brazil reduces oil production plans

[ProdigyofZen]

Re: brazil reduces oil production plans

Identifying when the irrational behaviour is on the verge of reversing (the start of the crash) is infinitely more difficult.

Even now, despite a lot of reasoned debate on iTulip, it is not certain that China is indeed in a cyclically irreversible crash. Even separating the secular from the cyclical is difficult. I beleve PoZ is correct on the secular trend, but the cyclical movements within that "long crash" can kill an investor. As PoZ has noted the PBOC and Beijing cannot defend every variable, so a continuing declining trend stock market and a declining Yuan seem highly likely. But the increased liquidity actions that are now ensuing are almost certainly going to goose the property market, and cause many to declare that the Chinese economy is improving. Cyclically perhaps..

This is very true: Every change you can envision can take longer than you can imagine but the impact of slow change is more profound than you know.

This is why I am cautious in my trades around China. If I were running a fund I wouldn't be out there trying to short their debt. In fact I would be long their 10 year USTs as I expect them to go from their current yield of 3.48 to well below 2.5%.

But I have written before that the PBoC will quickly find out that the equity market is not the property market and it is not so easily manipulated.

I was carefully watching the skyrocketing Shanghai index for my entry point to short. The market was going straight up since Feb 6 from 3000 to 4500 by April 27, an unsustainable increase. It had done this after increasing over 1000 points in a longer time frame starting in July 2014 (near to when the PBoC asked investors to invest in the stock market) to Feb.

Back in April, the 27th to be exact the market fell for no reason and continued to fall to May 4th even though it tried to make it back to its April 26th high. Then the market collapsed from May 4 at 4480 over 3 days to 4112. I went short that last week of April as I felt the market was drawing in all the retail investors.

It then recovered in a series of spectacular up days and down days to June 12 before margin debt started to propel the market down. I stayed short until mid-July and covered knowing full well that the PBoC would throw the kitchen sink at the market.

I surmised that the PBoC could not continue to backstop the economy and that for every pop in the market there would be immense selling pressure as everyone was trying to get out.

I again went short at the end of July when the market began to crash again and remain short.

This is one way to trade the long term China crash. I want to point out that even though we and others identified China as a risk 5 years ago, last year was the first time that you had declining FX reserves and reversing capital flows since that original formulation.

The funds who were way too early were absolutely crushed. I know one that was down 46% or so in 2012 and had to close.

There are long term identifiable shorts (and even longs as you could have invested in the Chinese stock market while it was going up and shorted it on the way down) but it takes patience and skill.

[ProdigyofZen]

Re: brazil reduces oil production plans

Personally, I would like to see the Chinese stock market fall more so I can scoop some ecommerce stocks for long term bet.

But how to know when it is the right time to enter?

The Chinese market went absolutely no where from 2009 to mid 2014. Their market is an asset bubble market.

It is a better bet to be long dividend paying Chinese equities. Like Mathews China Dividend Fund. I fully expect them to be down another 8% + in August.

[touchring]

Re: brazil reduces oil production plans

The Chinese market went absolutely no where from 2009 to mid 2014. Their market is an asset bubble market.

It is a better bet to be long dividend paying Chinese equities. Like Mathews China Dividend Fund. I fully expect them to be down another 8% + in August.

Thanks for the tip. I'll have to think hard about it. Many of the dividend paying companies are SOEs and there's a lot of corruption and abuse of power going on. This is the reason why people avoid stocks. The moral standards and corporate governance isn't there yet. Besides, with the credit and real estate bubble, Chinese banks are dangerous in the medium term.

I'm looking at specific Chinese stocks that I think will have better governance. Yes, I know the risk will be much higher for single stocks.

Found an interesting report - http://www.cnbc.com/2015/08/26/the-w...tack:topnews:2

[touchring]

Re: brazil reduces oil production plans

Here's an interesting report on China selling US debt to fund the share buyback while at the same time maintaining the RMB against the dollar.

