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EU sanctions on Russian banks would hit economy, business

Published on: Jumat, 25 Juli 2014 in , ,

* EU sanctions expected in response to Ukraine crisis
* Would force Russian banks to turn elsewhere
 * Nervous investors may shun Russia


MOSCOW, July 24 (Reuters) - Russia's state-controlled banks would have to turn to the state, domestic borrowers or new regions such as Asia if EU sanctions shut off investment, hurting their ability to lend to local businesses and further damaging the country's fragile economy.
 Under measures being considered by European Union governments in response to the Ukraine crisis, European investors would be banned from buying new debt or shares of banks owned 50 percent or more by the state.

 While the Russian government would step in to meet banks' funding needs, longer-term financing could be hit, hurting the banks' ability to finance business projects and crimping the country's growth potential.
 It could also cause nervous investors to avoid Russia altogether, encouraging more capital outflows and putting pressure on the rouble.

 "The net effect of state banks not being able to raise money in their traditional markets is that they will have to look domestically for money from the state," said Chris Weafer, senior partner with the Macro-Advisory consultancy in Moscow. "That ... will reduce the money available for lending to the broader economy as state resources are not limitless."


The largest banks with state ownership of over 50 pct are Sberbank, VTB, Russian Agriculture Bank (Rosselkhozbank) and VEB.
 Russia's publicly listed banks raised almost half of their 15.8 billion euro ($21.3 billion) capital needs in EU markets last year.

 "(Banks) will need to refocus, pursue their focus towards internal markets (or) Eastern markets such as Chinese ones," said one financial analyst who declined to be named.
 However these options could prove more difficult.

 "In Russia there is no long-term funding as such, and external markets were a big help," said BCS analyst Olga Naydenova. "This will affect Sberbank and VTB - it will be difficult to finance long-term projects."

 TIP OF ICEBERG

 Russia's economy is on the brink of recession as a result of sanctions already imposed by the West on individuals and companies deemed close to President Vladimir Putin, as well as a broader risk aversion towards emerging markets. That has sent equities and the rouble tumbling and spurred nearly $75 billion in capital flight so far this year.

 "It's the shadow impact of the sanction that's much greater," said one senior financial source in Moscow. "The point isn't how much is coming due in coming months by the state banks, but how much debt is out there that will be destabilised and what's going to happen to the credit default swaps and capital outflow and the rouble. It will be much greater than a specific set of sanctions on deals."

 VTB has loans of $2 billion maturing in 2016 and bonds of $400 million. Sberbank has loans of $2.6 billion and 603 million euros maturing by 2017 and bonds of $2.8 billion.


Moody's said in March that foreign currency wholesale maturities in 2014 by eight key Russian banks - Sberbank, VTB, Gazprombank, Russian Agricultural bank, Alfa-Bank, Nomos Bank, Promsvyazbank and VEB - represent on average 1.5 to 2 percent of these banks' liabilities - around $15-20 billion.
Sberbank, VTB and VEB declined comment. Rosselkhozbank did not respond to a request for comment.
 FUNDS JITTERY

 Sanctioning investors against buying shares in banks will also act as a further deterrent to holding Russian stocks and hurt those investing in benchmark indices.
 "If you're not allowed to invest in certain securities, you're basically banned from investing in the benchmark, and that could be an issue, particularly for strategies that are more passive," said Geir Lode, head of global equities at Hermes Fund managers.

 "The downside is you get stuck in a fund with securities you can't trade."
 Shares of VTB fell 0.3 percent while Sberbank fell 0.8 percent on Thursday. The shares have fallen 18 percent and 23 percent respectively so far this year.

 "People are underweight Russia but that doesn't mean more selling cannot happen because investor confidence is quite fragile," said Michel Danechi, portfolio manager at Swiss fund manager EI Sturdza. (Reporting by Megan Davies, Oksana Kobzeva, Sujata Rao-Coverley, Christopher Vellacott and Simon Jessop; Editing by Giles Elgood)

 By Megan Davies


Ukraine war threat affects world stocks; gold, oil rise

Published on: Kamis, 13 Maret 2014 in ,
The rising threat of war between Ukraine and Russia spooked markets and sent investors scurrying for relative safety on Monday, pushing stocks down sharply and lifting gold to a four-month high.
With Russian troops already on Ukrainian soil after an incursion into Crimea, comments over the weekend from President Putin that he had the right to invade the rest of the country were treated as a declaration of war by Kiev.

Geopolitical ripples from those statements, which included condemnation from the Group of Seven major industrialised nations, fanned through markets, hitting Russian assets the most and forcing the Russian central bank to aggressively raise interest rates. Russia's stockmarket nosedived 9 per cent at the open on Monday while the rouble fell 2 per cent to record lows against the dollar and the euro, and the central bank dramatically lifted its key lending rate by 1.5 percentage points to 7 per cent at an unscheduled meeting.
No major regional bourse escaped the aggressive selling, with all down more than 1 percent and Germany's DAX particularly hard hit, tumbling 2.5 per cent. That had followed overnight weakness in Asia, with MSCI's broadest index of Asia-Pacific shares outside Japan down 0.9 per cent and Japan's Nikkei 225 skidding 1.3 per cent, while futures for the US Standard & Poor's 500 slid 0.9 per cent off Friday's record high.

"We can expect some very sharp moves in the ensuing couple of days as markets and world leaders look to establish just how much of a threat there is to not only to stability in the area but stability across Europe," said James Hughes, chief market analyst at Alpari UK.

Chief beneficiaries of the market-wide flight from risk were gold, German benchmark debt and the Japanese yen and other currencies perceived as safe-havens in times of heightened volatility, while oil was supported by the demand outlook. Concern about China's economy also weighed on markets after a purchasing managers' index showed China's vast factory sector contracted again in February.

Spot gold hit a four-month intraday high of $1,350 an ounce, while the dollar dollar dropped to as low as 101.22 against the yen, its weakest in almost a month and slipped back against the Swiss franc to near Friday's two-year low of 0.8782 franc.

"It's a reaction to the escalation in tension in Ukraine over the weekend ... the traditional risk proxies are getting hit, and the safe havens are getting bid," said ANZ currency strategist Sam Tuck in Auckland.
The euro shed 0.2 per cent against the dollar to $1.3771 , slipping from Friday's two-month high as the euro zone economy is seen as vulnerable because of its dependence on gas supplies from Russia, part of which go through Ukraine.

Worries that Putin could act to crimp those gas supplies if the situation escalates further, and the prospect of a typical run-up in demand should war break out, boosted crude prices across the board. Brent crude, the European oil benchmark, rose as much as 2 per cent to a two-month high of $111.41 per barrel before trimming gains slightly. US crude futures , meanwhile, hit a five-month high of $104.65.


On top of concerns about a military confrontation, it was not clear if Ukraine's new interim government, formed only about a week ago after pro-Russian former President Viktor Yanukovich had been ousted, can secure funds to avoid default. Kiev has said it needs $35 billion over two years to avoid default, and may need $4 billion immediately. But Ukrainian Finance Minister Oleksander Shlapak said on Saturday the country was unlikely to receive financial assistance from the International Monetary Fund before April.
Concerns over Ukraine sent the yield on 10-year US debt to a one-month low of 2.592 per cent, before recovering to trade at 2.62 percent ahead of the release of important economic data this week, including manufacturing data on Monday and payrolls data on Friday.
Kicking off this week's data was China, where a private survey found Chinese factory activity shrank again in February as output and new orders fell, reinforcing concerns about a slowdown in the world's No. 2 economy. That offset a more upbeat survey from the Chinese services sector and pushed copper down to a three-month low. China is the world's top metals consumer and the market is already concerned about growing copper stockpiles in China.

