Category: Investing

23 February 2011.

Two weeks back, we took an extensive look at the process by which "Team China" has had over various Western corporations.

Today, we look at the other side of the Western / The far east corporate interface: the experience of Western companies with joint ventures in China.

It’s been ten years since multinationals [ MNCs ] first began turning away from joint ventures in China as the preferred way to play in the world’s hottest growth story.

Many joint ventures failed to endure,

and as multinationals gained experience in China, and foreign investment restrictions loosened,

many found it easier in lots of sectors to start a business from scratch—or to acquire an existing 1 outright—

than to negotiate, establish, and run a joint venture in the long term.

No longer.

China’s hot growth has boosted valuations and increased competitors for outright acquisitions associated with Chinese companies that are often much less interested in being acquired.

That makes joint ventures a more attractive option, and so does an increasing pool of healthier prospective Chinese partners.

All this is prompting some MNCs to reconsider the joint-venture approach as an alternate avenue to get a stake in the continuing strength of China’s economy.

But as the dynamics have changed, the fundamentals have not:

companies pursuing joint endeavors would do well to reflect around the lessons of past deals to improve the chances of success.

In China, some of those lessons are especially critical, such as

• choosing partners that can make concrete business contributions,
• safeguarding intellectual property,
• ensuring functional control of the joint venture, and managing talent.

Others are crucial for joint ventures in all geographies, this kind of as

• aligning strategic priorities,
• creating a structure that permits rapid responses to change, and
• preparing up front for eventual reorientating.

When China first opened its doors in order to MNCs in the 1980s,

some undertook combined ventures with local companies that appeared to be safe bets

because of their access to and influence with the nearby or national government.

Even today, many foreign executives prefer to engage with large, well-established Chinese companions.

Yet that preference hasn’t always benefited joint ventures,

typically because the parent companies didn’t reveal the same strategic or industrial interests.

Multinationals, for example, have stressed profitability, even when growth is slow,

while their Chinese companions have emphasized growth, even without profitability,

as we stated in our piece on Chinese takeovers of Western companies.

The result has been different priorities for investments and a lack of cooperation,

both between the parent companies and inside the mixed management team.

Instead, multinationals should pair with local firms that explicitly share their proper goals.

This doesn’t eliminate large, well-established Chinese companies.

But it does open up the door to faster-growing, privately owned, and smaller companies

that bring a powerful commercial mind-set and tangible company assets to joint endeavors.

The global pharmaceutical corporations GlaxoSmithKline and Novartis, for example,

chose such partners in 2009 for their joint ventures in the vaccine market.

Thanks to partnerships along with smaller local companies —

Shenzhen Neptunus Interlong Bio-Technique Company

and Zhejiang Tianyuan Bio-Pharmaceutical, respectively —

both joint ventures had the actual access they needed to government vaccine-procurement programs,

as well as a talent pool, R&D know-how, and an entrepreneurial management mind-set for further rapid growth.

One disadvantage that foreign companies may not have encountered in China before:

as Chinese executives grow more and more confident, many of these smaller gamers themselves hope to become nationwide, regional, or even global players,

a factor that, again, we have analyzed in some detail.

That aspiration can make it difficult to agree on the scope of the partnership if it’s to become limited to China or to particular products.

One approach is to outline the extent of co-operation both domestically and globally—for instance, whether it includes

• access to overseas sales channels,
• noncompete clauses for specific marketplaces, and
• agreement in principle on the possible evolution of the partnership into additional product lines.

MNCs still find it difficult to protect their intellectual property within China, and joint ventures are particularly vulnerable.

Protection in most developed markets occurs mainly through legally binding agreements enforced in courts of law.

But the concept of intellectual-property protection continues to be new in China,

and option to the legal system can be lengthy and inadequate.

Companies have had some success with more pragmatic, operational efforts, including the following:

• Bringing only older technology to China. This approach works for products that may have been available in developed markets for a while but are still competitive in China’s market. It also works in industries—such as bacteria channels for fermentation, vaccines, and particular motor engines—where innovation cycles are short.
• Leaving the plans at home. Multinationals can protect their ip by delivering equipment or technology ready to be installed, without detailed design specifications. Negotiating agreements to do so can signal a lack of trust in the local partners, however, and can increase costs if spare parts as well as maintenance must be provided from overseas.
• Keeping critical intellectual property totally out of a joint venture. Some companies have set up joint ventures that are restricted to individuals steps in the value chain that involve limited intellectual property, like putting together, packaging, or tailoring. This kind of approach is feasible only when local innovation lags behind global standards and, obviously, when the critical intellectual-property component can easily be separated into a step of the value chain.
• Charging with regard to intellectual property up front. Some multinationals have chosen to sell their intellectual property in order to joint ventures, either through up-front cash payments or licensing fees. This approach can be challenging to execute, with regard to while it resonates well with nearby companies, they generally are willing to purchase technology up front only at a significant discount.

In the past, foreign companies agreed to invest in joint endeavors as minority or equivalent stakeholders,

often failing to secure management positions that were meaningful enough to steer the development of the joint organization.

Such companies often found on their own relegated to providing know-how and capital, with little impact other than board voting rights.

In one extreme case, a global multinational had set up multiple joint ventures with leading nationwide players in China.

The organization was unable to exercise sufficient operational control over, for example, decisions around roll-out plans or product development.

Ultimately, it had to sell off its stakes in these ventures.

The capability to influence the course of a joint venture in China depends largely on the partners’ ability to build trust-based relationships

• at the working level,
• the joint-venture board level,
• and even outside the joint venture,
• with the federal government or other industry players.

Successful multinationals map out critical stakeholders in and around the partnership —

from local management to main regulatory bodies —

and assign relationship responsibilities at multiple quantity of a organization.

This approach requires creating interaction protocols—

the composition of any delegation, the amount of visits, the specific topics to be discussed, and so on,

depending on the relative importance of the stakeholders and their particular agendas.

The CEO of a leading global insurer, for example, often teaches management practices at the Central Party School.

His readiness to do so gives him trustworthiness with joint-venture partners

by allowing him to have interaction with current and long term decision makers

who directly and not directly influence the course of business within China.

Most leading multinationals learned from the first round of joint ventures in China

that obtaining the right managers in place had been critical.

Many of these companies had simply dispatched available executives—

often not top performers but rather average executives searching for new problems.

Most of these executives therefore had limited credibility with the corporate parent

and were ill-prepared to manage demanding joint-venture companions.

Today, experienced multinationals recognize that a successful joint venture

requires credible, high-performing executives supported by powerful local teams.

Yet with so many companies competing for the best local candidates,

those men and women can afford to be choosy,

and they understandably prefer leading companies that have a strong image and offer good prospects for career progression.

So today, joint ventures must not only invest in their corporate brands

but additionally partner with top colleges to sponsor undergraduate as well as graduate students

and to establish a training platform for current employees.

CEIBS, a number one business school in China, and itself a joint venture, has more than 80 company sponsors,

which provide funding as well as in return can recruit upon campus and send their executives on advanced training courses.

Finally, companies must continue their own commitment even after candidates are hired.

This means

• sending some of a multinational’s best people to the joint venture to create a strong team,
• compensating employees at or above relevant market rates, and
• fast-tracking the advancement of high performers—
• even breaking away from more tenure-based development systems.

Regardless of where a partnership is located, companies often invest too little time building a shared understanding

• of its future business,
• the marketplaces it will compete in, and
• how it will evolve over time.

Differences of opinion that are deeply rooted within competing expectations of long term performance

can affect the joint venture’utes strategy and focus and eventually result in its failure.

Take, for example, 4 life insurance joint ventures that failed in China in the last 18 months,

after an average of four to five years of unsatisfactory business development and shareholder disputes.

Chinese life insurance partners have been nonfinancial companies

accustomed to short breakeven periods of three years or less,

with an emphasis on top-line growth and earnings.

Foreign insurers, on the other hand, take a longer-term view

and emphasize sustainable growth in the value of the insurance coverage policies underwritten rather than accounting profits.

