LAZY DAY THOUGHTS

Just sitting around for Greece to disappear thinking that would really be a tragedy for the clogging profession...or that Janet would pop up with a "just kidding" and raise rates 50 b.p....or that Little Paulie Krugman would make sense for once...never happened.  Then came the news that the Congress in what to most sane people would appear to be a complete reversal, gave Il Duce his "fast track" trade authority and sent the bill on to the Senate...but of course this being Washington, nothing is sane.

Anyway, Asia came to mind and I started thinking about the China gambit in the formation of what amounts to an Asian World Bank and where this fits into the equation.  Everybody seems to think it's a good idea even if the Chinese control the thing.  China of course promises to be fair in its administration but fair to the Chinese---like most other things--can have a variety of definitions and applications; there is a lot of money to be spent as a result of this beast and you can be sure that a "fair" amount of it will wind up with Chinese interests and oligarchs not too terribly far removed from either the political leadership or the People's Army.  The U.S. will not participate nor will Japan.  We asked a number of our friends--actually, everyone for whom we had a phone number--and were politely told to bugger off by all including the Brits, the Aussies, the Germans, the French and the Koreans.  Another triumph of American diplomacy.

While I was thinking about this, one of those TV ads came on that warns you about the danger of inflation and the national debt and how to protect yourself from the same.  Actually, I learned something:  the national debt is now over $18 trillion!  I mean, who knew, who was keeping count?  Now that's a hell of big number I said to myself, I wonder if Little Paulie knew about that because he's always telling us that we shouldn't worry; everybody wants to give us money as witnessed by the very low interest rates at which we have been able to borrow.  Sounds good, but then I started thinking about what would happen if Janet started to tip over the punch bowl, would the bucks be still available?  Well, probably I thought, but of course at higher rates and everyone knows that there is an insatiable demand for this kind of quality investment and the only place to get it is..........uh oh.

I started thinking about the Asia Bank again.  When this thing gets going, there are going to be a hell of a lot more Renminbis floating around out there...a lot more.  And with that will come the need for far greater convertibility than there is today, because to get from the Renminbi to the reserve currency, the doll.......uh oh.

Why does there have to be only one reserve currency?  Well, because you need something with full convertibility, open markets, statistical certainty, trading platforms and depth.  So?  If the Chinese want to make that possible, what's to prevent them from so doing?  And who is going to stand in their way?  Surely not the guardian of all currency issues, the IMF.  Heck, they are already pushing for it.  Our close allies?  Hang on, I'll call the State Dept to find out who is on that list this week.  Those who don't like the U.S. a lot?  Now there's a growing list!  There is no magic to a reserve currency; faith and belief is all that is needed and a reserve currency is a great vehicle for investment.  And if there is a lot of it looking for a home...

Anyway, I had nothing better to do than think about things like this today and wondering what it would be like if global investors suddenly (well, it wont be sudden) were faced with alternative instruments to U.S. Treasuries?  Understand, this would certainly be "on the margin" as the smart guys like to say because there's no chance on an $18 trillion market springing up over night.  But it is on the margin where things get priced.  Rest assured, that the first Renminbi issue for international distribution be it from China, the Bank or where ever will be Triple AAA.  Is the coupon through Treasuries or above?  Keep in mind, one issuer HAS to issue, the other doesn't.  With $19 trillion to worry about one doesn't need competition for the product...or maybe one does.   I need a nap before dealing with that one.  Maybe I'll ask Little Paulie.

MY REALLY SMART "FRIEND" LARRY

There's one thing My Really Smart Friend Larry and a Really, REALLY Smart cousin of mine must have in common:  as the latter's grandmother once remarked, "He was a pain in the ass from the day he was born."  Bet Larry was too.

Anyway, the following arrived this morning with the admonition that I had gotten it a bit wrong and attached was this commentary from the South China Morning Post.

The yuan has surpassed the euro to become the second most commonly used currency in global trade finance, after the US dollar. Yuan usage in trade finance grew to 8.66 per cent in October from 1.89 per cent in January last year, according to the Society for Worldwide Interbank Financial Telecommunication (Swift). 