As Fed, China pull back, so do global markets

Published on: Jumat, 14 Februari 2014 in , , ,

The global economic crisis may be a receding memory, but investors and businesses around the world took stock this week of two big new potholes on the road to recovery

Fresh evidence that the Chinese economy is slowing triggered a sell-off in global stock markets that capped the worst weekly losses on Wall Street in more than a year. The Dow Jones industrial average and the S&P 500-stock index each declined about 2 percent Friday, with weekly losses of about 3.5 percent and 2.5 percent, respectively.

Markets in Europe and Asia suffered similar declines after a measure of Chinese manufacturing activity fell.
Across a number of developing countries, meanwhile, the adjustment to the slowdown of Federal Reserve monetary stimulus began to accelerate, as traders dumped local currency in Turkey, South Africa and elsewhere — a rout that touched off concerns of a new crisis brewing in one or more of the world’s once-vibrant emerging markets.
The sell-off in the markets, which are down since the start of 2014, follows a dramatic run-up that many analysts said was unlikely to continue, even with the U.S. economy gaining steam.
However, the confluence of events behind it emphasized the tight linkages in the global economy and the uncertain effect that the Federal Reserve’s tapering will have over time.
China has become a major prop of world economic growth, and a slowdown there will show up on the books of virtually every major trading nation and company — affecting orders for metal ores from Indonesia and Brazil, heavy equipment from the United States and Germany, and the flow of money to African nations where China has become a major investor.

Compounding the trouble is a growing fear that China’s massive investment in building and infrastructure in recent years — part of its effort to stoke growth during the 2008 financial crisis — will show up in unsustainable levels of debt and bad loans for local governments and banks.
Officials and analysts downplay the likelihood that China’s troubles will touch off global problems akin to those caused by the U.S. financial system. The country’s capital markets and banks are not as closely interwoven with the rest of the world, and the Chinese government has stashed away trillions of dollars in foreign reserves to use as a buffer.

But there is still a fear that the country — the world’s second-largest economy — is facing major financial and demographic constraints that could limit its growth and force a major correction to its banking sector.
Authorities there “are aware of that,” World Bank chief economist Kaushik Basu said in a recent interview with reporters. “The bad news is that there is no science for this,” and efforts to limit credit and investment in the country could slow its economy even further.

The impact of Federal Reserve policy is another unknown. Analysts at the International Monetary Fund, for example, have been generally sanguine about how the Fed’s slowdown in bond buying will affect the world.
There was a brief “taper panic” in mid-2013, when the Fed appeared ready to start its drawdown — a moment that marked, in a sense, the formal end of the U.S. crisis response.

After that, many analysts said that a gradual end of Fed asset purchases would be offset by a strengthening U.S. economy, because the Fed would not reduce its monetary stimulus otherwise.
But the impact may still be serious in some nations, notably those that rely on foreign currency to finance trade and other deficits.

The tremors started showing up this week as currencies in Turkey, South Africa and elsewhere plunged.
There may be less likelihood that problems in one of those places turns into a global disease, as happened in the 1990s in Latin America and Asia.
Still, “we’re seeing a gradual and cumulative realization that the growth prospects for many [emerging market] economies, long seen as a given, are in fact problematic,” Patrick Chovanec, managing director of Silvercrest Asset Management, said in a research note.

Source :  http://www.washingtonpost.com/business/economy/as-fed-china-pull-back-so-do-global-markets/2014/01/24/c8791244-8539-11e3-8099-9181471f7aaf_story.html

Are Chinese Market Under Control..?

Published on: Rabu, 12 Februari 2014 in ,



It’s hard to know exactly what degree of control the PBoC has over the events unfolding in China’s interbank markets.
On the one hand, making the smaller banks and shadow finance entities sweat fits with the central bank’s new high-priority goal, introduced late last year, of containing ‘financial risks’, and also with a broader government theme of clamping down on excess.
On the other hand, Chinese liquidity is also being affected by external forces (shrinking capital inflows) and the shadow financing calendar (WMP end-of-quarter maturities). Michael Pettis says he suspects the PBoC was “caught flat-footed” by this combination of events, and it certainly isn’t hard to imagine. He also points out that this is a central bank which has almost no experience of any market conditions other than credit creation and expansion.
WMP redemptions could certainly be a problem this week. But WMPs have turned bad before, even affecting mid-sized banks in big cities, and their effect has been contained. That’s the (ahem) beauty of a command economy, in which banks and the media are under state control. Bank runs don’t spread so easily if people don’t hear about them.
Yet could this Chinese ability to conceal and contain financial panic be a double edged sword?
Pettis argues that for many years now, China has been able to use its opacity and control to boost its reputation for financial stability through low volatility. Those days may now be over (our emphasis):
Chinese financial markets often seem less volatile than one would expect for a poor, developing country, largely because of administrative measures that intentionally or unintentionally suppress normal volatility. These kinds of systems, however, are not less volatile. They seem less volatile because small shocks have minimal impact. Larger shocks, however, tend to cause a much greater than expected surge in volatility. Perhaps last week was a case in point.
Going forward we will probably see more of this in China. Volatility will be suppressed for periods of times only to erupt in greater than expected volatility from time to time. This is not only a China problem, of course. One can easily argue that the Fed’s actions under Alan Greenspan seemed to induce a “great moderation”, but only temporarily, and when the great moderation became less moderate, the economy was always likely to be more disorderly than expected. The euro, similarly, sharply reduced volatility in peripheral Europe for many years until it suddenly exacerbated it. Of course no student of Hyman Minsky would be surprised by any of this.
In fact, even suppressing bad news can backfire, he suggests. Pettis points to the panic in China over SARS early last decade as a possible case in point: although news of individual cases was often successfully damped down, rumours only grew and resulted in a panic that was arguably disproportionate to the outbreak. “(T)he attempt to suppress them can actually undermine credibility and so exacerbate the impact of the shock.” He writes that Argentina’s experience in 2001, when the government tried to deny it faced a payments crisis, is another situation where suppression of information may have made the resulting response even worse than if it had been admitted upfront.
Pettis, like StanChart’s Stephen Green, doesn’t think we are seeing a Lehman moment in China. But he does think there are three unanswered questions about this situation: if liquidity is adequate, as the PBoC says, where is it being hoarded?
Secondly, why hasn’t it received more attention from the mainland press (we think Pettis maybe answers his own question by wondering if it was an attempt to prevent depositor panic).
Thirdly, if there are large net redemptions from WMPs, where will that money show up? Writes Pettis:

None of which seem like particularly worthy destinations, if the PBoC is hoping its tactics will help improve the quality of credit allocation.
Again, the immediate facts prompt the question about how equipped the PBoC is to handle these situations, and whether the advantages it’s had in the past will continue to work at all, or even backfire.
Central banking is a confidence game. As Anne Stevenson-Yang of J Capital Research writes, the PBoC has to maintain the confidence of not just domestic financial participants; it also has to persuade speculative overseas capital that the country, and its currency, are still stable enough to invest in.
At the moment, the most likely end game of all of this is more realisation of misdirected investments that have resulted from the vast wave of credit growth over the past few years (which has in turn taken the place of export growth as China’s primary key of growth).

Recognising the misallocation — or being forced to recognise it — would in turn imply a steeper growth slowdown. Just look at how the sub-8 per cent growth has shaken global confidence. Nomura are now putting a 30 per cent chance of sub-7 per cent growth in H2.
Here’s another thought. Stevenson-Yang, who closely watches the amazingly rapid innovations in China’s shadow finance world, sees a risk that China’s feted huge foreign capital reserves could dry up.
That would be a shock.

