Financial Sarcasm Roundup for 02/01/16

It's time for caucuses in Iowa. If sarcasm were a Presidential qualifier, I'm certain that my name would be at the top of the ballot.

JP Morgan is jumping on the blockchain bandwagon. All aboard! You all know I've trashed Bitcoin many times but the blockchain tech that succeeds it may be worth a look. The SIFI banks doing this will have to completely own their particular blockchain tech and disallow developers from forking it. They will also have to reserve a significant amount of data center space in case the hashes get out of hand. I suspect the world's central banks will have to standardize some part of a blockchain's code for money transfers. The whole movement risks turning into spaghetti code if central banks don't get involved.

China wants more foreign banks to trade its currency. It's a fun way to celebrate the yuan's new IMF reserve currency status. More importantly, it's a clever way to entice foreign banks to pump fresh currency into China so the PBOC can postpone the economy's day of reckoning. A stronger yuan means less PBOC money printing and less immediate stress on China's currency reserves. Have fun while it lasts, Beijing. The game will be up pretty soon. Foreign banks won't be happy to find out that empty real estate developments and shadow wealth management products are their currency trading counterparties' collateral.

The OMB is ready to review the US DOL's fiduciary rule for retirement advisers. Well, that sure took long enough. I blogged about this proposed rule in 2015 and I am all in favor of tighter controls. The industry's claimed concerns about stronger rules forcing them to drop smaller, less profitable clients are baloney. Automation is reducing the cost of servicing small clients to zero. Robo-advisers can implement fiduciary rules automatically. I want OMB and the rest of the administration to turn the screws on the retirement plan sector and make greedy brokerages howl with the pain of fiduciary compliance. That will force them to fire more humans and accelerate the automation shift.

May the most sarcastic candidate win. That would be me, of course, in any election year. Always vote your conscience, America.

The Haiku of Finance for 12/07/15

China baloney
Currency of corruption
Yuan fits regime

Financial Sarcasm Roundup for 12/07/15

Forbes thinks we should buy stocks before the Federal Reserve raises its interest rate target. Some editors forgot to mention that even a slightly higher cost of capital will force companies with weak balance sheets into serious trouble. I shake my head whenever a media publication that is obviously not a licensed brokerage purports to give financial advice to readers whose personal situations it cannot know. There's more to bank stocks than book value. Buying one without knowing its Texas ratio or capital adequacy ratio is like buying a pig in a poke.

Lower oil prices offer some support to long-term bond prices. I'll believe that correlation holds when someone shows me data for a time series longer than 48 hours. Interest rates still govern the yield curve in every country with a bond market. Any rise in the Fed's target rate means oil loses its hold on bond prices and the long end of the curve comes under downward pressure. It must be a slow news day when bond traders need to swallow an argument for tracking oil prices instead of the risk-free rate of return. I never ignore sovereign credit risk, but that concern escapes bond fund managers who take their eye off the ball and get distracted by oil.

I have noticed lots of mixed reactions lately about the IMF's acceptance of the Chinese yuan as a reserve currency. There's always an echo chamber blathering about how this is some harbinger of China's renewed rise to world dominance. Gimme a break already. When China matches the US's ranks on various data indexes for development and the rule of law, it will be trustworthy as a regional hegemon. I think a lot of the noise about the yuan is driven by portfolio managers who would like their Chinese positions to be more liquid in case they have to sell out quickly. Chinese elites buying vacation homes in California are already selling out.

Once again, there is no financial advice to be found at Alfidi Capital. I don't write this way to help anyone. I amuse myself when nutty market events are on my radar.

The Haiku of Finance for 08/11/15

Yuan keeps dropping
No firm fix any longer
Betting on exports

The Limerick of Finance for 03/16/14

Yuan trading band doubled wide
China thinks it has nothing to hide
With growth on the wane
Any move is in vain
This currency's value can slide

Financial Sarcasm Roundup for 12/23/13

It's been too long since I published a financial sarcasm roundup.  It's not for lack of sarcastic things to say.  I just had to find decent LOL pictures to accompany the text.  That problem is now solved.  I was not satisfied with commonly available LOL pics.  Many of them are governed by copyright law because of their proprietary origins.  Getting permission for each use would be expensive and burdensome.  Free stock photos also usually come with caveats about acknowledging credit to the creators.  I decided to take my own photos.  No one deserves any credit except me.  Get ready for genuine original Alfidi Capital LOL photos.