SCMP, December 4

Hip, hip, hurrah! And now, if we have done cheering, let's look a little more closely at this remarkable statistic.

Swift has used a narrow definition. It has measured only the portion of global trade financed by the traditional means of letter of credit, which interposes a bank between buyer and seller to help guarantee payment and delivery. It is not surprising that Swift should use the narrow definition. Swift is a bank international payment service. It is therefore primarily interested in how banks profit from trade finance, which happens to be when trade is conducted through letter of credit.

But an estimated 80 per cent of international trade is now conducted on open terms. Trade partners who have long done business with each other increasingly don't see the need for a bank intermediary. They decide to trust each other and not pay for this costly extra level of security.

China's foreign trade in yuan, however, is still dominated by letter of credit. Thus the only thing that the Swift ranking of global trade indicates is that exporters and importers who settle their accounts in yuan do not have that same high level of trust in each other that is enjoyed by most other traders. I can't see that yuan boosters have anything to crow about.

There is more. Along with the bar chart showing China's No2 position in letter of credit trade, Swift published another bar chart showing a ranking of currencies by value of worldwide payments.

In this one, the yuan was No 12 with only a 0.84 per cent worldwide share, slightly behind the Thai baht and a smidgen head ahead of the Norwegian krone. Norway has a population of five million, China of 1,360 million at latest count.

And China actually slipped a little in October with growth for all payments of 1.5 per cent against a worldwide growth of 4.6 per cent.

All of which is just another roundabout way of saying that the cheerleader squad for worldwide use of the yuan is starting to go a little over the top these days with its unending chorus of "Rah, Rah, Renminbi".

Take chief cheerleader Anita Fung Yuen-mei, of HSBC, for instance. We had her in this newspaper again the other day saying that yuan deposit growth in Hong Kong is so big, so huge, that it might put the squeeze on Hong Kong dollar liquidity. I haven't the space here to tell you why this is a theory from Never Never Land but will someone from the Hong Kong Monetary Authority please pull her in to tell her how the peg works. It seems she played truant from HSBC training school the day that the lesson on origins of money was taught.

Here is a little factoid on why we have seen more settlement of trade accounts in yuan over the past few years. The chart tells the story. The yuan has been pushed steadily stronger against the US dollar by the People's Bank of China.

This means that merchants in Hong Kong are quite happy to accept yuan for payment of goods shipped to the mainland. They then have the means of speculating on further yuan strength. It's a gift given them by PBOC policy.

Don't ask what might happen should the PBOC finally decide to call a halt to this policy. That's grim. Let's not go there. 

This article appeared in the South China Morning Post print edition as Too Swift to jump to conclusion on yuan's usage

Now all that is right and good but it doesn't disprove anything about which I speculated.  For example, the manner in which one builds trust--a truism throughout the ages--is to first deal through letters of credit and then move on to open account.  Traders for the better part of three centuries, I think the Chinese know this.  Of course, it might help to speed the process if bi-lateral trade agreement are negotiated specifying use of the Rrenminbi and chock full of attractive little bon-bons if signed, which the Chinese have been doing.  Now, I haven't any idea what Anita, baby, of The Bank is getting at nor what she has done to the SCMP or for that matter what the amount of Renminbi deposited in The Bank in Hankers has to do with anything when compaired to global issues but I'm willing to bet $HK100 with anybody that this time next year--wherever the peg may be--that we see a substantial increase in the amount of L/C trade in Yuan (it's easier to type) AND a move up from 12th place in Yuan open account transactions.  That being said, Larry was right to whack me upside the head for not telling the full tale and being too smug about my predictions.  Thanks, old friend, and for those of you out there he's full of insights and information as one of the finest emerging market gurus in the world.  I'll tell you how to get in contact if you are interested.

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It was announced late today that coming next week it will be revealed how provisions of Dodd/Frank will be applied to Chief Executives for violations of Dodd/Frank.  Inasmuch as no one knows what Dodd/Frank says or means this should be good.  I have been given a sketchy heads-up but I think I'll wait to read it over the week-end.  I'm sure I'll be the only one doing that…by design.

