BACK TO BASICS

...with one small interruption.  Obama was in Greece today and the presser with the Greek Prime Minister Alex Tsipras, was something to behold.  I never thought I would say it but Alex was the only one on the stage with a remote grasp of reality.  The other guy...



Anyway back to basics.  Things slowed down a bit today with the 10 year slipping slightly which was of course to be expected.  Yet the two year closed over 1.00%  and everything around the world was coming back into positive yields being dragged along by the U.S. market.  Up were equities again with the NASDAQ the star performer as the rotation continues into the "Trump Economy" although if you really try to pin people down as to just what that may be things get a bit mushy except that everyone seems to agree that financials and especially banks are the place to be as the regulatory picture we almost certainly appear far brighter.

A harbinger for that view came today in the audit report on the Fed's "stress tests" requested by the House Banking and Finance Committee whose Chairman may just wind up as Secretary of the Treasury.  While not as damning as some might have expected (or hoped), the report none-the-less did highlight that the Fed was far from transparent in it's approach.  This is going to be argued for weeks but let's boil it down to what is really important.  The objective measurements of the stress test are really no problem despite what the banking lobby would have you think.  Basically, they concerned with capital adequacy and to be honest while some might think that the levels may be set too high the banks really have no problem in meeting anything that might be required.  Do they infringe upon ROE?  Sure, of course but not to the extent as do some of the other regulations  in Dodd/Frank.  But the subjective tests...ah, that's another deal entirely.

To say that the Fed can make these up as it goes along is very close to the truth.  To begin, the banks have little idea as to what they are and NO idea as to the methodology by which these things have been invented.  They are unique to each individual bank and can be as subjective as to the distribution of the risk assets.  That is bad enough but think of it in the context of a nut job like Big Danny Tarullo running the show with crazy Lizzy looking over his shoulder.  Subjective means subjective: if he doesn't like you, tough nuggies.  This is exactly what happened to Citibank two years ago.  You see, Danny doesn't like international exposure whether he understands it or not, and guess who is the only real international bank in his small world.

Bad?  Yep, but it's not the biggest problem.  As administered, what the Fed has supplied to itself is a legislatively approved power to--if they were so willing--distribute credit through the regulatory process..."We don't like this in your portfolio; we would like to see more of...say...non-prime housing loans, or green energy projects, or loans to make widgets."  Now where have we seen that before?  Do we really want these guys to--as we allowed Barney Frank to do while spitting all over the House conference room, "Roll the dice on this one?"  A thought for your day.

And before we close a thought for the President Elect.  Be careful for what you wish.  China, your bete noir when it comes to currency manipulation announced today that they expect the Yuan to be in the 6.90 range by year end.  A boon to Chinese exports?  You bet.  Currency manipulation?  Only if one considers a Trump victory to be a manipulative tool in creating a roaring Dollar market.  This stuff gets complicated, Donald.  Don't move too fast.

THE RETREAT CONTINUES.

As predicted, everything was down again today.  Portents of gloom and doom were all that could be heard and people appeared to be listening, which is remarkable because to doom and gloom mob were the same people predicting with absolute certainty that REMAIN would have a smashing victory and who drove every index in the world to the roof.  They were wrong then and I suspect they are wrong now but time will tell.

The really remarkable thing, however, is that the impending recession in Europe is being placed firmly on the doorstep of BREXIT.  Memo to geniuses all over:  THE EUROPEAN ECONOMY STINKS AND HAS STUNK FOR YEARS.  The dumb buggers are just running out of excuses as to why.  Sr. Draghi is desperately trying to hold things together and has been buying bonds of all shapes and sizes for a week now but one wonders how long this can continue?  Alan Greenspan had a rather interesting thing to say the other day (for a change) on the subject.  Quoth he..."The Federal Reserve has the United States behind it.  Who stands behind the ECB."  Well, the answer is simple of course; Germany.  And the reality is...up to a point, especially now that half the Volk are so mad at Angie that they could spit.  Which makes me ask the question; "Just who is dealing from a position of strength here, the EU or the Brits?"  Jumping up ugly on either side does no one any good and will do a lot of harm if one thinks about it, which Moody's didn't of course and immediately lowered the UK's rating to AA from AAA.  Think about it:  Moody's is saying that there is a one full rating point of negativity in whether Gilts will get paid out between Wednesday and Friday.  IT'S THEIR OWN*&&$^%# CURRENCY YOU MORONS!  But there you have it.  The embarrassment is so great and the vanity so destroyed that people are simply trying to "get even" by being dumber than they have already been.  It's joy to watch.

