The Downside of Do Whatever it Takes

by Doug Noland

October 17, 2014

"Anyone who isn't really *concerned* doesn't understand the situation."

Goldman Sachs CEO Lloyd Blankfein provided a market-calming interview late Thursday afternoon with CNBC’s Carl Quintanilla. Not surprisingly, I suppose, Blankfein praised the Fed for being “wise and courageous.” He also stated that extreme market views were wrong.

Considering the global backdrop, I actually see a curious lack of extreme views (at least from the bear side). Instead, we’re at the stage of the cycle where even “bearish” pundits go out of their way to distance themselves from “the world is ending” prognosis. I guess I would be considered an extremist, though I don’t see the world ending anytime soon. But this week did offer further evidence that history’s greatest financial Bubble is at significant risk.

Friday’s rally did a lot to paper over what was a disturbing week for global markets. The mini-melt-up successfully took a great deal of value out of index and stock put options that expired Friday. Those seeking market protection will now have to pay up for expensive puts that expire in November, December or later.

But don’t let the S&P 500’s modest 1.0% decline fool you. It was an extraordinary week.

Japan’s Nikkei index was hammered for 5.0%, increasing 2014 losses to 10.8%. Japanese two-year yields traded to a record low 0.005%. After beginning the week at 6.60%, Greek 10-year bond yields traded to 9% on Thursday (before closing the week at 8.07%). Wild instability returned to European debt (and equities) markets. Portugal’s 10-year yields were up 75 basis points by Thursday, before a rally cut the week’s jumpe to 35 bps. Germany’s DAX equities index dropped 2.87% on Wednesday then rallied 3.12% on Friday. Italian stocks sank 4.44% and then rallied 3.42%.

Panic buying saw German bund yields trade to a record low 0.71% on Thursday, before ending the week at 86 bps. Spreads to bunds widened meaningfully throughout Europe. The German to Italian spread widened 20 bps to 165 bps, and German to Spanish 13 bps to 131 bps.

Curiously, even French bonds showed some vulnerability this week. With French 10-year yields up 6 bps, the spread to bunds widened nine to a three-month high 44 bps. Notably, Cyprus CDS surged 112 bps this week to an eight-month high 482 bps.

Watching the U.S. long-bond surge a full four points on my Bloomberg screen Wednesday morning brought back memories. I recall staring at Quotron and Telerate screens back on “Black Monday,” October 19, 1987, as stocks crashed and Treasury bonds gained an incredible 11 points. Ten-year yields traded to a low of 1.86% on Wednesday, with two-year yields down to 0.25%. In a matter of several hours, five-year Treasury yields traded from 1.47% down as low as 1.11%. In just seven sessions two-year yields sank from 56 bps to 31 bps. Recent trading has seen wild volatility in eurodollar future, CDS and derivatives markets generally. After beginning the week at 21.24, the VIX (equities volatility) index traded above 31 on Wednesday to the highest level since 2011 (surpassing even 2012 European crisis levels!). It is certainly also worth mentioning that the Goldman Sachs “Most Short” index jumped 3.3% this week in one of the bigger recent outperformances posted by commonly shorted stocks. The S&P 500 Homebuilding Index jumped 7.85% this week.

I find the backdrop surreal. And the more everyone acts as if it’s all business as usual the more worried I become. As crazy as I know it sounds, I am these days reminded of my bewilderment when studying the period leading up to the 1929 stock market crash. How could they not have seen it coming? How could everyone remain so bullish (“a permanently high plateau”) considering what in hindsight was an obvious – and quite ominous – deterioration in the market and global economic outlook. I also think often of a quote from that period: “Everyone was determined to hold their ground, but the ground gave way.” Can the world’s central bankers hold everything up?

These days, there are extraordinary divergences in views – two altogether different worlds – two completely opposing views of how things work. Take off the rose-colored glasses and the world is clearly a scary place. So long as the markets go higher the glasses stay on. Increasingly, however, I suspect many in the hedge fund industry see the markets similarly as I do – in complete disarray. Meanwhile, the traditional long-equities investors see yet another dip to buy before another big rally takes stocks to record highs.

So is this just another “healthy correction” or are there more serious dynamics at work?

For me, this week’s major market instability supported the bursting global Bubble thesis. In a way, the week was akin to a “flash crash” on a global, multi-asset class basis. Aggressive selling found a dearth of willing buyers – stocks, bonds, commodities and derivatives. Panic buying of Treasuries and bunds found a dearth of sellers. In short, various markets dislocated in illiquidity – simultaneously. I assume leverage and derivatives-related trading played integral roles.

Importantly, wild instability across various markets has surely inflicted meaningful losses on the global leveraged speculating community. With many funds now posting negative returns for the year coupled with markets succumbing to treacherous volatility, a period of de-risking/de-leveraging is likely now at hand. But as we saw this week with many stocks (and sectors) that the speculators were short, market dislocation and short squeezes can fuel spectacular volatility and even big gains.
Rather 1929esque, Jeremy Siegel filled the airways trumpeting robust U.S. fundamentals and Dow 18,000 (by year end!). Meanwhile, The Wall Street Journal went with the headline “Corporate-Debt Market Slows to a Crawl.” “Crawl” was generous. Bloomberg hit the mark: "Credit Markets Weaken as New Issuance Halts, Junk Extends Losses.” Importantly, the corporate debt market – especially for high yield bonds and loans that have been issued in record quantities – basically shut down this week.

To be sure, the U.S. Bubble economy will be at risk if this key financing market doesn’t get back to business quickly. M&A would be at risk; stock buybacks at risk; and corporate earnings and spending would be at risk.

While it has garnered some boom-time momentum of late, I believe the U.S. economy is more vulnerable than most appreciate.

Another Bloomberg headline: “Oil and Junk Don’t Mix as 19% Rout Posted on Worst of Crude Debt.” The U.S. energy revolution has been integral to the bull story on the U.S. economy. Now, with crude prices having collapsed, we’ll begin to tally the damage from one of the more conspicuous Fed policy-induced Bubbles. There are as well plenty more commodity price downturns (corn, wheat, soybeans, cotton, etc.) that will surely unveil plenty of ill-advised lending and investment. And I certainly expect many U.S. companies to suffer at the hands of a weakening global economy.

I subscribe to the “Austrian” focus on the critical importance of a balanced economic expansion. But in our world of central bank policy-induced financial booms and busts, economic balance is relegated to history. Instead, we live in a world of intractable imbalances and destabilizing serial sector Bubbles. The Tech Bubble, the “housing” Bubble and more recently the energy Bubble, Tech Bubble 2.0 and Stock Market Bubble 3.0. After years of excess and resulting resource misallocation, the maladjusted U.S. economy is inherently vulnerable to a reversal of speculative finance and resulting tightening of financial conditions (with deflating U.S. securities prices).

From my perspective, global markets have begun to adjust to what will be momentous changes to the financial and economic landscape. Faltering global fundamentals ensure acute problems for an over-leveraged world. Collapsing commodities prices equate to debt problems for scores of companies, countries, lenders and speculators. And considering the scope of global leverage and speculation, the odds of this market adjustment spiraling into a major financial crisis are high. This week offered unmistakable evidence as to how quickly things can unravel. In powerful crannies in the marketplace, confidence likely took a forceful hit this week. Potential illiquidity became a pressing issue.

At about 10:20 a.m. on Thursday, with European markets tanking and U.S. equities sinking, St. Louis Fed president James Bullard began to be interviewed on Bloomberg Television. Bullard, generally considered a FOMC moderate, had more recently shifted to the hawkish contingent. This ensured that his Thursday morning flutter to join the doves provided notable relief to the markets. The key Bloomberg headline (10:25 am): “Bullard Says Fed Should Consider Delay in Ending QE.” Nervous markets had been awaiting a signal of support from the FOMC. From the market’s 10:18 a.m. low to Friday’s high the S&P500 rallied 3.4%.

San Francisco Fed chief John Williams actually got things going Wednesday with his comment (Reuters interview), “If we really get a sustained, disinflationary forecast ... then I think moving back to additional asset purchases in a situation like that should be something we should seriously consider.” It was close enough to Bernanke’s summer of 2013 assurances that the Fed would “push back” against a tightening of financial conditions. As a longtime close advisor to Janet Yellen, Williams’ views matter to the markets.

The QE issue is a fascinating one. History is rather clear: once major monetary inflations begin they become nearly impossible to stop. I certainly don’t expect the ballooning of the Fed’s balance sheet stops at $4.5 TN. There will be no “exit.” I’m thinking “QE4” might be ushered in with something similar to the Fed’s statement before the stock market opened the day following the 1987 crash: “The Federal Reserve, consistent with its responsibilities as the Nation's central bank, affirmed today its readiness to serve as a source of liquidity to support the economic and financial system.”

The bulls absolutely fixate on the Fed (and its cohorts) reliably backstopping the markets – “QE infinity”. I could only chuckle when reading a Wednesday UK Telegraph headline: “World Economy So Damaged It May Need Permanent QE.” Anyone asking how it became so damaged?

From a real world perspective, by now it’s apparent that QE doesn’t work as prescribed – as the propaganda asserts. Global central banks have added Trillions of liquidity and the global economy and markets are as fragile as ever. The Fed has “printed” almost $3.6 TN in six years and the U.S. economy remains extraordinarily vulnerable. Arguably, U.S. securities Bubbles are an accident in the making. Incredible QE in Japan has had only modest economic impact, with sinking stocks now weighing on confidence. In the past two years of incredible global monetary pumping, disinflationary forces have gathered momentum. Many commodities are trading at multi-year lows. Now global market participants and pundits clamor for aggressive ECB QE, while blasting what is commonly viewed as mindless German austerity. The hope has been that ECB QE would sustain the global Bubble. Mindfully, the Germans don’t want to play ball.

If only Bubbles lasted forever. And, unfortunately, the longer they persist and the bigger they inflate -the more problematic the unavoidable collapse. This important reality is ignored at everyone’s peril. Determination to avoid collapse only ensures greater and more precarious Bubble distortions and maladjustment. “World Braces as Deflation Tremors Hit Eurozone Bond Markets,” read another UK Telegraph headline. And Bullard and the global central bank community fret a “collapse in inflation expectations.” It is important to recognize that disinflation and collapsing “inflation expectations” are symptomatic of a bursting global financial Bubble, providing early evidence of what will be a spectacular failure in experimental “activist” central banking.

Predictably, the calls for more “money” printing turn boisterous and increasingly desperate. But more QE only delays the day of reckoning. I guess I am an “extremist” for stating that printing “money” out of thin air and inflating global securities markets are not going to resolve deep structural deficiencies in global Credit and economic “systems.”

So how long can global policymakers and bullish pundits keep the Bubble psychology alive?

Indeed, we’re now facing two radically different world backdrops: the historic Bubble regains some momentum - or it continues to deflate.

These quite contrasting worlds imply widely divergent market values for so many things around the world, certainly including securities prices. So long as confidence holds, many will argue that securities are attractively valued. But if markets continue to weaken, financial conditions further tighten and liquidity continues to wane (i.e. contagious de-risking/de-leveraging), then securities markets will face a very problematic period of instability and revaluation.

I’ll state it again, I find the current global backdrop much more problematic than 2007/08.

Having become a historic Bubble, China’s financial system and economy are incredibly more fragile than six years ago. Throughout the emerging markets, economies and Credit systems have been damaged by six years of reckless excess. And how about Europe – financial systems, economies, societies and geopolitics? Across the board, European fundamentals have suffered frightening deterioration. And I can only concur with comments repeated Friday by Bundesbank President Weidmann: “ECB’s QE will not fix the Eurozone’s problems.”

This week saw some of the problems associated with aggressive central banking come home to roost. In a serious crack at the “periphery,” Greek bond yields spiked 250 basis points in three sessions. In the halcyon world of endless cheap liquidity, Greece’s debt load appeared manageable. So why not leverage in higher-yielding Greek debt with Fed, BOJ and Draghi all backstopping the markets? Why not debt from Portugal, Italy, Spain and France? Why not all higher-yielding “periphery” debt, including European and U.S. junk bonds? What difference do fundamentals matter when central bankers are promising to do “Whatever it Takes.”

Meanwhile, two years of booming securities markets took the heat off of European politicians (just as the Germans warned!). France is in the process of (again) flouting EU deficit rules, while Italy has also decided to boost deficit spending (with debt-to-GDP above 130%!). For monetary integration to have any chance of success would require strict fiscal integration. Things are instead going in the opposite direction, and there’s going to be some heated battles ahead. As I’ve said in the past, at the end of the day I do not expect the Italians (or the Greeks or French) and the Germans to share the same currency.

October 16 – Bloomberg (Patrick Donahue and Ilya Arkhipov): “Talks between Vladimir Putin and German Chancellor Angela Merkel, who blamed Russia for stoking the crisis in Ukraine, were scrapped when the Russian leader overstayed a celebration of a Soviet defeat of the Nazis in Serbia. Serbia’s government, which has refused to implement European Union sanctions against Russia even as it’s trying to join the bloc, welcomed Putin with the country’s first military parade since the days of Cold-War President Josip Broz Tito.”

I expect the markets will be confronted by myriad troubling European issues.

From the markets’ perspective, the Ukraine crisis has been resolved. Putin buckled under the pressure of Western economic sanctions, in another win for contemporary finance. I suspect this thinking is way too optimistic. Actually, I believe Putin is determined that Western sanctions don't win. And there were some rather ominous warnings this week regarding the potential consequences of “blackmailing” Russia. So don’t be surprised if Putin turns the tables and blackmails the West (i.e. if sanctions are not lifted there will be a renewed land grab in Ukraine, along with a more belligerent stance generally).

And while the focus was more on market volatility and the Ebola virus, the geopolitical backdrop worsens by the week. Putin and Beijing seem to be singing from the same hymnbook, as the Chinese turned more outspoken in blaming the U.S. for the Hong Kong protests (and other “color revolutions”). The situation in the Middle East becomes more alarming by the week. Overall, the gap between disconcerting global prospects and ebullient securities prices is as wide as ever.

Clearly, central bankers would hope to maintain this gap – to defend the Truman Show World. And I don’t believe it is an extremist view to see this as one big financial scheme. Moreover, it’s not extremist to fear how things will play out when confidence wanes - when this scheme falters.

Actually, the extremists are the inflationists that believe printing money will resolve the world’s ills. The Fed has been neither “wise” nor “courageous.”

Have we not seen enough already?

Chinese debt

The great hole of China

Its debt will not drag down the world economy, but it risks zombifying the country’s financial system

Oct 18th 2014   

OF THE many things that are worrying investors around the world, from tumbling oil prices to the spectre of recession and deflation in Europe, one of the most important, and least understood, is China’s debt. For the past few years China has been on a borrowing binge. Its total debt—the sum of government, corporate and household borrowings—has soared by 100% of GDP since 2008, and is now 250% of GDP; a little less than wealthy nations, but far higher than any other emerging market.

Since most financial crashes are preceded by a frantic rise in borrowing—think of Japan in the early 1990s, South Korea and other emerging economies in the late 1990s, and America and Britain in 2008—it seems reasonable to worry that China could be heading for a crash. All the more so because the nominal growth rate, the sum of real output and inflation, has tumbled, from an average of 15% a year in the 2000s to 8.5% now, and looks likely to fall further as inflation hit a five-year low of 1.6% in September. Slower nominal growth constrains the ability of debtors to pay their bills, making a debt crisis more likely.

Reasonable, but wrong. China has a big debt problem. But it is unlikely to cause a sudden crisis or blow up the world economy. That is because China, unlike most other countries, controls its banks and has the means to bail them out. Instead, the biggest risk is complacency: that China’s officials do too little to clean up the financial system, weighing down its economy for years with zombie firms and unpayable loans.

Half of China’s debt is owed by companies, and most of that, in turn, is owed by state-owned enterprises and property developers. As the economy slows and housing prices fall, many of these loans will prove unpayable. Banks report that bad loans are just 1% of their assets and their auditors insist that the banks are not lying, but investors price banks’ shares as if the true level is closer to 10%.

Even if a huge swathe of loans go bad, the consequence is unlikely to be a Lehman-style financial collapse. For that, thank the Chinese regime’s vice-like grip on its financial system. Most lending is by state-controlled banks, much of it to state-owned companies. If it faced an economy-wide credit crunch, the government would (as it has in the past) simply order banks to lend more. At the same time the country’s vast foreign-exchange reserves mean China need not worry about a sudden drying up of foreign capital, the main cause of many other emerging-economy crises.

This combination of control and buffers gives China the time and headroom needed to tackle its debt problem. Unfortunately, it has also bred complacency. After all, officials began to talk about tackling debt in 2010. They have taken a few baby steps towards cleaning things up: a new budget law, taking effect next year, gives central authorities more power to oversee local governments borrowings. But, in practice, too many officials are content to see bad loans rolled over; too many prefer bail-outs to defaults. Earlier this year, amid much hoopla, Chaori Solar was the first Chinese company to default on a bond. This month its creditors were bailed out.

The long night of the living debt
This process—extending credit to failing and inefficient firms—creates a slow-burn debt crisis, marked by opacity and a misallocation of capital. Japan provides a depressing precedent. It failed to clean up after its asset bubble burst in the early 1990s, preferring to pretend that firms could pay their debts and banks were solvent. The result was zombie firms, ghostly banks and years of stagnation and deflation.

Beijing’s officials vow they will not repeat Japan’s malaise. To do that they must hold their nerve and let firms fail: a culture of bankruptcy should replace the lifelines and “evergreening” of useless loans. As long as investors think the state will cover their losses, they will plough money into dodgy schemes—and the problem will grow. Not only will that be a huge waste of money; even mighty China cannot cover losses for ever.

One simple reason why global stock markets are reeling

The world's central banks have slashed stimulus by $125bn a month since the end of last year - leading to the current market rout

By , International Business Editor

6:45PM BST 17 Oct 2014
Could QE4 be on the way? Photo: AFP
It is no mystery why global liquidity is evaporating. Central banks have turned off the tap. They have reduced net stimulus by roughly $125bn a month since the end of last year, or $1.5 trillion annualized.
That is a shock for the financial system. The ratchet effect has been incremental, but relentless.

We are finally seeing the consequences, with the usual monetary policy lag.
The Fed and People‘s Bank of China (PBOC) have stopped their two variants of global QE altogether (for now). Others have chopped their purchases of bonds by half or more. The Brazilians are net sellers, and in a sense they carrying out reverse QE. The Russians have just joined them again.

Fed tapering has taken out $85bn a month. The markets are having to go it alone as of this month, without their drip feed. Less understood is the effect of global reserve accumulation by the BRICS, emerging Asia, and the Petro-states. This has collapsed.

Nomura’s Jens Nordvig has crunched the latest numbers for Q3. They show that China’s PBOC has completely withdrawn from global asset markets. In fact, it may have sold almost $9bn of bonds, (even adjusting for currency effects). This is a policy shift by Beijing. Premier Li Keqiang said in May that China’s $4 trillion foreign reserves are already so big they have become a “burden“.
China bought $106bn as recently as the first quarter of 2014, so this is a very sudden shift. Yes, I know, China’s purchases of US Treasuries, Gilts, Bunds, French bonds, and Japanese JGBs are not quite the same as QE. There are complex sterilization effects.
Yet there is a fungible effect whether the Fed is buying Treasuries or whether the Chinese central bank is buying them. It is all a form of global QE. It all helps to inflate asset prices, and vice versa if it reverses.
This was really what Ben Bernanke meant when he first began talking of the "global savings glut“. The flood money into the bond markets was compressing yields for everybody. Hence the subprime debt crisis in the US, and hence too the Club Med debt bubble.
The money had to go somewhere as the rising world powers boosted global FX reserves to $11.3 trillion from under $1 trillion in 2000. It went into safe-haven bonds, displacing that money into everything else.

Over the latest quarter, almost every country has been choking back: the Bank of Korea has cut net purchases from $25bn to $9bn; the Reserve Bank of India from $43bn to $12bn; the petro-states have cut from $19bn in Q1 to $11bn. (That must surely turn steeply negative with oil at $86 a barrel).
Net sellers were: China (-$9bn), Brazil (-$7bn), Singapore (-$7bn), Malaysia (-$5bn), Thailand (-$3bn), Turkey (-$1bn). Overall FX accumulation worldwide fell from $106bn to $22bn.
The Bank of Japan – now on QE8 -- is buying $75bn a month of Japanese domestic debt. But that is almost a fixture. It is not raising the pace of monthly stimulus.
Stephen Jen from SLJ Macro Partners said QE by the West since the Lehman crisis has – by a complex process -- set off a roughly comparable increase in the scale of bond purchases by central banks in developing countries. This is a sort of „two-for-one“ stimulus, at least for the global bond markets.
"The effect has been massive for the world economy, and one of the least understood. Reserve managers are faceless. They sit at computers pressing buttons. The data is not well-tracked,“ he said.
Unfortunately, it means that the end of QE by the Fed also has a "two-for-one" impact. The world is doubly leveraged on the way back down.
For at least three years a liquidity bonanza has fueled asset booms despite a weak global economy, a slowing China, perma-slump in Europe, and stagnation in Brazil, and Russia. The assumption was that the world economy would eventually catch up with stockmarkets and the frothiest of assets. It has not done so.
The obvious risk is that the S&P 500, the FTSE-100, the DAX and other bourses will have to continue deflating downwards as the whole process goes into reverse, until the gap is closed.
Or just as likely, until the blinking starts at the Fed and the Peoples‘s Bank. QE4 is creeping onto the table already.

Will this save the Swiss financial system?

by Egon von Greyerz

 October 2014

Matterhorn Asset Management AGOn 30 November 2014 the Swiss People has the opportunity to determine not just the fate of their own financial system but also to be the catalyst for the return to sound money in the Western World.

The “Gold Initiative” referendum November 30, 2014

On November 30th the Swiss will vote on:

1.Returning their national gold which is held abroad back to Switzerland
2.Requiring the Swiss National Bank to hold 20% of their assets in physical gold
3.Prohibiting further gold sales

Money printing SNB

So why is this referendum so important? Because Switzerland has, for hundreds of years, been a bastion of sound monetary policy and low inflation. But this has gradually changed in the last 100 years since the creation of the Fed in the US and especially during the past 15 years when the Swiss government quietly removed the 40% gold backing from the revised Federal Constitution which was adopted by popular vote in 1999.

No paper currency has ever survived throughout history in its original form. And the Swiss Franc from having been a strong currency is now in the process of being slowly destroyed by the recent policies of the Swiss National Bank (SNB).

Since 2008 the SNB’s balance sheet has expanded 5 times from CHF 100 Billion to CHF 500 Billion.

So Switzerland has printed around 400 Billion Swiss Francs in the last 6 years in order to hold its currency down against the Euro and other currencies. CHF 400 Billion is around 2/3 of GDP.

This means that Switzerland has printed more money, relatively, than any major country in the world in the last 6 years.

Why this change of policy?

For a very long time, the Swiss Franc appreciated against most currencies and Switzerland prospered with a strong economy, strong currency and lower inflation than most major countries. It is of course a fallacy to believe that a weak currency benefits a country when Switzerland has proved that the opposite is the case.

Between 1970 and 2008 the Swiss Franc appreciated by 330% to the dollar and 57% to the DM/Euro. So for almost 40 years a very strong Swiss currency went hand in hand with a strong economy. In spite of this proven success, the new guard in the SNB decided to abandon proven successful policies and print money like most other countries.

To tie the Swiss Franc to a weak currency like the Euro and a very weak economic area like the Eurozone is a recipe for disaster. To align your country to a failed political and economic experiment can only lead to failure.

Swiss Banks – Highly leveraged

But it is not only the SNB that is now following unsound policies but so are the big Swiss banks. From an equity ratio of 15-20% 100 years ago, the big Swiss banks are now down to 2-3.5% (note: because the basis of calculation changed after 2007 it is difficult to make an exact comparison). This means that the big Swiss banks have a leverage ratio of 30-50. Thus a loss in their loan book of 2-3% would be enough to wipe out the entire bank. It is virtually certain that when interest rates go up, the Swiss banks will have losses on the balance sheet or on derivatives that are considerably higher than 2-3%.

The SNB and the Swiss banks are already too big to save in relation to the size of the Swiss economy. Continued expansion of the balance sheets of the SNB and the Swiss banks is likely to lead to a very vulnerable positon for the Swiss economy and currency. With another crisis like in 2007-9, the SNB would have to print unlimited amounts of money which would destroy the value of the Swiss Franc, leading to high inflation or even hyperinflation. With both the SNB and the Swiss banks on a dangerous path, Switzerland now has the unique opportunity to return to a sound financial system that has been their trademark for centuries.

Swiss Gold Referendum – Unique opportunity

A “JA” (YES) vote victory for the Gold Initiative would prevent Switzerland’s economy and currency to reach the same destiny as all paper currencies in their race to the bottom.


Already in 1729 Voltaire said: “Paper currencies eventually return to their intrinsic value – ZERO”

To avoid this fate, Switzerland now has the opportunity to be the first country in the world with official partial gold backing of its currency. A currency backed by gold means the government and the central bank cannot manipulate the currency at will and print worthless pieces of paper that they call money. This would stabilise the real value or purchasing power of the Swiss Franc. A currency with stable purchasing power leads to stable prices and promotes savings and investment rather than spending and credit. Officially Switzerland, like most countries, has a low inflation rate but for the average person, consumer prices in the shops for food and other necessities continue to rise.

Even though the official Swiss inflation is low, there is massive inflation in some sectors like housing and financial assets. The money printing in Switzerland combined with artificially low interest rates have led to a major housing bubble. Swiss housing prices are now unaffordable for most Swiss and in relation to income prices are now in an unsustainable bubble. An increase of Swiss mortgage rates from current 1-2% per annum to a more normal 4% could lead to major mortgage defaults and a housing collapse.

The Swiss have a history in putting some of their savings into the Vreneli, the Swiss 20 franc gold coin. In recent times, as spending on credit rather than savings has been the norm, the Swiss have bought less gold but in spite of that they have more affinity with gold than most Western nations. The Swiss gold industry is also very significant since the Swiss refiners produce nearly 70% of the world’s gold bars.

The most proliferate savers in gold are of course the Indians mainly by buying jewellery. But in the last few years, China has been the biggest buyer of gold. There is a constant flow of gold going from the West to the East. This has created a shortage of gold in the West.

Swiss Gold sales at bottom of market

Switzerland used to have 2,600 tons of gold but sold half of it between 2000 and 2005 close to the bottom of the market, just like the UK did. That has cost the Swiss People CHF 27.5 billion at the current gold price.

A YES vote in the Swiss Gold Initiative referendum, would mean that Switzerland would have to buy 1,700 tons of gold at current prices which is $ 70 billion (CHF 67 billion). This is 70% of annual world gold production. The paper gold market is around 100 times bigger than the physical market. The SNB has 5 years to acquire the 1,700 tons. If they wait to buy, they are likely to get less than 1,700 tons for their CHF 67 billion.

In addition SNB would need to bring back 300 tons of gold that is currently in the UK and Canada. If this gold is unencumbered, it should come back immediately. But Germany recently had a different experience. They requested to have 674 tons back from the Fed in the US but all they have received so far is 5 tons! One may wonder of course whether that gold is still there. The Fed has either sold it or lent it out. It is likely that most central banks in the West that have lent gold to the Fed or other central banks will have problems getting it back. That is why it is critical for Switzerland to keep its gold at home.

A “Yes” vote – Beneficial for Swiss economy and Franc

Bringing the Swiss gold back home and partially backing the Swiss Franc with gold will be extremely beneficial for the long term prosperity of the Swiss economy and the Swiss Franc. It will also make Switzerland respected by people worldwide for introducing sound money. It is also likely to set a trend for other countries to follow Switzerland’s example. Therefore a YES vote on November 30, will not only be beneficial to Switzerland but also to the world economy.

It is also likely to have an immediate effect on the depressed and manipulated gold price. The holders of paper gold will be concerned and demand delivery of the physical gold against their paper claim. Since there is nowhere near enough physical gold to cover all the paper claims we are likely to see a major surge in the price of gold.

In May of this year Lukas Reimann, Nationalrat (member of the Swiss Parliament) made the following speech before parliament:

(The video has English subtitles)


A real opportunity

Thus, Switzerland now has the unique opportunity to create history and to lead the world back to a sound money policy and I would urge my Swiss compatriots to support the Gold Initiative on November 30.

Egon von Greyerz

Matterhorn Asset Management AG

BIS warns on 'violent' reversal of global markets

Investors take zero-rates for granted and unwisely believe that central banks will protect them, says the capital markets chief of the Bank of International Settlements

By , International Business Editor

9:00PM BST 14 Oct 2014

The BIS's
The BIS's "Botta" building in Basle Photo: Bank of International Settlements

The global financial markets are dangerously stretched and may unwind with shock force as liquidity dries up, the Bank of International Settlements has warned.

Guy Debelle, head of the BIS’s market committee, said investors have become far too complacent, wrongly believing that central banks can protect them, many staking bets that are bound to “blow up” as the first sign of stress.
In a speech in Sydney, Mr Debelle said: “The sell-off, particularly in fixed income, could be relatively violent when it comes. There are a number of investors buying assets on the presumption of a level of liquidity which is not there. This is not evident when positions are being put on, but will become readily apparent when investors attempt to exit their positions.
“The exits tend to get jammed unexpectedly and rapidly.”
Mr Debelle, who is also chief of financial markets at Australia’s Reserve Bank, said any sell-off could be amplified because nominal interest rates are already zero across most of the industrial world. “That is a point we haven’t started from before. There are undoubtedly positions out there which are dependent on (close to) zero funding costs. When funding costs are no longer close to zero, these positions will blow up,” he said.

The BIS warned earlier this summer that the world economy is in many respects more vulnerable to a financial crisis than it was in 2007. Debt ratios are now far higher, and emerging markets have also been drawn into the fire over the last five years. The world as whole has never been more leveraged.
Debt ratios in the developed economies have risen by 20 percentage points to 275pc of GDP since the Lehman Brothers crash.

The new twist is that emerging markets have also been on a debt spree, partly as a spill-over from quantitative easing in the West. This has caused a flood of dollar liquidity into these countries that they have struggled to control. It has pushed up their debt ratios by 20 percentage points to 175pc, and much of the borrowing has been at an average real rate of 1pc that is unlikely to last.

China was able to act as a stabilizing force during the global downturn of 2009, letting rip with an immense burst of credit. These buffers are now largely exhausted. All of the BRICS (Brazil, Russia, India, China, South Africa) countries have hit structural limits, and face difficulties of one form or another.

Mr Debelle said the markets may at any time start to question whether the global authorities have matters under control, or whether their pledge to hold down rates through forward guidance can be believed. “I find it somewhat surprising that the market is willing to accept the central banks at their word, and not think so much for themselves,” he said

The biggest worry is a precipitous sell-off in the bond markets once the US Federal Reserve and the other major central banks begin to tighten in earnest. Mr Debelle cited the US bond crash in 1994, but warned that it could be even more violent this time with a “fair chance that volatility will feed on itself”.

The picture is further complicated by a fall in the depth and inventory of market makers, the side-effect of new regulations that have raised costs and caused firms to exit this specialist business. “Market liquidity is structurally lower now than it was in the past. The question today is whether there is too little capacity. When volatility returns, it may well rise quite rapidly,” he said.
Mr Debelle may be especially sensitive to the risks, given his ring-side seat in Australia where authorities are grappling with a housing bubble and a commodity shock from China. Yet his warning is global: investors have taken on too much risk, and the illusion of liquidity can vanish almost overnight. “That strikes me as a dangerous combination and unlikely to be resolved smoothly,” he said.

lunes, octubre 20, 2014



The Gold Bull Market Is Not Over

  • Gold has been out of favor for the last few years but the bull market is not over.        
  • Our problems here in the US are not fixed and behind us, as the debt and deficits are about to explode higher.
  • As interest rates increase, the net interest payments on the US debt will triple by 2024.
  • Inflation is the only way that we can get out of the mess we are in.

