Dear CIGAs,
Aussie unemployment numbers just came out and were much better than expected!
DEBT,DEBT,DEBT for that theme was alive and well in the world today.
Hirohisa Fujii the finance minister of Japan was raising concerns about the recent sell off in JGBs as the rates on ten year Japanese debt have risen 20 basis points over the last 2 weeks. There is growing concern that Japan will have trouble financing their growing national debt that is now over 200% of GDP. This is not a new story but one that has been kicked around for several years and seems to be gaining adherents in the world because of all the other government debt that has been floated since the global recession has deepened. We will pass this off as a concern of crowding out – as the low yields on JGBs cause them to be replaced by other sovereign debt.
Yesterday that great luminary of credit analysis, FITCH, raised a warning about British gilts being downgraded from AAA which caused the sterling to be sold off.
We will note that this that warning the gilts have been up for 2 days so something else must be bothering the pound, like resistance, so we send you to the charts to see if the sterling can hold support.
The Greek government has also come under attack for budgetary malfeasance but that is a problem for the European Union so its impact is diluted. But if these DEBT concerns rattle the Japanese and the BRITS, what about the U.S. budgetary morass? Anybody want to buy 30 year treasuries? And the talking heads proclaim that GOLD is devoid of reality.
We also remind those who are quick to criticize the Japanese that 95% of JGB’s are held domestically while the holdings of U.S. debt are global. We are back to good old John Connelly – it is our dollar but your problem but with Mr.Obama in Japan and China next week we will see for how long this tired old phrase holds.
There was an interesting story out on Tuesday that the Chinese Investment Corp [CIC] has agreed to purchase a 15% stake in the large U.S. energy company AES. The agreement also includes the buying 35% of the firm’s wind power unit for another $570 million for a total investment of 2.1 billion dollars. This may not be deemed a significant amount of money but its importance lies in the concept that the Chinese are testing the Americans to see if they will block this deal under the auspices of CIFIUS.
Remember the last few times the Chinese have attempted to buy into U.S. assets they were rebuffed under the guise of strategic value to the U.S. With Obama in China pressing for possible appreciation of the Renminbi? The trade off may well be allowing the Chinese to purchase high technologically valued assets in the U.S. If the CIFIUS committee were to block this deal, we won’t know for a while, look for great friction to develop between the U.S. and China
Also out of Asia, tonight the Taiwan central bank announced that they are banning foreigners from putting money in bank time deposits. This is a new type of effort to place constraints on capital flows like the Brazilian 2% tax announced last week. We must stay alert to more of these actions as emerging markets attempt to halt the rapid appreciation of their currencies. The impact on the Brazilian REAL has been negligible but we can look for continued efforts to do so. If this becomes contagious the equity markets will be the recipient of that pain.
From the realm of the absurd we have our man Timmy Geithner in Japan reiterating his strong dollar mantra. Do they ever tire of looking like idiots on the world stage? The last time Geithner was in China college students openly laughed at him in a Q and A session he was having and that was in June.
What exactly has the Secretary of Treasury done to put any bite in that statement? We want to report that the Rick Mishkin piece in the FT elicited a couple letters to the editors that followed upon our criticism. One was written by an economist we admire greatly, Andrew Smithers, who noted that of course you can discern a bubble. Smithers has done a great deal of work on valuing Wall Street by using Tobin’s Q theory so when he is critical you should take notice. There are no good bubble periods for they only create pain further out in time as we saw with the bursting of the Dot.com bubble. The Fed held rates far too low for too long and created the housing bubble. Enough said. And then his eminence Sir Alan followed Mishkin with a speech in which he discussed how the recent equity rally was smoothing the way for recovery. Oh the rehabilitation of Greenspan is a work in progress. Reminds one of Lin Piao.
Yra Harris