That's not to say that things are not going to deteriorate a bit more and if the economic numbers Over Here do not match expectations--and they are high--for the second quarter, things could really get ugly.  Of course the Brits will get the blame as God forbid the folks running things admit a few miscalculations.  The one mob that's coming up trumps is the Chinese.  No Bod E is paying attention but they are taking the Yuan down and down.  Why let a made-up crisis go to waste?  Even Congress is on holiday while the rest of Asia is getting pounded on the trade front--the part of Asia that actually likes us...kinda.  So we shall sit for the next few days and watch this until someone finally figures out that all of the real problems were there before the vote and begins to speak in terms of "oversold positions."  Don't ask them who it was that oversold things.  Thinking is not their strong point.

FIFTEEN YEARS

Elliott Management and the Argentines announced that they had reached an agreement in principal to settle the 15 year old dispute over Argentina's restructured debt plan to which Elliott did not agree.  This could mark the end to one of the longest international financial disputes (there were a few wars) that I can remember and marks--perhaps--a return to sanity on the part of Argentina and a true statesman-like approach by its newly elected President.  How much time, effort and treasure was wasted on behalf of the Argentine people by the fools who ran that country for years will never be known, but it had to be immense.  One should also give a bow to the courts of the United States for upholding principals of law that have been with us since we were Englishmen.  We'll continue to follow this but I do wish everyone well and a speedy final conclusion to this sad chapter.  There are many issues that will arise which are certain to affect international and especially sovereign risk transactions in the future which should be explored and we shall attempt to do so in the course of time.

                                                                   _________


Well, the boys and girls got together in Shanghai this weekend and for the life of me I can't figure out what was accomplished except for the addition of more confusion piled atop of that pile of mass confusion known as the international economic outlook.  China did absolutely no one any good by announcing a reduction of 0.5% in the amount of banking reserves required at the Bank of China which would seem to indicate a loosing of monetary controls which would result in the fall of the Yuan (which did happen), but no, said the Chinese, their intention was to continue to support the currency...which they didn't do today.  So you tell me.  There was at least some good-natured bantering about the degree to which one could rely on the economic figures released by the government( one cannot to any degree) and what the REAL growth rate might be; 4% you say?  HA, HA, HA!  If correct it may be no laughing matter; that would be one hell of a slow-down, a level for which most every other country in the world would kill but not every other country has half a billion people marginally employed.  Coupled with slow to marginal growth in the rest of Asia, the numbers out of Europe (what numbers?) and the mess of Latin America,  that leaves the U.S. as One Great Hope for the world economy in the near term.

Problem is--not that anyone cares--I'm more confused than ever.  Last week we had a revision in the fourth quarter GDP from 0.7% to 1.0% and everyone went nuts.  OK, sez I, OK, but it's not gangbusters.  Inflation was reported to be heading for the 2.0% range which the Fed has been targeting since...hell, for so long I've forgotten...and wages were looking better.  The weekend was looking up.  Then comes today and the Chicago purchasing numbers were released and they absolutely stank which is where I start getting confused.  The global picture is poor to bad and the data Over Here is so contradictory, I keep telling myself that something has to be off.  Finally, equities sold off today across the board but WTI was UP over 3.0% as was Brent...a one-day-at-least de-linkage...but in the face of continued reports that the world is running out of places to store all the crude that is being pumped that no one wants.  We have more data than we have ever had but can we believe any of it or has the world just gone weird.  It's February 29 today so that's weird in itself but things are beginning to get out of hand.  I guess we just keep watch and see when and if all this matches up and look forward to more madness in March.  At least that kind of madness is fun.

NOT MUCH

I signed off last week with the thought of waiting to see what Monday was to bring.  Monday didn't bring much except for some stinko manufacturing numbers out of Chicago which really didn't have much of an effect, and mood changes in commodities (read, oil--that's all that counts) which means the equities were up and down all day ending slightly lower.

However, one of the things we talked about last week was the anticipated assault on world-wide currencies, particularly those in Asia.  Over the weekend into today a really strange scenario began playing out which I confess in all the years I have been around this business was new to me.

Traders are a paranoid bunch; everybody is out to get them...or at least learn their positions.  In the good old days, no one would speak as to one's plans other than the occasional "I own and therefore recommend" hyping of one's position, but for the most part secrecy reigned.  Not today; this is a whole, new breed out there, in-your-face people who could care less and are happy to brag about their positions.  It got to the point today where you wanted to ask, "If there is anybody long the Yuan out there, would you please hold up your hand!"  Had you done so I suspect nary a hand would have risen.  To listen to these guys, one would think the entire world is short the Yuan and that may be the case.

