Chinese Currency Slumps To 19-Month Lows

The PBOC's willingness to a) enter the global currency war (beggar thy neighbor), and b) 'allow' the Yuan to weaken and thus crush carry traders and leveraged 'hedgers' is about to get serious. The total size of the carry trades and hedges is hard to estimate but Deutsche believes it is around $500bn and as Morgan Stanley notes the ongoing weakness means things can get ugly fast as USDCNY crosses the crucial 6.25 level where losses from hedge products begin to surge. This is a critical level as it pre-dates Fed QE3 and BoJ QQE levels and these are pure levered derivative MtM losses - not a "well they will just rotate to US equities" loss - which means major tightening on credit conditions...

CNY hits a critical level at 6.25...

This is a major problem because...

The seemingly incessant strengthening trend of the Chinese Yuan (much as with the seemingly inexorable rise of US equities or home prices) has encouraged huge amounts of structured products to be created over the past few years enabling traders to position for more of the same in increasingly levered ways. That was all going great until the last few weeks which has seen China enter the currency wars (as we explained here). The problem, among many facing China, is that these structured products will face major losses and as Morgan Stanley warns "real pain will come if CNY stays above these levels," leading to further capital withdrawal, illiquidity, and a potential vicious circle as it appears the PBOC is trying to break the virtuous carry trade that has fueled so much of its bubble economy.

As we noted previously... The total size of the carry trade is hard to estimate although even just looking at some of the onshore CNY positions accumulated, DB Asia FX strategist Perry Kojodjojo estimates that corporate USD/CNY short positions are around $500bn. The size of the carry trade and the fact that China saw significant capital outflows during the last period of substantial Renminbi depreciation in the summer of 2012 has led to concerns over what this might mean for both the Chinese economy and financial markets as well as broader global financial implications.

Morgan Stanley believes that one such carry-trade structured product that will be the "pressure point" for this - should the Yuan continue to depreciate - is the Target Redemption Forward (TRF)which has a payoff that looks as follows...

While this is just an example of a product payoff matrix to the holder, the broader point is that the USD/CNH market has a particular level (or range of potential levels) at which three factors can create non-linear price action. These are:

1. Losses on TRF products will (on average) crystallize if USD/CNH goes above a certain level. This has implications for holders of TRF products, who are mostly corporates;

2. The hedging needs of writers of TRF products (banks) mean that there is a point of maximum vega for banks in USD/CNH. Below this level banks need to sell USD/CNH vol; above this level banks need to buy USD/CNH vol;

3. The delta-hedging needs of banks are complex. As we approach the average strike (the 6.15 in the theoretical point of Exhibit 1), banks need to buy spot USD/CNH. Above this point but below the European Knock-in (EKI) (i.e., between 6.15 and 6.20 in Exhibit 1), banks need to sell spot. Then above the EKI, banks don’t need to do anything in spot.

From internal Morgan Stanley data, we estimate that the point of maximum vega is somewhere in the range of 6.15-6.20, and that the 6.15-6.20 in Exhibit 1 is reasonably indicative of the average strikes and EKIs in the market.

In other words, so long as the TRF products remain in place (i.e., are not closed out) and we remain below the maximum vega point (somewhere between 6.15 and 6.20), there is natural selling pressure by banks in USD/CNH vol. When we get above that level, there is natural vol buying pressure.

Of course, in the scenario that USD/CNH keeps trading higher and goes above the average EKI level, the removal of spot selling flow by banks and the need to buy vol means the topside move may accelerate.

Simply put, if the CNY keeps going (whether by PBOC hand or a break of the virtuous cycle above), then things get ugly fast...

How Much Is at Stake?
In their previous note, MS estimated that US$350 billion of TRF have been sold since the beginning of 2013. When we dig deeper, we think it is reasonable to assume that most of what was sold in 2013 has been knocked out (at the lower knock-outs), given the price action seen in 2013.

Given that, and given what business we’ve done in 2014 calendar year to date, we think a reasonable estimate is that US$150 billion of product remains.

Taking that as a base case, we can then estimate the size of potential losses to holders of these products if USD/CNH keeps trading higher.

In round numbers, we estimate that for every 0.1 move in USD/CNH above the average EKI (which we have assumed here is 6.20), corporates will lose US$200 million a month. The real pain comes if USD/CNH stays above this level, as these losses will accrue every month until the contract expires. Given contracts are 24 months in tenor, this implies around US$4.8 billion in total losses for every 0.1 above the average EKI.

Deutsche Bank concludes...

Looking forward it’s possible that the PBOC is not attempting to actively engineer a sustained depreciation of the Renminbi but rather is attempting to increase the level of two-way volatility in the market to discourage the carry trade and also excessive capital inflows. In terms of the broad risk going forward the sheer scale of the challenge the PBOC has set out to tackle likely means they will have to move with restraint. This is certainly a story to watch...

As Morgan Stanley warns however, this has much broader implications for China...

The potential for US$4.8 billion in losses for every 0.1 above the average EKI could have significant implications for corporate China in its own right, as could the need to post collateral on positions even if the EKI level is not breached.

However, the real concern for corporate China is linked to broader credit issues. On that, it’s worth reiterating that the corporate sector in China is the most leveraged in the world. Further loss due to structured products would add further stress to corporates and potentially some of those might get funding from the shadow banking sector. Investment loss would weaken their balance sheets further and increase repayment risk of their debt.

In this regard, it would potentially cause investors to become more concerned about trust products if any of these corporates get involved in borrowing through trust products. In this regard, this would raise concerns among investors, given that there is already significant risk of credit defaults to happen in 2014.

Remember, as we noted previously, these potential losses are pure levered derivative losses... not some "well we are losing so let's greatly rotate this bet to US equities" which means it has a real tightening impact on both collateral and liquidity around the world... yet again, as we noted previously, it appears the PBOC is trying to break the world's most profitable and easy carry trade - which has created a massive real estate bubble in their nation (and that will have consequences).

