Eye of the Storm

[Peter 14.7]

Interesting, Peter

 

[Intrinsic_Value]

I don't understand why you have that worry specifically with the ASX? Doesn't it apply to the rest of the economy as well? And surely having the ASX full of companies that actually produce a good is better than a heap of companies like banks and retail and just about everything else that are more dependant on services and the debt loads of the consumer?

If resource companies are risky, then so is Australia's economy, as it's not like we produce much else that the world needs.

What would happen to Australia without the mineral and energy industry and with our manufacturing industry on it's knees?


See ya's.

Sorry my typing might have been confusing.
I ment worry for Australian equities.

In regards to resources, the worry is that Australian economy becomes more volatile. Years ago there was that saying that Australia rides the sheeps back or words to that effect. There is a risk that we are cycling back to those times.

 

[hobo-jo]

Interesting article on Zero Hedge about a dilemma the US will face within the next 12 months:

http://www.zerohedge.com/article/br...-fixed-income-has-increase-elevenfold-or-else

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.

What options does this leave for the administration? Very few, and all of them are ugly. As we stated earlier on, the options for the Fed are threefold:

1. Announce a new iteration of Quantitative Easing. This will be met with major disapproval across all voting classes (at least those whose residential zip codes do not start with 10xxx or 068xx), creating major headaches for Obama and the democrats which are already struggling with collapsing polls.
2. Prepare for a major increase in interest rates. While on the surface this would be very welcome for a Fed that keeps hinting that deflation is the biggest concern for the economy, Bernanke's complete lack of preparation from a monetary standpoint (we are surprised the Fed's $200 million reverse repos have not made the late night comedy circuit yet) to a forced interest rate increase, would likely result in runaway inflation almost overnight. The result would be a huge blow to a still deteriorating economy.
3. Engineer a stock market collapse. Recently investors have, rightfully, realized there is no more risk in equities, not because the assets backing the stockholder equity are actually creating greater cash flow (as we demonstrated recently, that is not the case), but simply because taxpayers have involuntarily become safekeepers for the entire stock market, due to Bernanke's forced intervention in bond and equity markets. Yet the President's Working Group is fully aware that when the time comes to hitting the "reverse" button, it will do so. Will the resultant rush into safe assets be sufficient to generate the needed endogenous demand for Treasuries is unknown. It will likely be correlated to the size of the equity market drop.

If the Fed decides on option three, we fully believe a 30% drop (or greater) in equities is very probable as the new supply/demand regime in fixed income becomes apparent.

 

[keithj]

Interesting article on Zero Hedge about a dilemma the US will face within the next 12 months:

Out of the $2.22 trillion in expected 2010 issuance, $200 billion will be absorbed by the Fed while QE continues through March. Then the US is on its own: $2.06 trillion will have to find non-Fed originating demand. To sum up: $200 billion in 2009; $2.1 trillion in 2010. Good luck.

Can you explain what the bolded quote from the article means ?

It sounds like a v. scary fivefold increase in US debt issuance.... but that doesn't correspond with the rest of the article. The Fed issued ~$2T in each of the previous 4 yrs.... so what's scary or different in 2010 ?

Or are they suggesting that no-one will want to buy US debt (the reserve currency) in 2010 & the Fed will have to absorb it all ?

I reckon they'll go for Option 1 - issue more debt..... just like they did every year for the last ~70. Sure it'll be met with voter disapproval... but either Obama will put enough spin on it, or else he'll lose at the next polls.... and it's v. likely that life will continue as normal for the US administration and us IP investors.

 

[hobo-jo]

Can you explain what the bolded quote from the article means?

I must admit it isn't the most clearly worded article, but the way I read it the Fed directly or indirectly purchased all but $200b worth of US debt issuances this year. What the article is saying is that x, x or x will need to occur if foreign investors do not pick up the slack in the treasury market in 2010. You make it sound so basic "they will just issue more debt like they have previously" but fail to acknowledge that they have had foreign buyers to purchase their debt issuances in previous years. If they continue to heavily purchase their own debt they will devalue current holdings and risk causing a sell off and potentially a US sovereign debt rating downgrade (personally I think this should have already occurred). China has already warned the US about their debt monetization, what exactly they will do if the US continues I'm not sure.

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
http://www.treas.gov/tic/mfh.txt

Shows that China has basically bought no treasuries since May this year. When for the past 8 years or so they have been the largest provider of credit to the US, have a look at the historical figures (look at China's increase from 2001-2008):

http://www.treas.gov/tic/mfhhis01.txt

So it's not as simple as issuing debt, it's a matter of who is going to buy it.

I mean you could be right, maybe they will just buy their own debt (through the Fed, essentially monetizing it), Geithner last week indicated that "We're going to do what's necessary to prevent that" when the possibility of a second wave financial crisis was raised. Although Bernanke (Fed Chairman) was on record earlier this year saying that "The Federal Reserve will not monetize the debt". So I guess either Bernanke or Geithner will be proved a liar in 2010, which one? Of course unless you are expecting foreign purchases of US debt to increase the amount required (lol).

What will the effect be here in Australia?? Depends on what happens I guess. If they go the monetizing route (printing to buy their own debt), this will push down the price of treasuries (increasing their yield) and increasing the costs for our lenders to source funds on the international market, so expect higher interest rates as lenders pass on the costs regardless of what the RBA does.

Note: This is simply my basic understanding of how things tie in, if I have something wrong please feel free to correct (I am certainly no expert ).

 

[House_Keeper]

MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
http://www.treas.gov/tic/mfh.txt

Shows that China has basically bought no treasuries since May this year. When for the past 8 years or so they have been the largest provider of credit to the US, have a look at the historical figures (look at China's increase from 2001-2008):

Interesting discussion, but I don't don't follow this last statement.

China may not have increase but Hong Kong increased by 50 billions. What's the difference? Isn't it China increasing exposure through Hong Kong?

Chinese are big savers, the money has to go somewhere. It's not going to dry up any soon.

Cheers,