Wednesday, 8 February 2017

The Calm Before The Storm.

Baltic Dry Index. 714 -21   Brent Crude 54.59

LIR Gold Target in 2019: $30,000.  Revised due to QE programs.

“The boom can last only as long as the credit expansion progresses at an ever-accelerated pace. The boom comes to an end as soon as additional quantities of fiduciary media are no longer thrown upon the loan market.”

Ludwig von Mises.

We open with China’s FX reserves still falling, now back once again below $3 trillion. A great sea change is underway in how America finances itself, and this before President Trump unleashes great capital expenditure programs and starts rolling back taxes and regulations. While this great experiment doesn’t have to end badly, it doesn’t have to end well either.  At present, all we can say is that for better or worse, a massive unplanned global debt financing change is underway.  Stay long fully paid up physical precious metals as insurance against the next Lehman surfacing in 2017.

Below, the calm before the storm?

China Jan FX reserves fall below $3 trillion for first time in nearly 6 years

Tue Feb 7, 2017 | 7:55am EST
China's foreign exchange reserves unexpectedly fell below the closely watched $3 trillion level in January for the first time in nearly six years, though tighter regulatory controls appeared to making some progress in slowing capital outflows.
China has taken a raft of steps in recent months to make it harder to move money out of the country and to reassert a grip on its faltering currency, even as U.S. President Donald Trump steps up accusations that Beijing is keeping the yuan too cheap.
Reserves fell $12.3 billion in January to $2.998 trillion, more than the $10.5 billion that economists polled by Reuters had expected.
While the $3 trillion mark is not seen as a firm "line in the sand" for Beijing, concerns are swirling over the speed at which the country is depleting its ammunition, sowing doubts over how much longer authorities can afford to defend both the currency and its reserves.
Some analysts fear a heavy and sustained drain on reserves could prompt Beijing to devalue the yuan as it did in 2015, which could throw global financial markets into turmoil and stoke political tensions with the new U.S. administration.
While Beijing quickly downplayed the fall below the $3 trillion level, the breach could bolster China's argument that it not deliberately devaluing its currency, ahead of the U.S. Treasury's semi-annual report in April on currency manipulators.
To be sure, the January decline was much smaller than the $41 billion reported in December, and was the smallest in seven months, indicating China's renewed crackdown on outflows appears to be working, at least for now.
Economists expect more forceful policing of existing regulatory controls after the latest slide, though China's financial system is notoriously porous, with speculators quickly able to find new channels to get funds out of the country.

Demand for Treasuries Is Now a ‘Made in the U.S.A.’ Phenomenon

by Luke Kawa, Liz McCormick, and Tracy Alloway
Buy American, hire American.

In the world’s biggest debt market, domestic purchasers have been faithfully fulfilling the first half of President Donald Trump’s inauguration decree.

Demand for U.S. Treasuries has moved "from global to local," Bank of America Merrill Lynch rates strategists Carol Zhang and Shyam Rajan wrote in a note to clients Tuesday. Whether that turns out to be a good thing remains to be seen. 

Domestic pension and insurance companies, banks, mutual funds, and money market funds all bought an above-average amount of U.S. debt over the past year relative to previous 52-week spans going back to 2007, according to data compiled by Merrill Lynch.

"The biggest macro theme playing out right now is the hand-off from international investors to domestic buyers of duration," wrote Zhang and Rajan. "Liability-driven investors are buying the long end of the Treasury market at a record pace since June 2016."

With the noteworthy exception of pension funds, this buying behavior is likely a function of domestic purchasers being the last ones left at the bar, rather than the first to arrive at the party.

Foreign central banks have "sold relentlessly," the strategists write, best evidenced by the decline in China’s foreign exchange reserves to below $3 trillion in January. This rise in U.S. buying helps explain why these continued Treasury sales from the People’s Bank of China no longer roil markets the way they did in the summer of 2015.

Recently, demand from foreign private buyers has begun to wane, particularly in Japan, as more and more government debt across advanced economies regains a positive yield. There is about $6 trillion, or 24 percent, of the $25.8 trillion of securities in the Bloomberg Global Developed Sovereign Bond Index that yield less than zero. That’s down from about 40 percent in July.