 Cross-posted from Kate Mackenzie at FTAlphaville.

Deal with emerging markets volatility

Published on: in ,

Since the beginning of the year, emerging markets have been like cats on a hot tin roof.
Hot money is skittering out of foreign markets as countries from Argentina to Turkey have been clawed by economic and political turmoil. But even with heightened concerns about the prospects of developing countries, emerging markets should still be a part of your larger portfolio.
A combination of currency crises and the "taper" of the Federal Reserve's bond-buying program - possibly resulting in economic slowdowns - have triggered the exodus in emerging markets. More than $12 billion left emerging markets stock funds in January alone, according to EPFR Global, with bond funds in this sector losing nearly $3 billion last week alone.

While nearly every emerging markets fund has been nicked this year, some funds have been clobbered. The WisdomTree Brazil Real ETF (BZF.P) lost 90 percent of its assets between January 28 and 29.
A common strategy is to invest in countries that are not part of this rout. That means pulling money out of countries like Argentina, Brazil, Indonesia, Turkey and South Africa and moving into countries whose currencies are more stable. While that's easy for institutional investors or those holding country-specific exchange-traded funds (ETFs), it's awfully difficult for individual investors.
One consideration is to find a wider base of smaller, "frontier" countries that are not being impacted by the currency woes or the Fed's moves.
The iShares MSCI Frontier 100 ETF (FM.P), for example, has 81 percent of its portfolio in Africa and the Middle East, with only 13 percent in Asian emerging markets and 4 percent in Latin America. It's up 1.4 percent year to date through February 7 and gained almost 24 percent last year. It charges 0.79 percent in annual expenses.

HOW TO VIEW THE VOLATILITY
If you want to isolate trouble spots, you'll have to prune your portfolio to avoid trouble ahead.
The "Fragile Five" - India, Indonesia, Brazil, Turkey and South Africa - are vulnerable because of a plethora of economic and political problems. According to Neena Mishra, director of ETF Research for Zacks Investments in Chicago, you may need to do some incisive sorting.
Mishra says the most troubled countries have high current account deficits to GDP and short-term external debt to foreign exchange reserves ratios - "that is, countries that are dependent on foreign capital and are thus vulnerable to the Fed's taper."

But not all emerging markets are alike. Some have healthy economic outlooks and are worth holding. Mishra likes countries prone to "solid macroeconomic fundamentals, pegged currencies (to the U.S. dollar) and low correlations to developed markets." This group would include the Gulf states, Mexico, South Korea, Taiwan and Vietnam.

While it's tempting to cherry pick developing countries, is it practical to strip out the most troubled countries from your portfolio? Probably not, which means a general emerging market index fund might be too volatile right now - if that's a short-term concern.

A global fund that invests in both developed and emerging markets might fit the bill. The Vanguard Total World Stock Index ETF (VT.P), invests in a mix of mostly large companies with only about 8 percent of its portfolio in developing countries in Africa, Asia and Latin America.
Although it's down 3 percent year to date through February 7, the Vanguard fund gained 23 percent last year and costs 0.19 percent in annual expenses. It holds well-known companies that have a global presence such as Apple Inc (AAPL.O), Nestle SA (NESN.VX) and HSBC Holdings (HSBA.L).

Another way of dealing with the uncertainty of emerging markets is to embrace it as the cost of doing business as a long-term investor. Don't bulk up in any one country or region and invest across every continent - if you can afford to take the risk now.

What you will not be able to do with any global or emerging markets fund is to avoid ramped-up volatility this year. To dampen that concern, reduce your foreign exposure to no more than 20 percent of your portfolio or simply stomach the risk and hold for the long term.

Is It The Time to Buy Gold..?

Published on: Minggu, 09 Februari 2014 in , ,
Gold has been in a downturn for more than two years now, resulting in the lowest investor sentiment in many years. Hardcore goldbugs find no explanation in the big picture financial numbers of government deficits and money creation, which should be supportive to gold. I have an explanation for why gold has been down—and why that is about to reverse itself. I'm convinced that now is the best time to invest in gold again.

Gold Is the Alternative to Non-Convertible Paper Money

If you've been a Casey reader for any length of time, you know why gold is a good long-term investment: central banks are expanding paper money to accommodate the deficits of profligate governments—but they can't print gold. Since the beginning of the credit crisis, the world's central banks have "invented" $10 trillion worth of new currencies. They are buying up government debt to drive interest rates down, to keep countries afloat. The best they can do is buy time, however, because creating even more debt does not solve a credit crisis.

Asia Is Accumulating Gold for Good Reason

Since 2010, China has been buying gold and not buying US Treasuries. China's plan seems to be to acquire a total of 6,000 tonnes of gold to put its holdings on a par with developed countries and to elevate the international appeal of the renminbi.
In 2013, China imported over 1,000 tonnes of gold through Hong Kong alone, and it's likely that as much gold came through other sources. For example, last year the UK shipped 1,400 tonnes of gold to Swiss refiners to recast London bars into forms appropriate for the Asian market.
China mines around 430 tonnes of gold per year, so the combination could be 2,430 tonnes of gold snatched up by China in 2013, or 85% of world output.
India was expected to import 900 tonnes of gold in 2013, but it may have fallen short because the Indian government has been taxing and restricting imports in a foolish attempt to support its weakening currency. Smugglers are having a field day with the hundred-dollar-per-ounce premiums.
Other central banks around the world are estimated to have bought at least 300 tonnes last year, and investors are buying bullion, coins, and jewelry in record numbers. Where is all that gold coming from?

COMEX and GLD ETF Inventories Are Down from the Demand

The COMEX futures market warehouses dropped 4 million ounces (over 100 tonnes) in 2013. The COMEX uses two classes of inventories: the narrower is called "registered" and is available for delivery on the exchange. There are other inventories that are not available for trading but are called "eligible." I don't think it's as easy to get holders of eligible gold to allow for its conversion to registered to meet delivery as the name implies. Yes, that might occur, but only with a big jump in the price.
The chart below shows the record-low supply of registered COMEX gold.
Meanwhile, SPDR Gold Shares (GLD), the largest gold ETF, lost over 800 tonnes of gold to redemptions. At the same time, central banks have provided gold through leasing programs (but figures are not made public).

Why Has Gold Fallen $700 Since 2011?