Now to be sure, China has problems reflected in the tremendous out-pouring of currency about which we have spoken which is going to continue for a bit as we approach the lunar New Year which is when every Chinese where ever located takes to the road with all the cash they can carry.  I don't think that even this band of thugs running things would dare mess with that.  But that will be over in a couple of weeks and then, after a reassessment of the reserve position, it will be interesting to see what stance is taken by the Bank of China, if any.

Shorting a nation's currency is always a bit risky; shorting it with one way traffic in the trade is even more risky.  Shorting it when there is only one real source of the currency which in this case is Hong Kong, is downright scary as we discussed last week.  The BOC still has around $3 trillion to play with which is a hell of a lot of money with which to go to war.

This is all hedge fund action.  As far as I can tell the banks, whilst probably short as well, are hardly so in size.  The guys that run these funds are very, very smart guys and very, very big risk takers.  The Chinese think they run the world or will so shortly.  It is a classic match-up and one whilst being written about is seemingly being ignored to a great extent.  The stage--unless these guys are simply making open boasts--is set for one of the great financial battles of all time..or not.  It's China after all and who knows what's really going on.  An emerging crisis or a rather clever way to devalue without getting jumped on by the rest of the world?  Do they have a firm or firms working on the "inside" or will they go after one of the shorts rather than setting up a broad defense simply to create an example in the hope of ending this once and for all?  Can they do that in this new age or have the rules of the game been changed forever by new strategies and new instruments?  This could make the Super Bowl look like the Pop Warner League.  Is there an over/under on this one?

HERE COMES THE CALVARY

He Who Knows All Things called last Friday.

"Don't ever do that again."

"What?"

"Disappear for a week.  Do you see what happened?  Everything went to crap"

Well, I'm back and sure enough the Stock Market stopped it's horrendous six day slide and rallied at the close today.  Shanghai didn't, however, and everyone is now convinced that China is a disaster in the making...or one already made...as once again the government proved that they are not quite ready for prime time.  Having received what they thought to be the imprimatur from the IMF in the form of a reserve currency designation, they decided to get cute and as we have mentioned in setting the "peg" for the Yuan against a basket of currencies instead of only against the dollar which the leadership believed would allow the Yuan to depreciate more rapidly and aid China's export economy.  It depreciated rapidly alright; it cratered, causing the Central Bank to engage in a massive struggle against this thing called "the Market" to get a grip on things immediately after agreeing to the "free markets" called for by the Fund.

Now a run on a currency is not always a bad thing but when it is caused not by technical factors but by a clear concern for the stability of a country as a whole, things get dicey.  Last week, things got real dicey and were made worse by the continued collapse of the commodities markets led of course by oil which continued it's downward slide by over 5% today.  What is about to start happening is the first in what will be substantial bankruptcies in the oil patch, the reality of which, though predicted, will trigger downward revisions in economic forecasts which will have the effect of decreasing economic expansion, which will...well, you get the picture.  Over the last few years the best prognosticator of economic performance has been the Atlanta Fed.  Their prediction for this year?  Well under 2%.  The economic and to reiterate, the political fall-out from such performance in this election year might well be earth-moving.  In any case, a fair reading of the tea leaves will lead one to realize that this economy stinks and this cannot be argued away with job creation as last month's growth greatly skewed to the age groups of under 24 and above 55.  In addition, the lack of any meaningful wage growth which leads me to believe that the real bell-weather is the labor force utilization number and that still stinks.  We are on a knife's edge and now, just when some positive thinking was growing concerning Europe, the refugee/immigration problem, as I am sorry to say I predicted broke out in the most ugly of manners throughout the continent over New Years followed by an almost imaginable breach of public trust by European leader led unfortunately by Ms. Merkel who may well lose her job as the result of completely misguided policies.  That occurrence could spell finis to any dreams to a Euro-led global recovery.

So I'm back, thinking I should have stayed away a bit more rather than having to comment on these gloomy goings-on.  But carry on we must, following the sound of the trumpet.  CHARGE!

GRANDCHILDREN WARS: THE PATHOGENS AWAKEN

Made it back having undergone assault from indubitably multiple armies of pathogens, merged and mixed in three third grade classrooms by the triplets.  Modern medicine has no answer to this: you either survive or....anyway, here I am.



Our landscaper, Ted, stopped in today.