Congress will negotiate its final spending allocations behind closed doors.  The lobbyists for the major sectors mentioned in the article pretty much know what they'll get, so there won't be many surprises.  They don't know that pork spending sprees can't continue forever.  Uncle Sam will have a hard time doling out research grants and child care subsidies after hyperinflation begins.  Meanwhile, let the catfights begin.

China is trying very hard to prevent a run on the yuan.  Note the discrepancy of over 300 basis points between the opening quotes on seven-day repos and that rate's mid-morning weighted average.  The PBOC is not injecting enough liquidity into the Chinese banking system to stop the rate from rising.  If real estate prices collapse, so will the shadow banking system, and then the run on the yuan will become very real.  I'm so glad I am no longer exposed to China in my portfolio.

The IMF is bullish on the US's prospects for growth next year.  It is no coincidence that Mme. Lagarde said this very close to the FOMC's taper announcement.  Central bankers and monetary authorities coordinate their actions and announcements to foster stability.  The IMF, as part of the European troika lending to the crippled PIIGS, knows darn well what the Fed's support means to the ECB.  I don't think she's realistic about the US's prospects but I'm one of the few analysts who lives in the real world.  She needs to know that corporate earnings are still at twice their historic norm as a portion of GDP, and when they revert to mean they'll take equities down with them.

Alrighty, then.  There's your fix of LOL pic sarcasm.  Expect more lulz now that I have a collection of my own meme photos to use.  

USF Gathers Thought Leaders on China's Financial Reform

I attended USF's conference this month on opportunities and challenges for China's financial reform.  It was nice to be back on my old MBA stomping grounds from last decade and the campus has changed quite a bit.  USF's China Business Studies Initiative organized this conference and brought local thought leaders into contact with students and alumni.  This conference is extremely important in light of the renminbi's growing use as a regional trading currency (according to this Peterson Institute paper "The Renminbi Bloc Is Here: Asia Down, Rest of the World to Go?").

China is increasingly allowing foreign entities to become Qualified Foreign Institutional Investors (QFII) that can invest in mainland China's markets.  Further reforms will allow the designation of Renminbi QFII (RQFII) who can use the external currency to make internal Chinese investments.  That is as close to full currency regime liberalization as China can come while still maintaining two currencies.  The designations come with stipulations like domiciling a certain portion of the QFII's operations inside China.  That's why non-Chinese banks are setting up shop in the Shanghai FTZ.  My exposition should sufficiently set the stage for what the conference participants had to say.  The Chinese consular official's introductory remarks noted that the PRC will duplicate the Shanghai FTZ if it succeeds.

Deloitte sent one of its longtime China hands to address China's pending reforms.  The huge size of China's shadow banking sector and its encouragement of bad investment is well known but this was the first I've heard of grey-market wealth management products.  I found a good discussion of the consequences of these proliferating grey market investments in the China Economic Review from February 2013.  The Deloitte guy said China's Gini coefficient is in an unstable range but I have read many times that China's self-reported economic stats are notorious fabrications.  I suspect economic inequality is a lot worse.  His take on savings was interesting; apparently Chinese citizens still save personal capital to anticipate future health care needs in the absence of health insurance and that's why consumption spending hasn't taken off.  China's leaders know that the country faces severe social stress if they don't push financial reform.  The blame for structural imbalances obviously lies with state-owned enterprises that accumulate capital and create overcapacity.  I find it ironic that the US's own state-owned enterprises - the housing GSEs, SIFIs, and bailed-out automakers - also create overcapacity and poor investments here at home.

