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On the heels of its ‘stealthy’ easing.. and not so stealthy:
In the past 48 hours China has:
– Cut its 7-day Treasury rate by 103bps
– Launched quasi QE
– told banks to flood the system with liquidity
– Sent the Yuan tumbling
– Warned more easing is coming
The PBOC just lowered the ax on the Yuan Fix – slashing their reference rate by the most since June 2016.
Offshore Yuan is tumbling to new cycle lows after the fix…CNH is down over 1250 pips this week – the biggest weekly devaluation since August 2015’s plunge.
President Trump is gonna be pissed!!
Will China’s chaotic capital markets ripple across the world?
Yen just snapped stronger…
The Indonesian Rupiah tumbled 0.5%, and gold is falling…
As we concluded previously, so how long before the trade war, which is already shifting to a currency war as a result of the recent record devaluation in the yuan, morphs into a central bank war and a renewed race to the bottom between the world’s two most important economies? .. or worst still as Bannon suggested, a kinetic war.
Russia is an annoyance. China is our great challenge. Russia’s economy is the size of Texas or New York State? It’s got lots of nuclear weapons…but in today’s warfare…nuclear weapons are taking a less important role. Trump is trying to end the Cold War and the Korean War…and all he is getting is grief from the globalists.
And that’s a huge problem, because not only are we adversaries with China, we are at war with China, Bannon said.
We’re in a war with China. Ray Dalio tweeted the other day. There’s three types of war: information war, economic war, and guns-up kinetic war. They’ve been at war with us for 25 years. Many people in this room have exacerbated the rise of China.”
…click on the above link to read the rest of the article…
Last night, Argentina got 50 billion pieces of good news, when the IMF agreed to provide the troubled Latin American nation with a $50BN standby loan, the largest even in IMF history. It also got some bad news, when the central bank announced it would remove the 25/USD barrier it had imposed in early May to prevent an escalating currency crisis.
Well, this morning, contrary to expectations that the Argentina Peso would rise on the IMF loan, ARS resumed its selloff, and promptly breached the central bank’s 25/USD barrier, and plunging 2.3% to 25.55 .
The breach of the barrier shows that confused traders are seeking to find the “fair value” of the ARS after almost a month of living with a virtual cap. The move is also surprising as it contrasts with the positive impact from the IMF deal seen in sovereign bonds market, with Argentina’s century bond’s due 2117 dropping modestly by 18bps, to 8.02%
Meanwhile, there is the political blowback to consider: as Bloomberg notes, after the kneejerk reaction and market stabilization at a new level – assuming there is one – traders will start watching the steps govt will make to achieve the new fiscal targets as Argentina is well known for protests, and the latest round of IMF austerity in the form of cuts in jobs and government spending is unlikely to be achieved peacefully.
Meanwhile, as Bloomberg’s Sebastian Boyd writes, “given the pace of inflation, the peso needs to weaken just to maintain the real exchange rate, and arguably it should fall more than that. But today is going to be interesting. It looks as if the market wants to test the bank’s resolve again.”
As we reported yesterday, Argentina will seek a fiscal deficit/GDP of 2.7% this year and 1.3% in 2019; below the previous targets were 3.2% and 2.2%, respectively; the country is expected to balance its budget in 2020.
…click on the above link to read the rest of the article…
Mohamed El-Erian warned overnight that Brazilian policy makers are “in quite a tricky position — and there’s little room for error,” and judging buy this morning’s rout in the real, he is dead right.
Crippling nationwide trucker strikes, which prompted the resignation of Petrobras CEO, and forced Brazil and Argentina to roll back their planned fuel-price increases have, according to Bloomberg’s Davison Santana, undermined their already fragile currencies and deter investors eager for signs authorities are serious about putting fiscal accounts in order.
Brazil’s projected budget deficit as a percentage of gross domestic product stands at 7.4 percent, the highest among major emerging-market peers.
The gap, as El-Erian explained succinctly, leave government with a stark choice: keep borrowing or cut spending.
As Santana notes, borrowing more isn’t a healthy option. Higher deficits make currencies less attractive, leading to rising interest rates that reduce growth and erode government revenue in a cycle that ends up, you guessed it, swelling the deficit. Reining in spending typically makes more sense. That’s why it’s all the more remarkable that Brazil recently capitulated in their efforts to remove artificial price controls that kept fuel costs low. After all, it’s much harder to reduce spending while maintaining subsidies.