"Yuan, " he said, "and the IMF.  Big deal?  Can you invest in it?"  Ted is obviously far richer than I had imagined.  I'll have to start looking at his bills more closely.

"Well," said I, here's what I think, " having just lost $.25 to My Really Smart Friend, Larry, with the news of the IMF allowing the Yuan to join in the currency basket of the IMF before year's end.

"Chrissie Lagarde just declared the Yuan, 'freely usable,' and if you are going to bank on that there's a bridge...somewhere...any bridge...that I would like to sell you cheap.  In fact, most of the conditions for the establishment of a reserve currency have not yet been met--not to mention the inability to engage in domestic equity investment in the Chinese equity market.  What has occurred is at this stage a recognition of the economic power of China and a near-capitulation by the IMF to China's rather unique way of doing business as a result of the Fund desperately needing a friend at this stage, having run out of really any role and yet still having a lot of very expensive mouths to feed.  Chrissie also wants her next title to be Madame Le President and this 'breakthrough' fills in some rather empty space on her resume.

In order to further bolster the complete unhinging of IMF rules the argument is being made all of the place that this will help liberalize China and diminish the power of the Communist Party as China will now be forced to play 'by the rules' and liberalize not only their economic and monetary policies but, by extension, their political policies as well.  Bollocks.  The CCP will do damn what it pleases unless and until a failure in their economic policies causes a rather compliant population, now seeing a rise in living standards so desperately needed, to experience a set-back and being asking, 'Hey, what am I getting out of this?'  It is a vanity gift to the Chinese people giving their government extra time but accomplishing little.

It is also being argued that this move is good for the world's financial system as it breaks the hold that the dollar has exerted over all facets of international financial and for that matter, ALL business dealings and by extension, the influence of the United States.  Fair comments except that there are far more many reasons for the existence of this influence beginning with the Rule of Law which far surpass the mere existence of the dollar and I would argue even the vast infrastructure and liquidity which supports it, although in reason years, under this---allow me to be political---incompetent administration and increasingly politicized central bank, these advantages are being eroded.  With a weighting of nearly 11% in the SDR basket let's see how many central banks switch 10% of their reserve holdings into dollars?  Aside from those tightly wedded to China in other areas, very few I would bet.  I'll take on all comers; I'm down $.25 to Larry.

The other thing in which I will be most interested is to see just how much of the approximately $18 trillion in Yuan sitting in deposit accounts will remain.  Under the agreement, the Chinese are supposed to be allowed to invest up to 50% of their assets in foreign assets.  Does money flow in, out, or simply sit tight.  If the trend is out, given how much Chinese money is already in such places as New York, San Francisco, Miami, London and points around the Globe with all sorts of restrictions in place, with restrictions relaxed if we have a vast outpouring, how long will Xi's mob allow that to continue as the result will almost certainly be the collapse of the Yuan?  Not long I would argue.  And the Fund's reaction?  Not much I would argue making it even a bigger joke than the ECB in dealing with budget deficits.

Finally, I would once again bring up the effect this ill have on one of the U..S's greatest strategic tools, financial sanctions.  If all the other reserve currencies are always on your side politically, they can work quite well.  When one reserve currency issuer is not on-side they don't work at all.  The U.S.'s strategic bag of tricks has just lost a big component."

"So, Ted," said I, "There you have my views.  Your call.  Have any more questions?"

"Charlie, that was great and I thank you so much.  Actually I have just one more.  Do you have Larry's number?"

QUESTIONS, QUESTIONS

The Yuan tried to crash today, or so I am told, but the Bank of China was in all day and made sure that nothing precipitous happened according to Mad Max.  Max was  not quite clear-headed as he was up since 1:00 a.m. watching the action in Asia but despite claiming to know nothing about equity markets he predicted that the DOW would rally in the afternoon to close flat after being down over 200 points in early trading.  It was something to behold, but a sign of confidence?  A sign of total confusion I think agreeing with Max on that view which is always a good thing to do.

The 10 year was relatively unchanged as well as the odds on a September move have risen above 50/50 against, indicating that Janet et Cie. is--and should be--increasingly concerned in light of the past few days of doing anything that will strengthen the dollar even more from its inevitable path given what is clear as to Chinese intentions.  I have as you know been in the no movement chorus for other reasons but this situation has only strengthened my view.  For the equity guys, as soon as they figure out that free money is still the game in town, we will probably rally as to be honest the Yuan trade while not helpful, isn't as damaging to U.S. corporates as it is to the Euros.  The one's who will really get hurt are the Asian emerging (and post-emergent) markets and the commodity boys although of all things, oil rallied today.  A dead cat bounce?  Could be.