In the four failed joint ventures, the inevitable tension over strategic priorities led to disagreements about,

for example, the right channels for pursuing lower-profitability volume

or whether to scale up an agency workforce faster,

but with a lower level of abilities, or more deliberately, with a higher-quality labor force.

These failures might have been avoided when the CEOs of the parent businesses and the joint ventures’ future management teams

had spent time collectively developing business plans and preparing for changes in market dynamics.

In contrast, at one of the three most successful international life insurers in The far east,

a standing business-development group, and a part of the future management team,

went through multiple iterations with its joint-venture partner

to agree on key business priorities, such as

• volume versus value,
• channels,
• products, and
• target client segments.

Once a joint venture is up and running, multinationals should aspire to manage it as if it were their own,

putting in place short lines of reporting from the joint venture back to the parent company.

This move is important in any joint venture, to provide senior managers the well-timed information they need to assess it’s performance.

But it’s especially true within China, where the fast speed in many sectors requires each partner

to react quickly to changes in the marketplace or the regulatory environment.

In this respect, multinationals can be in a disadvantage.

Decision-making processes for Chinese mother or father companies might include more people,

but once decisions are made, managers execute them quickly.

In contrast, foreign companies are slower to respond,

often encumbered by layers associated with country and regional administration.

It is not uncommon for the foreign executives of a joint venture in order to report back to the MNC’s The far east head,

who reports to the mind of the international unit,

who then eventually reports back to the actual CEO.

Some of the more successful multinationals provide for direct reporting lines to their CEOs.

Others have assigned obligation for China to a person in their management boards,

sometimes having a dual-reporting line into the regional business.

When a European transportation company made China its second home market, for example,

it elevated its China president to the worldwide management board and

sent its global CEO to China a minimum of six times a year to meet with the joint-venture partners.

The result had been improved cooperation with government bodies and therefore faster approvals,

more regular interactions and deeper relationships between the senior management of the parent companies,

and closer alignment within the joint ventures’ mixed management groups.

Even in developed markets, joint ventures are often restructured within a decade of being set up.

But in a market as dynamic because China’s,

partnership terms negotiated today might be ineffective in a few years,

and actually strong partners may find it difficult to survive.

This dynamism and uncertainty mean that the partners in a joint venture

must include provisions for restructuring its contract when the competitive landscape changes.

HSBC, for example, in its credit card partnership along with China’s Bank of Communications,

agreed to very specific actions if a change in regulation managed to get possible

to convert the partnership into an independent credit card company.

These detailed steps included the resulting board structure and the consideration to become paid to the partners.

Lacking such provisions, some multinationals have had to enter into tough negotiations with their Chinese partners to reach agreement on exit conditions.

Some that haven’t done so, according to McKinsey, have languished in joint ventures

which continued as formal relationships while either partner went after other avenues for growth.

None of these guidelines, however useful both in general and China particularly, guarantee success.

However the centrality of China in the world economic climate, both today and in the near future, means an MNC can disregard them only at its own peril.

David Caploe PhD
Chief Political Economist
EconomyWatch.com

 

In 2008, the National General Administration of Quality Supervision, Inspection and Quarantine raised the flags when a pediatric urologist noticed a boost in the number of children afflicted with renal system stones, a rare condition. Mounting fears and inquiries causally traced the source to then-popular Chinese infant milk powder, Sanlu, which was discovered laced with melamine.

Sanlu Group, a Chinese dairy produce company, based in Shijiazhuang in Hebei province, was found guilty and was ordered bankrupt after an estimated 300,000 infants fell ill – and at least 6 died from the tainted milk scandal.

This episode captivated what was perhaps the first wave of widespread international problem and skepticism over quality assurances in the “Made in China” label.

Headlines in the recent weeks have once again refocused the spotlight upon bad practices in Chinese brands and companies.

Just last week, Chinese officials uncovered five fake Apple stores in the north western city of Kunming, and suspended two faux outfits as research are underway, a local government website reported on Monday.

The investigation follows a blog publish by an American living in Kunming in Yunnan province who spotted the bogus Apple stores decorated, designed and modeled to the tee as the genuine Apple stores.

The proliferation of these kind of commercial fraud and insufficient quality audits highlights the sluggish progress the Chinese government is making in countering a system of rampant piracy and shoddy management practices. Much to the dismay and frustration of its trading partners and investors.

Equity markets are not spared from allegations of false accounting practices from Chinese companies either. Sino-Forest Corporation is the latest company from China to characterize what is quickly becoming a truism: for Chinese businesses listed abroad through change takeovers, short selling can prove to be enormously profitable.

Instead of attracting investors the conventional way, which is via initial public offerings, numerous Chinese companies listed on North American stock exchanges have opted for the backdoor route by buying over near-defunct shell companies.

Known as change takeovers, or RTO, this strategy provides Chinese language companies a comparatively easier use of financial markets, without the strict analysis and filing requirements which initial public offerings tend to be subjected to.  

In the case of Sino-Forest, experts are split over regardless of whether Sino-Forest is a fraud. After a statement by little known advisory firm Dull Waters, sensational accusations were raised that Sino-Forest allegedly higher its earnings and property, and Sino-Forest saw its stock price fall by almost 75% from a high of $25.85 in March, wiping off more than $3 billion in paper value.

When it comes to reverse takeovers, it is difficult to evaluate if companies are well-intentioned or unscrupulous businesses aiming for a quick shot at stock exchange listings.

According to a Bloomberg monitor, Chinese reverse takeovers more than tripled from March 2009 in order to January 2010. But the numbers do not reveal the list of Chinese companies suspended with regard to securities fraud.

A study carried out by GovernanceMetrics International Inc. discovered that 60 per cent of North American listed Chinese companies had poor accounting practices. And the numbers simply do not accumulate.

“There has been a huge explosion of cases in the last quarter,” says Andrei Rado, plaintiff layer at Milberg LLP. Milberg suing Chinese companies Puda Coal and The far east Integrated Energy.

“The scams that Enron and WorldCom committed in the 90s and early 2000s had been more sophisticated. These guys are much bolder in what they do. Some of these information mill a complete sham,” Rado said.

Chinese authorities are also starting to get concerned. “I hate these scandals, everybody hates them … the scandals are very damaging for the reputation of all Chinese companies in the US,” said Liu Qingsong, deputy director of the study centre of the China Securities Regulatory Commission.

The key query then is whether investorsshould, or can, believe the numbers from Chinese companies.

As a major globe economy today, Chinese regulators know fully well which haphazard and flippant accounting practices will no longer be tolerated as auditors move towards adopting worldwide recognized accounting standards.

At the risk of coming across as a quasi Ponzi scheme, bad play and fraud committed by companies bearing the Chinese emblem potentially damages investor confidence.

But ultimately, the ethical of the story is as Paul Dietrich, chairman of Foxhall Capital Management, aptly concludes;

“The account issue is not a new problem. I have been investing in China because the 80s and we would see five different sets of audits. You have to do your due diligence. If you think you can rely on audits, you’re fooling yourself.”

The US dollar is trading heavier against most of the major and emerging market currencies. The euro and sterling remain within the ranges seen prior to the weekend while dollar slipped to JPY107 in a Tokyo-less Asian program. 

Unanticipated strong Chinese imports helped underpin the actual Australian dollar. Most Oriental equities followed the US reduce, though the recovery in Europe may have helped lift Indian shares in late dealing. European shares gapped lower but were able to recover by mid-morning. Bond markets were firmer in Asian countries and weaker in European countries, though UK gilts are significant exception, slipping to new lows (since June The year 2013) below 2.20%.

Neither French nor Finnish bonds show much response to the pre-weekend announcement by S&P.  It took Finland’s AAA standing away and cut France’s perspective to negative from stable.  France’s 10-year is flat at One.25%, and Finland’s yield is up not even half a basis point.  Greece’s government survived the vote of confidence just before the weekend, but this has not removed the pressure upon Greek bonds, where the 10-year deliver is up 8 bp to a different three-month high near 6.55%.  