So where does this leave the real? It means authorities will have to keep intervening in currency markets, a costly use of foreign-exchange reserves that can only stop for good once the nations tackle their underlying fiscal problems. And indeed, after Brazil’s real tumbled to a two-year low on Tuesday, the government effectively tripled its support – which has already failed dismally.
A month ago we explained how critical the Brazilian Real is to identifying just when the Emerging Market turmoil will go viral.
…click on the above link to read the rest of the article…
Commercial banks are putting gold into Turkey’s central bank to help deal with rapid inflation
In late 2011, Turkey started to allow commercial banks to use gold instead of the Turkish lira for their required deposits at the central bank. These deposits are known as reserve requirements and help ensure that the banks are capitalised.
Over the past six-or-so years, Turkey’s central bank has accumulated an additional 400 metric tonnes of gold. That’s a lot of yellow bricks – more than what Britain has – and the sizeable stash has the possibility to take the edge off the crisis.
To put the Turkish gold haul in perspective, there are 10 million ounces of gold – roughly 311 tonnes – at the Bank of England, according to the New York-based financial consulting firm CPM Group.
The burgeoning balance of bullion comes as the result of a change in banking rules made earlier this decade.
I thought the Turkish thing was pure genius
– Jeff Christian, CPM Group
“I thought the Turkish thing was pure genius,” says Jeff Christian, founder of CPM Group. “It was using gold in the way that you should use it.”
In the simplest terms, the tweak to the rules allows gold to be used as a financial asset by the banks. In addition, the new regulation helped flush out a lot of gold that was previously held privately.
“This change allowed the government to get hold of the under-the-mattress gold to help stabilise the banks and the underlying economy,” says Ivo Pezzuto, professor of global economics, entrepreneurship, and disruptive innovation at the International School of Management, Paris, France.
…click on the above link to read the rest of the article…
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On April 2, 1792, George Washington signed into law what’s commonly referred to as the Mint and Coinage Act.
It was one of the first major pieces of legislation in the young country’s history… and it was an important one, because it formally created the United States dollar.
Under the Act, the US dollar was defined as a particular amount of copper, silver, or gold. It wasn’t just a piece of paper.
A $10 “eagle” coin, for example, was 16.04 grams of pure gold, whereas a 1 cent coin was 17.1 grams of copper.
The ratios between gold, silver, and copper were all fixed back then.
But if we apply today’s gold price of $1292 per troy ounce, we can see that the current value of the original dollar as defined by the Mint and Coinage Act of 1792 is roughly $66.75.
In other words, the dollar has lost 98.5% of its value since 1792.
What’s incredible about this constant, steady destruction of the currency is how subtle it is.
Few people seem to notice, because modern day central bankers try to “manage” inflation between 2% to 3% per year.
2% to 3% per year is pretty trivial. But it happens again the next year. And the year after that. And the year after that.
After a decade or so, it really starts to add up.
But there’s an important, other side of the equation: income.
Costs are clearly rising. And it’s fair to say that incomes have been rising too. But which one has risen more?
In 1982, back when I was a toddler, the price of a Ford Mustang was $6,572. Today the cheapest Mustang starts at $25,680 according to Ford’s website.
…click on the above link to read the rest of the article…
It may be time to cry for Argentina…
The Central Bank of Argentina (BCRA) just hiked its 7-day repo reference rate to 40.00% – up a stunning 1275bps in a week – in a desperate attempt to stall the collapse of the peso (and ARG bonds) this week.
BCRA hiked this week three times:
The central bank said it will continue to use all tools at its disposal to avoid disruptions in the markets and guarantee a slowdown in inflation. The bank is ready to act again if necessary, it said in the statement.
As The FT reports, appetite for Argentine assets has been waning in recent months as concerns grow over the country’s painfully high level of inflation and large trade and fiscal deficits. A severe drought is also complicating President Mauricio Macri’s efforts to revive Latin America’s third-largest economy. Agricultural exports are one of Argentina’s main sources of hard currency, but the worst drought in decades is expected to hit this year’s soybean and corn harvests. The country’s famed cattle industry is also predicted to rack up millions in losses.
And, of course, adding to Argentina’s woes is the return of US dollar strength.