+++++++++++++

The bottom line is the question of whether the PBOC's engineering this CNY weakness is merely a strategy to increase volatility and thus deter carry-trade malevolence (in line with reform policies to tamp down bubbles) OR is it a more aggressive entry into the currency wars as China focuses on its trade (exports) and keeping the dream alive? (Or, one more thing, the former morphs into the latter as a vicious unwind ensues OR the market tests the PBOC's willingness to break their momentum spirit).

The escalation of the unwind in recent days suggests the vicious circle is beginning.

Finally, putting aside speculative trader P&L losses, many of which are said to be of Japanese origin and thus will hardly enjoy much or any PBOC sympathies, here is CLSA's Russel Napier on what the long-tern fate of the Renminbi will be:

“Mercantilist alchemy transmutes China’s external surpluses into foreign exchange reserves and renminbi. But with capital outflows from China at record highs, those surpluses are only maintained due to its citizens’ foreign-currency borrowing. Bank-reserve and M2 growth are already near historical lows and are driving tighter monetary policy. This will lead to severe credit-quality issues and force the authorities to accept a credit crunch or opt for a major devaluation of the renminbi. They will do the latter; and despite five years of QE, the world will get deflation anyway.”

http://www.zerohedge.com/news/2014-04-24/real-pain-about-begin-chinese-currency-slumps-19-month-lows

Trade the recovery of the Yuan - Open a Forex account

Ukraine Currency Collapses Nearly 70% Against Gold In 4 Months

The euro, the dollar and the pound have been three of the stronger currencies in the world in recent months which has curtailed gains in precious metals in these currencies. This has not been the case for emerging market currencies many of which have fallen sharply and gold has risen correspondingly in value.

Thus, gold has again acted as a safe haven for millions of investors and savers around the world and protected them from the declining value of fiat currencies.
 

Gold in Euros - Jan, 2009 to April 17, 2014 - (Thomson Reuters)
This is particularly evident in Ukraine where the economy is nearing collapse and the currency is in free fall. The Hryvnia has been the world’s worst performing currency in 2014.

The charts below gives an indication as to the terrifying magnitude and speed of the recent decline in the value of the currency. Last week alone the currency fell by 7% against gold or gold per ounce has risen from 15,669 hryvnia per ounce at open on Monday to 16,880 hryvnia per ounce at the end of the week.

Gold in Ukrainian Hryvnia (Sharelynx.com)

Year to date, gold in hryvnia has surged by 69% from 9,992 per ounce to 16,880 per ounce or to put it more correctly, Ukraine’s national currency has collapsed by 69% against gold in less than four months.

This has resulted in the cost of food, fuel and basic staples surging for ordinary people in Ukraine.
People are buying gold, silver, other hard tangible and income generating assets.

Goldpriceticker.com

Once again, the lucky few who own physical gold are being protected from the currency collapse.  They are in a position to buy food, water, property, land, businesses and other income generating and life sustaining essentials.

Thereby, once again showing the lack of knowledge and sometimes simple bias of those who claim that gold is not a safe haven and discourage investors from having even a small allocation to gold.

Gold is protecting people and companies in Ukraine today. It will do the same for people and companies in other countries in the coming months and years.
Singapore is now one of the safest places in the world to store gold - Essential Guide To Storing Gold In Singapore

http://www.zerohedge.com/contributed/2014-04-22/ukraine-currency-collapses-nearly-70-against-gold-4-months

Trade the Currency Wars by Opening a Forex Account

Anti-HFT Trading Platform Comes To "Rigged" FX Markets

The surge in volume on the anti-HFT equity trading platform IEX - of Flash Boys and TV-fight-night fame - makes it very easy to see how the buy-side (which the US retail investor is one small part of) clearly prefers an un-rigged place to find willing sellers (or buyers). Relatively light regulation and high volumes make the $5.3 trillion-a-day foreign-exchange market a prime target for high-frequency traders. More than 35% of spot currency volume in October was by speed traders, up from 9% five years earlier, but just as in equity markets, there are speculators and there are natural buyers and sellers in FX markets (looking to hedge payments and receipts from real business for example). As Bloomberg reports, a currency-dealing platform known as ParFX, established in 2011, offers a transparent marketplace and subjects orders to random pauses of about 20 to 80 milliseconds, and "is the industry’s effort to heal itself."

IEX volumes hit record highs...

And now the FX markets - also dominated by High-Frequency-Trading - have an anti-HFT platform upon which to transact...

The FX market is just as plagued by the HFT "parasite" as equity markets...

Relatively light regulation and high volumes make the $5.3 trillion-a-day foreign-exchange market a prime target for high-frequency traders. More than 35 percent of spot currency volume in October was by speed traders, up from 9 percent five years earlier, according to Boston-based consultancy Aite Group LLC.

...

“There’s been a lot of dissatisfaction, particularly on the buy-side and asset-management community, about high-frequency trading,” said Richard Bentley, the vice president for financial services at Software AG, which aggregates trading platforms including ParFX. “There’s the perception that they’re parasites. What ParFX have done is essentially play to that and said, come and trade in our pool, because we’re not going to allow the HFT people to come and spoil the fun.”

And ParFX was set up specifically to rmeove HFT's ability to front-run orders (just like IEX did in equity markets)...

A currency-dealing platform known as ParFX, established in 2011 by firms from Deutsche Bank AG to Citigroup Inc...

The system started trading in July, and now executes deals for 15 firms including Deutsche Bank, Citigroup, Barclays Plc and UBS AG, the four biggest currency dealers. It expects to have 25 percent more clients by the end of April.

ParFX offers a transparent marketplace and subjects orders to random pauses of about 20 to 80 milliseconds, and “is the industry’s effort to heal itself,” according to Marcus.

The bottom line is a search for "trust" is on the rise...