The main news today appears to be about China.  First, it reported strong rise in imports and exports, along with a substantial trade surplus that a quarter smaller than expected.  Exports flower 15.3% in September from a year ago.  This follows the 9.4% increase in August, as well as expectations for a 12.0% increase.  This is the strongest since Feb 2013, when there was still much suspicion of Chinese language companies using exaggerated exports to cover capital flows.  Imports unexpected rose 7% in September.  The consensus was for a 2% decline after a 2.4% decline in July.  Details were sketchy, but electronic imports appeared strong while commodity imports and autos had been soft. 

Second, the ECB indicated that it had been considering adding Chinese yuan to its reserves.  We have been skeptical from the talk of the internationalization of the yuan.  In the end recognize its increased make use of, we find much of the reports grossly exaggerated.  For example, Hong Kong is part of China, as the Hong Kong people understand full well, yet when the trade is conducted in yuan, many observers count that included in the internationalization of the yuan, but is it truly?  The network of exchange lines it has established is actually interesting, but they have not been utilized.  It is as if it is not valued the logic of the buck swap lines and the part of dollar funding within this (we are told) G-Zero world. 

Yet, main banks holding yuan as reserves is indeed the internationalization of the yuan.  Nevertheless, we caution here as well that the exaggerations distort the real advancements.  First, there are simply insufficient yuan assets, which are what supplies are kept in, available for the yuan to be a major currency.  Second, a small amount of yuan in reserves is consistent with the broad pattern of some diversification into "other currencies".  Third, it is not a zero-sum game.  As reserve holdings overall increase, the yuan can be covered without the sale of another currency.  This also means that an increase in the yuan may come at the expensive of other currencies, but not always the dollar.  In the ECB’s situation, maybe the yen or sterling, for example. 

In any event, recall that China is working to establish a few financial centers, such as London and Frankfurt, to clear yuan deals.  The UK recently indicated it’ll sell its first yuan bond for reserves, and the ECB’s intend to explore the issue seems broadly consistent with this.  It is not worrying, nor does it signal the actual imminent demise of the dollar.  

Brent oil continues to trade heavily.  The Saudis and the Iranians have reduce prices for Asia.  Essential oil from Africa, like Nigeria, which was once one of the top five suppliers to the US, has diverted supplies to Asia when confronted with weakening US imports.  Kuwaiti officials indicated over the weekend that OPEC was not likely to agree to cut output to support prices at next month’s OPEC meeting.  Note that OPEC’s agreement is perfect for 30 mln barrels a day.  Estimates suggest it produced Thirty.474 mln bpd.  Kuwait’s oil minister was cited suggesting that $76 a gun barrel may be the new floor with regard to prices.

Dollar Heavier to Start Week is republished with permission from Marc to Market

Goldman Sachs is the bank everyone loves to hate. In the first of the two-part investigation into the bank, all of us ask why they become the biggest winners in the economic crisis. We also look at how they lobbied the US Government to reduce banking regulations, the way they acquired massive fortunes by selling sub-prime mortgages, and how they deceived their clients by betting against the products they offered.

Don't Forget To Read The Second Part Of Our Feature: Into The Belly Of The Beast (Component II – Goldman Sachs & The European Crisis)

Goldman Sachs wasn’t always the investment bank everyone affects to despise. It’s bankers were once named “billionaire boy scouts” because of their expertise for making fortunes while maintaining a guilt-free, cherubic image.

But Goldman’s bankers are actually far more likely to be compared to squids compared to boy scouts and have become the favourite target of anti-bank protestors. A week before Christmas, 300 protesters in the Occupy Movement dressed up in squid costumes and carried a giant puppet squid on the march to Goldman Sachs’ offices within New York.

The action was influenced by a Rolling Stone article which in comparison Goldman Sachs to: “a great vampire squid, wrapped round the face of humanity, relentlessly jamming its blood funnel into anything that smells like money”. The protesters shouted: “We fry calamari”, as well as “everyone pays their taxes. Everyone, but Goldman Sachs.”

Related: Is Take up Wall Street Bringing Back “Real” Capitalism?

Related: Getting out of bed From The Nightmare On Walls Street

Related: A Global Transcendence of Change – Exactly what the 99% Really Want: Joseph Stiglitz

Public hatred of Goldman, fuelled by modern media, has intensified, but it could be naive to believe the banks’ personality has fundamentally changed. Although there was nothing on the same scale as its nefarious role within the 2007 Financial Crisis, Goldman has been involved in controversy ever since it was founded by the German-born Jew Marcus Goldman in 1869. In 1929 for example, Goldman backed a pyramid scheme concealed as a mutual fund, which collapsed causing 42,000 investors to lose US$300 million. Then, within 1970, came the Penn Central catastrophe in which a default upon short-term paper marketed by Goldman created damage claims exceeding the actual bank’s net worth. In the late 1980s, Goldman’s head of risk arbitrage, Robert Freeman, was delivered to jail for insider buying and selling. And during the same period, Goldman was implicated in an illegal plan to prop up insolvent companies operated by the corrupt Czech-born newspaper tycoon Robert Maxwell.

“The reality is the firm has been in and out of trouble throughout its whole existence and has constantly been pushing the edge of the envelope,” said William D. Cohan, an old investment banker and the writer of Money and Power: How Goldman Sachs Came to Rule The World.

Cohan marvels at the hypocrisy embedded in Goldman Sachs’ 14 Company Principles, which were codified in the 1970s and are still being drummed into programmed employees’ heads today.

“They make everyone think they believe in them, however the most important principle is ‘placing the client first’, whereas the reality is they are in business to make money and will get it done any way they have to,” he said.

Cohan thinks the 14 principles are at the heart of what he calls Goldman’s ‘holier-than-thou attitude’.

“At Merrill Lynch, we had principles scratched into the wall, however never gave them a moment’s thought. But from Goldman they write them down, distribute them and reinforce them regularly. There’s some ‘drinking the Kool-Aid’ when you sign up for Goldman and most of them fall for the brainwashing. They get people youthful so they can mould their thinking. “

“To give an example of the Goldman mindset, I was giving a speak recently to 250 New Yorkers and a Goldman Sachs banker stood upward and loudly berated me with regard to daring to suggest they were not all saints.”

Suzanne McGee, a journalist as well as author of Chasing Goldman Sachs, believes there was a change in the bank’s standing in the 1970s.

“For most of its 200-year history Goldman wasn’t the pressure it is today. It transformed itself in the 1970s, which was a turbulent period when some firms thrived yet others withered on the vine. Goldman was probably the most innovative banks and by the actual mid-1980s it was positioned to be a energy house,” she said.

“What pursuits me historically is how Goldman altered from being the firm everybody might not like, but admires, to the firm everyone affects to despise. Up to the 1990s, their own reputation was very high. In that period, if an IPO had been underwritten by Goldman Sachs that was akin to Good Housekeeping’s sales approval. They were believed to have the X-factor, which meant they could outperform everyone else in every way. This reputation was so strong that in the late 1990s their bankers were prohibited from carrying bags with Goldman Sachs logos on when they required flights to conferences. The actual bosses were afraid they’deb tip off rival traders.”

“But that mainly good reputation has gone since the economic crisis. Goldman Sachs’ workers still don’t have bags with logos, but now it’s because they might get beers poured on their heads, or someone might pick a fight with them!”

While McGee expresses a grudging admiration for the financial acumen of the Goldman elite, she is under absolutely no illusion that they follow the ‘do what’s best for the client’ theory to the letter.

“Someone from another bank said that when Goldman comes with a deal the first question you ask should not be ‘will they mess me’? It should be ‘in which way can they try to screw me’? Other banking institutions are the same, but Goldman is far better at it than anyone else”.

Just how much better became evident in 07, when the US housing bubble burst and the nation had been plunged into its greatest financial crisis since the Great Depression. The fall-out for America’s financial sector was huge. Lehman Brothers filed for bankruptcy, IndyMac bank flattened, Bear Stearns was acquired through JP Morgan Chase, Merrill Lynch was sold in order to Bank of America, and mortgage giants Fannie Mae and Freddie Mac had been put under government manage. Meanwhile, although Goldman helped to provoke the crisis, it made billions of dollars out of it by taking away huge bets that the mortgage market was about to crash. The firm went on to earn US$11.6 billion in 2007, more than Morgan Stanley, Lehman Brothers, Bear Stearns as well as Citigroup combined. Merrill Lynch lost US$7.8 million that year.