Oh, great jobs report today.  Of course, there is this shadow of doubt as to whether it's real given the   "errors" of last year.  I'll give them the benefit of doubt but, with this mob...

 

AN OBSERVATION AND A CONFIRMATION

According to reports published today, the banks lost what might be a big one in the argument about the Volker Rule over the strategy known as "portfolio hedging."  You might remember that this was suddenly discovered by regulator and politicians alike (why not before,…who knows) in the debacle in J.P. Morgan's shop in London which became know as the "London Whale" scandal for it was claimed that the activity being undertaken was portfolio hedging.  

Now if Jaime Dimond can be accused of one thing--and I have--is not knowing when to keep his mouth shut.  To claim, as he did, that what happened was "portfolio hedging done badly" was crap.  Worst of all everybody knew it was crap.  Had he said, "these bastards tried to make an extra buck, got it wrong, tried to double down, got that one wrong too and we decided to liquidate the position when everybody in the world knew it was going to be one way traffic and as a result we lost $6 billion, so we fired everyone involved including some seriously senior people," Jamie might have skated…but he didn't.  And given the excuse, the Carl Levins and Crazy Lizzys of the world were give the perfect opening and nailed everybody…maybe.  We'll see how this comes out but if it is as reported, two things will happen: first, the price of credit goes up for everybody.  Remember yesterday's post?  Ain't no competition out there any more or a lot less of it.  Secondly, feeling constrained, banks will look around for something else to do that they know nothing about, immediately become masters of the unknown and at some point screw that up as well.  Hang around to see if I am right.

Which I may be if history is any guide.  Remember a couple of years ago when I suggested that one of the things our buddies the Chinese would love to do is replace the U.S. Dollar as the world's only reserve currency?  As of last month, the Reiminbi or Yuan--take your pick--became the second most used currency in the settlement of international trade replacing the Euro.  It's way behind the dollar to be sure but these guys have been a functioning society for a few thousand years.  They know how to wait.  Repercussions?  heck, I'm not smart enough.  Ask Joe Biden when he resurfaces.  He's our new Sino expert.

RANDOM THOUGHTS

A few days ago it was Joe Biden, today it's Laura Tyson. Laura Tyson is smart. Joe Biden is...well...Joe Biden. Anyway, they seem to be in agreement that they were really not on target with the state of the economy on January 20 and suggested that another stimulus might be in the offing. The Leader chimed in all the way from Russia with the thought, as here predicted, that it possibly the fault of the previous administration for not having and supplying good data. Aside from a debate as to what the present stimulus package has accomplished, the stock market at least took one look at the thought of another gazillion dollars in deficit spending and said, "Nope," and traded down 161 points on the Dow. The big auction of three year notes, however, went off reasonably well with adequate demand and while the yield was pushed up to 1.51%, some observers had expressed concern that there might have been real trouble brewing. What appears to be brewing is a return of the "flight to quality" syndrome given the growing concern as to the current and future state of the economy. The maturity of this auction appeared to be short enough to attract safe money; whether the longer-dated stuff will fare as well remains to be seen. Clearly, our Chinese friends continue to shorten the maturity profile of their portfolio so the coming months will be a test both for real demand and if that is absent, the willingness of the Fed to continue to monetize to any further extent.

And speaking of our Chinese friends, their movement to move away from the dollar as a reserve currency continued apace. It was reported that the monetary authorities have begun to allow trade settlement to occur in Renminbi as between Hong Kong and the mainland and in certain other locations in southeast Asia. Despite statements that the dollar will remain supreme for the foreseeable future and the smoke-screen concerning Special Drawing Rights (the Chinese are anything but stupid) the ascendence of the Chinese currency is proceeding far more rapidly than anyone anticipated...except for a few of us, that is. Look for a more accommodative attitude on the part of the Chinese in the coming months and perhaps a bi-lateral agreement involving commodities denominated in Renminbi. With whom is immaterial.

Finally, it would appear that Michael Jackson is still deceased and will remain in that state. Hopefully, he is at peace.

Tomorrow, thoughts on the G8 conference and whatever else might pop up.