just in in-tray
The below are my own personal musings and do not necessarily represent Tai Tam’s views.
The hot topic today is continued problems coming out of Europe as highlighted by
Portugal ’s failed auction to raise $500mm bonds but instead raised only 300mm
Greece ’s largest union, GSEE, approving second mass strike this month. “It’s still the beginning” says GSEE spokesman, Stathis Anestis.
The PIGS’ ( portugal , italy , greece , spain ) impact on world economy don not come any where near the potential damage
To risk appetite as the increasing conflict between the 2 largest economies in the world: USA vs China .
The below nytimes article highlights major underlying currents which could not be hotter “hot button” topics which challenge the sovereignty of China .
We are not politicians and are only students of the markets, but a weakened Obama post the failed Christmas Northwest airline bombing and Massachusetts elections have forced him to appear tough.
So what does a weakened President go after as easy targets? Bankers and China
In a space of only a few days, Obama has threatened China on:
Google – challenge China ’s sovereignty on its internal laws
Selling arms to Taiwan – challenge China ’s sovereignty on what it considers its internal borders
Meeting Dalai Lama – challenge China ’s sovereignty on its actual internal borders
Labeling China as currency manipulator – challenge China ’s sovereignty to manage its currency
China’s new found confidence (swagger?) post a G7 led recession will not allow its national pride to go quietly in response to the above challenges. Not when USA owes China almost 1Tln of debt.
Pundits argue that China would not do anything rash as it would harm itself economically. This misses the point of non-economic buyers. After covering Asian central banks for 15+ years, I’ve learned that central bank reserves are used as policy tools not as a profit center. There is little consideration and little negative consequences of a marked to market loss if their Treasury holdings would sell off. The reserves are utilized to achieve their political ends. Eg Japan ’s MOF holds 800Bln of treasuries to manage its exchange rate.. not because it finds value or lack of value in a 3.50% yld; China of course recycles its trade surplus with USA by buying Tsys.
If it’s a question of sovereignty or economic loss, there is (in my humble opinion), little China would not consider to protect its sovereign rights. The man on the ground in China is also tired of the preachings out of a discredited USA .
What if China were to boycott next week’s Treasury auction of 10 and 30 years? Is this any less likely than the middle east oil embargo of 1970s? Some analysts have indicated that 10 year yields are upto 75bps lower because of China support.
10 year yields at 5%+ yld within 24 hours post a boycott?
What to do?
1) long volatility – The Vix has fallen from 52 to 22. cheap insurance
2) short equities
3) short treasuries – while it used to be a flight to safety bid, long dated treasuries may longer be a “risk free” asset as commonly applied in traditional capital asset pricing models.
4) Gold – what flight to safety? In 2008 selloff in equities, gold also sold off
I hope global policy makers are wiser than the headline posturing but we’ve seen already some highly unlikely outcomes due to populist rage in Europe and USA .
Again, these are only my personal musings about the large risks in the markets at the moment.
Best,
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