I believe this to be the biggest story of the year. It wont make the news tomorrow, and you likely wont even see it in your local paper. Everyone will be talking about McCain. In a few months to years, the significance of this will be important.
Also, I wonder if this is why Bill Gross freaked out today (http://www.bloomberg.com/apps/news?pid=20601087&sid=aaVfH47UrqgA&refer=home) with talk of a financial tsunami? Gross manages PIMCO funds - the largest bond trader on the planet. He is sitting at 71% GSE exposure. If international appetite for their debt were to subside, it would end very badly for him.
..
http://www.nytimes.com/2008/09/05/business/worldbusiness/05yuan.html?pagewanted=2&_r=2&ref=business&adxnnlx=1220587952-Hvoq7pELYSX9KJXtxhDM%20Q
HONG KONG — China's central bank is in a bind.
China's central bank has accumulated about $1 trillion in United States debt. It has been on a buying binge in the United States over the last seven years, snapping up roughly $1 trillion worth of Treasury bonds and mortgage-backed debt issued by Fannie Mae and Freddie Mac.
Those investments have been declining sharply in value when converted from dollars into the strong yuan, casting a spotlight on the central bank's tiny capital base. The bank's capital, just $3.2 billion, has not grown during the buying spree, despite private warnings from the International Monetary Fund.
Now the central bank needs an infusion of capital. Central banks can, of course, print more money, but that would stoke inflation. Instead, the People's Bank of China has begun discussions with the finance ministry on ways to shore up its capital, said three people familiar with the discussions who insisted on anonymity because the subject is delicate in China.
The central bank's predicament has several repercussions. For one...
Click the link, its worth the read.
That is interesting. In order for the holders of all of the bad paper here to clear their books they have to dispose of them somewhere. I think the Chinese have been looking at the US as a kind of cash cow for a while now. I don't pretend to understand all of the implications of what takes place in the financial world. I think I have learned more from your posts Muldoon than I ever knew before as you seem dialed right in to that world. I did see something last night about trouble in the emerging markets financial sector but I didn't know what it all meant.
I was able to use yesterdays market plunge to beef up my position in Verizon VZ as the share price dropped to near where I bought my initial holding. I hope it was just a bad day where the entire market got punished , not a trend for telcom. Like I said I am still learning.
This is how they maintained the trade imbalance over the past seven years. Normally as there is a trade imbalance with a nations currency the currency devalues, but if they kept using the currency to buy our debt it just kept going in a cycle. When that cycle ends, both countries are screwed. No more deficits or war for the us, no more assets for the chinese. What is disturbing is the average homeowner in the U.S owns less than 50% of there home. For many of them the Chinese Government owns the other half.
Tada.. right on schedule. The federal reserve solution for this one hot off the presses. My blackberry is going nuts tonight.
http://www.federalreserve.gov/boarddocs/legalint/BHC_ChangeInControl/2008/20080805.pdf
Fed grants exemption to Chinese govt-owned banks. Their US branches and subsidiaries will be able to own controlling interest in US companies. They're also getting exempted from Bank Holding Company Act reporting and capital requirements.
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I expect to see some Chinese buyouts coming up, and without any auditing of the books or capitol requirements either I bet they get to trade their existing GSE and treasury paper at par value for stake in these institutions.
Dang -- I don't know if I'll ever be able to learn to speak Chinese. Have I wasted all of my time and effort learning to speak Mexican? hmm
I wonder if this had something to do with the take over of Freddie and Fannie. Could the chinese have pressured the government to use tax payer money to bail out the debt that they actually hold?
You damn right they did. They promised not to buy another cent of US debt unless the government bailed them out.
I agree scott, it was even stated point blank that foreign investors were a primary cause of the timing. How is it panned out since then? Very badly, it seems the foreign banks received their bailout and are not wanting to make the same mistake again.
NEW YORK (Dow Jones)--Asian investors bought only 12% of Fannie Mae's (FNM)
$7 billion two-year notes sold Wednesday.
In the last sale of two-year notes in July, they had bought 39% of the $3
billion deal.
This was the first deal sold after the government's takeover of Fannie and
Freddie Mac (FRE) over the weekend. Market participants say investors are wary
despite government backing due to questions about the future of Fannie and
Freddie.
"Asian investors will take a very cautious approach but over time, they will
come back," said Rajiv Setia, an agency strategist at Barclays Capital in New
York.
U.S. investors bought 63% of the notes sold Wednesday, and European
investors bought only 8%.
The bulk of the debt - 54% - was bought by fund managers. Central banks
bought 27%.
The $7 billion debt was sold at 70 basis points over comparable Treasurys,
to yield 2.896%.
"Spreads were very attractive for investors," said Jim Vogel, an analyst at
FTN Financial.
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On the russian front, its going very very badly.
First to show up on russian news:
http://www.dni.ru/economy/2008/9/5/148521.html
then reuters: http://www.reuters.com/article/RussiaInvestment08/idUSL816846420080908?pageNumber=1
The Central Bank of Russia has started a massive sale of its USD reserves and US obligations. From early summer the total volume of investments have been 1.5 times less than the last year. In August Central Bank of Russia stopped buying USD altogether, and have been selling its dollar holdings through September. It will buy Euros instead, as was mentioned in the statement.
This is a big deal, not only are they giving us a big middle finger and refusing to finance our debt further at these rates, but they also are losing the ability to threaten us with doing this. Half of the weapon is doing it, the other half is threatening to do it. Much like nukes, the real threat is in what one might do. They are doing it. For them this means they believe the risk of further US debt purchase ends worse for them than us sanctions economically. The russians are not dumb so consider this a huge red flag.
The market is going schizophrenic this week. This is not a sane environment in any way whatsoever to invest in, its a casino right now. surge up, surge down, everyone running on pure panic. Wamu is acting like it's in death spiral, also NCC bank and Lehamn brothers as well. Oil is under 100, silver at 10.70, gold at 750. Someone big (likely more than one) is unwinding and liquidating behind the scenes. This is a rush to the exits. The bond market is still holding and yield continues to drop as people try to find somewhere safe to put money. The bond market is always the last to let go.
Party like its September 1929.