Dollar Woes: Big Trouble In Little China?

by: The Nattering Naybob

Discussion, critique and analysis of the potential impacts on equity, bond, commodity, capital and asset markets regarding the following:

Last Time Out; Big Trouble in Little China; Currency Manipulation; Demography.

HIBOR; Chinese Debt Downgrade; PBOC Forward Dollar Swap Squeeze.

Non Deposit Liabilities; The Price of Money and Hegemony; Bigger Trouble Ahead.

Last Time Out

The contraction of 98% of BTC trading volume (in CNY), created volatility and an amplified "demand" squeeze.

Much like the credit based "dollar" (Eurodollar) and its attendant unregulated, unbackstopped, global liquidity issues, the above circumstances have increased the valuation of BTC and through additional speculation, all crypto currencies in the process.

It is probable that the currency share of BTC global trading volume has changed radically since the Chinese acted in Feb and would not be surprised if the two principals in the "dollar" carry JPY and USD are now sporting a higher share %. - Money? or Crypto Tulips?

It would seem that Eurodollars, the Asian (USD/JPY) dollar carry and a RMB (yuan) squeeze (CNY/CNH) could be hinting at...

Big Trouble in Little China?

Big Trouble in Little China is a 1986 American fantasy martial arts comedy film directed by John Carpenter and starring Kurt Russell, Kim Cattrall, Dennis Dun, and James Hong.

Following Elvis, Escape from New York, and The Thing, this project was Carpenter's fourth collaboration with actor Kurt Russell, while fulfilling the directors long standing desire to make a martial arts film.

Originally scripted about a cowboy in Chinatown in 1899, W.D. Richter (The Adventures of Buckaroo Banzai Across the 8th Dimension) came in for a rewrite, changing it to modern times and using Rosemary's Baby as a guide.

Gene Siskel complained about "the ridiculous amount of special effects in the film" and Roger Ebert asked "why am I supposed to care about these characters?" Going up against Aliens and Top Gun, the film was a commercial failure, grossing $11.1 million in North America, below its estimated $19 to $25 million budget.

After the commercial and critical failure of the film, Carpenter became very disillusioned with Hollywood and became an independent filmmaker.

"The experience [of Big Trouble] was the reason I stopped making movies for the Hollywood studios. I won't work for them again. I think Big Trouble is a wonderful film, and I'm very proud of it. But the reception it received, and the reasons for that reception, were too much for me to deal with. I'm too old for that sort of bulls**t." - John Carpenter

In the 30 years since its release Big Trouble in Little China, a cinematic oddity, blending varied styles and genres with a non-traditional hero, an iconic villain (Lo Pan remains a favorite US street art subject), and endlessly quotable, has become a cult classic, with an 82% average rating on Rotten Tomatoes and a steady audience on home video.

In June 2015 it was reported that Dwayne Johnson was developing a remake to star in. In an interview Johnson expressed interest in having Carpenter involved in the remake. Carpenter later said this, "It's very early in the process. I haven't spoken to Dwayne Johnson about any of this...I'm ambivalent about a remake."

Speaking of ambivalence, potential big trouble in little China and the film's apropos tagline:

Some people pick the the damnedest places to start a fight!

Currency Manipulation?

President Donald Trump declared China the "grand champions" of currency manipulation on Thursday, just hours after his new Treasury secretary pledged a more methodical approach to analyzing Beijing's foreign exchange practices. In an exclusive interview with Reuters, Trump said he has not "held back" in his assessment that China manipulates its yuan currency, despite not acting on a campaign promise to declare it a currency manipulator on his first day in office.

"Well they, I think they're grand champions at manipulation of currency. So I haven't held back," Trump said. "We'll see what happens." - Reuters

Over the last four years, the PBOC has spent trillions to prop the RMB, fight short speculation and prevent outflows. A formal declaration that China or any other country manipulates its currency requires the U.S. Treasury to seek negotiations to resolve the situation, a process that could end in punitive tariffs on the offender's goods. China was the last country to get the designation, in 1994.

The Demography of Hegemony?

Yes, Germany in effect has an undervalued currency relative to what it would have without the euro. So the euro system has kept Germany undervalued, on a sustained basis, against its neighbors.

