State of the "union" 2016

Major Currency War Coming Up?

Japan, China, the ECB, Sweden, Brazil, and Switzerland have all been involved with direct or indirect attempts to weaken their currencies.

Realistically, it's safe to include the US in that list when the Fed was first country outside of Japan to slash rates to zero.

Mathematically, it's impossible for every country to weaken its currency vs. every other currency. That basic fact hasn't stopped a growing list of countries from trying.

With the end of QE coupled with rate hikes, the US is no longer in the debasement by force camp, but if the US economy weakens, the Fed is likely to do anything.

A huge currency crisis of some nature is undoubtedly coming up. The timing of the crisis and where it starts are both unknown.

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Less than a month ago, and just days after the Yuan was finally inducted into the IMF's hall of reserve currency fame, the Chinese Foreign Exchange Trade System, a part of the PBOC, made it very clear that what was about to happen would not be pretty, when it announced - in a statement which clearly everyone ignored - that going forward it would index the relative strength of the CNY not to the USD but the a basket of currencies (against which the USD to which it is pegged has been soaring).

At the time we explained that "what this means is that for anyone who thought the Yuan devaluation is over, now that the currency is at the lowest level relative to the dollar since 2011, the reality is that the devaluation relative to everyone else is only just starting.
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... former Dallas Fed governor Robert Fisher admits "We frontloaded a tremendous market rally to create a wealth effect ... The Federal Reserve is a giant weapon that has no ammunition left."
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RBS has advised clients to brace for a “cataclysmic year” and a global deflationary crisis, warning that major stock markets could fall by a fifth and oil may plummet to $16 a barrel.

The bank’s credit team said markets are flashing stress alerts akin to the turbulent months before the Lehman crisis in 2008. “Sell everything except high quality bonds. This is about return of capital, not return on capital. In a crowded hall, exit doors are small,” it said in a client note.
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Hugo Salinas Price said:

Bloomberg is back and presents updated data on International Reserves held by Central Banks, excluding gold, as of Friday, January 8, 2016, after a hiatus on this information since December 11, 2015 (for reasons unexplained).

The data for Friday, January 8, 2016 are shocking, as expected: Total International Reserves held by Central Banks, excluding gold, expressed in US dollars, amount to $11.032 Trillion dollars as of that date.

The decrease in Reserves thus amounts to precisely $1 Trillion dollars, as of January 8, 2016. This gigantic fall, of 8.31% of the maximum amount of Reserves - $12.032 Trillion dollars recorded on August 1, 2104 - took place over the course of only 17 months, whereas the growth of Reserves to its maximum figure took some 70 years, roughly since the end of WW II.

The fall in International Reserves is a clear indicator of a world-wide economic slump, which will become a severe depression.

It would be much easier to stop the flow of water over Niagara Falls, than to halt the contraction in International Reserves.

World liquidation has set in. The Piper must be paid. Growth is gone. This will be story in this epic year 2016.
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We have recently found out (not that we did not already know) through admission that many statistics have been wrong, and wrong for many years. What was reported and paraded as fantastic employment news on Friday turned out to really be a stinker as the truth turned out to be a whopping 11,000 job gain http://davidstockmanscontracorner.c...s-report-the-us-economy-is-dead-in-the-water/! What would have been considered heresy just 10 years ago is now “normal”, the Swiss National Bank has become a huge global hedge fund http://www.zerohedge.com/news/2016-...sts-record-23-billion-loss-down-4-eur-aapl-vr along with the PBOC http://www.zerohedge.com/news/2016-...otection-team-bought-¥18-trillion-stocks-2015 and Bank of Japan. Does anyone doubt the Fed is not deeply in U.S. equity markets also? What kind of monetary policy is this? Sovereign “money” (currency) is foundationed on stock markets? Please keep in mind that global trade is crashing with the Baltic Dry Index making all time lows this past week and reports of tankers (non oil) all over the world being docked and empty. As for oil, there is such a global glut there are now fears of lack of storage space. All of this points toward a collapsing real global (depression) economy …which must service the most financial debt in the history of history!
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The current melt-down of the world's debt bubble is likely to continue in the course of the next months. The secular trend to expansion of credit has morphed into contraction and liquidation. It is my opinion that the new trend is now established and no action by any of the Central Banks (CB) that issue reserve currencies will do anything at all to reverse that trend.

Sandeep Jaitly thinks that the desperate reserve-issuing CBs - the US Fed, the ECB, the Bank of England and the Japanese CB - may resort to programs of QEP, by which he means "Quantitative Easing for the People". This quantitative easing will mean putting money into the hands of the populations by rebates on taxes, invented make-work schemes or any other excuse to furnish the people with the famous "helicopter money", to get them to spend.