The peso has now plunged over 17% this year against the dollar, and plunged yesterday by the most since it began its free-float in December 2015. ARS is very modestly stronger as it opens this morning after the hike.
Furthermore, Argentina’s ‘infamous’ Century bonds have collapsed – selling off for 15 days straight as those who bought the 100-year bonds last year in the massively oversubscribed deal are likely regretting that ‘reach for yield’ choice now…
As we said at the time of issuance, while the bond was massively oversubscribed, investors questioned the wisdom of investing for a such a long term in a country as volatile as Argentina.
…click on the above link to read the rest of the article…
It’s been said that when the U.S. sneezes the rest of the world catches a cold. Inflation by overall annual average has been below target for some years now, since 2012 to be exact. The Fed usually seeks a 2% inflation as a comfort zone.
Granted, it’s only one data point but with unemployment currently low and some signs that economic growth is accelerating, the suggestion exists that overheating/inflation is a risk for the U.S. economy in a way that hasn’t existed for about ten years.
What is inflation?
Inflation is when the buying power of a currency declines over time. If inflation is 2% that translates to a basket of groceries which cost $100 today costing $102 a year from now.
But since prices rise and fall and we each buy different articles how is that tracked? Government statisticians and economists create indexes to reflect a full range of products and services that are consumed weighted by how much the average household spends on each item.
Various ways of measuring are done by comparing the decline of the U.S. dollar compared to other currencies or to gold. The aggregate of the items compared can show how prices are changing over time considering the range of items the average household purchases
This leads to the next question, “is inflation good or bad?”
It can be either. In places like Venezuela today or Zimbabwe a few years ago, inflation was so out of control that the currency ceased to function as a means of exchange and the population was forced to resort to a barter system. This led to a breakdown in the two countries’ financial systems.
…click on the above link to read the rest of the article…
It’s our currency, but it’s your problem.
– U.S. Treasury Secretary John Connelly to European Finance Ministers, 1971
Today’s post will cover a topic that consumed my thoughts for many years, but one I haven’t discussed much lately. Namely, the terminal nature of a global financial system being propped up artificially by central bank shenanigans.
First, it’s crucial to understand that at the very core of our global economy is a financial system dominated by the U.S. dollar. The USD is a fiat currency directly backed by nothing, the supply of which can be arbitrarily altered and manipulated by a group of unelected bureaucrats in charge of the Federal Reserve. This money system represents the most powerful tool of centralized power on planet earth.
The USD is unique in that it grants the U.S. the “exorbitant privilege” of having a national currency which at the same time serves as the global reserve currency. This was solidified toward the end of World War 2 with the Bretton Woods agreement, and was accepted because the U.S. agreed to offer sovereign nations holding dollars a right to exchange these dollars for gold at a fixed price. This fell apart in 1971, but was shortly replaced with an unofficial “petrodollar” system, which allowed the USD to remain the world reserve currency despite no longer being redeemable in gold.
Before moving on, I want to share a few excerpts from an article I read yesterday titled, The De-Dollarization in China:
Petrodollars emerged when Henry Kissinger dealt with King Fahd of Saudi Arabia, after “Black September” in Jordan.
The agreement was simple. Saudi Arabia had to accept only dollars as payments for the oil it sold, but was forced to invest that huge amount of US currency only in the US financial channels while, in return, the United States placed Saudi Arabia and the other OPEC neighbouring countries under its own military protection.
…click on the above link to read the rest of the article…
“Unless you’re poor, it’s hard to understand what it’s like to be poor.”
Indian Prime Minister Narendra Modi has a grand ambition to make his country into a cashless society. In 2014, he launched a scheme to provide bank accounts to the nearly 40 percent of the population with little or no access to financial services. In November 2016, he withdrew 500 and 1,000 rupee notes ($7.80 and $15.60), the country’s two most common banknotes, from circulation.
The aim was to clamp down on black-market money and get more people into the formal economy, but it had a negative effect on the poor, with micro and small-scale service businesses cutting 35 percent of staff in the first few months, and some families left unable to afford fruit and vegetables.
Cash is on the decline worldwide; non-cash transactions grew 11.2 percent globally in 2015. But for some, the Modi experiment is a sign that cashless societies will hurt the poor, and India is not alone in having poor, unbanked populations. An estimated 7 percent of American households don’t have access to bank accounts, according to the most recent survey from the Federal Deposit Insurance Corp. And a government study at the end of last year found that the U.S. homeless population had risen for the first time since 2010. Given rising inequality, what happens to those on the margins of the economy when cash is no longer king?