"That’s been quite a substantial decline," said Gennadiy Goldberg, a New York-based interest-rate strategist for TD Securities. "The risk-reward isn’t quite as obvious for investors such as those in Japan, who are now more inclined to take down their own domestic supply than take-down Treasuries."

Sources of demand for Treasuries could be dwindling at a particularly inopportune time in the event that fiscal stimulus causes the U.S. budget to balloon and the Federal Reserve begins to take steps to slim down its balance sheet.

ECB's Draghi lambasts Trump's banking deregulation

ECB president Mario Draghi has rejected a plan by Donald Trump to soften US banking regulation adopted in the wake of the financial crisis, saying laxer rules are "the last thing we need" in financial markets.

European Central Bank (ECB) president Mario Draghi said on Monday that financial regulations implemented since the 2007-08 global financial crisis have underpinned stability, and any effort to relax the rules was "very worrisome."
Speaking before the European Parliament's Committee on Economic Affairs in Brussels, Draghi called President Trump's plan to review and likely unwind US banking regulation as "the last thing we need."
"The fact that we are not seeing the development of significant financial stability risk is the reward of the action that legislators and regulators and supervisors have been undertaking since the crisis erupted," Draghi noted.
The Trump administration last week ordered a review of major banking rules that were put in place after the 2008 financial turmoil, signaling that looser banking regulations are coming.
While the regulations succeeded in stabilizing the American banking industry, European banks are still struggling to adapt to tougher rules. Therefore, any relaxation in the US would give the industry a competitive advantage over their EU rivals.
Casino banking revisited
Post-crisis US banking regulation adopted under the so-called Dodd-Frank Act aimed to curb the actions of the finance sector that led to the "Great Recession" in the United States.
The rules required banks to demonstrate their solid financial grounding in annual "stress tests" as well as refrain from certain risky transactions, and significantly expanded the role securities regulators play in overseeing the investment industry.
Before signing executive orders to review the regulation on Friday, Trump said he wanted to "cut a lot out of Dodd-Frank."

'Is Germany tired of Merkel?' asks mass-selling newspaper Bild

Tue Feb 7, 2017 | 6:06am EST
Germany's mass-selling newspaper Bild openly questioned whether voters have had enough of Chancellor Angela Merkel on Tuesday after a poll showed the Social Democrats (SPD) pulling ahead of her conservatives.
"Is Germany tired of Merkel?" Bild asked in a headline after a survey for the newspaper by pollster INSA put the center-left SPD on 31 percent and Merkel's conservative bloc on 30 percent.
The SPD, junior partner in Merkel's ruling "grand coalition", has been trailing the conservative CDU/CSU bloc - known as the "Union" - for years in opinion polls. It last won an election under Gerhard Schroeder in 2002.
But the SPD has been re-energised by its appointment of Martin Schulz, a former European Parliament president who came home to enter German politics, as its new leader last week.
He replaced Sigmar Gabriel, who said he was standing aside to boost the party's chances.
Schulz has vowed to unseat Merkel with a campaign aimed at overcoming "deep divisions" that he says have fueled populism in Germany in recent years.
"A close race between the SPD and the Union is in any case good for German democracy," Bild said in an editorial, adding that the SPD's revival made another grand coalition less likely.
Unlike other SPD leaders, Schulz has had no role in Merkel's grand coalitions - governments of the two largest parties because no other coalition was mathematically or politically possible - and can more readily critique her record.
In better global news, China sees opportunity in Brexit.

China invites Britain to attend new Silk Road summit: sources

Tue Feb 7, 2017 | 11:03pm EST
China has invited British Prime Minister Theresa May to attend a major summit in May on its "One Belt, One Road" initiative to build a new Silk Road, diplomatic sources told Reuters, as London said she would visit China this year.

"One Belt, One Road" is Chinese President Xi Jinping's landmark programme to invest billions of dollars in infrastructure projects including railways, ports and power grids across Asia, Africa and Europe.

China has dedicated $40 billion to a Silk Road Fund and the idea was the driving force behind the establishment of the $50 billion China-backed Asian Infrastructure Investment Bank.

China has so far given few details about who will attend the summit, to be held in Beijing.

