Saturday, February 6, 2016

Global Liquidation: Ponzi Schemes Don't Go In Reverse

The Global drawdown in foreign exchange reserves is QE in reverse. At December's run rate, China's reserve drawdown is occurring at a $1.3 trillion annualized rate. Instead of buying bonds and incentivizing risk, they are selling bonds and disincentivizing risk. As Facebook found out this week.

It's called a rock and a hard place. Devalue, and monkey hammer risk markets massively one time. Or, defend the currency and monkey hammer risk markets every day....

Stocks thought this was good news on Wednesday because it meant the Fed was on hold:

"In trying to prop up their currency by selling foreign-exchange reserves, the Chinese are stoking volatility in global stock markets. Also putting pressure on shares: asset liquidations by sovereign wealth funds."

On China:
First, the Non Sequitur of the day reminds us that today's elite are not so much dumb, as they are corrupt, which makes them look as stupid as a fucking brick...

"as with China, the central banks bought up foreign currencies (mainly dollars) to prevent their own from rising too much."

and then, several paragraphs later...
"hedge funds and other investors have been piling into bets that China will be forced to give up its prideful attempt to prop up the yuan...That, of course, contradicts Republican presidential candidate Donald Trump’s assertion that China is deliberately lowering its currency"

To clarify, for even the most corrupt jackasses...
The Chinese WANT their currency to devalue, they just don't want the Dow to be limit down 1,000 points at the open circa Aug. 24th, 2015. Or maybe they do...we'll find out.

All of that to get to this i.e. China's attempts to prop up the currency are reducing liquidity, exacerbating their economic death spiral AND causing "volatility" in financial markets, meaning they're going straight down:
“The spending of forex reserves is in itself a monetary tightening (sell U.S. dollars/buy Chinese yuan/removing yuan from the system), and the Chinese economy isn’t in that part of its economic cycle where it can withstand a dramatic or quick tightening.” 

"it is the pace of reserve liquidation that has the highest potential to keep market volatility and repricing higher than otherwise"

Referring of course to the "brake stand": Lowering rates and buying up the currency at the same time...and we must remember, this is a "stable" currency, and they don't want it to go down...

With respect to Sovereign Wealth Funds of large well-known commodity producers:

"SOVEREIGN WEALTH FUNDS HAVE BEEN LIQUIDATING ASSETS at the same time as the central banks of China and other nations, also with significant impacts on capital markets...In the equity sphere, he finds, sovereign wealth funds are overweighted in financial and consumer-discretionary stocks and geographically in European markets"

THE MARKET TOOK A PUMMELING on Friday from all sellers:
"the S&P financial, health-care, consumer-discretionary, and technology groups have gone from the top of the leader board last year to the bottom in 2016. Meanwhile, last year’s low-beta sluggards—consumer staples, telecoms, and utilities—have come into favor in what’s shaping up to be a year of living dangerously."

This is S&P 1880 on the :15 minute chart going back two weeks:

As long as Kelloggs doesn't roll over, this will all be fine...