The United States Senate’utes 2011 Levin–Coburn Report found:

“The actual crisis was not a natural catastrophe, but the result of high risk, complex financial products; undisclosed conflicts of interest; and the failure of regulators, the credit rating agencies, and the marketplace itself to rein in the excesses of Wall Street.”

Goldman Sachs CEO Lloyd Blankfein even apologized in 2008 for his bank’s role. “We participated in stuff that were clearly wrong and also have reason to regret,” he confessed.

But the apology was meaningless, according to William K. Dark, an American lawyer, author as well as former bank regulator, who has testified against the banks. Black believes Goldman knew precisely what it was performing and was operating based on a well-known formula in the financial world. If he had his way, Black says he would send Goldman’s bankers in to the fourth circle of Hell – which is reserved for the avaricious — in Dante’s inferno.

 “Goldman, and other investment banks, behaved fraudulently in order to generate massive amounts of money,” Dark said. “There were four components in their foolproof fraud recipe. 1. Grow like crazy. 2. Help to make really crappy loans confined yield. 3. Have remarkable leverage. 4. Make virtually no allowances for future losses.”

“If you do those four issues, you are virtually guaranteed to statement record off-the-chart short-term profits. We’ve recognized this in economics since a 1993 paper by Akerlof and Rohmer called Looting The Economic Underworld associated with Bankruptcy for Profit. Even if a firm fails, the CEO and all sorts of other folks will walk away wealthy. It’s maths; a certain thing!”

Related: Gun Toting Goldman Executives Prepare for the Revolution

Related: It’s Reward Time At Goldman Sachs, How Much Are They Paying Out?

Related: Buffett Makes $1.7 Billion on Goldman "Rescue"

The first two elements of the actual formula, Black says, are related. A bank grows like crazy by making “crappy loans”. Good financial loans would not work because a financial institution would have to buy market share, reducing its yields.

“But there are tens of millions in the US that cannot afford to repay a loan to purchase a house. Precisely because they can’t, the bankers can charge reasonably limited yield and can grow such as crazy. Into the teeth of this flood, they created the largest bubble in the history of the world.”

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If the worst of the market panic is behind us, it is worthwhile exercise to see what the charts are saying about the dollar. One advantage of technical analysis is that the fundamental causes and considerations behind the big moves need not be determined.  

As is truly the case, the large market moves were likely over-determined in the sense of getting many contributing factors. Market placement after sustained market developments created vulnerabilities.  The stop by oil prices, and worries that the global headwinds would derail the US economy, and postpone Fed tightening, or as the Fed’s Bulllard argued today, extend QE much more time.  

In any event, the selling climax appears to have passed, and significant technical damage continues to be done to the US dollar. Simultaneously, the breaking of what seemed to have been a one-way bet is a salutary for medium and long-term traders who focus on value, despite the fact that such dramatic moves hurt short-term speculators.  

The euro’s 5-day moving average offers crossed above the 20-day average the very first time since mid-July.  A base has formed near $1.26, and on Wednesday, the euro posted some other up day, which solidified that support.  It is most certain that the market is not bullish the euro.  However, further position squaring ahead of the FOMC meeting at the end of the month, especially given the risk that QE is continued.  Initial resistance is seen in the $1.2850 and then $1.2900.  The RSI which had been over-extended has become neutralized.  A break back below $1.2700-15 would likely be seen as a sign that a top is in place.  

Sterling is more interesting from a technical point of view.  Shifting rate expectations and marketplace positioning weighed heavily upon sterling.  On Wednesday it traded at its lowest level because last November.  Yet, the actual RSI and MACDs have failed to confirm the current lows, and this has left a bullish divergence in its wake.  A minimal of looks to be in location.  The first hurdle is seen close to $1.6165, but a break could spur a move toward $1.6225-50. 

The dollar had been confined to a two-yen range between 04 and August (JPY101-JPY103). On Thursday it traversed more than a two-yen range (JPY105.23-JPY107.50).   This range may dominate activity in the coming days.  Initial resistance within that range is seen in the JPY106.50-75 area.  The RSI’s suggest a low is in place.  The dollar spent much of the US session near the reduce Bollinger Band (~JPY106.15), but pushed up to new session highs in late turnover.  

Technical indicators don’t appear to be generating strong signals in the dollar-bloc.  The US dollar looks poised to pullback from the multi-year levels it recorded yesterday from the Canadian dollar.  Initially, the actual CAD1.1200 may offer support, additional support is seen near CAD1.1160.  The Australian dollar is too uneven to get a good read.

Some Opinion of the Dollar’s Technical Outlook Now’s republished with permission from Marc to Market

Over the past several decades, we view how China’s high financial growth and increasing financial integration with other countries possess led to a dramatic increase in its clout in global result and trade.

Just look at the facts. China is now the world’utes second largest economy, comprising 12 per cent of global gross domestic product in 2013. It is also the actual world’s largest exporter and second biggest importer, accounting for about 12 percent of world trade in 2013. Attracting more than US$110 billion in FDI in 2013, the PRC may be the world’s largest developing-country recipient of FDI inflows. It is also the world’s largest holder of foreign exchange reserves, having a total of US$3.8 trillion in reserves at the end of The year 2013.

The PRC may be a globally significant economic and trading power, however the market share of its currency, the renminbi (RMB), lags well behind the US buck and the euro.

To align the RMB with its growing global prominence, the PRC has embarked on the strategy to internationalise the RMB. Typically, it’s taking a gradual approach. In this, it has embarked on a number of initiatives designed to encourage the wider use of the RMB and raise its status in the international monetary program.

These measures include allowing foreign investors access to domestic capital markets, through programs such as the Qualified Foreign Institutional Investor and also the RMB Qualified Foreign Institutional Investor. It has also increased flexibility from the exchange rate — the RMB buying and selling band has been widened in order to plus or minus 2 per cent. Also, through the use of RMB as a settlement currency for cross-border trades, the PRC has been gradually growing the use of RMB in bilateral trade settlement agreements.

There are other steps being taken, such as the development of RMB down payment accounts and the opening from the offshore RMB market. The PRC has also opened offshore RMB centres, for example in Hong Kong, Singapore and London.

The outcome has been the emergence of the RMB in the international monetary system. For example, the RMB is beginning to play a role in international industry transactions. In December The year 2013, the RMB overtook the euro being the second most used forex in global trade finance after the US dollar. China’utes international trade has also grown at a compound annual growth rate of 19.1 percent between 2001 and The year 2013.

The rapid expansion of RMB trade negotiation together with other policy and regulating steps have bolstered the development of the RMB bond market in Hong Kong (also known as the dim amount bond market). From only 10 billion yuan (US$1.6 million) in 2007 — the year once the first dim sum relationship was issued — RMB-denominated bond issuance in Hong Kong significantly increased, to 372.1 billion yuan ($60.7 billion) within 2013. In the first 3 months of 2014, bond issuance reached 338.8 billion yuan ($55.2 billion).

The number of bond issuances has likewise rose steeply from just 5 in 2007 to 891 this year and 1,160 in 2013, while the number of relationship issuers increased from simply 3 in 2007 in order to 132 in 2013. From The month of january through May 2014, 890 bonds were issued by 107 issuers.

While the bulk of RMB bond issuances still originate from companies based in the PRC and Hong Kong, issuances from other economies also have grown through the years. In 2010, issuances through firms outside PRC and Hong Kong taken into account only 5.4 billion yuan ($880 million). By 2013, their RMB bond issuances amounted to Seventy six.1 billion yuan ($12.4 billion). As a share of total RMB bond issuance, their share offers varied from about 13–35 per cent.

