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Maybe China’s Selling Treasuries Because They Made So Much Money

There’s a lot of talk this morning about China’s treasury holdings dropping by a few ten billion. Most of it is panic talk but I am choosing to take away two themes from the report:

1) China made a boatload of money being long US debt

You always hear about how China is throttling the US by buying up all of our paper and holding it over our head. Or how we’re just years away from defaulting on all of it and sending half the planet to an early grave. But you rarely hear just how profitable for foreign countries keeping US paper has been.

Good for them; they’ve been investing in us for decades and it has been a huge winner. Just look at China’s holdings versus treasury rates (per Wikipedia and the US Department of the Treasury)


H T Rates

If you were up this much in such a large position, and had the perfect selling opportunity present itself, tell me; would YOU just sit still?

Or would you take profits?

At some point it doesn’t make sense for China not to roll over the position, whether it’s to longer term maturities of US paper, or something else entirely. I’m not going to sit here and freak out about such common sense moves. China could particularly use the funds right now anyway, with their economy slowing down. I’ve got a good feeling those dollars will work their way back home again in short time.

2) There’s a good chance Yellen is serious about raising rates next year, and has given advanced notice to a major player of US debt that this is really happening

Conspiracy rant/

I’m supposed to sit here and pretend that the Fed doesn’t have conflicts of interest and doesn’t talk with anyone about what they’re planning. It’s complete horseshit.

We’ve had a known leaker at the Federal Reserve for years, and the only ones who seem to get targeted are the whistleblowers. China just happens to pick now of all times to drop this big of a position on the markets, and I’m supposed to play along like Yellen isn’t telling them this hike is happening sometime in January or April?

/Conspiracy rant end

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Market Update – 18 Months In Review

2014 began with an intense implosion of overpriced tech stocks that destabilized players and set us up for nasty knock off effects. Months afterwards, energy names began to turn downward and started an at first slow descent; a black omen for anyone looking for a forward indicator.

Saudi Arabia decided to play the world’s worst move (effectively maiming OPEC), spiked the oil markets when they could least handle it, and sent oil into the abyss touching off a second massive sector implosion in oil and gas names. But not just oil & gas, as the market became terrified of economic stagnation led by fears out of Europe and Asia, and the entire energy sector followed oil down the hole.

We are now experiencing what I view as the third wave of the same phenomenon that began in early 2014, more than a year later, as the entire stock market collapses 10% in a short span of time, led by China’s markets and the intensely poor decision making of a command/control economy trying to have their cake and eat it too.

That being said, I haven’t yet seen any indication that the real economy is retracting.

Job growth seems present and in my own local markets where I have a good ear to the ground concerning hiring and pay policies, I am actually hearing talk of wage hikes. The last five years, our local job market at least was terrified of the HR monsters that were federal regulations (chiefly PPACA), not to mention we are still reeling from 2009 in some respects. But I think as we clear away from the implementation of these federal regulations, especially with rigid conservatives now holding fast against, we are going to start to see some wage growth. Employees are actually demanding it now, voting with their feet when they can.

This should do wonders for the economy.

With regards to oil specifically (which is chiefest of my concerns) the EIA is suggesting that the current imbalance between consumption and production of oil is 2 million barrels per day. This is the cause of our stockpiling and the foremost reason oil has sunk so far. Saudi Arabia’s move to curtail US production has been a failure and so far the long feared wave of insolvencies has held to a slow drip, even from the most precarious of businesses.

A 2 million barrel imbalance is not all that bad and I believe that, barring some sort of real demand destruction, we’ll just float along at these levels until the market becomes more comfortable with oversupply. I don’t think oversupply necessarily will force pricing lower as it would take a very specific set of circumstances which include not having a merger & acquisition brokerage occur. Yet we see M&A activity is very healthy in this current time period and I have to believe that if oil goes much lower you would see US markets consolidate aggressively.

Besides this, the global imbalance is equivalent to about one major oil producer globally. And in this current environment, we also should be aware that civil unrest is a powerful destabilizer of oil production (via civil war) with positive likelihood.

Sources of new supply are questionable. New well development at these oil prices are unprofitable and only large state sponsored development is probable. Yet, economic weakness is harming state budgets and may make it difficult to attain approval for unprofitable ventures. The largest foreign state controlled sources of oil are also some of the most sensitive to this oil price shock.

Altogether, I continue to believe that the most likely outcome in oil markets is unknowable yet still predictable production locations going offline from internal unrest. Venezuela is pegged as the most likely location for such an event, do to the extreme nature of their current state of affairs, and because their leadership is proven incapable of handling the situation. But Venezuela is hardly the only candidate; just the best.

Outside of that, the economic uncertainty that hit everyone’s radar earlier this summer is now coming back under control. Bond yields continue to subside across all major foreign issuers, and I would not be surprised if the EU crisis in particular remains hidden from view for another full two years.