The panel on capital markets and cross-border investments made it very clear that state-owned enterprises (SOEs) are an element of China's soft power.  They can invest outside its borders in support of China's foreign policy objectives.  I'll predict that full financial reform on the mainland will be impossible because China cannot stop subsidizing its SOEs.  It absolutely must maintain an expansionist foreign policy to obtain natural resources in Africa and Southeast Asia and SOEs are its instrument of penetration.  That also explains why the US maintains national security requirements that blunt the ability of Chinese SOEs to invest here, as the panel noted.  I do not necessarily agree with the panel's conclusion that Shuanghui's acquisition of Smithfield Foods was a more cost-effective way to obtain advanced agricultural technology than developing food processing at home.  I believe the acquisition is designed to divert pork products from the US so China can manage its pig cycle in the same manner as it manages capital flows.  Shuanghui is privately owned but I think the connections between its top officers and the Politburo deserve scrutiny.  I wonder about the panel's belief that an appreciating RMB will allow more US food exports to China.  The stagnation of Chinese purchasing power due to inflation could IMHO easily be a countervailing force.  The panel revealed that China expects the Shanghai FTZ to attract the regional headquarters (RHQs) of foreign firms away from Hong Kong and Singapore, where non-Chinese multinationals traditionally set up shop to manage their Chinese projects and repatriate profits.  I was not surprised to learn the local governments report WOFE registrations up the chain to Beijing.

One of USF's deans gave a sales pitch for the school's Jesuit values.  I have been skeptical of how seriously the school takes those values ever since they allowed a Stolen Valor fraud to receive free MBA tuition from 2007-2009 while he was masquerading as a ROTC faculty member.  I'll take the values pitch seriously once they revoke his MBA and demand payback of the tuition remission he received.  That won't be difficult after he's indicted and convicted for some related embezzlement scams he pulled in the local veterans' community.  Several USF alumni may very well be indicted along with "Mickey," so maybe they'll bunk together in prison.  I am optimistic that USF has new programs in the works like this China initiative.  If they're serious about building MBA coursework in supply chain sustainability and internal audit / financial compliance then the school will differentiate itself.  I'll believe it when I see the results.

The panel on RMB internationalization noted that obtaining physical RMB outside China is still difficult and the overall quotas for offshore RMB are still small compared to China's stock market capitalization.  Dollar-RMB swaps allow Chinese investors to purchase US Treasuries more cheaply than with direct purchases.  It's intriguing to note that trading differentials between onshore and offshore RMB allow arbitrage with forward contracts.  Non-China MNCs use offshore RMB to hedge their exposure to operations inside China.  I would be very wary of those Hong Kong banks attracting RMB deposits with high rates.  That's what Cyprus banks did up until last year and that ended badly for many large depositors.  Investors who use those RMB to buy dim sum bonds when China hyperinflates its way out of a shadow baking crisis are going to be really hurt.  I don't think there's any totally safe place for foreigners to invest in China for those reasons until long after the reforms of the Twelfth Five-Year Plan have taken hold.  MNCs need to take risk management very seriously in China.

The final panel on the implications of the RMB's globalization gave me my chance to ask my only question.  I asked the panel if they thought the RMB would ever displace the US dollar as the world's reserve currency.  I set off a few laughs among the audience.  The panel generally thought that it won't happen in the near term as long as the RMB remains China's control currency for managing trade and investment.  The RMB pools outside China aren't large enough yet for reserve use among central banks.  One panelist from the Bay Area Council Economic Institute noted that foreign-born talent is rising faster in the Bay Area than in the rest of the US and that local patents with foreign co-inventors are growing in number.  I guess that means our region has the right stuff to attract brain power.  US investors who want to bank with one of the four licensed Chinese banks in California need to know that RMB deposits are not insured by the FDIC.  That's a relief.  For a minute there I thought the US taxpayer might have been subsidizing Chinese moral hazard.  Those Chinese banks can grant letters of credit in RMB, which is good news for the local import-export crowd and the trade promotion experts at ChinaSF.  It's too bad the stupid losers over at FX Invest West Coast didn't invite me to speak at their show this year.  If they invite me next year I'll have a lot to say about the RMB thanks to this conference.  I will note for the record that the IMF's SDR regime does not at present include the RMB.  I don't think that will change.  Please note that Alfidi Capital is not a QFII of any sort, so don't ask me where you can open an RMB account.