In our distorted world of debt-ridden governments and demand from Asia, gold should continue rising. What's going on?
The gold price quoted all day long comes from the futures exchanges. These exchanges provide leverage, so modest amounts can be used to make big profits. Big players can move markets—and the biggest player by far is JPMorgan (JPM).
For the first 11 months of 2013, JPM and its customers delivered 60% of all gold to the COMEX futures market exchange; that, surely, is a dominant position that could affect the market. By supplying so much gold, they are able to keep the price lower than it would otherwise be.
A key question is why a big bank would take positions that could drive gold lower. Answer: Banks gain by borrowing at zero rates. But the Federal Reserve can only continue its large quantitative easing programs that bring rates to zero if gold is not soaring, which would indicate weakness in the dollar and the need to tighten monetary policy. Voilà—we have a motive. Also, suppressing the price of gold supports the dollar as a reserve currency.
The chart below shows the month-by-month number of contracts that were either provided to the exchange or taken from the exchange by JPM. For a single firm, the numbers are large, but the effect across all gold markets is greater because so many gold transactions follow the price set in the paper futures market.
What jumps out from the chart above is the fact that while JPM had been selling gold into the futures market for most of the year, it made a major shift in December, absorbing 96% of all gold delivered.
That is a radical shift and, I believe, an indicator that JPM's policy has shifted. In my opinion, their deliveries of gold were suppressing the price during 2013, but now their policy has shifted in a way that will support gold going forward.
This leaves a vital question unanswered: Why? Has the motivation to suppress the price of gold gone away? Not likely, and we may never know the full truth of what is happening, but I suspect the main reason for the shift is that they have done their damage. The $740 drop from top to bottom, a 39% decline, has shaken confidence in gold as a financial "safe haven" among many investors, especially those new to precious metals. At the same time, continuing to lean on gold at this point could become very costly. JPM delivered $3 billion (about 2 million ounces of gold) into the market up to December in 2013, and may not have ready sources of gold to keep that up. It is dangerous to put on big short positions unless you have gold or some future gold deliveries as a hedge.
By now, everyone knows of the shortages in the gold market; JPM has to be as aware of that as the rest of us. It just isn't safe for them to continue to lean on the market. Being aware, it looks like they are taking the bet that gold will rebound, so they could do well on the other side of the trade.
Another confirmation of the shift by big banks comes from data provided by the US Commodity Futures Trading Commission (CFTC) that shows the net positions of the four biggest US banks in the futures market. There has been a dramatic change from being short the market to now being long.

Crisis Brewing in the Gold Market

Germany claims to hold 3,390.6 tonnes of gold, about half of which is held by foreign central banks. Over a year ago, they announced a plan to repatriate 674 tonnes of gold from France and the United States. The US said it would comply, but told the German government that it would have to wait seven years for all the gold to be delivered. The news out last week was that after a year, Germany had only obtained 37 tonnes of its gold—and only five of them were from the US. That is a trivial amount (only 160,000 ounces).
So why can't Germany get its gold? Explanations of having to melt down existing gold and recast it just don't make sense. The most logical conclusion, and the one I've come to, is that the United States simply doesn't have the gold it says it has—neither Germany's nor its own.
Of course, the US government isn't going to admit that there's a problem, but I say there is.
More evidence: JPMorgan's COMEX warehouse contained 3.0 million ounces of gold in 2012, but that had dropped to 0.5 million ounces by mid-2013. Its registered inventories are a razor-thin 87,000 ounces. These kinds of swings are indicative of shortages and instability.
Further, JPMorgan sold its gold vault in New York City—located next to the Federal Reserve's vault—to the Chinese. The banking giant also just announced the sale of its commodities trading business (although it may not have sold the precious metals part of that business). Perhaps they were concerned about new regulations of banks with deposit insurance from the government.
In another relevant development, Deutsche Bank recently surprised the gold community by quitting its position on the committee that sets the London a.m. and p.m. fixings. This came a few weeks after a German regulatory body called BaFin started investigating how these prices were set. BaFin also gave an indication that the process appeared worse than the LIBOR fixing scandal, which resulted in billions in fines.

Putting Inventories and Traders Together

The futures market looks fragile to me. The basic problem is that there are many more transactions that could put a claim on gold than there is gold registered for delivery in the COMEX warehouses.
The chart below gives a dramatic picture by simply dividing the open interest of all futures contracts by the registered inventories. The black line at the bottom shows the big jump in the ratio as the registered inventories declined. There are 107 times more open-interest positions than there is registered gold.
The futures markets operate on the expectation that only a few big traders will demand delivery. JPMorgan has shown that it is in a position to demand almost all (96%) of the gold for delivery. They are big enough that they could cause a collapse of the market, if they were to force delivery of more than is available. They know better than to do so, though, and I would guess that they will just manage to try to gain back what gold they have been delivering over the last several years. That should support the price of gold.

Gold Will Rise, and It's on Sale Now

Now is the time to stake your claim in gold. In the long term, we know that paper money will become worthless; in the short term, the biggest seller has just shifted its actions to becoming a buyer. That makes this a good time to accumulate gold and gold mining stocks before a major shift upward in price.