“These banks do need to trade foreign exchange because it’s their business and they’re hedging their currency exposure across the world,” London-based Marcus said in an April 15 interview. “They would rather trade in an environment that they can trust.”

http://www.zerohedge.com/news/2014-04-19/anti-hft-trading-platform-comes-rigged-fx-markets 

Glaring Q.E. Failure Spotted - Money Velocity Is Falling Rapidly

Sometimes pictures are far more effective in communicating an important point. They are extremely effective in undermining respect and confidence, when in the cartoon format. A sequence of graphics struck the cognitive circuits recently. Long explanations will not serve well. The US Federal Reserve has been printing money since 2011 to cover USGovt debt securities in a frenetic manner. They have lost control. They call it stimulus, when it is actually the opposite. It does assist the speculators with nearly zero cost money to borrow, but one must be a club member to win loan grants.

The Quantitative Easing programs are deceptive. When the program was initially announced, the Jackass claimed it would be part of an endless sequence. With QE1 and QE2 and Operation Twist and QE3, following the failed trial balloon called Taper Talk, it is quite clear to anyone with an active brain stem and absent rose colored glasses that the USFed is caught in a trap called QE to Infinity. It is not stimulative. Instead, the uncontrollable bond monetization causes capital destruction. It causes economic degradation. It causes lost jobs and vanished income. It is a gigantic wet blanket to smother and destroy the USEconomy slowly, amidst unending propaganda. QE is the device that will result in Systemic Failure, which is already flashing signals of its arrival.

MONEY VELOCITY FALLING RAPIDLY

Money Velocity continues to fall rapidly in both the USEconomy and that of Canada, reaching 50-year lows in the Untied States. The indication is failure in monetary policy, as hyper inflation has killed capital on an extensive basis. The capital destruction is in its fourth year, probably having reached critical mass. Compared and contrasted with fast rising money supply, the systemic failure is obvious to conclude. The exception is to morons, Wall Street junkies, Big Bank criminal elite, and USGovt hacks. The fast decline in Money Velocity means that it is not moving in the body economic. The reason is simple. The blood system is contaminated with the USDollar, a toxic currency with no backing in a hard asset. The new money is toxic currency under phenomenal debasement by its own steward, the USFed itself. They redouble their harmful policy instead of abandoning it.

The Money Velocity picture is not pretty. The declining rate has broken lows set 50 years ago. Technically, the velocity of money is the frequency at which one unit of currency is used to purchase domestically produced goods and services within a given time period, like an inventory cycle time. In other words, it is the number of times one dollar is spent to buy goods and services per unit of time. If the velocity of money is increasing, then more transactions are occurring between individuals in an economy. The result would be that growth (as measured in GDP) should be rising. With falling velocity of money, then fewer transactions are occurring and a recession is indicated. Such is the present case in astonishing rapid deterioration. Consumers and business are holding firm their money rather than investing it, as they see poor prospects. New capital formation is not occurring inside the USEconomy, or pitifully little. Debts are being dissolved, usually in default. It should be noted that the velocity of money has also been falling in the EU and Japan. The entire global economy is in recession, the pathogenesis shared.

DESTRUCTION OF CAPITAL

The claim that the QE bond monetization is stimulus is pure propaganda, and could not be further from the truth. The claim disguises the nature of the hidden Wall Street bailout, which is to cover their worthless mortgage bonds, and to cover all manner of derivatives, in addition to the obvious coverage of USTreasury Bond sales. Nobody wants the USGovt bonds anymore, except for Belgium operating as hidey hole on behalf of the Euro Central Bank, and for Japan operating as the usual lackey servant. The claim of stimulus is 180 degrees wrong. The bond monetization is pure unsterilized monetary inflation, free money shoved into the system without offset. To be sure, Bernanke had a machine to produce money at no cost, except that like with acid it ruins capital. The result is pure inflation, and extreme motivation for the entire world to take on hedge positions with energy, metals, farmland, and more in order to protect themselves from the ruin of money. The effect is felt as a rising cost structure, felt across the world, and thus shrinking profit margins for the entire global business sector.

As businesses realize the lost profitability, they shut down and retire their capital. They turn idle their factor machinery, their design workstations, their office computers, their transportation vehicles, their company buildings and offices. The destruction of capital is the ugliest dirty secret behind the official New Normal of central bank monetary policy. They are killing the system, so as to avoid liquidating the big banks. By refusing to take the proper capitalism path in liquidating failed corporate structures, they have instead chosen to kill capital, force income engines to the sidelines, generate capital formation in other nations (like the East & Asia), and destroy the USEconomy. The US and West has forgotten capitalism and embraced socialism with a fascist twist.

RAMPANT MONETARY GROWTH

Contrast the declining Money Velocity with fast rising Money Supply growth (presented in March). The conclusion is both galloping economic recession and systemic failure, hardly a reward. Yet it continues without interruption, only the promise of interruption. The systemic failure and breakdown is upon us, the evidence stacking up, the message no longer escapable. The two charts back to back make the point convincingly. New money is wrecking the financial structures and economic systems by destroying capital. The USFed balance sheet is well over $3 trillion, and continues to grow. The new money is going largely in a hidden Wall Street bailout of their bonds and derivatives. The USFed is a grand liar, as their QE volume is growing, not tapering. They are using proxies and back doors, in addition to airborne dirigibles like the Interest Rate Swap contract. Like with the Hindenburg, the floating monsters will explode someday. The growth in money supply is frightening and alarming, evidence of the wrecked capital and wrecked system. Many have called the Jackass a lunatic and alarmist, but they seem incapable to explain the fast rise in monetary base, yet fast decline in money velocity. Monetary policy is a failure. The fiat paper money is toxic. The big banks are insolvent. The global franchise system of central banks should be shut down, except they control the governments, control the finance ministries, control the central banks, control the regulators, and control the militaries.

LOST CRITICAL MASS IN INDUSTRY

It is very confusing that money velocity is falling fast, yet central banks are creating new money very rapidly. Imagine a Ferrari or Lamborghini race car spinning its gears, burning its engine out, running out of oil, making no movement. It aint working, started by Alan Greenspan, amplified by Benjamin Bernanke, and to be continued by Janet Yellen. They are stuck with failed monetary policy, and cannot alter the destructive course. The Jackass has maintained that a critical error was committed by granting China the Most Favored Nation status for trade. It was actually a fatal error. The industrial investment is taking place in Asia, led by China. Wall Street and the USGovt leadership at the time, under President Clinton and Robert Rubin, betrayed the nation. They leased gold from the Chinese, in order to perpetuate the fiat paper USDollar regime. They deployed the lunatic Rubin Doctrine, to wreck next year for a few more tomorrows. In doing so, the Chinese benefited from $23 billion in foreign direct investment in the space of a mere two to three years. But the blowback was fatal. The USEconomy lost its industrial critical mass, and has inadequate traction from monetary policy in accommodation. It still has some industry, but not enough. The ultra-low interest rate makes borrowing costs low, but grotesquely inadequate new capital formation has taken place in the USEconomy. It is being done in Asia. Worse, the new industrial parks are springing up across the US landscape, operated by Chinese industrial masters. The QE is not stimulating the USEconomy because 1) the US lacks critical mass industrially, 2) the regulator burden and corporate tax burden and ObamaCare burden are too great, and 3) the nation is too busy with court cases against the big banks and waging war against fabricated enemies. This is Game Over !!!

As David Chapman points out, "It all seems counter-intuitive that the velocity of money should be falling even as the ECB, the Fed, the BOJ, and the Bank of Canada have been maintaining low interest rates for years in order to encourage borrowing and keep the cost of money low. The central banks have also pumped billions of dollars into the economy through QE and other stimulative measures. The result has been an explosion in the monetary base, a sharp rise in M1 but lower growth for M2 and sluggish M3. The economies are weighed down with debt, banks are reluctant to lend, consumers and corporations are unwilling to borrow. The money instead has been used for speculation, primarily going into risk assets such as the stock market. Corporations instead of investing in new plants and investment are sitting on cash hoards or buying back their own shares. Both are non-productive."

CANADA DITTO ON FAILURE

The Jackass howls in laughter at the claim that Canada is different, an independent nation, a refuge of wiser leadership, the Great White North with more integrity. What nonsense! Canada is in the US pocket, and has been for a very long time. The arguments that Canada is different or better or free from gold corruption are truly baseless and stupid. The big Canadian banks short gold with Wall Street banks, and have been doing so for a long time. See the Scotia Mocatta alliance with JPMorgan in recent months. The Canadian Govt efficiently vacated all their gold in the 1980 and 1990 decades. It was probably stolen in part by Mulroney, just like as Bush & Clinton & Rubin stole the US gold. See the hidden brisk activity at Barrick Gold, where the ex-prime minister sat on the Board of Directors. Pay close attention to the Evergreen gold contracts by Barrick, which never force under contract the delivery of gold, only the sale under dubious specious contracts. Then the big Canadian banks are deeply committed in the Wall Street and London derivative entanglements, just like the big US banks. All their big banks are hollow reeds, just like in the Untied States. Lastly, the Canadian stock exchanges engage in rampant naked shorting of the mining stocks, not by those who wish to preserve the fiat currency system, but rather by the investment banks that fund the capital requirements for the mining firms themselves. They sell more shares than granted on finance deals. The most disturbing gold factor from Canada in the last year has been the collusion of Scotia Mocatta with JPMorgan in the provision of gold bullion. They have been offered some special deal for the future, but that future will include a charred landscape and devils as warlords. Scotia Mocatta is in Satan's service at the Wall Street altar. The old formula still holds: CANADA = UNITED STATES / 10  (just like always). The Jackass expects an extreme conflict very soon, as Canada is far more a Chinese commercial colony than the Untied States. My expectation is that Toronto, Ottawa, and Vancouver will soon begin marching to a different drummer out of Beijing, Shanghai, and Hong Kong. A big hat tip to David Chapman for his recent article (CLICK HERE) on the Money Velocity subject, where the graphic was obtained.

BLACK HOLE DYNAMICS

Bernanke was correct. The cost of newly printed electronic money is zero. But he left out the other half of the statement, since he is a lousy economist. The value of the newly printed electronic money is zero. Due to his pathetic education, Bernanke overlooked or fails to comprehend the effect of hyper monetary inflation. Endless spigots of new fiat money are not the salvation of a system, but rather a cornucopia of new capital formation can lift the system in an effective legitimate manner. The unchecked inflation results in the destruction of capital, the wreckage of income producing engines, the extreme ruin of jobs. The new money goes down a drain. The curvature to the drain is defined by toxic bonds even as the inflection is marked by harmful derivatives. The stubborn behavior of the central bank franchise system operations, their deep collusion, their phony patches to the bond structures, their self-dealing $23 trillion in near zero interest loans to themselves, their waged war to protect the King Dollar regime, it is all destructive. Sooner or later the people and madding crowds will awaken, surely very late in the end game.

GOLD STANDARD PROTECTION, SOLUTION, FUTURE

The protection is with Gold & Silver bars & coins. The solution is not more bond purchases, broader monetization programs, more liberalized bank reserve rules, or suspended accounting rules. The solution is liquidation of the big dead zombie banks, and a return to the Gold Standard. It will be put in place. It will be installed. It will arrive with a vast new structure of legitimacy. It will include barter systems and decentralized mechanisms. It will include new Letters of Credit based in Gold Trade Notes. But the East led by Russia, China, and followed by India, Japan, and South Korea will be the promoters, installers, and architects of the new strong stable equitable Gold Standard system that the Untied States dreads and fears. The West will continue its rapacious confiscation of wealth and its vicious devotion to war until the platform they stand on built of USD ceramic tiles and USTBond cables and SWIFT pylons collapses. The return of the Gold Standard will relieve the global economy of the burden and wreckage of central bank ruinous and criminal actions. The damage will be extensive. The survivors will be owners of Gold & Silver. The rest will become debt slaves in a nasty fascist state.

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"Jim Willie is a gift to our age who is the only clear voice sounding the alarm of the extreme financial crisis facing the Western nations. He has unique skills of unbiased analysis with synthesis of information from his valuable sources. Since 2007, he has made over 17 correct forecast calls, each at least a year ahead of time. If you read his work or listen to his interviews, you will see what has been happening, know what to expect, and know what to do."

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by Jim Willie CB 
Editor of the “HAT TRICK LETTER” 
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Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 25 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at  www.GoldenJackass.com, which includes a Squirrel Mail public email facility.

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US to Foreign Officials: Stop buying Treasuries

Cassandras warn that the foreign appetite for US debt is satiated and wonder who is going to buy US Treasuries when the Federal Reserve stops. Not only are US officials not concerned about this, but the Department of Treasury continues its campaign to discourage foreign central banks from buying so many Treasuries.

Foreign official purchases of Treasuries are usually the result of intervention in the foreign exchange market. The rules of engagement as they have evolved from the G7, the G20 and IMF over past decade are to let market forces drive foreign exchange prices. Of course, the orthodoxy prior to this, and the rules under which the high income economies boomed, was the exact opposite.

In any event, the US Congress requires US Treasury Department to make semi-annual reports on the international economic policies and exchange rate practices of the major US trading partners. It did so yesterday, April 15. As part of the report, it must look at whether these trading partners are manipulating their currencies to prevent an adjustment on the balance of payments or to seek an unfair trade advantage. The fact that the US has not cited any country for two decades has, in some sense, makes the threshold more significant.

On the other hand, the currency policy of many countries is more nuanced. It is not just intervention, but a certain purpose of the intervention that is required to conclude manipulation. Let's concede for the sake of the argument that China did not just tolerate, but actually played an active role in the yuan's recent weakness. It may not meet the threshold of manipulation of the law if it did so to wash out what it regarded as speculative positioning.

The Treasury report warns that it would "raise particularly serious concerns" if the recent yuan weakness was an indication that Chinese officials would resist further currency appreciation. However, the report still assumes the if left to market forces, the yuan would strengthen. This assumption is not as obvious as it once was, especially given the sharp decline in its external surplus and the compounded effect of persistent inflation than the US, Europe and Japan.

Though stopping shy of labeling a country a manipulator, which would require bilateral negotiations, the US Treasury still uses the report to express its desires. It calls on China to let markets play a bigger role and take advantage of the opportunity created by widening the band (to 2% from 1% from daily fix). The US does not force China to intervene and buy US Treasuries and it wishes it did not.  

 The February TIC data show that China's Treasury holdings fell by $2.7 bln, bringing the three month decline to almost $34 bln. Still at $1.27 trillion, China's Treasury holdings remain the largest in the world. Japan comes in a close second with $1.21 trillion. Japan's holdings increased by $9 bln and over the past three months; they have risen by about $25 bln. Japan has not intervened in the foreign exchange market for a few years (2011), but over the past year, its Treasury holdings have risen by about $100 bln. The US Treasury urges Japan to focus on structural reforms that boost the growth potential and not rely on monetary to offset the fiscal adjustment.

Over the past three months, South Korea's Treasury holdings have increased by about $10 bln. The US Treasury report notes that South Korea's current account surplus in 2013 was 6.1% of GDP, the largest in 14 years. It cautions the country that intervention (resulting in US Treasury purchases) should only take place under "exceptional circumstances of disorderly markets" and increase the transparency of the interventions.

Germany did not go unscathed. It says Germany's reluctance to boost domestic demand retards the adjustment process. The US Treasury notes that German domestic demand has only grown faster than GDP in three times in the past ten years. Germany's current account surplus remains well above 7% of GDP. The adjustment that has taken place is largely in the periphery through higher savings, which compresses demand. 

The G20 have agreed on working toward readdressing global imbalances. The Treasury's report argues that there are two reasons why a larger adjustment has not taken place. First, surplus countries have not increased domestic demand sufficient. Second, more progress is needed to more fully embrace market-determined exchange rates, refrain from currency intervention and stop excessive reserve accumulation.

Over the course of February, non-residents Treasury holdings rose by about $45 bln. Only about $1 bln was due to central banks. Their note and bond purchases appeared to have been large funded by shifting funds from the bill sector. Of the private sector increase, the lion's share (almost $31 bln) can be accounted for by Belgium. The US Treasury data suggests that Belgium owns Treasuries equivalent to roughly 3/4 of its GDP.

No doubt this overstates the case. Instead, Belgium's holdings, third overall behind China and Japan, are most likely a function of the role of Brussels as a financial center. The bank-owned clearer and custodian, Euroclear has around 22 trillion euro of assets and reports a large increase in Treasury holdings in recent months. Treasuries are ubiquitous collateral.

In January and February, the Federal Reserve reduced the amount of Treasuries it bought by $10 bln (and it reduced its purchases of Agencies by $10 bln as well). Foreign investors more than covered the difference, buying about $92 bln worth over the same period. Of this, foreign central banks accounted for about $15 bln.

US officials have long argued that the self-insurance strategy of building massive reserves is inefficient, expensive, and contributes to financial instability. Remember the Greenspan "conundrum": why US long-term rates were low even though the Fed had been raising short-term interest rates (circa 2004-2005). Bernanke responded by attributing it to Asia, which coming out of the 1997-98 financial crisis, began running significant current account surpluses and building reserve war chests. US officials have been consistent in recent years arguing that the self-insurance strategy is an obstacle to the agreed upon goal of reducing imbalances. They want private investors to buy US assets, including Treasuries, but are not so keen on foreign official purchases.

http://www.zerohedge.com/contributed/2014-04-16/us-foreign-officials-stop-buying-treasuries 

Open a Forex Account today

Pensions 'Timebomb' - 85% of Pension Funds Will Go Bust

Today’s AM fix was USD 1,311.50, EUR 950.43 & GBP 784.06 per ounce.               

Yesterday’s AM fix was USD 1,324.50, EUR 958.05 & GBP 792.21 per ounce.  

Gold rose $8.90 or 0.68% yesterday, closing at $1,326.70/oz. Silver rose $0.04 or 0.2% yesterday to $19.99/oz.

Gold fell from a three week high today on speculation that very tentative signs of an improving U.S. economy will curb demand for the safe haven. A report yesterday showed U.S. retail sales increased more in March than economists forecast.

Gold in U.S. Dollars - Jan, 2009 to April 15, 2014 - (Thomson Reuters)
Palladium fell nearly  2% today, declining from the highest price since August 2011, after climbing the previous five sessions. Increasing tensions in Ukraine sparked concern that more sanctions will curb raw material supplies from Russia, the largest palladium producer and one of the largest gas exporters.

The worsening geopolitical tensions between Putin’s Kremlin and many governments in the West should support gold bullion [11] and could lead to gold challenging the important psychological level of resistance at $1,400/oz. Gold has rebounded 9.1% this year after the sharp falls of last year.

Gold in U.S. Dollars - 20 Years - Jan, 1994 to April 15, 2014 - (Thomson Reuters)
Pensions 'Timebomb' - 85% of Pension Funds Will Go Bust The “pensions timebomb” keeps on ticking and as societies we become less prepared by the day.

Yet another report shows that the public pension system is in dire straits. This one comes from renowned investment manager Bridgewater Associates.

The study estimates that public pension funds will earn an annual return of 4% or less in the coming years due to near zero percent interest rates and financial repression. That, in turn, would cause bankruptcy for 85% of the pension funds within 30 years, the study warns.

Public pension plans now have only $3 trillion in assets to invest so that they can pay out $10 trillion of retirement benefits in coming decades, according to Bridgewater. The funds would need an annual investment return of about 9% to meet those obligations, the report says.

Many pension plans assume they will earn 7% to 8% annual returns, an assumption which is far too high. But even in the best case scenario of the pension plans achieving those returns, they will face a 20% shortfall, Bridgewater notes.

Bridewater looked at a range of different market conditions, and in 80% of the scenarios, the pension funds become insolvent within 50 years.

A little notice report issued earlier this year by the Rockefeller Institute of Government says state and local government pension systems have very significant problems.

"Bad incentives and inadequate rules allowed public sector pension underfunding to develop," the study says. "They mask the true costs of pension benefits and encourage underfunding, under-contributing, and excessive risk- taking, trapping pension administrators and government funders in potentially destructive myths and misunderstanding."

It is likely that many pension funds will go bust in the medium term and this may be a crisis that looms large sooner than the Bridgewater research suggests.

Pension funds traditional mix of equities and bonds may under perform in the coming years. Many stock markets appear overvalued after liquidity driven surges in recent years. Bonds offer all time record low yields and are at all time record highs in price. They will fall in value in the coming years.

Pensions allocations to gold are exceptionally low internationally and yet gold has an important role to play in preserving and growing pension wealth over the long term.

Pension funds over exposure solely to paper assets and lack of diversification has cost pension holders dearly in recent years. This will almost certainly continue in the coming years.

Residents in the UK and Ireland, the US, the EU and most countries internationally can invest in gold in a pension [12] - through self administered pension funds. Self administered schemes continue to offer the widest investment choice to company directors and other eligible participants. UK citizens can invest in gold bullion through their Self-Invested Personal Pensions (SIPPs), Irish citizens through their Small Self Administered Schemes (SSAS) and US citizens in their Individual Retirement Accounts (IRAs). If interested, our bullion services team who will take you through the steps required to add the ultimate form of financial insurance to protect your retirement nest egg from the coming pensions timebomb.

To conclude, respected academic and one of the leading researchers on gold in the world, Dr Constantin Gurdgiev, has this to say about the value of gold in pensions:

“Gold is a long-term risk management asset, not a speculative one. As such it should be analysed and treated predominantly in the context of its role as a part of a properly structured, risk-balanced and diversified portfolio spanning the full life-cycle of the investment and pension horizon for individual investors and those with pensions – whether they be SIPPs in the UK or IRAs in the USA.”