As the present crisis deepens and given our experience with the way our so-called “economists” think, we can reasonably expect such programs to be launched. Nevertheless, the present trend of world economic contraction will not be reversed by any ad hoc program. The world’s expectations - positive for growth since WW II - have turned negative. This is an event of such magnitude that no “QE” will have any effect upon the final outcome: debt collapse.

The growing fear in the world's markets arises from the recognition on the part of indebted corporations and individuals that their debt burdens are increasing due to devaluations of their national currencies. International investors are attempting to reduce their exposure. “Hot money”, invested in countries which offered higher interest rates, now wants to go home. In recent years of bonanza, foreigners borrowed some $11 trillion dollars, in various Reserve Currencies, to invest in their own countries. Of this total, it is calculated that about $7 trillion of those dollars are denominated in dollars. The debtors are now attempting to pay-off their dollar loans, and this has the effect of lowering the value of their own currencies with respect to the US Dollar, thus aggravating the situation. There is a loss of confidence in national currencies, producing Capital flight to the rising Dollar, because the countries that issue those currencies are no longer able to maintain export surpluses against the reserve-issuing countries, and are thus unable to increase reserves and are actually losing these reserves. The export-surpluses are disappearing in the "rest of the world" because the reserve-currency countries, plus China, are in an economic slump (essentially attributable to excessive debt) and are reducing their consumption of imports, thus reducing the exports of the export-surplus countries.

The loss of Reserves on the part of the countries which depend on export-surpluses for economic health makes the accumulated debt burden in the world increasingly unsustainable; investors around the world are worried that some of their assets (which are actually debt instruments, that is to say various sorts of promises to pay) may turn out to be duds, and they are trying to find ways to protect themselves - and Devil take the hindmost!

Whatever expedients are implemented, the final outcome of the unprecedented economic contraction in the world will have to be the revaluation of gold reserves, as desperate governments of the world resort to gold to preserve indispensable international trade. The revaluation of gold reserves held by Central Banks will be the only alternative for countries seeking to retain a minimum of international trade to supply their economies, whether they are based on agriculture, on manufacturing or on mining.
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... But I rather sense that an increasingly large number of central banks are actually looking at what is going on and saying “We are being asked to do something that is effectively impossible.” In a nutshell, most central bankers know that our economies do not face a liquidity problem but a solvency problem linked to excessive debt accumulation. If it’s a solvency problem, central banks can’t fix it. ...

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PMBug said:

Oil seems to be a big catalyst for much of the banking turmoil and it may not yet have found it's bottom (apparently a huge supply problem).
Are we watching the shit hitting the fan in slow motion right now?

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Investor Kyle Bass said Wednesday that China’s liquid foreign reserves are “already below a critical level,” intensifying a debate over China’s ability to keep its currency from falling.

Mr. Bass, whose Hayman Capital Management LP has a multibillion-dollar bet that the yuan and Hong Kong dollar will fall, told clients in a letter that his firm estimates that China’s liquid foreign reserves are $2.2 trillion at most. That compares with the $3.23 trillion reported by the People’s Bank of China, the central bank, for the end of January.

The comments from the Dallas hedge-fund manager highlight mounting investor unease about the degree to which the official Chinese number reflects reserves the nation can quickly use to prop up the value of its currency.
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“The view that China has years of reserves to burn through is misinformed,” Mr. Bass wrote. “China’s back is completely up against the wall today, which is one of the primary reasons why the government is hypersensitive to any comments regarding its reserve levels or a hard landing.”
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The 11-page letter, Mr. Bass’s first to his investors in more than two years, contains some of his most-detailed comments yet on the thinking behind his fund’s China short. Hayman, starting last year, sold off the bulk of its investments in stocks, commodities and bonds to focus on shorting Asian currencies in the biggest concentrated wager it has made since its profitable bet years ago against the U.S. housing market, The Wall Street Journal reported last month.

Hayman began repositioning its portfolio after studying China’s banking system and being stunned at its rapid expansion of debt. The firm’s analysis suggested that past-due loans would rise sharply and eventually require a huge injection by the central government to recapitalize the banks.

In the letter, Mr. Bass wrote that the assets in China’s banking system are equivalent to 340% of the country’s gross domestic product and that the PBOC would need to print more than $10 trillion worth of yuan to recapitalize its banks. The magnitude of losses by China’s banking system “could exceed 400% of the U.S. banking losses incurred during the subprime crisis,” he wrote.

China has several levers to pull, including cutting interest rates to zero and using reserves to recapitalize its banks, the letter said, but “ultimately a large devaluation will be a centerpiece of the response.”
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