Global markets have found themselves again at the precipice. My sense is that everyone’s numb – literally dazed and confused from prolonged Monetary Disorder and the resulting perverted market backdrop. Repeatedly, “The Precipice” has signaled easy-money buying and trading opportunities. Again and again, selling, shorting and hedging at “The Precipice” guaranteed you were to soon look (and feel) like an absolute moron – for some, progressively poorer dunces the Bubble was pushing yet another step closer to serious dilemmas (financial, professional, personal and otherwise). A focus on risk became irrational. Fixation on seeking potential market rewards turned all-encompassing.
All of this will prove a challenge to explain to future generations. Keynes: “Worldly wisdom teaches that it is better for the reputation to fail conventionally than to succeed unconventionally.” And paraphrasing the great Charles Kindleberger: Nothing causes as much angst as to see your neighbor (associate or competitor) get rich. In short, Bubbles are all powerful.
Going back to those darks days in late-2008, global policymakers have been determined to not let the markets down. Along the way they made things too easy. “Do whatever it takes!” “Shock and Awe!” “Ready to push back against a market tightening of financial conditions.” “Do what we must to raise inflation as quickly as possible.” Historic market excess and distortions were incentivized and, predictably, things ran amuck. “QE infinity.” Seven years of zero rates, massive monetary inflation and incessant market backstopping have desensitized and anesthetized. Rational thought ultimately succumbed to “perpetual money machine” quackery. And now all of this greatly increases vulnerability to destabilizing market dislocations, as senses are restored and nerves awakened. Continue reading
Things just went from bad to worse for Canada. Along with a continuing collapse in crude prices, and a teetering real estate market, the Federal Reserve in the United States is set to increase interest rates on December 16th for the first time in ten years.
Traditionally the Bank of Canada would match interest rate increases in the US with its own increases. The challenges which Canada faces by increasing interest rates is that the country holds the title for the highest level of private debt in the world, as well as one of the most overvalued real estate markets.
Any rate increases by the Bank of Canada will send debt management costs into the stratosphere, causing a collapse in real estate markets over an extended period of time.
As such, Canada is faced with two choices. One, match the rate increases in the US and suffer the economic fallout. Two, don’t match the rate increases. The latter of the two choices will cause the Canadian dollar to depreciate even further against the US dollar. Neither choice is great.
It appears we may have been given an answer on what direction Canada will go. A policy paper titled Framework for Conducting Monetary Policy at Low Interest Rates was published today by the Bank of Canada. It outlines the macroeconomic policies which the Canadian central bank will have to embark upon in an environment of low interest rates. This is a clear signal that the Bank of Canada intends on not matching the interest rate increases by the Federal Reserve. Continue reading
Chinese Wealth Exodus
Old records are being broken. New records are being notched. On Monday, for example, the People’s Bank of China reported that a record liquidation of foreign exchange reserves occurred in November.
Specifically, China’s foreign exchange reserves declined $87.22 billion in November to $3.438 trillion. This amounts to a monthly sell off of 2.5 percent. What could possibly be prompting the massive sales?
The Great Wall of China – it sure hasn’t been able to keep the money in.
Photo via citypictures.org
For starters, China’s economy is slowing down. Chinese exports, the major growth engine for China’s economy, fell 6.9 percent on an annual basis through October. What’s more, China’s on target to report its slowest growth in the last 25 years.
This means a number of different things. But, at the moment, it means people with money in China are trying to get it offshore and out of Chinese assets. Popular destinations include U.S. real estate and stocks and bonds.
U.S. Treasury data estimates over $500 billion have exited China between January and August of this year. These, no doubt, are massive capital outflows. But, despite increasingly stringent capital controls, forecasters believe the wealth exodus increased in November. Naturally this is stressing and straining the yuan. Continue reading
There are times when you can distill the utterly complex into something elegantly simple. This is one of those times, as there really should be no doubt as to “what” and “why” about December so far. From repo to crashing EM’s to crude oil, the common theme is both eurodollar and Asian “dollar.” In that sense, it might be fair to craft the simple equation of; eurodollar = source; Asian “dollar” = destination. The eurodollar banks create global liquidity that ends up in Asia, largely China. In December that is the case only in reverse and only in continuation of these overriding trends in bank balance sheet behavior (contraction and withdrawal).
Again, this is quite simple even if how it actually and exactly got from A to B is dauntingly multifarious: