China and the Goldfinger Syndrome
by ilene - July 23rd, 2010 5:18 am
China and the Goldfinger Syndrome
Courtesy of JESSE’S CAFÉ AMÉRICAIN
I have had some interesting discussions recently with correspondents about the problem which China has with its very large US dollar reserves.
To summarize what I think, China is attempting to diversify their portfolio of US Treasury dollar holdings. They are obviously accumulating ‘real goods’ including stockpiles of basic materials, gold, silver, oil and investments in the means of production in their own region and in key regions around the world.
This is more difficult than it might appear on the surface. Real goods are often strategic, and governments are sometimes reluctant to allow them to be acquired by a government considered a potential threat. The first difficulty is the strategic importance of some assets, such as the China’s offer for the purchase of Unocal.
But there is also a need for confidentiality, stealthiness if you will. If word were to leak out that ‘China is dumping its Treasuries’ there would be a run on the market and the Chinese could lose a portion of their reserve wealth rather quickly.
Now, would it matter. Well, yes. It would matter because US dollars are still the currency of choice for most international trade including the all important international commodity, oil. If you think that philosophically dollars have no value because they are just paper, I would be more than happy to dispose of them for you. Limited time offer, of course.
I also posited that China, while accumulating its real goods quietly against the constraint of perturbing the markets, could do short term hedges against the less catastrophic scenario of further dollar devaluation by going into the very deep and liquid financial assets markets, and hedging risk with CDS and other obvious investments including shorts of various types.
As anyone who has attempted to acquire a company or take a substantial position in or out of an asset or company, at some point you can affect the price, making other participants aware that the asset is in play, and end up selling or buying against yourself. In the case of China it could also trigger a run on the bank of the US, which is an immediate endgame.
With regard to the use of financial instruments, someone raised the obvious issue of counter party risk. Well, of course it is an issue. But less so if you are merely hedging…
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Much Ado About TED, LIBOR, and Currency Swaps
by Chart School - May 22nd, 2010 1:41 pm
Much Ado About TED, LIBOR, and Currency Swaps
Courtesy of JESSE’S CAFÉ AMÉRICAIN
There is some alarm being expressed about the recent increase in the TED spread from some quarters this week.
Here is a short term chart of the TED. It is definitely elevated expressing the accelerated demand for dollars in Europe. Although the BIS reports will not catch up with this action for quite a while, I suspect we are seeing a replay of a flight away from dodgy assets such as dollar denominated CDO’s that European customers had deposited with their banks that are now being liquidated again. Also, and undeniably, there is a flight to gold, Swiss francs, and US dollars from the Euro as the ECB and the EMU sort out their serious issues brought about by a single currency and monetary policy working across a wide diversity of localized fiscal conditions.
However, here is the longer term picture of the TED spread. As you can see, it is a bit too early to hit the warning sirens. But it does bear watching.
The long view is not very dramatic, and also not as useful for promoting short euro hedge fund trades, or for generating viewer clicks.
For some additional perspective, here is a chart of the one year LIBOR rate.
Here is a short term view of LIBOR in US Dollars. It is definitely elevated.
But here is a similar short term view of LIBOR expressed in ECU’s. By comparing the two LIBOR charts one might think that there is an elevated demand for dollars, probably attributable to a flight to safety. The DX chart indicates that it seems to be peaking. But it can always take a turn for the worse.
And while we are at it, here is a reprise of a prior discussion of the Fed’s swap lines with Europe, designed to relieve imbalanced demand for dollars.
The US is indeed contributing to the bailout of Greece, via its membership in the IMF. But not through the currency swap lines, unless there is something else going on there behind the scenes. Since the US owns the biggest printing press in the world, at least for now, that would not be a shock.
There may be a time to worry about European insolvency. But quite a bit of what we are hearing about Europe these…
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Philip R. Davis is a founder Phil's Stock World, a stock and options trading site that teaches the art of options trading to newcomers and devises advanced strategies for expert traders...
Ilene is editor and affiliate program
coordinator for PSW. She manages the site