China's Impact on Gold Prices in 2014

Published on: Jumat, 07 Februari 2014 in , , , , ,

Gold prices, as yet, remain unmoved by the Chinese New Year of the Horse...
WHAT should gold investors and traders expect from the Chinese New Year, marked with near-month long celebrations from tomorrow? asks Adrian Ash at Bullionvault, now in Chinese.
First, expect yet more press coverage of housewives and single young men buying gold hand over fist to mark the start of the Year of the Horse. 
Expect also to learn that China is (drum-roll please) the world's No.1 gold miner and No.1 consumer, but not why (the long collapse of South African output, and the 2013 collapse of Indian imports thanks to the government's attack on the trade deficit).
The lunar New Year marks an auspicious time to buy gold, you'll be told. It also marks a retail frenzy, pictures from Shanghai and Shenzen shopping malls will show. 
But will that push gold and silver higher? 
Nope. The New Year move in world prices would have already come if it mattered, before the celebrations, not when shoppers hurry home with their treasure. Sure, wholesale demand from Chinese stockists did indeed seem to coincide with January 2014's rising bid for gold. But in terms of China's impact on world gold prices, the inflows themselves would have come earlier, giving importers time to arrange and land new shipments. Which they did. Only prices fell.
There was a "rapid rise in local inventory in August-November 2013 by local traders," as consultancy Metals Focus notes, "in order to avoid running out of stocks before the Chinese New Year." November and December then both saw gold imports through Hong Kong, the major point of entry, fall below 100 tonnes per month (net of re-exports). Lower Chinese import demand did coincide with a nasty retreat in the world gold price, back towards the three-year lows set in mid-2013. But whatever relationship China's import demand had on world gold prices, its impact was again far from simple. Because premiums for gold delivered from the Shanghai Gold Exchange, over and above world prices, again spiked as gold hit $1180 per ounce, rising to $20 after hitting $30 per ounce at the same mid-summer low.
Might that Chinese premium reflect the impact which China would have on gold prices if only the world followed Shanghai as its benchmark rather than London? If so, then the world's No.1 mining nation and physical buyer would still have done little to stem 2013's slump in gold prices. The end-June premium would scarcely have kept prices above $1200 per ounce at the low. And yet China's importers bought gold hand over fist to feed its wholesalers who met unprecedented household demand.
What gives? The simplest explanation, we suggest, is that final end-consumer gold buying doesn't move world prices. Not from people who buy gold because it is gold. They tend to want more when prices fall, and vice versa. The people who count are instead those who buy gold because it isn't anything else.
Witness the loss of India, former world No.1, in mid-2013. Driven by religious, cultural and social forces running back to pre-Roman times, Indian households were on track for a record year as prices slumped last spring. Because prices were slumping. 
That huge call on physical gold then got cut off from the world market by the government's anti-import rules (aimed at reducing India's massive trade deficit). Yet the back-half of 2013 then saw sideways price action overall. Gold ended December back where it was at the end of June, which was when India's import restrictions (effectively a ban) really got started. 
Now, just as the loss of India failed to pull prices lower (and even with India locked out of new imports ahead of Diwali, its own peak demand season), so China's New Year surge won't reverse much of last year's slump. Not yet.
Money managers in the developed West continue to drive, moving prices by pouring in cash (or sucking it out) that would otherwise go into other, financial assets. Remember how last year's crash was all done by midsummer? Seventy per cent of the 550 tonnes of gold leaving the giant New York-listed SDPR Gold Trust in 2013 was gone by end-June. Speculators in US gold futures and options had by then slashed their net bullish position by four-fifths, cutting it to what proved the low for 2013, equal to barely 100 tonnes.
What might give China's demand to buy gold more impact on prices this year? Analysts are split either way. One calls it "make or break" for gold in 2014. But they are all watching what the world's new No.1 is doing very closely.
And with Western money managers cutting their interest in gold to levels last seen at the bottom of the previous 20-year bear market, the sheer weight of China's wealth might start to count soon. After all, per head of the population, the world's second-largest economy creates GDP more than four times the size of India's, the former gold No.1.
What's more, China's fast-growing middle-class is set to enjoy a new, broader range of financial services products to choose from. Late 2013's third plenum of the current politburo made "market-based reform" a top priority.
Some gold analysts think wider financial choices mean Chinese investors and households will buy less gold. That's a guess. But it would most certainly mean people stop buying gold for its own sake, and can start buying (or selling it) because of what they expect will happen to other, financial asset classes.
Already, the growth in China's gold demand since deregulation began in 2002 has been extraordinary:
  • China's GDP has grown four-fold over the last decade; private gold demand by value has risen 15 times;
  • On top of being the world's No.1 gold mining nation, China almost doubled its net imports in 2013 to more than 1,000 tonnes;
  • That's five times the weight the country consumed as a whole in 2002, and pretty much matched the outflow of metal from Western gold funds and private accounts.
Why did 2013 gold prices sink then, pulling silver down too?
Because China's private households remain, in the main, a gold consumer, not investor. So they are price takers, not price setters, as leading analyst (and now Hong Kong-based) Philip Klapwijk put it in this presentation in December.
Speculation (whether from Western journalists or analysts) that China's surging 2013 demand included gold buying by Beijing's central bank still leads to the same conclusion. The People's Bank would a price taker, and happy to be so when prices drop 30% in a year. If only it were a buyer. Which on its own balance-sheet, and in its public statements (repeating a long-stated desire not to drive prices higher...hurting would-be household buyers...by unleashing Western speculative dollars into the market), it made plain it wasn't in 2013. The PBoC added no gold to its reported reserves for the fourth year running.
Still, looking back to the last adjustment in 2009, that's not to say another state agency didn't buy gold in 2013, and now holds that metal ready for the PBoC to take into reserves sometime in future.
Equally uncertain, but a Beijing-based rumor instead, is that the politburo has opened up China's gold-import quotas to foreign banks for the first time. Letting HSBC and ANZ Bank import gold won't necessarily support or grow the level of gold demand this year. But it plainly shows the Communist regime is serious about liberalizing China's gold market, and about ensuring future supplies.
Now why would the bureaucrats in charge of the world's second-largest economy want to do that?
Back to this weekend, and Chinese New Year will likely mark the peak season for household gold buying. The Year of the Horse starts Friday 31 January 2014, but the lunar cycle can push Xīnnián back to late February. And by value, China's private end-consumer demand over the first 3 months of the Western calendar year has set new quarterly records 11 times in the last 12 years.
At current prices, a new record for the first quarter of 2014 would see Chinese households and investors buy more than 385 tonnes of gold. And yet here we are, with gold recovering a mere 7% from its second trip to $1180...a level first seen on the way up in December 2009. 
Yes, public statements from People's Bank officials have put the gold market at the heart of China's broader financial reforms. So both at the household and state level, China's affinity with physical gold looks set to keep growing. And yes, Beijing also continues to open up its domestic gold market, inviting foreign banks to join the Shanghai Gold Exchange and now (perhaps) inviting a couple to start shipping bullion into the Middle Kingdom as well.
That would cut both ways, bringing more influence to the global market from the world's No.1 gold miner and end-consumer economy. But there's no rush. The PBoC remains wary of encouraging Western speculators to boost prices on word that it's buying for China's reserves. Instead, Beijing continues to allow and encourage private households – whose demand doesn't as yet touch the world wholesale price – to accumulate growing quantities at record values.
If you feel that's smart long-term thinking, then it might also be smart to think about holding a little of your long-term money in the same stuff. Certainly here at Bullionvault, Chinese speakers the world over offer a market we'd be pleased to assist.

U.S. trade deficit widens 12% to USD38.7 billion in December

Published on: in ,
The U.S. trade deficit widened significantly in December, as exports dropped 2.2% and imports rose 1.6%, official data showed on Thursday.
In a report, the U.S. Bureau of Economic Analysis said that the U.S. trade deficit widened to a seasonally adjusted USD38.7 billion in December from a deficit of USD34.56 billion in November, whose figure was revised from a previously reported deficit of USD34.25 billion. Analysts had expected the U.S. trade deficit to widen to USD36 billion in December.

U.S. exports fell 2.2% to USD191.29 billion in December, while imports rose 1.6% to USD229.99 billion.
Following the release of the data, the euro added to losses against the U.S. dollar, with EUR/USD shedding 0.31% to trade at 1.3491.

Meanwhile, the outlook for U.S. equity markets remained higher. The Dow Jones Industrial Average futures indicated a gain of 0.25% at the open, S&P 500 futures pointed to an increase of 0.2%, while the Nasdaq 100 futures indicated a rise of 0.3%.

China hates to back down from a fight

Published on: Selasa, 04 Februari 2014 in , ,
Good economic sense may not stop China from retaliating against Japan’s devaluation of the yen 

China hates to back down from a fight, especially against its most reviled opponent, Japan. But while the two countries trade political barbs regularly, they are hardly at odds economically. The two countries cooperate in many industries and occupy different places in global supply chains with Japan operating in higher-value sectors befitting a developed country and China still geared toward less complex exports, such as more basic electronic components, and product assembly.
However, the countries may now be on an economic collision course. Japan set out to massively devalue the yen at the end of 2012 as part of an effort to end more than a decade of economic stagnation and deflation. Since the currency first began its march downward in October, the yen has weakened roughly 22% against the renminbi and US dollar.

Japan’s new Prime Minister Shinzo Abe has continued to back devaluation efforts after his election in December. The value of the yen will likely continue to fall: Bank of Japan’s massive monetary easing announced April 4 will inject as much money into the financial system as needed to hit 2% annual inflation. The weaker currency appears to be already working its magic on the economy. The countries nagging trade deficit declined, particularly in relation to China, and incoming investment increased in February to create a current-account surplus.

China itself has long been under pressure from the US and others for maintaining currency controls and allegedly keeping the value of the renminbi artificially low. But despite the hypocrisy, Chinese officials have blasted the devaluation as passing off the country’s economic ills on its neighbors and warned that Japan should not start a currency war.

Analysts say China may slow or reverse the gradual appreciation of the renminbi in retaliation, although any moves to devalue the yuan have been minor and short-lived to date. Beijing is undoubtedly displeased with American hypocrisy as well: While the House of Representatives has launched a new bill to pressure China into allowing the yuan to appreciate, lawmakers have hardly reacted to Japan’s much larger currency intervention.

Chinese leaders may not like it, but this is one battle in which they should back down. All currency manipulators are not created equal and examining Japan’s justification for devaluation spells out clearly why the world is correct to ignore the yen and maintain pressure on China.
The Chinese populace generally bristles at any perceived affront by the Japanese as psychological wounds from World War II continue to fester. The more China makes this economic problem into a political dispute with Japan, the less able Beijing will be to back down. If leaders go down that road, politics may yet trump good economic sense.


Why we fight
Few countries look good in the currency debate, and there is more than enough hypocrisy to go around. “With central banks in advanced economies themselves pursuing unconventional monetary policies that appear to deliberately weaken their domestic currency, who is in a position of moral authority to mediate currency tensions?” asked investment bank Citi in a January note when the currency battle was just taking off.