http://www.zerohedge.com/print/487345

Global Rankings Study Depicts an America in Warp Speed Decline

April 9, 2014  |  

If America needed a reminder that it is fast becoming a second-rate nation, and that every economic policy of the Republican Party is wrongheaded, it got one this week with the release of the Social Progress Index [3] (SPI).
Harvard business professor Michael E. Porter, who earlier developed the Global Competitiveness Report, designed the SPI. A new way to look at the success of countries, the SPI studies 132 nations and evaluates 54 social and environmental indicators for each country that matter to real people. Rather than measuring a country’s success by its per capita GDP, the index is based on an array of data reflecting suicide, ecosystem sustainability, property rights, access to healthcare and education, gender equality, attitudes toward immigrants and minorities, religious freedom, nutrition, infrastructure and more.
The index measures the livability of each country. People everywhere depend on and care about similar things. “We all need clean water. We all want to feel safe and live without fear. People everywhere want to get an education and improve their lives,” says Porter. But economic growth alone doesn’t guarantee these things.
While the U.S. enjoys the second highest per capita GDP of $45,336, it ranks in an underperforming 16th place overall. It gets worse. The U.S. ranks 70th in health, 69th in ecosystem sustainability, 39th in basic education, 34th in access to water and sanitation and 31st in personal safety.
More surprising is the fact that despite being the home country of global tech heavyweights Microsoft, Cisco, IBM, Oracle, and so on, the U.S. ranks a disappointing 23rd in access to the Internet. “It’s astonishing that for a country that has Silicon Valley, lack of access to information is a red flag,” notes Michael Green, executive director of the Social Progress Imperative [3], which oversees the index.
If this index is an affront to your jingoistic sensibilities, the U.S. remains in first place for the number of incarcerated citizens per capita, adult onset diabetes and for believing in angels.
New Zealand is ranked in first place in social progress. Interestingly, it ranks only 25th on GDP per capita, which means the island of the long white cloud is doing a far better job than America when it comes to meeting the need of its people. In order, the top 10 is rounded out by Switzerland, Iceland, the Netherlands, Norway, Sweden, Canada, Finland, Denmark and Australia.
Unsurprisingly these nations all happen to rank highly in the 2013 U.N. World Happiness Report with Denmark, Norway, Switzerland, the Netherlands and Sweden among the top five.
So, what of the U.S? In terms of happiness, we rank 17th, trailing neighboring Mexico.
We find ourselves languishing for the very fact we have allowed corporate America to hijack the entire Republican Party, and some parts of the Democratic Party. This influence has bought corporations and the rich a rigged tax code that has redistributed wealth from the middle class to the rich over the course of the past three decades. This lack of shared prosperity and opportunity has retarded our social progress.
America’s rapid descent into impoverished nation status is the inevitable result of unchecked corporate capitalism. By every measure, we look like a broken banana republic. Not a single U.S. city is included in the world’s top 10 most livable cities. Only one U.S. airport makes the list of the top 100 in the world. Our roads, schools and bridges are falling apart, and our trains — none of them high-speed — are running off their tracks.
With 95 percent of all economic gains funneled to the richest 1 percent over the course of the last decade, and a tax code that has starved the federal government of revenues to invest in public infrastructure, America will be a country divided by those who have and those who have not. In The World As It Is, Chris Hedges writes, “Our anemic democracy will be replaced with a robust national police state. The elite will withdraw into heavily guarded gated communities where they will have access to security, goods, and services that cannot be afforded by the rest of us. Tens of millions of people, brutally controlled, will live in perpetual poverty.”
This week the Republican Party rolled out its 2014 Ryan budget. Robert Greenstein, president of the Center on Budget and Policy Priorities, noted that under the Ryan budget, "[affluent] Americans would do quite well. But for tens of millions of others, the Ryan plan is a path to more adversity." Greenstein pointed out that the plan would leave millions without health insurance through repeal of the Affordable Care Act and changes to Medicaid funding.
Greenstein also criticized the budget for its impact on anti-poverty programs, estimating that it would slash basic food aid provided by SNAP by at least $135 billion and convert the program to a block grant, make it harder for low-income students to attend college and make massive unspecified cuts to domestic non-military spending, which means cuts to social welfare programs.
The countries ranked highest in social progress are doing the complete opposite. They’re investing in schools rather than drones. They’re expanding collective bargaining laws rather than busting unions. They’re providing their citizens with universal healthcare and education rather than selling these basic human rights to the highest bidder.
“Those who care about the plight of the working class and the poor must begin to mobilize quickly, or we will lose our last opportunity to save our embattled democracy. The most important struggle will be to wrest the organs of communication from corporations that use mass media to demonize movements of social change and empower protofascist movements such as the Christian Right,” observes Hedges.
It’s your move, America.

 

See more stories tagged with:

u.s. [4],

global country rankings [5],

Social Progress Index [6],

SPI [7],

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Source URL: http://www.alternet.org/news-amp-politics/global-rankings-study-depicts-america-warp-speed-decline

The Paul Craig Roberts Dilemma: World War Or The End Of The Dollar

Submitted by Paul Craig Roberts via The Institute for Political Economy,

Is the US or the World Coming to an End?
It will be one or the other

2014 is shaping up as a year of reckoning for the United States.

Two pressures are building on the US dollar. One pressure comes from the Federal Reserve’s declining ability to rig the price of gold as Western gold supplies shrivel and market knowledge of the Fed’s illegal price rigging spreads. The evidence of massive amounts of naked shorts being dumped into the paper gold futures market at times of day when trading is thin is unequivocal. It has become obvious that the price of gold is being rigged in the futures market in order to protect the dollar’s value from QE.

The other pressure arises from the Obama regime’s foolish threats of sanctions on Russia. Other countries are no longer willing to tolerate Washington’s abuse of the world dollar standard. Washington uses the dollar-based international payments system to inflict damage on the economies of countries that resist Washington’s political hegemony.

Russia and China have had enough. As I have reported and as Peter Koenig reports herehttp://www.informationclearinghouse.info/article38165.htm Russia and China are disconnecting their international trade from the dollar. Henceforth, Russia will conduct its trade, including the sale of oil and natural gas to Europe, in rubles and in the currencies of its BRICS partners.

This means a big drop in the demand for US dollars and a corresponding drop in the dollar’s exchange value.

As John Williams (shadowstats.com) has made clear, the US economy has not recovered from the downturn in 2008 and has weakened further. The vast majority of the US population is hard pressed from the lack of income growth for years. As the US is now an import-dependent economy, a drop in the dollar’s value will raise US prices and push living standards lower.

All evidence points to US economic failure in 2014, and that is the conclusion of John Williams’ April 9 report.

This year could also see the breakup of NATO and even the EU. Washington’s reckless coup in Ukraine and threat of sanctions against Russia have pushed its NATO puppet states onto dangerous ground. Washington misjudged the reaction in Ukraine to its overthrow of the elected democratic government and imposition of a stooge government. Crimea quickly departed Ukraine and rejoined Russia. Other former Russian territories in Ukraine might soon follow. Protesters in Lugansk, Donetsk, and Kharkov are demanding their own referendums. Protesters have declared the Donetsk People’s Republic and Kharkov People’s Republic. Washington’s stooge government in Kiev has threatened to put the protests down with violence. http://rt.com/news/eastern-ukraine-violence-threats-405/ Washington claims that the protests are organized by Russia, but no one believes Washington, not even its Ukrainian stooges.