Proponents of a shift away from cash often point to Kenya or Sweden as proof that such a transition can happen without further disadvantaging the poor. In Sweden, which is on track to be the world’s first cashless society, a magazine called Situation Stockholm has equipped its homeless sellers with credit card readers. And M-Pesa, a mobile money service first rolled out in Kenya, has 30 million subscribers and has been credited with raising 2 percent of Kenyan households out of extreme poverty.
…click on the above link to read the rest of the article…
Just days after Beijing officially launched Yuan-denominated crude oil futures (with a bang, as shown in the chart below, surpassing Brent trading volume) which are expected to quickly become the third global price benchmark along Brent and WTI, China took the next major step in the challenging the Dollar’s supremacy as global reserve currency (and internationalizing the Yuan) when on Thursday Reuters reported that China took the first steps to paying for crude oil imports in its own currency instead of the US Dollars.
A pilot program for yuan payment could be launched as soon as the second half of the year and regulators have already asked some financial institutions to “prepare for pricing crude imports in the yuan“, Reuters sourcesreveal.
According to the proposed plan, Beijing would start with purchases from Russia and Angola, two nations which, like China, are keen to break the dollar’s global dominance. They are also two of the top suppliers of crude oil to China, along with Saudi Arabia.
A change in the default crude oil transactional currency – which for decades has been the “Petrodollar”, blessing the US with global reserve currency status – would have monumental consequences for capital allocations and trade flows, not to mention geopolitics: as Reuters notes, a shift in just a small part of global oil trade into the yuan is potentially huge. “Oil is the world’s most traded commodity, with an annual trade value of around $14 trillion, roughly equivalent to China’s gross domestic product last year.” Currently, virtually all global crude oil trading is in dollars, barring an estimated 1 per cent in other currencies. This is the basis of US dominance in the world economy.
However, as shown in the chart below which follows the first few days of Chinese oil futures trading, this status quo may be changing fast.
Superficially, for China it would be a matter of nationalistic pride to see oil trade transact in Yuan: “Being the biggest buyer of oil, it’s only natural for China to push for the usage of yuan for payment settlement. This will also improve the yuan liquidity in the global market,” said one of the people briefed on the matter by Chinese authorities.
…click on the above link to read the rest of the article…
Imagine if the world’s metre sticks all grew or shrunk a bit each year. That would make for a confusing system of weights and measures, wouldn’t it? Well, that is exactly what happens with money.
We have been measuring the world around us for thousands of years. Units like feet and cubits have been used for distances, pounds and kilograms to measure weight, and dollars and yen to measure economic value. Measuring value, however, is by far the most complicated of the measurements that must be taken. This is because – unlike the other units – the various items that have been used to represent dollars and yen are constantly fluctuating in value.
The British Pound, or lb
Monetary units have always been closely tied up with units of weight. For instance, the word “pound” has been used to describe both the British monetary unit (£) and the weight (lb). The pound weight was originally based on wheat. In 1266, King Henry III decreed that the British unit referred to as the grain should be defined as the weight of a corn of wheat “well dried, and gathered out of the middle of the ear.” Thirty-two grains were to be equal to a pennyweight, twenty pennyweights equal to an ounce, and twelve ounces added up to a pound. So the early English pound, otherwise known as the Tower pound, was comprised of 7,680 “well-dried” grains from the middle of an ear of wheat.
The Tower pound wasn’t the only pound weight used in England. The Troy pound, used for gold and silver, contained 5,760 grains, while the Merchant pound was made up of 6,750 grains. To add to the confusion, the avoirdupois pound would contain 7,000 grains.
The Exchequer Standard
Although the grain unit served as the basis for weights, people didn’t go about their regular business of measuring the weights of things by counterbalancing them against tiny grains of wheat. Imagine how awkward it would be to go to the local market to ask for an ounce of meat! The butcher would have had to count out 640 grains and then counterbalance them on a scale against the hunk of meat, an arduous process that would have brought the gears of trade to a near halt. Buyers would have been constantly accusing sellers of not using appropriately dry grains, adding to the confusion.
…click on the above link to read the rest of the article…