Trade settlements have contributed to the rise of the RMB as a global currency. According to the Society with regard to Worldwide Interbank Financial Telecommunications (Quick), the RMB only had a Zero.31 per cent share in globe currency payments in 2011. Within March 2014, however, its reveal had increased to 1.Sixty two per cent. The RMB’s ranking in world currency repayments has also increased. In October This year, it was ranked 17th when it comes to usage but by March 2014, its ranking had now use 7th position. Indeed, the RMB is gaining on the Canadian dollar (which held the share of 1.83 per cent, ranking 6th) and the Aussie dollar (with a share of just one.84 per cent and Fifth in rank).

So while good progress has been made, there is lots of work still to be carried out. Trade settlements and bond issuance have increased, but from a reduced base. There have been some rest in restrictions on funds flows, but the capital account is still largely controlled. The actual exchange rate is still managed.

There is a positive trend in RMB as a reserve holding, but it’s still small compared to other global currencies. Financial markets are still less deep and liquid because those in developed countries, and are much less than those with global currencies. While the accomplishment is remarkable, the RMB is still far from being a full-fledged international currency.

The PRC is moving in the right direction with these measures and producing positive results. But these developments with the RMB are more a result of the PRC opening up its capital account and deepening its financial markets rather than the pursuit of specific policy objectives. All these trends will develop a critical mass over time and have the potential to start transforming the global financial system.

Renminbi stepping in right direction toward internationalisation is republished with permission from East Asian countries Forum

The US dollar gained of all of the major foreign currencies a week ago, but the overall tone, departing aside the yen, had been largely consolidative in nature.  The buck was soft in the first half of the week but retrieved in the second half.  

The Australian and Canadian dollars were the only major currencies that were able to hold onto some of their gains (0.55% and 0.40% respectively).  The actual yen was the poorest of the majors, losing 1.2%, because the panic from the week prior to died down.  Equity marketplaces were mostly higher, using the Nikkei’s 5.2% rise, leading the major markets.  US 10-year Treasury yields flower 8 bp. Core bonds generally traded heavier, but European peripheral bonds had been firmer, in line with the calmer conditions.   

We were never persuaded that last week’s turmoil would prevent the Fed from completing it’s tapering operation, and see that in the market, cooler heads are prevailing.  Talk of "declining the tapering" has diminished, and no one is taking too seriously the prospects of QE4.  Nevertheless, we note that both the Dec 2015 Fed funds and Eurodollar commodity contracts were unchanged on the week at 46 british petroleum and 77 bp correspondingly.  

Perhaps offsetting the diminished interest rate support for the dollar has been speculation that more action from the Western Central Bank and the Bank of Japan could be imminent. Reports suggested that the ECB might consider adding corporate bonds to the asset purchase program.  There were also report suggesting the BOJ sees risk that rising cost of living may fall, and this could prompt an extension of the currently aggressive Qualitative and Quantitative Easing.  We’re skeptical that either may materialize in the coming days.  The BOJ meets next week and the ECB the following week.    

Technically, the dinar looks poised to continue in order to consolidate.  Most of last week’s cost action took place within the $1.2625-$1.2886 range set on October 15.  Within recent session, the dinar flirted with the lower end and slipped to about $1.2615.  The euro spent the second half of the week underneath the 20-day moving average, which comes within near $1.2690. This is the nearby limit.  Of note, the nearly four-cent bounce in the euro has not been accompanied by a sharp change in euro positioning. The confidence of the euro bears is palpable and quite widespread.  

The bearishness toward the pound was more evident in the price action than in the euro.  We had identified the actual yen’s gains as among the most overstated in last week’s technical note.  The dollar’s recovery last week recouped 61.8% of its slide from the push marginally above JPY110 upon October 1.  It closed above its 20-day moving typical in the two sessions prior to the weekend for the first time since earlier this month.  The RSI continues to be recovering, and the MACDs have now crossed higher. The risk is that the speculation of more action by the BOJ gets ahead of itself.  This may assist cap the dollar, in which a trend line drawn off the early October highs comes in around JPY108.70-80 next week.  

From a specialized perspective, sterling continues to look good.  Bullish divergences continue to be evident within the daily RSI and MACD.  It could be important that the $1.60 area mostly held in the second half of a week ago.  It appears that sterling may be carving away a head and make   near $0.8650.  Before the weekend, the Aussie tested both sides from the pattern.  It closed firm, in an outside day, although off its high and merely below the previous day’s higher.  This is still impressive because of increased speculation that the main bank is considering reducing interest rates.  This chart design is notorious for fake breaks, and the technical indications do not appear to be generating powerful signals. 

The US dollar retracted against the Canadian dollar in order to challenge the past month’s uptrend. It’s found near the 20-day moving average, just above CAD1.1210.  The US dollar could not get back above CAD1.13 in the first half of the week and came down to test CAD1.1180-CAD1.Twelve hundred in the second half of the week.  It’s been unable to close below the 20-day average for a month.  The MACDs tend to be turning lower, though the RSI is within neutral.   

The US dollar has additionally been riding the 20-day moving average higher against the Mexican peso. It comes in now near MXN13.48.  The greenback has lost some momentum in recent day but has not pulled back from the highs very much.  There is no compelling technical evidence to conclude a dollar top is in place.  

Last week we anticipated that the S&P 500 could recover toward 1940, and it finished just above there on the week.  It retraced more than 61.8% of the decrease from the record highs.  To help keep the bullish momentum undamaged, the 1920 area should stay intact. On the upside, there is previous congestion in the 1980-1995 region.  There was an interesting gap that was created last week that is discovered between 1905.03 and 1909.Twenty-eight. This is Monday’s high (October 20) and Tuesday’s low.  That it has not been filled suggests it is unlikely to be a "normal" gap.  The "calculating gap" takes places in the middle of moving.  That would also project the S&P 500 toward 1990.  

US 10-year yields trended higher last week however remained unable to return to it’s former range. On the top aspect, yields look capped within the 2.30%-2.40% area.  On the drawback, the new range may extend to 2.10%-2.15%.  The MACDs are consistent with higher yields, while the RSI is soft.    

The CRB Index has been embracing the 270 area because October 15.  It signifies two-year lows. Although technical readings are stretched, especially MACDs, there is still no sign of the convincing low.  The Next year low, which itself would be a two-year low, was near 267. The 2010 low was just above 247.  The actual December crude oil futures contract lost $1 last week and documented lower highs for the last 3 sessions.  Bids around the $80 level are being absorbed without much consternation.  The marketplace still feels heavy.  The actual $83 level may be the top of the near-term range.  A break of $80 could see a push toward $76.  

Observations from the risky positioning in the futures market:

1.  Despite the large swings in the spot market, position adjustments in the currency futures were limited.  There was only one yucky position adjustment larger than 10k contracts.  Gross short yen positions were culled by Twenty five.6k contracts to 98.4k.  This was the largest short-covering since March.  

2.  Investors responded to the large price swings by reducing positions.  Of the 14 gross positions we monitor, nine were reduced.   Yucky long positions were cut except in the Japanese yen, where they grew by under 4k contracts.  Gross euro long euro positions were flat, but at 60.Two thousand contracts, it remains the largest gross long position among the currency futures.   Short positions were also generally decreased but did edge greater in the euro, Australian dollar and Mexican peso.

3.  The net brief euro position has grown for three consecutive weeks.   Speculators are accumulating a large short position in the dollar-bloc currencies and the Asian peso. The net short Canadian dollar position of 21.5k agreements is the largest since late-May. The actual 31.5k net short Aussie dollar contracts are the largest net short position since March.  Speculators are net short 21.1k peso contracts, the largest since late-February.  

4.  The net short 10-year US Treasury speculative futures placement was reduced to 90k agreements from 123k.  Speculators piled in to the longs, growing the gross position by almost 37k contracts to 456.7k.  The short added a small 3.6k contracts to 546.7k.

The Buck: More of the Same is republished along with permission from Marc to Market

The underlying driver of the forex market is the divergence between the US and the other high-income countries.  This was underscored previously couple of weeks.  Between the BOJ and the national pension fund, monetary stimulus and capital outflows are set to accelerate from the world’s third biggest economy. 

The ECB underscored its commitment to broaden its balance sheet and looks for other measures to apply as the risks align towards the downside. The signal ongoing to come from key Fed officials is that barring a significant downside surprise, the Fed will initiate a walking cycle next year. 