Russian news reports have identified US mercenaries among the Kiev force that has been sent to put down the separatists in eastern Ukraine. A member of the right-wing, neo-Nazi Fatherland Party in the Kiev parliament has called for shooting the protesters dead.

Violence against the protesters is likely to bring in the Russian Army and result in the return to Russia of its former territories in Eastern Ukraine that were attached to Ukraine by the Soviet Communist Party.

With Washington out on a limb issuing threats hand over fist, Washington is pushing Europe into two highly undesirable confrontations. Europeans do not want a war with Russia over Washington’s coup in Kiev, and Europeans understand that any real sanctions on Russia, if observed, would do far more damage to Europeans. Within the EU, growing economic inequality among the countries, high unemployment, and stringent economic austerity imposed on poorer members have produced enormous strains. Europeans are in no mood to bear the brunt of a Washington-orchestrated conflict with Russia. While Washington presents Europe with war and sacrifice, Russia and China offer trade and friendship. Washington will do its best to keep European politicians bought-and-paid-for and in line with Washington’s policies, but the downside for Europe of going along with Washington is now much larger.

Across many fronts, Washington is emerging in the world’s eye as duplicitous, untrustworthy, and totally corrupt. A Securities and Exchange Commission prosecuting attorney, James Kidney used the occasion of his retirement to reveal that higher ups had squelched his prosecutions of Goldman Sachs and other “banks too big to fail,” because his SEC bosses were not focused on justice but “on getting high-paying jobs after their government service” by protecting the banks from prosecution for their illegal actions.http://www.counterpunch.org/2014/04/09/65578/

The US Agency for International Development has been caught trying to use social media to overthrow the government of Cuba. http://rt.com/news/cuba-usaid-senate-zunzuneo-241/

This audacious recklessness comes on top of Washington’s overthrow of the Ukrainian government, the NSA spying scandal, Seymour Hersh’s investigative report that the Sarin gas attack in Syria was a false flag event arranged by NATO member Turkey in order to justify a US military attack on Syria, Washington’s forcing down Bolivian President Evo Morales’ presidential plane to be searched, Saddam Hussein’s “weapons of mass destruction,” the misuse of the Libyan no-fly resolution for military attack, and on and on. Essentially, Washington has so badly damaged other countries’ confidence in the judgment and integrity of the US government that the world has lost its belief in US leadership. Washington is reduced to threats and bribes and increasingly presents as a bully.

The self-inflicted hammer blows to Washington’s credibility have taken a toll. The most serious blow of all is the dawning realization everywhere that Washington’s crackpot conspiracy theory of 9/11 is false. Large numbers of independent experts as well as more than one hundred first responders have contradicted every aspect of Washington’s absurd conspiracy theory. No aware person believes that a few Saudi Arabians, who could not fly airplanes, operating without help from any intelligence agency, outwitted the entire National Security State, not only all 16 US intelligence agencies but also all intelligence agencies of NATO and Israel as well.

Nothing worked on 9/11. Airport security failed four times in one hour, more failures in one hour than have occurred during the other 116,232 hours of the 21st century combined. For the first time in history the US Air Force could not get interceptor fighters off the ground and into the sky. For the first time in history Air Traffic Control lost airliners for up to one hour and did not report it. For the first time in history low temperature, short-lived, fires on a few floors caused massive steel structures to weaken and collapse. For the first time in history 3 skyscrapers fell at essentially free fall acceleration without the benefit of controlled demolition removing resistance from below.

Two-thirds of Americans fell for this crackpot story. The left-wing fell for it, because they saw the story as the oppressed striking back at America’s evil empire. The right-wing fell for the story, because they saw it as the demonized Muslims striking out at American goodness. President George W. Bush expressed the right-wing view very well: “They hate us for our freedom and democracy.”

But no one else believed it, least of all the Italians. Italians had been informed some years previously about government false flag events when their President revealed the truth about secret Operation Gladio. Operation Gladio was an operation run by the CIA and Italian intelligence during the second half of the 20th century to set off bombs that would kill European women and children in order to blame communists and, thereby, erode support for European communist parties.

Italians were among the first to make video presentations challenging Washington’s crackpot story of 9/11. The ultimate of this challenge is the 1 hour and 45 minute film, “Zero.” You can watch it here: http://www.youtube.com/watch?v=QU961SGps8g&feature=youtu.be

Zero was produced as a film investigating 9/ll by the Italian company Telemaco. Many prominent people appear in the film along with independent experts. Together, they disprove every assertion made by the US government regarding its explanation of 9/11.

The film was shown to the European parliament.

It is impossible for anyone who watches this film to believe one word of the official explanation of 9/11.

The conclusion is increasingly difficult to avoid that elements of the US government blew up three New York skyscrapers in order to destroy Iraq, Afghanistan, Libya, Somalia, Syria, Iran, and Hezbollah and to launch the US on the neoconservatives agenda of US world hegemony.

China and Russia protested but accepted Libya’s destruction even though it was to their own detriment. But Iran became a red line. Washington was blocked, so Washington decided to cause major problems for Russia in Ukraine in order to distract Russia from Washington’s agenda elsewhere.

China has been uncertain about the trade-offs between its trade surpluses with the US and Washington’s growing encirclement of China with naval and air bases. China has come to the conclusion that China has the same enemy as Russia has–Washington.

One of two things is likely: Either the US dollar will be abandoned and collapse in value, thus ending Washington’s superpower status and Washington’s threat to world peace, or Washington will lead its puppets into military conflict with Russia and China. The outcome of such a war would be far more devastating than the collapse of the US dollar.