Domestically, I expect monetary policy to remain accommodating, but would not be surprised if Yellen raises interest rates some token amount, to try and claim some victory for the Federal Reserve. I cannot expect how the market will react to his, but believe the raise will be mostly symbolic anyway, so any effects should be temporary in nature.

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The Meltdown Shall Continue

China pushed tonight to throw 50 billion yuan into their markets. 50 billion yuan is $8 billion. Does SHIBOR look like an $8 billion problem to you?

Looks like a little bit bigger of an issue than that.

Reports that China had credit issues have been disseminating for years. The background here is that China stemmed credit to get costs under control, but in doing so many of their corporations were going under, unable to obtain financing. That’s the funny thing about statists – when credit dries up, only the well connected and morally popular can get loans for anything. The black market for credit was pushing rates that would make a loan shark blush.

To tap into those double digit interest rates, the rumor was that China’s finance markets were running money out the back door and into the black markets.

If this is the tipping point for China, my calls just as recently as yesterday for 1,540 SP will be fond memories, because we’ll pass through them like a hot blade through butter.

Do yourself a favor and throw out everything you were working on yesterday. It’s worthless now. Start over from a point without preconceived notions. You’ll save yourself money in the long haul.

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Most Excellent

Needless to say, I decided to edge long at exactly the wrong time. Ben suckered me in, and my once strong 30% cash position has been whittled away to a mere 10%.

This selloff is going to hurt, delivering its full force directly against the 9th floor, shaking the very walls.

But I find that I am willing to wait it out. The concerns that are driving this selloff are immaterial.

Spanish insolvency, fiscal cliffs, Chinese communists and Ben’s retirement – the four horsemen are dotting the sky and Twitter is like a dumping ground for snarky comments.

Earnings and growth are slowing and Bob Pisani is nowhere to be found.

The funny thing is I was sitting around in exactly the position of the bears this time last year, guffawing in between comments of doom and chugging from a golden chalice.

Let me tell you how this ends for the shorts.

First, they get run over by a stampeding flock of turkey’s. Seasonality adjustments and earnings projections tick up with bad modeling methods. A bottom in housing prices is called for the spring. Employment looks extra rosy with the holiday shopping.

Then Santa comes and mows the surviving shorts down with his sleigh.

This is how the holiday season works.

Let’s review the “impending demise” of civilization. Spanish insolvency can be flooded with EU money. The EU collapse comes from price inflation and manufacturing contraction, not outright defaults. Chinese communists are scary but China can’t exactly afford to have foreign investment flee the country at this precise moment. The fiscal cliff can be voted away.

And after his presidential inauguration, Mitt Romney is going to be ushered into a back room where central bankers will begin the process of extorting him. But even if they fail, Ben has plenty of time to sink so much money into dark pools there’s no chance of reversing his policies.

Why do we need to embrace the end of humanity right now? It’s the holidays. Can’t it wait until next June?

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So Dramatic

As the market is off a whopping fraction of a percent, commentators are literally soiling themselves on live television, trying to time the next selloff.

Oil reversed yesterday – to a flurry of publications informing us that the move higher is over with.

Bond analysts are flipping out about Europe.

Romney made some comment most everyone I hang out with agrees with – half of all American’s are lazy tits with zero self-worth – and now a few ancient and withered CNN “journalists” are creaming their pants insisting Obama now somehow has this election in the bag.

And China is thinking of crushing Japan because of some island that might have oil rights.

Folks, this is obviously a drama day. I’m checking my brain out.

Do you understand insignificant this selloff is?

Do you get how high all commodities ramped over the last three weeks as the QE announcement was obviously leaked?

Do you see that European bond yields are still lower than they’ve been all year?

Do you understand that CNN journalists all dorm together in a crawl space and haven’t made a correct prediction in the last 15 years? That the polls coming out have fluctuated consistently by 3% or more, leaving Obama and Romney (the guy supposedly nobody likes) in a virtual tie?

Do you get that Japan has nukes too?

Seriously, this is ridiculous. I’m closing the 9th floor for business early today. My things are packed. I’m closing the door behind me – the lights are flipped off as my hand slides quickly out before the latch locks tight.

Today is just too stupid to get involved with. I’ll see you tomorrow.

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How, Jimmy?

I just finished perusing over Jim Roger’s most recent comments on the Eurozone; and I find I generally agree with everything he has to say.

Europe is playing a fast game of bluffing when everyone already knows what they have. It’s destined to fail. Only a combination of zealots trying to save their little project, high frequency speculators, and the totally uninformed will be caught exposed to Europe’s bonds.

So why, then, is Jim Roger’s bullish on China???

It’s like he has no idea where China’s economy comes from. I’ll give you as many guesses as you’d like.

When half of China’s GDP comes from ponying shit to Europe and the US, how can you forecast an EU implosion and then make the jump to “oh well, that nation that doesn’t know how to do anything but sell cheap labor to bigger nations will be just dandy.”

It’s like trying to argue that a pilot every pilot on a plane can have a suffer heart attacks midflight but then predict zero casualties amongst the passengers.

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