The dollar’s technical condition, however, is stretched.  Emotion is extremely one sided.  Virtually everyone is bullish the dollar and bearish the euro and yen.  The dollar’s inability to industry higher, despite the constructive work report before the weekend appears to reflect the reluctance of recent dollar longs to come in without a pullback.  The dollar might indeed drift a bit reduce at the start of next week, in a mostly corrective/consolidative fashion. 

Euro: Initial resistance is pegged near $1.2470.  Above there, the $1.2500-30 area is seen a far more solid cap.  Given the confidence level of many participants, this triggers a short squeeze a move above $1.2600 is needed now.  The economic calendar warns of a slow start to the new week.  The next major downside objective, ahead of the psychologically important $1.20 degree is the potential trend line connecting the 2010 low (~$1.1880) and also the 2012 low (~$1.2040) comes in close to $1.22. 

Yen: Since the BOJ/GPIF surprised the market on October 31, the actual yen has more than 5%.  Like the euro, the technical indicators are warning of an over-extended market.  However, downticks continue to brief as well as shallow.   Initial support is likely near JPY114.  Chart-based resistance occurs in front of JPY116 and then JPY117.60.  

Sterling: Brand new lows since September The year 2013 came before the US jobs data, near $1.5790.  Although it managed to recover, it stalled within the lower end of the previous day’s range.  Initial resistance is seen near $1.5880 and then $1.5920.  On the drawback, the next objective is near $1.5725, which represents the 61.8% retracement from the rally off the July 2013 low near $1.4815. 

Canadian dollar: Strong employment data helped the Canadian dollar recover in to the weekend.  However, the US dollar pullback to CAD1.1330 fulfilled the minimal retracement objective off the October Twenty nine low near CAD1.1120.  A further drive could see the greenback test CAD1.1275-95.    The CAD1.15 level neared, while offering the immediate psychological resistance, when it passes; the next main target is near CAD1.1725. 

Australian dollar: The Australian dollar staged an impressive recovery before the weekend break after making new four-year lows that matched the 50% retracement from the gains recorded off the 08 low near $0.6000.  The actual RSI and MACD trended higher in Oct.  There has been no validation of the pullback in prices in early The fall of.  There is near-term scope for the Aussie to test the $0.8660-80 area, which may also offer a new selling chance. 

Mexican peso: After retreating at the start of the week, the actual peso traded sideways through the remainder of the week.  Technically, the buck looks poised to slip back again toward the October Thirty-one low of MXN13.40.  Area of the difficulty in selling dollars for pesos is that it is not obvious when to place a stop.  Having said that, on a relative basis, from the euro, for example, or pound, the peso can outperform.  

S&G 500: The US employment information led to new record highs.  Of the mid-October lows, it has rallied nearly 12% and only once has seen 2 consecutive losing sessions.  The larger October 31 opening created a small gap (1990.40-2001.Twenty).  The gap, pierced on November 4, did not close.  This should provide support though initially we suspect support around the 2015 region. 

US 10-year Treasuries:  The yield peaked simply shy of the 2.40% degree after the US jobs information and dropped nearly 10 bp.  The futures market reflected this, with an outdoors up day for the US 10-year note futures.  The lack of key data in the early part of the new week could see yields drip a bit lower.  The 2.27% region is interesting and then 2.20%. 

Light Sweet Crude Oil: The Dec futures contract recorded greater lows in the second half of last week, but was still not able to resurface above the $80 level.  The RSI and MACDs did not validate the actual November 4 low near $77.25.  Above $80, the next target is $82.

Observations from the speculative positioning in the futures market: 

1. There have been three significant (more than 10,000 contract) adjustments in gross positions.  The gross lengthy euro position was cut by a little more than 5% or Thirteen.8k contracts to 238.6k.  The yucky long yen position flower more than 50% or 14k contracts to 37.9k.  The gross brief yen position rose 20% or even 18.3k contracts to 109.3k.  This report covered the two days before the BOJ/GPIF announcement (Oct 31) and two days after. 

2.  The general pattern among the currency futures in the latest CFTC reporting period ending November 4 was for both trend follower and bottom pickers to get more involved.  The growth of both gross wishes and shorts reflected this.  Of the seven currencies we track, two were exclusion.  The euro, which saw a cut in gross pants, and the Australian dollar, which saw gross longs, trimmed.

3.  Activity was concentrated within the euro and yen.  No other gross currency positions changed by more than 4k agreements. 

4.  The net short 10-year US Treasury note futures position increased in order to 47.3k contracts from Thirty-five.8k.  This was a function of wishes cutting (almost 17k contracts to 414.4k) and a small covering associated with shorts (nearly 5.4k contracts covered to leave 461.7k contracts).

Dollar Technicals Extended, but Fundamentals Remain Encouraging is republished with permission through Marc to Market

What can’t go up forever apparently will not and today has seen a couple violent moves.  The buck, which has risen by more than 10% against the yen since the BOJ shocked with a 5-4 vote to speed up its already aggressive financial easing on October Thirty-one, rose to new multi-year levels yesterday just shy of JPY122 only to sell off to almost JPY119.50 today.  

There was not a fundamental trigger, though the sell-off in global collateral markets may have encouraged the actual some profit taking.  A lot of the pressure, however, appeared to originate from crosses, especially the dollar-bloc.  A poor business confidence survey saw the Australian dollar fall to $0.8225, fueling more calls for rate cuts next year.

Chinese stocks also staged a dramatic reversal.  The Shanghai Composite, which extended it’s recent moon-shot initially by tacking on another 3% to bring the gains since last November’s surprise price cut to nearly 27%, reversed dramatically to close 5.4% lower at the time.  A 7.5% drop in financials, and almost as large the drop in the energy sector brought it.  Regulators have been caution about investors getting ahead of themselves in recent days.  Earlier today, regulators stiffened collateral rules for collateral margin.  AA rated ties or lower can no longer end up being collateral to buy stocks.  This particular effectively drained liquidity, though the PBOC itself refrained from open marketplace operations. 

The yuan sold off sharply.  It’s declined 1% since the end associated with last week.  The dollar arrived at CNY6.2080 today, the highest level since July.  The recent low had been set at the end of October close to CNY6.1080.  China reports inflation and lending figures tomorrow.  Blocking a significant surprise, many individuals will continue to look for a near-term decline in the reserve requirements. 

Ideas the UK economy was taking pleasure in new momentum late around were stopped cold through disappointing industrial production as well as manufacturing data.  Expectations had been for October industrial production and manufacturing to have each risen by 0.2%.   Recall the October manufacturing PMI flower to 53.3 in October from 51.Six in September.  Today the united kingdom reported industrial output dropped by 0.1% while production output slumped 0.7%.  The implied yield of the December 2015 short-sterling contract is nearly 10 bp higher than yesterday.  UK gilts tend to be outperforming. 

Separately, BRC sales were stronger within November rising 2.2% year-over-year following a 1.4% increase in October.  Like-for-like increased 0.9% after a flat Oct.  Also, MPC member Weale, who has favored an immediate hike in prices, reiterated his hawkish stance.  Another dissenting hawk McCafferty speaks Thursday.  

Greek bonds will also be staging a dramatic reversal today.  Ten-year bonds yields had contacted 8.5% in late November, however by the end of last week, yields experienced slumped to near 7.15%.  The actual yield has jumped back toward 7.70% today.  Greek stocks have slumped more than 8%, led by financials (-11%).  The actual trigger was Prime Minister Samaras’ decision to bring forward the selection of the following Greek president.  Opposition parties will try to prevent Samaras from gaining the sufficient super-majority needed to achieve this, and this would force elections earlier next year.  Syriza, which is anti-austerity, and most lately pressing for official sector investor haircuts, is operating ahead in the polls.  The January election, for example, might influence the ECB to wait until its March meeting to declare a wider asset purchase plan.  It could be an awkward time for you to buy Greek bonds, to say the least.   