Exchanging US debt in exchange for Chinese blue chips doesn't sound like a bad idea?


http://www.zerohedge.com/news/2015-0...rns-washington

It's Official: China Confirms It Has Begun Liquidating Treasuries, Warns Washington


On Tuesday evening, we asked what would happen if emerging markets joined China in dumping US Treasurys. For months we’ve documented the PBoC’s liquidation of its vast stack of US paper. Back in July for instance, we noted that China had dumped a record $143 billion in US Treasurys in three months via Belgium, leaving Goldman speechless for once.


We followed all of this up this week by noting that thanks to the new FX regime (which, in theory anyway, should have required less intervention), China has likely sold somewhere on the order of $100 billion in US Treasurys in the past two weeks alone in open FX ops to steady the yuan. Put simply, as part of China's devaluation and subsequent attempts to contain said devaluation, China has been purging an epic amount of Treasurys.


But even as the cat was out of the bag for Zero Hedge readers and even as, to mix colorful escape metaphors, the genie has been out of the bottle since mid-August for China which, thanks to a steadfast refusal to just float the yuan and be done with it, will have to continue selling USTs by the hundreds of billions, the world at large was slow to wake up to what China’s FX interventions actually implied until Wednesday when two things happened: i) Bloomberg, citing fixed income desks in New York, noted "substantial selling pressure" in long-term USTs emanating from somebody in the "Far East", and ii) Bill Gross asked, in a tweet, if China was selling Treasurys.

Sure enough, on Thursday we got confirmation of what we’ve been detailing exhaustively for months. Here’s Bloomberg:

China has cut its holdings of U.S. Treasuries this month to raise dollars needed to support the yuan in the wake of a shock devaluation two weeks ago, according to people familiar with the matter.

Channels for such transactions include China selling directly, as well as through agents in Belgium and Switzerland, said one of the people, who declined to be identified as the information isn’t public. China has communicated with U.S. authorities about the sales, said another person. They didn’t reveal the size of the disposals.

The latest available Treasury data and estimates by strategists suggest that China controls $1.48 trillion of U.S. government debt, according to data compiled by Bloomberg. That includes about $200 billion held through Belgium, which Nomura Holdings Inc. says is home to Chinese custodial accounts.

The PBOC has sold at least $106 billion of reserve assets in the last two weeks, including Treasuries, according to an estimate from Societe Generale SA. The figure was based on the bank’s calculation of how much liquidity will be added to China’s financial system through Tuesday’s reduction of interest rates and lenders’ reserve-requirement ratios. The assumption is that the central bank aims to replenish the funds it drained when it bought yuan to stabilize the currency.
Now that what has been glaringly obvious for at least six months has been given the official mainstream stamp of fact-based approval, the all-clear has been given for rampant speculation on what exactly this means for US monetary policy. Here’s Bloomberg again:

China selling Treasuries is “not a surprise, but possibly something which people haven’t fully priced in,” said Owen Callan, a Dublin-based fixed-income strategist at Cantor Fitzgerald LP. “It would change the outlook on Treasuries quite a bit if you started to price in a fairly large liquidation of their reserves over the next six months or so as they manage the yuan to whatever level they have in mind.”

“By selling Treasuries to defend the renminbi, they’re preventing Treasury yields from going lower despite the fact that we’ve seen a sharp drop in the stock market,” David Woo, head of global rates and currencies research at Bank of America Corp., said on Bloomberg Television on Wednesday. “China has a direct impact on global markets through U.S. rates.”
As we discussed on Wednesday evening, we do, thanks to a review of the extant academic literature undertaken by Citi, have an idea of what foreign FX reserve liquidation means for USTs. "Suppose EM and developing countries, which hold $5491 bn in reserves, reduce holdings by 10% over one year - this amounts to 3.07% of US GDP and means 10yr Treasury yields rates rise by a mammoth 108bp ," Citi said, in a note dated earlier this week.