While there are hardly ethical absolutes in currency manipulation, Japan has certainly done enough economic penance to gain some moral authority to take action. The country has suffered bouts of deflation since the 1990s when its economy overheated and stalled coming off the booming ’80s.
Japan has borrowed and spent to hold back already large declines in nominal GDP. That path is not sustainable as Japan’s debt has now ballooned to more than 200% of GDP.
After decades of economic stagnation and rising debts, Japan simply needed to do something to escape this spiral. The Bank of Japan and the country’s leadership sees its massive monetary easing as a way to boost inflation, pushing up nominal GDP growth while pushing down the value of the yen.

What’s China got to do with it?

The Chinese worry that Japanese devaluation could affect them on several fronts. First, it could damage China’s export competitiveness with Japan. However, this concern is likely overplayed, since China and Japan make few of the same products. According to a Citi report in January, Korea stands to lose out most because it competes with the Japan on cars, followed by Taiwan and Singapore which will be hurt by cheaper Japanese electronics.

Second, Chinese may worry that Japanese inflation will push up China’s own inflation. As HSBC phrased it in a note immediately after Japan’s central bank announced its monetary easing scheme: “This is not just a Japan story: Liquidity will pour into regional financial markets already drowning in the stuff.” Money generally flows into emerging markets when inflation rises as investors seek out higher returns. But with China still firmly in control of cross-border capital flows and its exchange rate, this threat too seems overplayed.

Last, but perhaps more important, is not how yen devaluation actually affects China but how it makes China look. The US continues to put pressure on China to allow the renminbi to rise, including the bill currently being considered in the House. The Obama administration did criticize Japan for devaluing its currency in its semiannual report on exchange rates released Friday, but the closer relationship and lack of perceived economic threat compared to China means that Japan is unlikely to see similar vitriol in Congress. With the US and Europe also in the midst of monetary easing, which pushed down the values of their currency, Chinese leaders likely think they’re being unfairly singled out.

China may be right on that account. However, that’s not sufficient reason to oppose these devaluations. The dire straits that Europe, Japan and the US are now facing demand that these economies do something to restore growth. In the end, if easing and devaluation helps these economies back on their feet, the global economy as a whole stands to benefit – including China. These efforts are simply a necessary short-term evil. In the meantime, China’s economy remains relatively robust, giving it little reason beyond political posturing to justify holding down its currency.

Playing to a Chinese audience

For now, China will likely continue to complain but take only token actions to retaliate against Japan. The risk remains, however, that Chinese rhetoric could turn into a full-blown currency war. If China reverses on yuan appreciation and virtually all of the world’s largest economies are devaluing in unison, it could lead to devastating global inflation. But the more Chinese leaders turn the discussion into an us-versus-Japan debate, the less it can back down without looking weak to a domestic audience.
Beijing will likely keep their rhetoric on currency to a low roar unless another conflict with Japan arises – a very real possibility if tensions over disputed islands in the East China Sea flare up again. Those tensions over the Diaoyu/Senkaku islands drew mass boycotts and vandalism of Japanese companies in the mainland late last year. If such fierce anti-Japanese sentiment rears its head again, China will be even less able to back down in any respect, including on the currency, or risk appearing weak to its citizens.
Therefore, all sides should seek to maintain the current status quo. China can continue to make remarks and take the moral high ground on the currency. The US should keep up mild pressure on China to continue allowing the yuan to appreciate. Japan, for its part, should seek to diffuse tensions with China in the East China Sea in the midst of its devaluation.
All this will allow China to maintain face, which will be the best way to keep the peace on currency. To some observers, China’s lack of retaliation may be seen as conceding ground to Japan. But Chinese leaders likely won’t consider it as backing down against its historic enemy, so long as the Chinese public doesn’t see it that way.

China's Stealth Move in the Currency Wars

Published on: Senin, 03 Februari 2014 in , , ,
Five years on from the Great Financial Crisis and whilst it might feel like little's changed for us as individuals, different nations and their central banks are engaged in heated currency wars. In a race for exports and to inflate away huge debts it often looks like a game to print as fast as you can.
However, amidst all this China is stealthily pursuing another strategy, little noticed by most in the West.
Whilst ensuring her banking system has sufficient liquidity, China is quietly accumulating stunning amounts of gold bullion. The Chinese authorities are also actively encouraging their citizens to stock up on gold bars too. Some of the most powerful politicians, bankers and academics in China are overseeing China's gold plan.
China has identified gold as a strategic financial asset and is acting on this conviction.

Explaining China's gold fever

Like many exporting, mercantile nations China has been building up large reserves in other currencies, most notably in US dollars. Like other holders of dollars China is vulnerable to Federal Reserve money printing, which devalues her hard earned national savings. After experiencing such devaluations in her savings, and with the long-term goal of launching the yuan as a global, reserve currency, China has naturally looked for alternative savings, less affected by inflation. Hence the focus on gold.
This is not something China has done in a knee-jerk reaction after the crisis of 2008, although this phenomenon has got a lot more impressive to behold since then.
In the late 1990s China was already paving the way for more use of gold in the Chinese economy and banking system. In the early 2000s things started to hot up, before even greater developments over the last five years really attracted attention. This infographic shows the trend evolving.

What's the end game for China?

In the short term China is looking to safeguard the value of her reserves, whilst in the medium and long-term she is looking to grow beyond American and Western financial power.
To meet her goals in the short-term China has not just been buying gold but also mines and mineral interests around the world. She wants to own real assets during a time of heavy currency debasement.
In the longer term gold is a crucial part of her strategy too.
Understanding the power and privilege of owning the world's reserve currency - something the Americans have enjoyed for over 50 years - China is looking to make the yuan a challenger to the US dollar. China wants a future where more trade is conducted with her currency than the dollar and to achieve this she needs to make her own currency the more attractive option to use.

Replacing the dollar

To make the yuan more attractive than the dollar China needs investors and speculators around the world to believe the yuan is safer and sounder.
China can achieve this by printing less and restricting supply of her currency, making it relatively more attractive compared to other more debased alternatives.
China can also back the yuan with gold, as the British pound and US dollar were for great stretches of their dominance. Holders of yuan can then go to the Chinese central bank and trade it in for gold bullion if they think supply of the currency is not being managed responsibly enough. This is why many in the gold market believe China is piling up gold in the vaults of the Peoples' Bank of China.
China is going back to the old-school when it comes to money.
Although this trend is something much commented upon in niche, gold market circles, it's amazing how little of the wider public are aware of what China is really up to here.
China has identified gold as one of the trump cards in the currency wars. She's now hard at work making her trump cards count.

Why China wants low Gold prices?

Published on: in , , ,
One question that has not been asked sufficiently is, “How can China buy well over 2,000 tonnes of gold without sending the gold price rocketing?”
In the U.S. people believe that the gold price will fall even further in 2014 despite indications that Chinese demand will continue at current high levels if not rise even more. This is because U.S. investors have been selling gold to move into the rising equity market. With the developed world focused on events in its own part of the world it is assumed that their influence will dominate the financial world including gold. But this ignores events in the emerging world and their hunger for gold.
With ‘normal’ annual supply to the gold market around 4,000 tonnes annually you would have thought that such a heavy Chinese demand would have propelled gold prices higher. But it didn’t. We have explained why in earlier articles last year. We will write more about this in the future, but in this article we will look at just why the Chinese prefer to see low prices continue.

There are two primary reasons why they want low prices to continue:
1)   It encourages Chinese retail demand. - With Chinese middle class numbers set to rise considerably as the government there pushes their growth emphasis to the service sector, more and more Chinese will save and a good proportion of that will go into gold. So low gold prices will accelerate the volume of gold bought. Higher prices lower the overall volume of gold bought. The nouveau riche of China will invests in relation to the size of their disposable income, so the more gold they can afford with that, the greater the total volume bought.

