prosecute their own kind for financial malfeasance is the source of market distrust.  Solve that with prosecutions and trust will gradually reappear.

I have a couple of meetings this week in the San Francisco Bay Area with some business folks and an event to attend.  I'll let you all know what happens.  Alternatively, maybe I won't let you know what happens.  

Financial Sarcasm Roundup for 01/06/14

The first Monday of a new year means the grind starts afresh for cubicle wage-slaves.  I celebrate my freedom from such drudgery by unleashing sarcasm tinged with LOL photos.  Taste the rainbow of sarcasm.  Taste the flavor of Alfidi Capital.

A bunch of washed-up economists are mouthing off about rosy economic growth.  Any economist who anticipates continued US growth in 2014 is either incompetent or on the Fed's payroll.  I anticipate the US falling off a cliff at some point for several reasons.  Corporate earnings are at all-time highs and must revert to mean.  Personal indebtedness sustains consumer spending and uncontrolled government spending sustains the rest of the economy.  The US's official GDP reached a new level of absurdity last year after the BEA recalculated it to include money already spent.  Puh-leeze.  Magical thinking about markets won't make them levitate in the face of reality.

Central banks will have trouble keeping a unified consensus for more stimulus.  The developed nations' central banks have stimulated themselves into a corner, and everyone knows it.  "Decoupling" was a big financial meme a couple of years ago when asset managers started worrying about which global sector would head down first.  They all headed down more or less together in 2008 until central bank stimulus  propped them back up.  Now with competitive currency devaluation they all face variations on the Prisoner's Dilemma.  The first one to defect from monetary stimulus will reap a more valuable currency, should they wish to attract FDI, and will set off a shockwave roiling currency markets.  I'm hedging this madness with positions in currencies I trust not to play the game.

China faces a double-whammy.  Western multinationals are moving production away from China and back to their home countries.  Chinese local governments have rising default risk due to their reliance on the shadow banking system.  This means that China's goose is cooked, so the only question is whether they'd like it medium rare or well done.  China's perma-bulls still claim that learning Mandarin is a smart educational move.  I hope they learn to file bankruptcy claims in Mandarin.  I blogged a log time ago that China's rare earth element export quotas were set disingenuously low.  Beijing's central planners can look forward to revising other data down from politically-determined highs.

My new year is getting off to a nice little sarcastic start.  I am confident that the human race, and the finance sector in particular, will keep me supplied with amusing news items.

The Limerick of Finance for 08/18/13

Central banks drive markets to the moon
There's been talk of some tapering soon
Stimulus will not stop
That would make markets drop
No one wants to pop this big balloon

BIS Says Central Banks Drive Capital Markets Insane

The BIS Quarterly Report dated June 2013 is proof from the horse's mouth that financial markets are totally insane.  Saying markets are under central bankers' monetary easing spell may be the understatement of the year.  The graphs on page 2 show stock markets rising and bond yields falling.  The graphs on page 3 show economic surprises getting more negative, growth forecasts falling, and commodity prices dropping.  Knowledgeable practitioners are thus getting pessimistic while know-nothing investors are getting more optimistic.  This divergence of market sentiment from economic reality cannot continue forever.  Read between the lines of that BIS report for amusement.  They hint on page 9 that Europe-wide contagion was narrowly avoided in the Cyprus bank meltdown once Eurocrats backed down from the proposed one-off levy on insured deposits.  My blog readers knew about that when it was happening thanks to my extreme genius.

I shake my head in a sorrowful stupor at the people who manage money professionally in this environment.  Some investors are starting to wake up but it takes a lot to rouse even so-called smart money.  Investors in SAC Capital are reportedly preparing massive redemptions.  Not every investor gets a wake-up call in the form of SEC investigations.  That's one reason why most investors are sound asleep.  Another reason is that so many money managers are just plain stupid.  Portfolio managers and their supporting analysts are paid to understand basic trend data.  They either don't understand it (too stupid), can't admit what's really happening (too cowardly), or don't want to upset clients with bad news (too dishonest).  I don't have those problems and that's why I won't ever be hired as a portfolio manager.

Insane media shills continue to jump on the bull market bandwagon.  It's a fun ride until the wagon goes over a cliff at eighty miles an hour.  The weightless feeling in freefall is very short.  The pain from impact at the bottom lasts a lifetime.  Anyone going along with this joy ride is trusting central bankers at the wheel to steer correctly.  The central bankers have the gas pedal to the floor.  Go watch the last scene in "Thelma and Louise" if you need a good image.

The Haiku of Finance for 02/20/13

Central bank pumping
Risk loss on toxic assets
Inflate your way out

The Haiku of Finance for 09/22/12

Central bank folly
Currency intervention
Destroy its value