The Federal Reserve’s Labor Marketplace Conditions Index deteriorated within November (2.9 versus 3.9).  Today’s Bumps report is to follow.  It is not a market mover, and it will stand in the way of rising confidence of the first Fed hike the coming year.  The immediate focus is on next week’s FOMC statement, where there is growing speculation that the Fed drops or changes “considerable period”.  In fairness, many thought this was possibly at the last meeting, but it is now recognized that the importance of the Fed press conference to help clarify and guide expectations.  This is why the first rate backpack is also at a meeting by which Yellen holds a press meeting.

A Day of Reversals is republished with authorization from Marc to Market

For many investors, today marks the end of the year, but it is finishing on a favorable note. The mixture of the FOMC meeting and the SNB adoption of negative interest rates underscored the actual dollar and equity bullish divergence theme. 

It struck us that too many people were doing all kinds of mental and verbal gymnastics to account for what was a technical move. The correction, which came after a strong six-week trend move, lasted a week, December 9-16. The S&P 500 and also the Dow Jones Stoxx 600 possess both recouped around 70% of this downdraft.

The euro peaked near $1.2570 upon December 16 and has not really been able to resurface above $1.2300 for nearly 24-hours. The SNB’s move, effective the same day the ECB’s meeting, The month of january 22, is no coincidence. Just like the market is feeling more confident inside a rate hike by the Given near mid-2015, it is feeling well informed of a broader asset plan from the ECB. The euro is actually holding above the low focused on December 8 just below $1.2250. In the thinning holiday markets, techniques may be exaggerated, but now it appears asymmetrically so to the downside.

The dollar peaked against the yen on Dec 8 near JPY121.85. The violent correction ended in entrance of JPY115.50, a key technical retracement level of the dollar’s advance from both October 15 as well as October 31. The JPY119.Fifty high the dollar documented today corresponds to a 61.8% retracement of the dollar’s decline over the past 7 days. A move above there would advise a return to the highs and beyond.  

Ironically, today’s dollar increases against the yen come as BOJ Governor Kuroda appeared to express concern about the pace of the recent moves.  It was practically a forgone conclusion that the BOJ wouldn’t alter policy or break new ground at it’s last meeting of the year.  The actual Nikkei gapped higher yesterday and today.  The index closed on it’s high and now appears ready to test the December 8 high that is just above 18000. 

Sterling is uninspired.  It is caught between your strength of the dollar and also the weakness of the euro (as well as Swiss franc).  Since mid-November, sterling has been limited to a $1.56-$1.58 trading range.  There have been a handful of violations of the two-cent range, but it has mostly held.  The euro has been around a wider range.  Since September, it has been peaking in the GBP0.8000-50 area and bottoming in the GBP0.7800 area.  The divergence between the UK and dinar area will widen.  Nevertheless, political uncertainty, especially with the actual Scottish Nationals indicating they are prepared to cut a deal with Labour, may detract from sterling’s advantage.  Meanwhile, the FTSE recouped 61.8% of its weeklong decrease. 

Incorporating the latest census data to determine economic activity, China revised how big its economy upward at the end of last year.  The 3.4% increase is CNY58.8 trillion.  To put that into perspective, consider it roughly the size of the Singapore’s Gross domestic product.  This is the first step of the procedure.   The next step is to adopt the worldwide standards regarding methodology, that China has signaled it will early next year.  This will likely boost estimations of the size of China’s economy another 3-5%.  One consequence of such revisions is that it makes evaluations to GDP, such as debt/GDP or current account surplus/GDP marginally smaller.  We suspect there is little coverage implications in the changed optics. 

On the other hand, the PBOC has taken actions to ease the liquidity squeeze within the interbank market.  It has injected an unspecified amount of liquidity through the Pledged Supplementary Lending facility and contains fully rolled over the MLF funds (CNY 500 bln three month financial loans) that were maturing.  The flurry of year-end IPOs in China has started, and between yesterday as well as December 25, there are approximately dozen IPOs that are tying upward over CNY3 trillion (~$480 bln).  Getting beyond the IPOs, with no repos expiring next week, many anticipate the liquidity squeeze to help ease. The 7-day repo rate, which is a helpful metric of interbank liquidity, jumped 154 bp today (213 bp around the week) to almost 6.0%.  The actual PBOC preferred to keep it below 4%.  

The Shanghai Amalgamated rose 1.7%, led by telecoms and utilities.  This can be a new four-year high.  Since the PBOC surprised investors by cutting the actual benchmark rate on The fall of 21, the Shanghai Composite has rallied almost 25%.  Its correction survived two days (December 8-9), and has already been recovering since. 

Canada reports CPI as well as retail sales today.  The consensus expects a 0.2% decline in headline inflation and a 0.1% rise in the core rate.  The main bank expects price pressures to ease.  The surprise may be in retail sales.  The headline is expected to be 0.3% lower after a 0.8% rise in October.  There is scope for an upside surprise.  Excluding autos, retail sales are expected to increase slightly after a flat studying previously.   

The divergence theme weighs around the Canadian dollar, which continues to be treated like as petrol currency.  The US dollar has found good support this week near CAD1.1560.  The commodity intensive Greater toronto area Stock Composite has rallying highly in recent day, but has generally under-performed.  The highs for the year were at the begining of September.

The Santa Rally Underpins the Dollar is republished along with permission from Marc to Market

The powerful divergence theme re-emerged and effectively ended the dramatic correction throughout the capital markets. The FOMC statement strengthened conviction of a mid-2015 lift off, even if the speed of tightening may be somewhat slower than previously anticipated. At the same time, the Swiss National Lending institution’s decision to move to unfavorable interest rates, partly in anticipation of the actual ECB expanding its asset buys as early as next month, underscores that Europe remains well at the rear of the US in the credit cycle.

Rather than attribute the downdraft within the dollar and equity marketplaces to a shift in underlying basic drivers, we had seen the actual hand of a technical modification, driven by short-term market placement, and aggravated by year-end portfolio adjustments.  Indeed the dinar peaked within a few ticks of the 50% retracement objective of its deficits from the October 15 high near $1.29. For its component, the dollar’s dramatic slide against the yen stopped just timid of a key retracement objective of their rally from both Oct 15 and October Thirty-one found near JPY115.50.

We anticipate the dollar’s higher trend to carry on.  However, the lack of participation within the next two weeks could imprecise this trend.  The Dollar Index made a new high before the weekend near 89.65.  A move above 90.00, which has held back previous dollar bounces since the start of the Great Financial Crisis, would signal an acceleration of the dollar’s advance.  The 88.Eighty area is Initial assistance.   

The euro recorded a new reduced for the move just before the weekend near $1.2220.  A break of $1.2200 would suggest losses towards $1.20.  It has not had the opportunity to resurface much over $1.2300 since breaking below in response to the SNB’s decision. 

Technical indicators suggest the dollar’s uptrend against the yen will resume.  The move above JPY119.50 strengthens the conviction that the greenback obtained care of back to the December Eight high near JPY121.85 as well as beyond.  Initial dollar assistance is in the JPY118.50-80 area. 

Sterling is not especially interesting now, caught between your strength of the dollar and the weakness of other currencies, including the euro, Swiss franc, yen and Australian dollars.  Against the greenback, a $1.56-$1.58 trading range since mid-November represents it’s confinement.  There have been a handful of violations of the two-cent range.  Technical indicators recommend risk remains to the downside.  Sterling set a low near $1.5540 upon December 17, but the click back into the range seemed halfhearted.  Resistance is seen $15680-$1.5700.      

The dollar-bloc currencies are heading lower.  They did not participate in the bounce that the euro and yen enjoyed.  Resistance in the Aussie dollar is near $0.8200.  Our next important target is actually near $0.8000, ahead of which are the lows from 2010 around $0.8060-70.  The US dollar reached a high of roughly CAD1.1675 upon December 15.  This was towards the lower end of the range we have been suggesting for the greenback.  The upper end of that variety is near CAD1.1725.  Since documenting the highs, the US buck has not been below CAD1.1560. 