2)   It has increased the supply of gold to China. - Low gold prices has discouraged developed world demand and encouraged more selling of gold in 2013, making a greater volume of gold supply to be made available for the Chinese to buy as it implies that the rest of the world’s gold demand remains subdued. Add to this is the choking off of Indian demand since August 2013, taking the now second largest gold buyer out of the market. Over a year this would remove 800+ tonnes of demand from the market.

As simple market theory tells us, the greater the demand over supply is, the higher gold prices will rise. So how can one buy gold in huge quantities without driving up gold prices? The answer has to be by buying gold outside the market and not buying in the market where gold prices are set. Another answer is to ensure that where one does buy in a market where prices are set, one buys “on the dip”. In other words don’t buy when prices are rising, buy when they are falling and only take the gold that is on offer in the market.

Market Fragmentation

We know that China has and is buying gold mines and can direct the gold of those mines straight to China.
We also know that many gold producers, such as South Africa, are not bound to sell their gold to the London market or direct it to any market [such as they sold to the ‘gold pool’ in the seventies] in particular but can sell to anyone they want.
Traditionally, bullion banks made buying commitments to certain mints and producers to supply gold on a long-term basis, but today they do not have the same hold on newly mined gold, which can go to any solid buyer. A client like a non-banking Chinese importer for large quantities over a lengthy period is as attractive a client now as the bullion bank. 

The price paid to the supplier is referenced to the market prices at the time of delivery. Because the gold does not pass through the London gold market it no longer plays a part in determining prices. The more gold that is bought that way [off market], the smaller the London/New York market becomes.
This leaves market like London and its five bullion banks pricing gold on the basis of only part of the global market, so not truly reflecting global demand and supply. If both demand and supply in the traditional markets, such as London, is lackluster the gold prices set there will continue to look weak, despite the massive and rising demand elsewhere.

Indian demand is routed through London, so the loss of such a big buyer knocked the stuffing out of London’s demand. Add to that U.S. selling [also routed through HSBC to London] and it is no wonder that prices fell in 2013. Should Indian demand return once more then gold prices will turn higher.
The loss of traditional demand from India and the additional supply of gold from the U.S. has supported falling or stable low gold prices in London and will continue to do so, ignoring Chinese demand.

We have no doubt that China will continue to buy in a way so as to be a neutral influence on gold prices in 2014.

Agreement between the U.S. and China for lower gold prices?

Some commentators believe there is an agreement between China and the U.S. to suppress gold prices. It is a matter of history that the U.S. does not want gold to be seen as money, but wants the world to believe that the dollar is. China is moving towards elevating the Yuan to a position of a global reserve currency. It appreciates the monetary turbulence that this will bring as the Yuan challenges the dollar and becomes part of a multi-currency reserve currency system. That’s why it is buying gold as a factor that will give the Yuan global credibility. China, once it has acquired a certain level of gold reserves [it will keep increasing them after this point is reached], has every interest in seeing the gold price rise to a point where it is a reflection of true value, whereas the U.S. does not.
Consequently, the two do not have the same objectives or interests as the other. Hence, there can be no agreement between the two to suppress gold. Rather, China is taking advantage of the current state of the gold market and the persistent selling of gold from the U.S. based gold Exchange Traded Funds to acquire the gold that is being sold ‘on the dips’, so as to not drive gold prices higher.

ANZ revise their forecast for the pipeline of potential major projects down

Published on: Rabu, 29 Januari 2014 in , , ,
  •  
  • Revises lower their forecast for potential major projects pipeline in Australia
  • 2014 to 2016 revised to A$280bn from A$312bn (prior estimate was in March 2013)
  • Have upgraded their capital expenditure projection for projects either committed to or already under construction to from $160bn to $180bn (citing both cost increases and  changes in the timing of
ANZ says further:
  • state governments are signalling their intention to increase infrastructure investment
  • A number of large projects marked to proceed, which should be supportive of activity from 2015 onwards
  • Also, forecast a sharp rise in resource exports, to contribute 1% to GDP growth annually in coming years

How Germany is Killing Europe

Published on: Senin, 13 Januari 2014 in , , ,

Germany is flat-out waging economic war on its fellow EU countries…
The euro’s persistent strength has been bizarre. It does not make a lot of sense in light of Europe’s overall challenging economic conditions. This is partly because the ECB (European Central Bank) is incompetent. As Mark Blythe has observed, the ECB is not a “real” central bank. It is actually a currency board in drag, meaning the ECB can do some of the things a real central bank can do, but not the most important things.
Furthermore, many  assume that a strong currency is a sign of sensible monetary policy. But this is not always the cause. It is a misread of macroeconomics, overly focused on surface level interpretations – like the false idea it is always good to save and cut back on debt. These things are good in general overall terms, but there are certain situations where saving and cutting back on debt can actually shrink the size of your economy, and make your relative debt load even worse! (Macroeconomics can be weird.)


At any rate, Germany is a country unlike any other in the euro zone. The German psyche is historically shaped by two things: A passionate hatred of inflation and a laser-like focus on high-margin exports. (Think high end industrial equipment, BMWs and Mercedes, chemical processes and so on. Germany’s export mix is very similar to Japan’s.) Because Germany is so different from all the other countries in the euro zone, their solution to the financial crisis – “become more like us, be more German” – never actually made sense. When Germany tightens its belt and keeps costs down, this helps the German economy – because lower costs contribute to price competitiveness, which helps Germany pump out high-margin exports. But Greece, Spain, Portugal et al don’t have meaningful exports to speak of.

As Mark Blythe has put it (paraphrase): “What is Greece going to do, start making Audis? And if they did, who would buy them?”

Germany’s low inflation, cost-control economic solutions, in otherwords, are good for Germany specifically, because the Germans are so good at exporting. Low inflation is also a key consideration for a high-margin exporter… because again, it keeps you competitive. But this medicine is absolutely terrible for all the periphery countries. When your economy is saddled with an albatross of debt, and you are flirting with outright deflation – Greece recently posted the most deflationary numbers since records began, back in 1960 or so – German-style policy can kill you.

And this is exactly what is happening. The periphery countries are slowly being killed by creeping deflation and Great-Depression-like unemployment levels…
So on one level, the strong euro is a function of Germany, as the big dog in the mix, running monetary policy that is killing the periphery countries… and the periphery countries simply taking it. “Not our problem,” the Germans might say. “They shouldn’t have borrowed so much in the first place.” But do tell, Germany, who lent them all that money in the first place? And what did the periphery countries do with it? In large part they bought Audis, BMWs, espresso machines and the like… things exported by Germans. In sum, one can argue Germany has waged “war by other means” on its counterparts in the EU via economic dominance and ill-fit monetary policies. The wealthy Germans lent a ton of money to the sad-sack peripheries… took the profits when the periphery countries used that borrowed money to buy a bunch of “stuff” from Germany (via import imbalance)… and now that the periphery countries are choking on the debt, Germany owns them, psychologically and fiscally.