In other words, for every $500 billion in liquidated Chinese FX reserves, there's an attendant 108bps worth of upward pressure on the 10Y. Bear in mind here that thanks to the threat of a looming Fed rate hike and a litany of other factors including plunging commodity prices and idiosyncratic political risks, EM currencies are in free fall which means that it's not just China that's in the process of liquidating USD assets.

The clear takeaway is that there's a substantial amount of upward pressure building for UST yields and that is a decisively undesirable situation for the Fed to find itself in going into September. On Wednesday we summed the situation up as follows: "one of the catalysts for the EM outflows is the looming Fed hike which, when taken together with the above, means that if the FOMC raises rates, they will almost surely accelerate the pressure on EM, triggering further FX reserve drawdowns (i.e. UST dumping), resulting in substantial upward pressure on yields and prompting an immediate policy reversal and perhaps even QE4."

Well now that China's UST liquidation frenzy has reached a pace where it could no longer be swept under the rug and/or played down as inconsequential, and now that Bill Dudley has officially opened the door for "additional quantitative easing", it would appear that the only way to prevent China and EM UST liquidation from, as Citi puts it, "choking off the US housing market," and exerting a kind of forced tightening via the UST transmission channel, will be for the FOMC to usher in QE4.

[ProdigyofZen]

Re: brazil reduces oil production plans

Here's an interesting report on China selling US debt to fund the share buyback while at the same time maintaining the RMB against the dollar.

Exchanging US debt in exchange for Chinese blue chips doesn't sound like a bad idea?

This was to be expected years ago. As China enters an existential crisis (and make no mistakes about it, they are in crisis) they would draw down their FX reserves and UST hoard to support their economy.

The very fact that they have to sell UST and not just sell down their FX reserves obviates everyone's fall back in defense of China that "they have 3.6T in reserves for any crisis" defense.

[touchring]

Re: brazil reduces oil production plans

This was to be expected years ago. As China enters an existential crisis (and make no mistakes about it, they are in crisis) they would draw down their FX reserves and UST hoard to support their economy.

The very fact that they have to sell UST and not just sell down their FX reserves obviates everyone's fall back in defense of China that "they have 3.6T in reserves for any crisis" defense.

Don't know much about UST, low interest means high UST price. Isn't this about locking in the profits?

Now only China is selling, what if everyone notices and starts bailing out of UST?

[jk]

Re: brazil reduces oil production plans

This was to be expected years ago. As China enters an existential crisis (and make no mistakes about it, they are in crisis) they would draw down their FX reserves and UST hoard to support their economy.

The very fact that they have to sell UST and not just sell down their FX reserves obviates everyone's fall back in defense of China that "they have 3.6T in reserves for any crisis" defense.

i assumed that their reserves were held in ust of shortish duration, i.e. their ust holdings and their reserves are one and the same. is that not the case?

[Polish_Silver]

student loan innovation

You're absolutely right, Prodigy. Well said. Student loans are a recent innovation to prop up both the debt-based economy as well as keeping-the-lid-on welfare state subsidies.

They are only recent if the last 35 years are recent. I used them and I was far from the first. The amount borrowed was relatively modest, and the terms
were very reasonable. I had them all paid off within 5 years of graduating. Maybe we could say "large student loans that threaten the solvency of the borrower for decades are a recent 'innovation' . "

[Polish_Silver]

Re: brazil reduces oil production plans

This was to be expected years ago. As China enters an existential crisis (and make no mistakes about it, they are in crisis) they would draw down their FX reserves and UST hoard to support their economy.

The very fact that they have to sell UST and not just sell down their FX reserves obviates everyone's fall back in defense of China that "they have 3.6T in reserves for any crisis" defense.

is the crisis so big that the 3.6 trillion will be dented?

It seems like selling of assets is merely a delaying tactic. What will happen in the long run?

With rates so low, I guess they will have plenty of buyers.

[ProdigyofZen]

Re: brazil reduces oil production plans

i assumed that their reserves were held in ust of shortish duration, i.e. their ust holdings and their reserves are one and the same. is that not the case?

