CHINA DUMPING US TREASURIES: THE PROBLEM IS, WHAT DOES IT MEAN? AND ...July 28, 2015
This very, and I'd even say, extremely important article was shared by Mr. S.D., and I have to pass it along. It's in one of those "in the cracks" categories on this website, hence I've filed it not only under "Banks and Banksters" but under "You Tell Us". The article itself, from our friends at Zero Hedge, is worth pondering in its totality and at length, but there are a couple of highly suggestive statements in the article that call forth our traditional high octane speculation, which in this case might be more accurately described as geosynchronous orbital speculation, so "out there" were my thoughts when I read it. And when the "speculation" I am going to propose in this short blog hit my mind, my first thought was, "No, it can't be," and "Farrell, you've lost it," but we'll get to that in a moment.
Here's the article:
Now, as the article title itself suggests, even Goldman Sachs can't make much sense of what's happening, and if they can't, then the reality probably is that no one else can either: not the Bank of International Secrec...er... Settlements, not the European Central Bank, not the Old Lady of Threadneedle St., not Hong Kong and Shanghai Bank, nor Barclay's nor Lloyd's nor Morgan nor Chase-Manhattan nor anyone else... except maybe the NSA or GCHQ or the Mossad or the BND. So if Goldman Sachs can't make - as the saying goes - "niether hide nor hare" of it, then I feel safe, as a hack from South Dakota, in plunging right in and indulging in some geosynchronous orbital speculation. In other words, what I am about to propose is really "out there" and may indeed be simply "outlandish" and completely "loony tunes"(Play cartoon theme music here).
Consider just these statements from the article alone:
Needless to say, a capital exodus of that pace and magnitude would suggest that something is very, very wrong with not only China's economy, but its capital markets, and last but not least, its capital controls, which prohibit any substantial outbound capital flight (at least for ordinary people, the Politburo is clearly exempt from the regulations for the "common folk").
But what is likely the take home message for non-Chinese readers from all of this, is that while there has been latent speculation over the years that China will dump US treasuries voluntarily because it wants to (as punishment or some other reason), suddenly China is forced to liquidate US Treasury paper even though it does not want to, merely to fund a capital outflow unlike anything it has seen in history. It still has a lot of 10 Year paper, aka FX reserves, left: about $1.3 trillion at last check, however this raises two critical questions: i) what happens to 10 Year rates when whoever has been absorbing China's Treasury dump no longer bids the paper and ii) how much more paper can China sell before the entire world starts paying attention, besides just JPM and Goldman... and this website of course.
Finally, if China's selling is only getting started, just what does this mean for future Fed strategy. Because one can easily forget a rate hike if in addition to rising short-term rates, China is about to dump a few hundred billion in paper on a vastly illiquid market.
Or let us paraphrase: how soon until QE 4? (Bold-italics emphasis added)
Now, it's that bit about China being forced to dump its US treasuries, which at the same time means that its foreign exchange ("FX" in the article) is flowing out of the country at an alarming rate, in response to the "take down" of the Chinese stock market. (And, for a really interesting picture, check out the German stock market in this same approximate time period, as Catherine Austin Fitts pointed out to me). Assuming for the moment that somehow the USA was behind the Chinese stock market "correction," then an interesting - but dangerously "out there" scenario - emerges, namely, that the USA might possibly be buying back all those treasuries with all that QE money already sloshing around in the system.
"But... now... wait a minute," you're probably saying to yourself. "If that's the case, shouldn't all those dollars be showing up, leaving their footprint?" Yes, they should, on any conventional analysis. But we certainly haven't been living in anything like a conventional financial and currency picture for a long time. Indeed, it's because those dollars aren't showing up that Zero Hedge, I suspect, was led to propose the question "how soon until quantitative easing" number four?
But what if - just consider, what if - that "sell-off" was ulimately of a very different nature altogether? What if we're not being shown or told the entire picture(not an unlikely idea in a world where the USA installed a secret system of finance under Truman in 1947). What if a "Tanaka" has just been pulled on China, with the engineered "stock market correction" being the trigger for the bonds sell-off? Prime Minister Tanaka of Japan, you'll recall, came up with the scheme of the "57 bonds," when faced with a looming financial crisis of bonds coming to maturity that the Japanese financial ministry did not have the money to pay. Tanaka hit upon the scheme of "swapping the paper" with new bonds, denominated in astronomical sums of money, that were not sold on any public bond market, and which were issued with peculiarities and flaws that would allow the Japanese government subsequently to renounce the bonds as counterfeit. Only those playing along with the government would be allowed to redeem the bonds, and even then at only extremely sharp discount. It was a wonderful way to swindle the rich of Japan (and anyone else rich enough, and unlucky enough to have bought the bonds), and to retire from the books a mountain of bad paper all at one fell swoop.
So what if China's bonds have been swapped in some similar version of the scheme. The new paper would be denominated in dollars, but the bad paper - along with the dollars backing it - would be completely retired, leaving China stuck with bad paper that could only be redeemed at discount, and only if it played ball. And perhaps, just perhaps, the Chinese government saw this coming, and hence this might be a hidden reason they are so keen to open bond markets in Canada and Europe selling bonds denominated in reminbi and not US dollars.
Which raises the central question, not only for my wild and crazy speculation, but, even lacking that speculation, and that is the question raised by Zero Hedge itself: "What happens to ten year rates when whoever has been absorbing China's Treasury dump no longer bids the paper." It's that "whoever bids the paper" that is the real question, because it is implying no one really knows who it is. The obvious candidate is the USA, or, more precisely, the Federal Reserve. Indeed my wild and wacky scenario is based on that assumption. But what if it isn't? What if it's someone else with similar amounts of "money" sloshing around on its books... someone like, well, maybe, Deutschebank perhaps? with the means to buy all that paper via cutouts? And then convert its new bad paper purchased from China into a stock buying spree in Frankfurt?
Well, who knows? But eventually, that "someone" will eventually leave a footprint. Most likely when it does that foot will smash my two highly improbable scenarios.
But the possibilities of those scenarios at least had to be admitted for the record.
See you on the flip side.