The dollar peaked against the Mexican peso on Dec 12 near MXN14.95.  Five days later, it had slumped to MXN14.37.  By the end of the week, the dollar’s bull move have had recovered to over MXN14.70.  In the days ahead, the dollar may consolidate it’s gains.  It could pull back toward MXN14.50, though, over the moderate term, it appears the dollar can retest the 2009 high close to MXN15.60.  

The US 10-year yield bounced off the 2.0% level to near 2.25%, where the rally faded.  Economic data out in a few days expects to show stronger capex (long lasting goods orders) and more powerful growth momentum (upward modification to Q3 GDP to above 4%).  This may limit the pullback in yields.

At the same time, we observe that the premium the US pays over Germany widened out to almost 160 bp now.  This is the largest premium because mid-1999.  It began the year close to 110 bp.  The widening was a result of German bund produces falling further than US produces fell.  

Although the US 10-year yield continues to be relatively low, the 2-year deliver has firmed, and at 65 british petroleum is 1-2 bp below the five-year high set earlier this month.  The US high quality over German at this tenor is about 73 bp, which represents a new three-year high.  These relative rate of interest developments are constructive for the dollar.

The S&P 500 gapped higher December 18 following a powerful close the previous day after the FOMC meeting and seemingly aided by the Switzerland National Bank’s move to negative interest rates.  It had advanced further before the weekend.   In the mid-week low to the pre-weekend high, the actual S&P 500 gained about 95 points or 5.2%.

That gap is between 2016.Seventy five and 2018.98.  We do not search for this gap to fill in the near-term.  Rather the gap, like the one on October 21, signals the end to the corrective losses and the resumption of the bull advance that carries it to new highs.

There is a reasonable chance that the February oil futures contract has put in a short-term low around $54.30-60.  The RSI is turning up, and the MACD is about to mix. The sellers were tugging back, and bargain searching reported.   The $60.00 degree is the first hurdle and near $63.00. 

Observations based on the speculative positioning in the futures market:

1.  There was only one significant placement adjustment of more than 10k within the latest CFTC Commitment of Investors report for the week finishing December 16.  It was the 12.4k contract reduction in the gross short euro position, leaving 182k contracts still short.  The net short position is smaller by 52k contracts since peaking in early November, which is accounted by short covering.  

2.  There were other gross currency positions which changed by almost 10,000 contracts.  The short yen placement fell by 9.6k agreements to 132.6k.  The gross lengthy Swiss franc position doubled in order to 18.9k.  The speculative yucky long Australian dollar position increased by 9.4k contracts to 26.8k.  

3.  All the forex futures we track here but the Canadian dollar saw gross short positions trimmed in the latest week.  This seems very much consistent with squaring up ahead of the holiday season.  For its component, the gross short Canadian dollar position rose the by 300 contracts.  

4.  The speculative net short All of us 10-year Treasury futures position increased by 20% to 258k contracts.  Liquidation was a complete 10% of the gross long position, or 32.3k contracts offered to leave 273.4k still long.  The gross short position elevated by 24.6k contracts raising the short position at 531.6k agreements.  It has risen by 70k contracts over the past three reporting weeks. Over the same period, the actual gross long position offers fallen by 110k contracts.

Dollar Bulls Get back Upper Hand is republished with authorization from Marc to Market

The quarterly report by the Bank for International Settlements does not express it in so many words, but its warning of possible currency and funding mismatches illustrates the reason why the much ballyhooed Chinese swap lines are misunderstood. 

Recall that during worst of the Great Financial Crisis in 2008-2009, there was no G7 currency intervention.  Instead, officials recognized the main problem was not foreign currency prices per se, but the use of dollar funding.  The Federal Reserve responded accordingly and established currency swap lines with a several countries to make buck funding available through nationwide central banks.  These swap lines were used to different degrees.  The swap outlines for the ECB, BOJ, BOE, BOC, and SNB were changed into permanent structures of the worldwide architecture in the form of standby agreements at the end of 2013.  Although the exchange lines, and now standby contracts, were bilateral, the US never used the ability. 

Chinese officials saw the US exchange lines and erroneously believed this was part of the US initiatives to re-impose a dollar-centric order.  These people responded by extending their very own network of currency exchange agreements.  Barring a single exclusion, they have not been drawn on.  Yet, it has not avoided observers from claiming these people represent the internationalization of the yuan.  

In the actual BIS quarterly report released over the weekend, authorities warn that a continued appreciation of the dollar will squeeze many corporations from emerging market economies.  There are two stations by which this will happen.  First, many of these businesses issued bonds denominated in foreign currencies, especially US dollars.  The BIS estimates such entities experienced issued $2.6 trillion of these obligations, of which three-quarters was denominated within US dollars.  Second, international banks have lent about $3.One trillion as of mid-2014, mainly in dollars, to such companies. 

Borio, the head of the monetary and economic department of the BIS, had been quoted on the news wires saying that "Should the US dollar, the dominant international currency, carry on its ascent, this could expose currency and funding mismatches by raising debt burdens.  The related tightening of financial conditions could only worsen once rates of interest in the US normalize."

Moreover, an increase in forex borrowing preceded the Latina American debt crisis of the late 1970s and early 1980s.  It presaged Mexico’s Tequila Turmoil in 1994-1995. An increase in hard forex borrowing also took place within the run-up to the Asian financial crisis within 1997-1998.  

According to the BIS data, overseas lending rose by 400 bln in Q2 2014 to surpass $30 trillion.  The fir.2% increase in the year from mid-2013 had been the first increase since the late-2011.  Not even close to being part of the solution (through the internationalization of the yuan), China is part of the problem.  BIS figures indicate that outstanding loans by international banks in order to Chinese businesses doubled in the 18 months to mid-2014 to $1.1 trillion.   

The low level of US interest rates, and the dirty peg that keeps the yuan shadowing the US buck, made it attractive for Chinese companies to borrow dollars.  The actual currency mismatch may not be as large as it is for companies from other emerging market economies with a freer exchange price regime.  However, the 3.8% dollar appreciation of against the yuan within first four months of this 12 months was sufficient to wipe out more than a year of the interest rate cost savings.  Even now, the dollar is about 2% higher against the yuan than it was at the beginning of the year.  The difference between your US and China’s prime rates are about 225 bp annualized.  

The fact that set exchange regimes have largely been jettisoned (with the notable exception of Hong Kong and OPEC countries), the chance of a repeat of the earlier emerging market crises tend to be perceived to have lessened.  The greater flexibly currency regime does not prevent the kind of currency mismatch that has resulted in past crises.  It is true that lots of emerging market economies have amassed large reserves of hard currencies.  These reserves can be employed to resist a forex decline or address an industry imbalance.  Precisely how they can be used for a private sector currency or funding mismatch is less instantly clear. 

What the various crises over the past 40 years or so have in common is a currency or maturity mismatch that was accelerated just prior to the start of the crisis.  The  fairly low US interest rates relative to domestic rates available in rising market economies, and the depreciation of the dollar, which was broadly seen in structural rather cyclical conditions, encouraged such behavior.  This worked until the dollar and US interest rates rose.  

Many experts put the onus on the Federal Reserve.  When it eased policy using orthodox and then unorthodox guidelines to avoid a harder downturn, critics say it should not have done so.  It was exporting deflation.  Because it prepared investors for the end of its unorthodox measures, some have complained the US is actually exporting inflation.  

The Federal Reserve is not the central bank for the world, but of the United States.  Still, it recognizes its importance.  This had revealed its motives to investors months before it was going to slow its asset purchases.  It even waited a few months after it experienced appeared to signal the beginning of it’s tapering.  It has been warning investors since the beginning of the year that after an unspecified “considerable period” after the long-term asset purchase plan was completed, it might raise US interest rates.  The actual clearest signal from the Fed’s leadership is that this process will likely begin around the middle associated with next year.  Of course, it is dependent on the data but barring a substantial surprise, those with potential financing or currency mismatches, have just as much warning as can reasonably be expected.    

Meanwhile, China’s yuan swap lines go unused.  The yuan may be a lot of things, but it is not an international funding currency.

BIS Quarterly Report Shows China’s Exchange Lines Misunderstood is republished with permission from Marc to Market