peg

From David Rosenberg’s morning musing’s today:

“ In contrast, the Asian FX complex is selling off. Risk assets are not responding to this week’s apparent good news: the Chinese peg announcement (has anyone noticed that yuan forwards are actually …. weakening?)”

Whether this is a real trend or not is unknown, but I fully expect the yuan to appreciate before it really falls anyhow, gotta get Congress off their backs for now. No matter what a strong yuan is not in China’s interests right now and China’s ruling party wants to remain the ruling party so are they going to fear Congress or a billion Chinese storming the Peoples House? You get my point.

To further make my point about the troubles in the EU and in China, moreover how this is a global issue now, Rosenberg went on to say:

“ There are all sorts of news reports in today’s FT discussing how the problem countries in Europe are in such bad shape that their banks are increasingly relying on the ECB for their funding survival. Portuguese banks reportedly doubled their borrowing from the central bank in May as a sign that this is not just a Greek tragedy. We have reached a stage where countries representing 18% of Eurozone GDP is accounting for 68% of the growth in ECB funding. Is that a currency you really want to own?”

What does all of this mean? It means big trouble and the markets are telling us that the problems from around the world are about to wash up on our shores. The irony is it is all coming full circle because we kicked it off with our credit induced sugar coma over a 5 year period which made risky paper seem safe and led foreign banks to buy it. Later everyone found out that safe paper was worth far less than the paper it was printed on and the write downs, globally, were enormous, with more to come. That triggered a collaborative global bailout of the entire financial system, but the ones who funded the bailouts are now in trouble and the recipients of the bailouts were never really in such great shape even after they received hundreds of billions in aid.
While we allowed our banks to extend and pretend, mostly because we have the luxury of printing our own money and we are the reserve currency, foreign banks bought seemingly safe sovereign government debt instead of treasuries, for the obvious reasons. Well, that debt became no good and we are where we are with a potential funding problem across the pond and a healthy exposure to European banks. We had exported our “safe debt” which ended up being toxic to the Europeans and they, more or less, did the same thing to us! Except theirs was disguised as safe government paper instead of CDO’s and CLO’s.

I believe the proper name for such a thing is “circle jerk,” but I am not 100% sure on that. Either way it is definitely heading this way and only a fool would deny that fact. In today’s world it no longer matters if a problem starts 10,000 miles away because everything is handled via the internet in microseconds and exposure can go from nil to billions in the blink of an eye. All this means is that we are exposed and the market knows this. Why else would treasuries be doing what they are doing while gold is rising and stocks are declining, the interesting thing is the stocks declining part is new and all 3 were once going up at one time, how odd. All 3 asset classes could not be right, but 2 out of the 3 asset classes were bearish for stocks so directionally speaking a downward move should not be overly surprising to anyone, but it is, interesting.

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