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Key News

  • A plan led by Germany and France to bail out Greece with as much as €30 billion ($41 billion) in aid began to take shape amid intense and risky jockeying between Athens and Berlin over timing and terms. (WSJ)
  • Turcan Connell, which caters to rich families, expects the pound to lose between 20 percent and 30 percent against the dollar once investors turn their sights on Britain as the government sells a record amount of debt. Sterling slid to a 10- month low versus the U.S. currency today. (Bloomberg)
  • The pace of Chinese manufacturing eased last month, suggesting slower government spending and steps to curb credit growth could be taking some of the steam out of the world’s third-largest economy. (Reuters)

Quotable – On China Holdings of US Paper

“It is a real toss-up as to which generates more bizarre comment in the international press: Beijing’s long-feared dumping of US Treasuries, or the use and value of the PBoC’s central bank reserves. The revelation last week that Chinese holdings of US Treasury obligations fell in December by $34.2 billion, to $755.4 billion, generated a frisson of fear and excitement, leading one prominent newspaper to worry that “If there is one thing that gets investors twitchy, it is the fear that China is losing its appetite for US government bonds.”

“And shouldn’t they get twitchy? After all this reduction in Chinese holdings of Treasury bonds comes from the USG’s TIC data, so it must be true that China is dumping dollars, right?

“No need to twitch, it means no such thing. First of all, the data from which this was derived indicates national ownership of USG bonds only to the extent that foreigners are directly registered holders. It says nothing about what happened to the large amount of bonds held by the PBoC and other Chinese investors indirectly or in street names. Those could have easily gone up by more than the reduction in bonds directly held by Chinese investors in their own name. If the PBoC had let maturing Treasury bonds get repaid, for example, and reinvested the proceeds into the USG bond market through another account, or in a street name, its total holdings would have actually increased even though its registered holdings would have declined.

“More importantly, the TIC numbers completely fail to disclose whether China’s reduced holding of USG bonds was matched by increased holding of other dollar assets, thereby increasing the pool of capital available to fund USG bonds by an amount equal to its reduced Treasury holdings. If Chinese investors decide to take on more risk, for example, they might sell USG bonds and use the proceeds to buy corporate bonds. Of course the seller of these corporate bonds will then have cash, which must be put to work, and ultimately this ends up back in the USG bond market.”

                             Michael Pettis

FX Trading – Pound pounded, Euro fading, and Reader mail

Ouch! The British pound got hammered this morning…and the euro ain’t acting as though the German/French plans to bailout Greece are going so well. Commodity currencies flat…but will likely take their cue from stocks again today.

GBPUSD Weekly: The pound tested its weekly trend line and key retracement level this morning i.e. 61.8% from the old high to the credit crunch low. Next stop 1.35—the credit crunch low? Or time for a bounce?

EURUSD Weekly: Ditto. Testing a 61.8% retracement level (1.3400) from its high to credit crunch low? (see next page)

Reader Mail about my comments on gold last Friday

This we thought was brilliantly written, besides the fact Emil makes some excellent points:


I’m writing to try and treat your oedipal complex with gold. I mean the metal…

First of all, I’d ask you to be open to recognizing that you may have a problem. So please don’t read this in some state of denial. By the end of this short note you may be taking your first steps on the path to investing in the barbarous relic. Let’s try.


Gold may be to only asset that is still in a bull market since 2007/2008. I wasn’t sure so I had a quick look at some ETFs. Commodities? DBC down 49%. Brics? BIK down 30%. China! FXI down 43%! Brazil!!! EWZ down 30%!!! I grant you that I haven’t done an exhaustive study, but you get the idea.

GLD is currently up 12% from its March 2008 high of $98. Have a careful look at the chart Jack. It’s impressive! Question: Is "being married to your position" equal to "fighting the tape"?

2) DON’T BE A GOLD BUG Why do the chattering classes insist on calling those who invest in gold, "bugs"? And let’s be honest Jack, that includes you. Are gold investors in some way similar to the lowest forms of animal life? Something you wipe from your windshield when it gets squished?

I opened my position in gold in 2004. Since that time I’ve had a few investment discussions with professional… shall we say, money men. Do you know what! I’ve never said that I invest in gold. I’ve always muttered something about a position in commodities. Really!

Now can gold in a bubble when those of us who buy it are ashamed to say so? For fear of being thought of as an insect? I think not… (or maybe I’m just too shy). Anyway, the asset was in a bear market for almost 20 years. Peoples’ perceptions don’t change easily.

3) DON’T HEDGE AGAINST INFLATION In addition to a position in gold, your analyst is invested in high quality government long term debt. Did I hear you say, "What!?".

It’s true! Why? There’s a lot of overleveraged (un)economic capacity out there. There’s going to be debt destruction. The dollar is going to be strong (I agree with you Jack.) and I expect deflation.

So why buy gold with such an outlook? Answer: As this deleveraging process evolves, investors are going to increasingly seek out the highest quality assets. What are those? Money in the reserve currency? Right… and then? Yes Jack there is gold. Gold is money!

Investors will continue to move towards gold. And a few years from now they will be all in. You too Jack. You’ll believe too. When you do believe would you drop me a line? It could be the sell signal I’m looking for.

Time’s up Jack. Our session is over. See you next Thursday.

All joking aside, I remain your faithful reader, Emil Zamarelli.

Thank you Emil!

And another good one from MR:

Big credit cycles are good gold indicators-gold/commodities-you want historic money -gold- during a bust- and stocks and other financial assets during a boom-for the big ones.

Stocks not gold 1990,s to 2000-gold not stocks or junk bonds or commodities-worked in 1929, 1873 and 2008 and probably 2010 when the credit bust starts generating margin calls on over leveraged hot carry trade stories-that cannot meet margin calls with commodity prices falling and sovereign debt repudiation and shadow derivative events-time for historic real money.

Gold may go down nominally in dollars, but gold mining will be very profitable as all commodity cost inputs crash with global bust of massive credit contraction.


Thank you MR!