So, if Max thinks the world is confused, I wonder what he thinks of his buddy, Charlie?  Don't answer.  I have no idea what the hell is going on, which I guess is obvious.  There is one thing I do know, however, and it is that the Chinese are not yet ready for prime time despite the IMF jumping up and down.  They will get their Yuan SDRs, but a reserve currency status?  Only if the rest of the world has gone mad which I doubt has occurred.  You would indeed have to be nuts to hold your reserves in Yuan, not because of valuation reasons but because there is not an open, viable, accessible market to underpin the currency.  Then again as some guy once stated, "There's one born every minute."

The Chinese are going to try to gut this one out and they may be able to do it.  The real fear, however, may be that the growth rate for which just about every other country in the world would kill to have may not be there as anticipated.  Suppose it's not 7.00%?  What then?  Suppose its waaaay lower...and you can bet that the official numbers are really going to get massaged this time around which has not really been the case.  What then is the market reaction?  More importantly, what would that portend for global economic well-being?  Questions, questions.  We may wind up with some answers we may not like quicker than we thought.

BIG NEWS DAY

International financial junkies rejoice!  Today was a red letter day!  The Greeks and the EU have reached an agreement in principle on a new 86 billion Euro bail-out package.  All the usual stuff including fiscal deficit targets which are unattainable, asset sales--not on--governmental restructurings --when there may not be a government and on and on.  It short, it is a nonsense but it will be agreed and the ECB will get paid as will everybody else this month and when it is realized that the thing isn't working we will revisit the entire situation around March.  Which is exactly what should have happened, allowing the Euro to stay around, the EU to remain intact and Greece to remain as a member of the same until a better time comes to either face up to the inevitable (D*** F*********) or the unthinkable G*****.  See you in March.

The really big news was the decision by the Chinese to devalue their currency, the Renbinbi (let's call it the Yuan, it's easier).  Down went everything except for the U.S. Dollar and the Euro with shock and surprise on the faces of all the talking heads.

The Chinese dropped their previous support for the Yuan and announced that at the new level, their would be a new trading band of 2.00%  Remarkably, the general view was: how clever.  The Chinese had accomplished two things at once.  They had made their exports (which had been down over 8.00% for the year) much more competitive and they had "listened" to the IMF and its promise of creating Special Drawing Rights in the Yuan by making their currency more "market sensitive."  Allow me to comment if I may:  pure and utter crap.  The Chinese have in fact admitted failure in their attempt to transform their economy into a consumer oriented one and have fallen back on the export, export, export model making sure everybody has a job.  They are in a spot of bother.  Things ain't working as well and may be worse than we realize for as far as the eye can see their are bubbles of one sort or another.  One good thing is that there is a hell of a lot less saber rattling since things started to go south.  The People's Liberation Army ("PLA") which has a finger and sometimes a fist in everything that makes money in China may have realized that to gain the world and lose all your Yuan isn't the greatest of strategies and may now be paying a bit more attention to what's going on at home rather than in the South China Sea.  And then there is the newly "market sensitive" Yuan.

Boys and girls, this is what is known as "Lowering the Peg."  If the Chinese wanted to make their currency market responsive, they would have gotten rid of the peg.  To impose a 2.00% trading band on an artificially created price is a nonsense.  It can be 2.00% or .002% at any point in time depending on the whim of the Chinese leadership.  That is not to say it, from a Chinese standpoint is not a useful step, but for pity sake let us recognize it for what it is, pure, naked currency manipulation.  The IMF will praise it of course because nobody but the Chinese wants them around anymore but to look at it in any other way is a joke.  The currency market opens at about 2130 EDT in Asia.  Let's wait until then to see just how "freely traded" is the Yuan tomorrow morning.

As for the rest of the world...well, there are a few questions.  And for Central Banks, including the Bank of China which for quite a while now had achieved mystical stature, one might well ask, "Is this the best you can do?"  Throw scads of money at economies and when that doesn't work, bugger thy neighbor?  Even the Smartest Guy in the Room admitted over the weekend that nobody is really quite sure as to how to deal with the problems of today.  Far be it from me to offer advice to Dr. Fisher but might it be wise to stop doing what hasn't worked and try something different?  Or better yet, stop doing anything at all, especially bailing out the gutless politicians of the world of which every country has a surplus?  Just a though, Stan, just a thought.

More tomorrow.