Events like this give me hope for USF students.  The quality of my fellow USF MBA students a decade ago was very low.  Things are different now.  I will continue to attend USF events like this high-quality China conference.  There were many very attractive Chinese women on hand wearing their shiny cheongsam dresses.  I'll get their phone numbers next time.  Good job, Dons.

The Limerick of Finance for 09/08/13

China says inflation is tame
No one can believe such a claim
The yuan is toast
No way can they boast
The bull case for yuan is so lame

Financial Sarcasm Roundup for 04/29/13

There must be some sarcastic angle on the movement of the gold price, economic turning points, and the debate over whether austerity is discredited.  This blog is the right place to find such material.

France is going absolutely ga-ga over the yuan.  Maybe they could stick the trading center on Corsica to give the island some respectability.  This is mainly about French multinationals wanting to piggyback on Chinese-funded development projects in Africa, but China is too wily to let the French in easily.  The French Foreign Legion will have to learn to speak some Chinese if it wants to get missions securing Chinese project sites.  I wouldn't blame Germany for feeling jealous if France drops hints about leaving the euro once it goes live with yuan trading.

Iceland is getting sick of both austerity and the European project.  Voting in the parties who led the country into its banking crisis is pretty dumb.  No one said the way out would be painless but grown adults in Western countries don't want to sacrifice for their own good anymore.  They'd rather act like babies and throw temper tantrums when other adults in the room tell them to live within their means.  That's why economists in America are so giddy that the Reinhart-Rogoff debt threshold theory is being attacked for calculation errors.  Everyone wants to be the enabler of good times forever.  Anyway, Icelanders like their welfare state and dislike the troika's preference for austerity, so the euro won't be coming there.

Maybe the House Republicans are smart to trade away entitlement cuts for tax reform.  Entitlements aren't going to be cut anyway because both parties think they're untouchable.  It all depends on what kind of tax reform they get.  If it's a code full of bigger loopholes for corporate big shots and more earned income credits for welfare queens, then forget it.  Two tax brackets and no deductions would be a colossal improvement.  I've been mouthing off in favor a a flat tax for something like forever but I'll take what I can get.  Maybe America will get lucky and have a simplified tax code in place before we get hyperinflation, which would really take care of the entitlement problem.

High-cost financing is now a way of life for ordinary Americans.  A sub-prime nation deserves more than just sub-prime auto and home loans; it deserves a check cashing outlet on every corner to soak up all the income Americans don't need anymore for goods they can't afford anyway.  I'm really impressed with the speed at which my fellow citizens have become addicted to formerly shameful ways of making ends meet.  The crush of applicants for SNAP EBT cards, free cell phones, and SSI disability payments would not be complete without a surge in payday loans and pawn brokers.  America is turning into one big trailer park and the final coup de grace will be to change our national mascot from the bald eagle to a mangy junkyard dog.

In other news, I'm still waiting for some shoe to drop in the markets and flush out a whole bunch of trust fund babies who should never have turned Mommy and Daddy Warbucks' money into a hedge fund.

Yuan Soon Ready For Global Settlement

The sun is setting on the U.S. dollar's position as world reserve currency.  China is building a currency clearance system that will probably end up matching the capabilities of the US-backed SWIFT system.  Control of SWIFT gives the West leverage over rogue states like Iran.  Shutting bad states out of the world's main interbank payments system gives those renegades the painful options of starving, bartering, surrendering, or threatening war.

China's yuan trading system is more than another jab at the dollar's increasingly fragile leadership.  It is an alternative diplomatic structure that can give China leverage over emerging economies where the US also competes for political influence.  Once China has this system in place it will no longer need to worry about parrying US diplomatic pressure on behalf of its trading partners.

Full disclosure:  Long FXI with covered calls.