It is a good thing the broad masses do not actually understand macro. If they did, there would be many more riots in the streets. (Europe already has rioting in the streets, of course… but if the extent of this were known it would be worse…)
But wait. As Ron Popeil liked to say, that’s not all. Germany is also waging economic war on the Italians and the French! How so? Because Italy and France actually have competitive manufacturing industries that can export. Unfortunately for the Italians and French, however, these manufacturers are not as competitive as the Germans. Because Italy and France cannot match Germany, they must charge more to make a widget and still show a profit. This means that an expensive currency (the euro) hurts Italy and France’s ability to globally compete. Germany does not mind a strong euro, however, because it is one of the best in the world at what it does. Not only can German exporters tolerate a strong euro… they actually like it, because it lets them take manufacturing business away from the lesser equipped Italians and French!
We do not hate Germans by any means. (Some on the Mercenary team have German roots, and we have colleagues and friends in Berlin.) But the screwed up nature of what is happening in Europe right now nicely illustrates why ill-thought currency union among a wholly disparate group of countries, solely for the idealistic political purpose of avoiding war, was one of the worst ideas ever conceived. Lumping Germany in with all the others is like having a Friesian draft horse on a wagon-pulling team with a bunch of Chihuahuas. And whether it does so intentionally or completely by accident, Germany really is waging economic war on its fellow euro-using countries right now, in ways that will produce dramatic and dire results when things come to a head.

As Charles Gave of research house Gavekal has pointed out, the euro’s uncanny strength can be assigned to Germany too in respect to export foreign exchange impacts. Germany sells a hundred-billion-plus worth of exports to the world, with most of that inventory sold in dollars (the currency of international trade). Germany then trades those dollars for euros (because the Germans have little interest in buying US treasuries, like the oil exporters or China). That inflow from dollars back to euros thus pushes the euro higher… which is just fine by Germany, because it allows yet more manufacturing business to be taken from the Italians and the French, who get priced out of the game.

First and foremost we look at the world through a pragmatic lens, to try and spot where money can be made (or where risk is building). But we are also human beings, and cannot help but note the slow tragedy of what is unfolding. The toll taken on tens of millions of suffering Europeans is not an abstract thing. Suicides have spiked in the periphery countries. Many millions of youth in Greece, Spain and elsewhere – with youth unemployment levels well above 50 percent – are despairing of ever having a good job, ever, possibly assigned to menial labor and/or low value minimum wage type work for the balance of their lifetimes.
Imagine if that were the fate of your own children – not just to clean toilets or some such thing, but to do so in a foreign country where they were looked down on by the locals, because your own country cannot even offer up service jobs. Again from a broader perspective, looking beyond trading, this is the stuff that frightening political uprisings are made of. The ghost of Francisco Franco (a horrible fascist leader) is already stirring in Spain. The Golden Dawn, a neo-Nazi party in Greece, is gaining in popularity. And this is perhaps the greatest irony of all: While the euro was essentially dreamed up to bring Germany into the fold and head off the prospect of future wars, euro-driven policies are doing more to raise the prospect of future hot war – by laying a groundwork of shocking pain and suffering – than anything else has done.

RPT-UPDATE 1-India, Indonesia's push for dollars helps send Asian FX reserves to record high

Published on: in , , ,
Jan 10 (Reuters) - As the U.S. Federal Reserve winds down an era of easy money, Asia has built up record-high currency reserves, as countries especially those most dependent on foreign capital inflows amass dollars in case investors cut and run.

Foreign exchange reserves in 13 Asian countries excluding Japan tracked by Thomson Reuters are expected to have risen 3.2 percent to a record high $6 trillion in the October-December quarter, marking a near 12 percent increase for the whole year.

The estimate includes an expected 3.8 percent rise in China's FX reserves to an all-time high of $3.8 trillion, or a whopping 19.5 percent surge for the year. The country will report numbers in coming days.
The rise in reserves in the last quarter was led by India and Indonesia, according to data this week, providing comfort about two countries dependant on foreign money to help narrow their traditionally hefty current account deficits.

Both took further steps this week to bolster their defences, with Indonesia raising $4 billion via a bond sale, and India expanding a currency swap agreement with Japan to potentially as much as $50 billion from $15 billion after going on a massive drive late last year to raise money from abroad.

Yet analysts say both may need to do more to avoid the type of painful measures, including interest rate hikes, they undertook last year when foreign investors raced to the exits amid fears the Fed was about to start winding down its money-printing stimulus programme.

That is especially true for Indonesia, given its current-account deficit hit a record 4.4 percent of gross domestic product in the second quarter of 2013.

"Recent global bond issuance should help to shore up market confidence, but Indonesia still needs more funds either from sovereign or domestic bonds to cover its current account deficit," said Rangga Cipta, an economist for Samuel Sekuritas in Jakarta.

"And as risks from global trends and inflation continue to be seen ahead, BI (Bank Indonesia) still needs to increase the benchmark rate in the first half."

Although Indonesia's reserves rose by 3.9 percent in the October-December quarter to $99.4 billion, the biggest rise since the first three months of 2011, it still saw reserves fall 12 percent for 2013, after hitting a more than 2-1/2 year low in July.

Indonesia's reserves cover only around five months of imports and around 1.6 times short-term debt, among the lowest in the region, according to J.P.Morgan estimates last month.
Jakarta has also sought additional cover through currency swaps with other Southeast Asian countries as well as Japan.

STAYING ON GUARD
India is also seen as vulnerable, although confidence is improving after FX reserves surged 7 percent in the October-December quarter to $295.71 billion, the biggest quarterly increase since January-March 2008.
India on Friday said FX reserves in the week ended on Jan. 3 fell to $293.11 billion.
The big improvement came after lenders took advantage of central bank subsidies to raise $34 billion from deposits and capital abroad. Worries about its current-account deficit and foreign outflows drove the rupee currency down by as much as 20 percent to record lows last year.
Policymakers in India and Indonesia have pledged renewed vigilance after the Fed said in December it would start to reduce monthly bond purchases by $10 billion a month.
Both countries were forced to take strong measures last year after their currencies tumbled, with Bank Indonesia raising interest rates by a total of 175 basis points since June, although it held policy steady on Thursday.

Despite the hikes, foreign investors still ended selling $1.8 billion worth of shares in Indonesia, according to Credit Suisse estimates, and 53.31 trillion rupiah ($4.37 billion) in government bonds, according to the finance ministry.

Meanwhile, the Reserve Bank of India raised short-term rates in June. Although a rebound in the rupee has allowed it to wind down those emergency steps, it had to raise interest rates by 50 bps to deal with surging inflation.

RBI officials say continuing to build their FX reserves will be a priority, especially by buying dollars at advantageous rates.

"There is a change in strategy now. The current strategy is to build reserves whenever there is an opportunity so that whenever required we can protect the currency," said an Indian policymaker who declined to be identified talking about the country's FX strategy.

Malaysia remains another source of concerns for analysts.

Foreign investors have big holdings in its markets, while the central bank has traditionally been reluctant to intervene even as currency reserves fell 3.4 percent to $134.9 billion last year, near their lowest in 1-1/2 years.

These worries contrast with the rest of the region, where reserves in South Korea and Taiwan hit record highs, and where the prospect of currency appreciation against the slumping Japanese yen had been a stronger concern.

Although South Korea has been suspected of intervening in recent months to prevent the won from appreciating too much against the yen, analysts say that could change now that the dollar has strengthened after the start of the Fed taper.

"It's hard to expect the won to keep rising against the dollar given the external uncertainties about the pace of the U.S. tapering and how that affects the U.S. economy," said Son Eun-jung, a currency analysts at Woori Futures in Seoul. ($1 = 12190.0000 Indonesian rupiah) (Writing by Rafael Nam; Additional reporting by Se Young Lee in SEOUL, Faith Hung in TAIPEI, Karen Lema in MANILA, Saikat Chatterjee in HONG KONG and Jongwoo Cheon in SINGAPORE; Editing by Kim Coghill)
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