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Thursday, February 26, 2009


emergent trouble for the dollar

the ongoing shocking collapse of japan got another datapoint yesterday as new data showed the country, just a few months ago one of the world's preeminent export powers, returning to a current account deficit for the first time in 25 years. japan was only recently the largest buyer of dollar-denominated debt in the world; today, it has no need of any. japan is about to experience what is likely the most savage depression of any first-world country since the 1930s.

Japan’s exports plunged 45.7 percent in January from a year earlier, resulting in a record trade deficit, as recessions in the U.S. and Europe smothered demand for the country’s cars and electronics.

The shortfall widened to 952.6 billion yen ($9.9 billion), the biggest since 1980, the earliest year for which there is comparable data, the Finance Ministry said today in Tokyo. The drop in shipments abroad eclipsed a record 35 percent decline set the previous month.

Exports to the U.S. tumbled an unprecedented 52.9 percent from a year earlier, and shipments to Asia and Europe also posted the largest-ever declines as the global recession deepened. The collapse is likely to force Japanese companies to keep firing workers and closing factories, worsening an economy that shrank the most in 34 years last quarter.

china is unfortunately likely to follow. the latest piece of evidence via yves smith and bloomberg that china is experiencing a consumer-driven deflationary collapse is a bit of goldman sachs research on tax collections within the middle kingdom. official pronouncements of fiscal and financial health from the chinese leadership look more and more bogus with every passing week.

as such, we are witnessing the end of vendor finance. and that has severe ramifications for the united states.

spending plans for the united states are exuberant as the nation turns to neo-keynesianism in its hour of need, reinforced earlier today in a deutsche bank call on american GDP.

Deutsche Bank sees current quarter GDP at -6.5 percent and makes assertion that while it is not likely one can make a case for -10 percent.

a (-10%) decline in GDP is only possible when some really bad economic data is hitting the wire -- and it is. united states january durable goods orders came out this morning (-23.3%).

the obama administration budget proposal just released for 2009 considers a fiscal shortfall of nearly $1.8tn for this year alone. treasury is already auctioning unprecedented amounts of debt weekly, creating new maturities and reopening old issues. it will have to step up in size from even these auctions.

the reasonable paramount question is, now more than ever, "who is going to buy all this debt?"

japan is suddenly out of the picture. petrostates are dealing with the collapse in global demand for and price of oil by shutting down petrodollar reinvestment flows and, in some cases, actually shedding reserves. china is faced with shortly following japan. and, as cited in the financial times, bank of new york mellon runs the sums and notes that even 8% american domestic savings rate by the end of 2010 -- which would correspond to a depression-level contraction in spending -- would raise just $830bn in potential domestic finance for treasury against something on the order of $4tn in deficit spending plans. brad setser's notion that rising domestic savings will offset contracting vendor finance would in this scenario be found severely wanting.

it is quite possible that some of the approximately $3tn that needs to be found in 2009 and 2010 could be vomited out of other capital markets -- corporate bonds, stocks and the like.

to the extent that it is not, however, the federal reserve bank is very likely to be compelled to monetize treasury debt in terrific size -- true quantitative easing and in earnest, no later than the second half of this year.

but the fallout may be harder to predict than simply "inflation". the united states will not be alone -- indeed, in a world of competitive devaluation, the dollar might even appreciate vis-a-vis its forex crosses. furthermore, the inflation of quantitative easing may well fail to stave off declining prices (particularly in leverageable assets) simply because, even at a full $3tn of monetization, it isn't enough to offset the vaporization of moneylike credit which is ongoing. if prices are to rise, chances are much better that it would be in the realm of physical raw inputs and unfinished goods, with the depressed conditions of falling income and credit scarcity continuing to crush leverage and margins.

the conclusion? mellon suggests storing wealth in precious metals, which they see as outperforming.

UPDATE: john jansen speculates:

The indirect bidding category, which folklore holds is a proxy for central bank interest, won nearly 39 percent of the auction.

In spite of that result and in spite of economic data this morning which borders on calamitous the bond market can not get out of its own way. Tomorrow brings month end and a substantial index extension and even with that the market sits within a basis point of cycle lows.

In that regard, I think that the markets have a serious auction and supply problem. David Ader, an analyst at Greenwich Capital, in a piece he wrote this morning talks about the rolling concession which the Treasury market requires to accommodate the issuance.

He notes that the concession building makes the charts look weak and that engenders more selling. ...

I think that an era of unheard of concessions for Treasury issuance is possible too. The funding needs of the Treasury are prodigious and given the details of the budget released today it will only increase in the near term. The wholesale market ( primary dealers) has shrunk in size and the amount of balance sheet available to those in the market has contracted, too. I think that it is only a matter of time until demand slackens and the Treasury faces 10 basis point and 15 basis point tails on a regular basis (A tail is the number of basis points between the level at which the issue was trading in the brokers market and the level at which the auction stops.)

It has happened in other markets and it seems only logical to me that it should happen in this market also. If that pattern were to develop. I think it would force the hand of the Federal Reserve and would hasten their entry into the market as a buyer of Treasuries.

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