No, they actually have about 1.5 trillion in USTs and another 3.7 Trillion in FX reserves of mostly US dollars.

Check the chart:

PBOC balance sheet July 2015.png

[jk]

Re: brazil reduces oil production plans

No, they actually have about 1.5 trillion in USTs and another 3.7 Trillion in FX reserves of mostly US dollars.

Check the chart:

[ATTACH=CONFIG]5689[/ATTACH]

so in what form are the fx reserves held? do they just have a really big mattress?

[ProdigyofZen]

Re: brazil reduces oil production plans

so in what form are the fx reserves held? do they just have a really big mattress?

The PBoC has total assets of 5.7 trillion. 4.3 T is in FX (3.7 of which is USD) and the rest I presume Gold. The difference between 5.7 trillion and 4.3 is the amount of USTs they hold.

There are only 3 trillion in USTs held worldwide by all Central Banks. China can't possibly have 3.7T in all USTs.

USTs held by foreigners.png

In the past two weeks China has spent 250B USD supporting their stock market and another 200B in FX interventions to support their currency. They have also injected 90B USD into domestic banks as equity.

Which means China has spent between 500 to 600B FX reserves in the last two weeks alone.

The PBOC is effectively short the yuan and long the dollar on their balance sheet.

You can read the paper here: http://origin.www.uscc.gov/sites/def...20Holdings.pdf

What is interesting is that just about all macro economists and everyone else has been wrong.

The thought process was this: "China pursues an exchange ratepolicy that keeps its currencyundervalued. This requires China’scentral bank to purchase U.S.dollars entering China’s economy,resulting in massive foreignexchange reserves ($3.82 trillionby the end of 2013)."

Their currency instead of being undervalued is grossly overvalued precisely because it has appreciated against all currencies (but especially the USD) since their original devaluation in 1994.

[touchring]

Re: brazil reduces oil production plans

is the crisis so big that the 3.6 trillion will be dented?

It seems like selling of assets is merely a delaying tactic. What will happen in the long run?

With rates so low, I guess they will have plenty of buyers.

The fact that China is secretly selling shows that they know if the word goes out, they may not get a good price for their UST. They have managed to dump a couple hundred billions quietly. What happens now that the word has gone out that China is dumping UST?

[Southernguy]

Re: brazil reduces oil production plans

"Their currency instead of being undervalued is grossly overvalued precisely because it has appreciated against all currencies (but especially the USD) since their original devaluation in 1994."

A completely anomalous situation for an emerging economy. Specially if it is coupled with a current account surplus maintained during a long time.
Usually emerging economies with overvalued currencies hold big current account deficits.
Me thinks the root of their plight is overproduction of goods.
Seems to be the world is no longer able to buy as much as they produce.
Hence the need to turn to internal market. They did the trick first with a lot of debt, just as western powers did.
This mecanic is wearing out. Because the only real way to boost consumption is to raise salaries.
They have done it, but not in the necessary scale.
On the other way raising salaries reduces profits.

[touchring]

Re: brazil reduces oil production plans

"Their currency instead of being undervalued is grossly overvalued precisely because it has appreciated against all currencies (but especially the USD) since their original devaluation in 1994."

A completely anomalous situation for an emerging economy. Specially if it is coupled with a current account surplus maintained during a long time.
Usually emerging economies with overvalued currencies hold big current account deficits.
Me thinks the root of their plight is overproduction of goods.
Seems to be the world is no longer able to buy as much as they produce.
Hence the need to turn to internal market. They did the trick first with a lot of debt, just as western powers did.
This mecanic is wearing out. Because the only real way to boost consumption is to raise salaries.
They have done it, but not in the necessary scale.
On the other way raising salaries reduces profits.

Sounds right. Income is one thing, distribution is also very important.

Imagine if Alibaba starts building such service centers in the rest of the BRIC. The market is huge.

http://www.bloomberg.com/news/articl...he-countryside