There was a large real depreciation during the euros good years, when Spain had massive capital inflows and an inflationary boom. This has only been partly reversed, despite an incredible depression in Spain. Why? Because wages are downward sticky, and Germany has refused to support the kind of monetary and fiscal stimulus that would raise overall euro area inflation, which remains stuck at far too low a level.

But does this mean that the euro as a whole is undervalued against the dollar? Probably not. The euro is weak because investors see poor investment opportunities in Europe, to an important extent because of bad demography, and better opportunities in the U.S. - Paul Krugman

At the end, Krugman's analysis sounds contradictory. The difference between US vs EU and US vs Chinese demography aside, are both the Germans and Chinese guilty of currency manipulation?

05/10/17 HIBOR


ON 2.78200

1W 4.09317

2W 4.35000

1M 4.79700

2M 4.83417

3M 4.84650

6M 4.84850

1Y 4.99067

05/31/17 had the second largest one day appreciation since the RMB was de pegged from the dollar in 2005. In the 22 days since 05/10 USD/CNH has gone from 6.91 to 6.75, that 2.3% is a big move in RMB.

Chinese Debt Downgrade

Most of the huge RMB move has occurred since the 05/24 Moody's downgrade of Chinese debt. Moody's Investors Service cut its rating on China's debt for the first time since 1989,reducing the rating one notch, to A1 from Aa3.

"While ongoing progress on reforms is likely to transform the economy and financial system over time, it is not likely to prevent a further material rise in economy-wide debt, and the consequent increase in contingent liabilities for the government." - Moody's

Here are the offshore cost of loans funds for RMB on 06/01...

06/01/17 HIBOR

ON 42.81500

1W 19.59633

2W 13.91267

1M 10.57033

2M 7.84583

3M 6.99650

6M 5.71633

1Y 5.50983

Yes, that's in percent for all duration, including ON overnight. 42% is the third highest ever, as the overnight rate surged to 66.8% in Jan 2016, and a record 110% in Jan 2017. PBOC has squeezed liquidity, dampened outflows and chased the shorts?

PBOC Forward Dollar Swap Squeeze?

It is possible that Chinese banks who at the behest of the central bank, sold USD/RMB forwards and did not get a June roll over from the PBOC, forcing those lenders to settle the contracts by delivering RMB.

The increased cost to borrow the currency and sell it, (soaring short cost squeeze) prompts lenders that want to avoid paying the higher rates, to instead buy the RMB they need in the spot market, reducing the float and boosting the exchange rate.

In order to buy those needed RMB, large Chinese banks have been selling dollars onshore and offshore in HK. The above dynamics have propped the RMB and longs are at their largest in 2 years.

For the moment, the Asian "dollar" carry USD/JPY and RMB squeeze have concomitantly contained King Dollar's Eurodollar squeeze.

Non Deposit Liabilities?

We could also be witnessing a big problem with bank credit circulating back into the banking system as non deposit liabilities.

Above in late April Chinese equities, bonds and commodities were all headed South. Non deposit liabilities can take the forms of WMP's (wealth management products) and involve those acting as SPV's (special purchase vehicles).

These investments and entities circulate bank credit as non deposit liabilities. More importantly, these off book - off balance sheet shenanigans are not subject to reserve requirements.

As per the chart above, those holding WMP's or acting as SPV's, leveraged or otherwise, including risky equities, high yield bonds and commodities, could be creating a self reinforcing vortex of selling and margin calls which could rapidly drain systemic liquidity with little to no PBOC backstop.

The Price of Money?

Contrary to what most might think or expect, the PBOC 10 yr yield +18bps in April and +17bps in May to 3.65%. Meanwhile, the 7 day RR (repo rate) averaged 2.93 vs 2.31% in May 2016 for a +62bps YOY increase in cost of loan funds.

Meanwhile, with a dog eared dollar, in May the UST 10 yr yield went from 2.327% to 2.198%, the second lowest level in a year for a May decline of 13 basis points.

The price of money is reflected and quoted in FX currency pairs and price indices. That distinction expands the definition well beyond the price of money being the reciprocal of the cost of the good, viz. a wrapper is .50, therefore a dollar is two wrappers.