The country's top diplomat, State Councillor Yang Jiechi, told the official China Daily last week that leaders from about 20 countries have confirmed their participation, representing Asia, Europe, Africa and Latin America, though he did not give names.

One Beijing-based diplomatic source with direct knowledge of the invite list told Reuters that May was among the leaders who had been invited.

"China is choosing the countries it sees as friends and who will be most influential in promoting 'One Belt, One Road'," said the source, speaking on condition of anonymity.

Two other diplomatic sources confirmed May was on the invite list.

“But it [the boom] could not last forever even if inflation and credit expansion were to go on endlessly. It would then encounter the barriers which prevent the boundless expansion of circulation credit. It would lead to the crack-up boom and the breakdown of the whole monetary system.”

Ludwig von Mises.

At the Comex silver depositories Tuesday final figures were: Registered 30.20 Moz, Eligible 150.05 Moz, Total 180.25 Moz. 

Crooks and Scoundrels Corner

The bent, the seriously bent, and the totally doubled over.

Everyone Is Suddenly Worried About This U.S. Mortgage-Bond Whale

by Liz McCormick and Matt Scully
6 February 2017, 00:00 GMT 6 February 2017, 16:30 GMT
Almost a decade after it all began, the Federal Reserve is finally talking about unwinding its grand experiment in monetary policy.

And when it happens, the knock-on effects in the bond market could pose a threat to the U.S. housing recovery.

Just how big is hard to quantify. But over the past month, a number of Fed officials have openly discussed the need for the central bank to reduce its bond holdings, which it amassed as part of its unprecedented quantitative easing during and after the financial crisis. The talk has prompted some on Wall Street to suggest the Fed will start its drawdown as soon as this year, which has refocused attention on its $1.75 trillion stash of mortgage-backed securities.

While the Fed also owns Treasuries as part of its $4.45 trillion of assets, its MBS holdings have long been a contentious issue, with some lawmakers criticizing the investments as beyond what’s needed to achieve the central bank’s mandate. Yet because the Fed is now the biggest source of demand for U.S. government-backed mortgage debt and owns a third of the market, any move is likely to boost costs for home buyers.

In the past year alone, the Fed bought $387 billion of mortgage bonds just to maintain its holdings. Getting out of the bond-buying business as the economy strengthens could help lift 30-year mortgage rates past 6 percent within three years, according to Moody’s Analytics Inc.

Unwinding QE “will be a massive and long-lasting hit” for the mortgage market, said Michael Cloherty, the head of U.S. interest-rate strategy at RBC Capital Markets. He expects the Fed to start paring its investments in the fourth quarter and ultimately dispose of all its MBS holdings.

Unprecedented Buying

Unlike Treasuries, the Fed rarely owned mortgage-backed securities before the financial crisis. Over the years, its purchases have been key in getting the housing market back on its feet. Along with near-zero interest rates, the demand from the Fed reduced the cost of mortgage debt relative to Treasuries and encouraged banks to extend more loans to consumers.

----Talk of the Fed pulling back from the market has bond dealers anticipating that spreads will widen. Goldman Sachs Group Inc. sees the gap increasing 0.1 percentage point this year, while strategists from JPMorgan Chase & Co. say that once the Fed actually starts to slow its MBS reinvestments, the spread would widen at least 0.2 to 0.25 percentage points.

“The biggest buyer is leaving the market, so there will be less demand for MBS,” said Marty Young, fixed-income analyst at Goldman Sachs. The firm forecasts the central bank will start reducing its holdings in 2018. That’s in line with a majority of bond dealers in the New York Fed’s December survey.
There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved.

Ludwig von Mises.

Solar  & Related Update.

 With events happening fast in the development of solar power and graphene, I’ve added this section. Updates as they get reported. Is converting sunlight to usable cheap AC or DC energy mankind’s future from the 21st century onwards? DC? A quantum computer next?

No update today. Normal service resumes tomorrow.

True, governments can reduce the rate of interest in the short run, issue additional paper currency, open the way to credit expansion by the banks. They can thus create an artificial boom and the appearance of prosperity. But such a boom is bound to collapse soon or late and to bring about a depression. 

Ludwig von Mises.

The monthly Coppock Indicators finished January

DJIA: 19864  +92 Up NASDAQ:  5615 +95 Up. SP500: 2279 +95 Up

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