There is non money and there is money which provides a flow of services over time. Aside from currency, other forms of "money" having varying degrees of moneyness or liquidity preference viz. T-bills, repo, CP or any definition of a monetary aggregate has a corresponding price index.

Just remember, interest rates are the price of credit or the cost of loan funds, and are NEVER to be conflated with the price of money. And if one did, Salmo Trutta would slap them silly.

The Price of Hegemony?

As for "grand champions of currency manipulation", I don't know, but I'll tell you, 89 countries keep their currency in a tight trading range relative to the USD. More than 85% of forex trading involves the USD and 40% of the world's debt is issued in USD.

Many countries such as China and Japan, invest in foreign currencies of countries they export to so that their own currencies are cheaper in comparison. Hence, in Q2 2016, 64% of the world's known reserves were held in USD.

So to buy RMB, those Chinese banks could liquidate anything else they hold, but as most transactions and reserves are denominated in dollars, and the Chinese probably do not hold enough alternatives to satisfy this massive effort, they are not.

Bigger Trouble Ahead?

In any event, whether any of the above is by design or error, there may be another reason the PBOC might be firming the RMB. The PBOC is getting ready for a June FED raise and any potential market, currency, cost of loan funds and economic instability resulting thereof. Again, buffering for non deposit liabilities could play a substantial role.

This would include any potential fall out should the schedule for the big punch bowl removal (Fed balance sheet reduction through bond purchase taper) be made public in the details of the June 14th FOMC announcement or July 5th release of the minutes. As they say, Beezlebub is always hiding in the minutia and out.

Happy Trails?

Hope you folks enjoyed yourselves, catch you later on down the trail. Would like to thank you folks fer kindly droppin' in. You're all invited back again to this locality. To have a heapin' helpin' of Nattering hospitality. Naybob that is. Set a spell, take your shoes off. Y'all come back now, y'hear!

This is our 119th in a series of thematically related missives which will attempt to identify the macroeconomic forces with potential to adversely effect capital, commodity, equity, bond and asset markets.

I wish to dedicate this missive to one of my mentors, Salmo Trutta, who is a prolific commenter on SA. Without Salmo's tutelage, and insistence on not masticating and spoon-feeding the baby ducks, as in learning the hard way by doing the leg work and earning it, this missive would not have been possible. To you "Proximo"... "win the crowd and win your freedom" - Spaniard.


Investing is an inherently risky activity, and investors must always be prepared to potentially lose some or all of an investment's value. Past performance is, of course, no guarantee of future results.

Before investing, investors should consider carefully the investment objectives, risks, charges and expenses of an investment vehicle. This and other important information is contained in the prospectus and summary prospectus, which can be obtained from the principal or a financial adviser. Prospective investors should read the prospectus carefully before investing.

Market Plays?

As for how all of the above ties into the potential and partial list of market plays below... the market as a whole could be influenced, and this could tie into any list of investments or assets. Those listed below happen to influence the indices more than most.

There are many macroeconomic cross sector and market asset correlations involved that affect your investments. Economic conditions, the eurodollar, global dollar debt and monetary policy all influence the valuation of the above and market plays below, via King Dollar's value, credit spreads, swap spread pricing, market making, liquidity, monetary supply and velocity, just to name a few. For a complete missive series listing covering those subject and more, click here.

The potential global economic developments discussed in this missive could affect numerous capital and asset markets, sectors, indexes, commodities, forex, bonds, mutual funds, ETFs and stocks.

A List of Potential Market Plays (Long or Short?):

Apple Computer (NASDAQ:AAPL); Google (NASDAQ:GOOG) (NASDAQ:GOOGL); Facebook (NASDAQ:FB); Microsoft (NASDAQ:MSFT); Citigroup (NYSE:C); General Electric (NYSE:GE); Cisco (NASDAQ:CSCO); Bank of America (NYSE:BAC); Amazon (NASDAQ:AMZN); Tesla (NASDAQ:TSLA); SP 500 Trust ETF (NYSEARCA:SPY) ; Ford (NYSE:F); Starbucks (NASDAQ:SBUX); Intel (NASDAQ:INTC); ATT (NYSE:T); IBM (NYSE:IBM); Exxon Mobil (NYSE:XOM);

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.