With gold still trying to decide whether it wants to put in a triple bottom or have one final plunge lower, it's important for investors to realize that either way this bull market is not over. Gold has been out of favor for the last few years as easy money from the Fed and other Central Banks has caused investors to run for stocks instead of to the safety of precious metals. Which is ironic since the precious metal sector is the one that will benefit in the end from all of this printing of worldwide currencies.

Below is a look at the SPDR Gold Trust (NYSEARCA:GLD). The 115 level is key and you can see that it bounced off of that level earlier this month. If 115 is breached then I expect 90-100 to be the final bottom.

GLD Chart
GLD data by YCharts

I have read so many articles about how gold is a lousy investment and its run is over with. It's easy to say those things when the Dow, Nasdaq, and S&P have almost doubled over the last 3 years while gold has declined from $1,900 down to $1,200. Investors chase returns, and the majority are always late to the party, never early. When an investment sector is down, and you try and say anything positive about it, not many people are going to pay attention. That's not where the action is. But the point of investing is to get in front of the next big thing and ride it all the way.

Those who think this gold bull that started in 2000 is now over don't understand that fundamentally nothing has changed. If anything we are on an even worse path than we were 10-15 years ago. There is no way out of the hole we have dug, and just because the major indices are rising (or at least were rising) and gold is falling, doesn't mean that our problems are fixed and behind us. There is nothing in the rear view mirror yet. Everything is in front of us and we are heading straight for it.

This isn't a doom and gloom article. I'm not bearish on the US over the long-term, I am however bearish on the US Dollar and almost every other major currency out there.

Below is a look at the total US deficits or surpluses for the last 40 years, plus the projected 10 year outlook. 36 out of the last 40 years we have had a deficit, and these aren't small deficits either. The average is -3.1% of GDP, but we hit some big numbers in the last 5 years. If you look at the projected figures from the Congressional Budget Office for the next 10 years, the US will stay close to the average. I can tell you though that rarely are the CBO's projections accurate when it comes to GDP as they usually over-estimate growth. In other words, the projected deficits are probably going to be worse than displayed below.

(click to enlarge)
(Source: CBO)

When you think about it, by 2024 the US will have had a deficit for almost every year for the last 50 years. That little blip in the late 90's/early 2000's into a surplus is just that, a blip. There is only so much that a government can spend before the public says no more. And we are nearing that point.

Outlays for net interest in 2024 are projected to be more than triple those in 2014. In 2014 the net interest will be $231 billion, by 2024 it will be $799 billion. This increase in interest payments is the result of both projected growth of the US debt and a rise in interest rates. If you look at the graph below, you will see that net interest payments will make up the majority of our total deficit. By 2022, we will be running almost $1 trillion deficits per year, and that is with 2.1% real GDP growth (or 4.2% nominal) factored in.

(click to enlarge)
(Source: CBO)

The Fed is saying it's going to raise rates soon as growth picks up, but when it does it's going to trigger an avalanche of many bad events. Interest on the US debt will increase, and if we have below average growth then that means the debt is going to keep piling up at an even faster clip.

Things will get worse, not better. The interest and debt will just start feeding off of each other and then things get out of control. We are nearing that point, all that needs to happen are for interest rates to increase.

By 2024, the projected rate on the 3-Month Treasury Bill will be 3.4%, and the 10-Year will be at 4.7%. The majority of US debt is held in 10-Year Treasury Notes, and right now the average rate that the US is paying on those is 1.8%. The US Government is benefiting more than anybody from these low interest rates.

(Source: CBO)

The US Government has tried to cut spending to lower the rate at which we are adding to the debt, but we are now to the point where any reductions are more than cancelled out by increased outlays for Medicare, Social Security, and Net Interest. Those account for 85% of the total projected increase between now and 2024. The $2.3 trillion increase in outlays over the next 10 years might not seem like much, but between now and 2024, over $7 trillion will be added to our debt because of this.

(Source: CBO)

Gold is out of favor at the moment but nothing has changed in terms of how well it is going to perform over the next decade. We have no way out of our problems but to inflate. Most people don't realize that. The Fed needs to keep the Fed Funds rate below the rate of inflation as by doing so keeps this negative real interest rate environment intact. And gold loves negative real interest rates. As long as the rate of inflation exceeds the interest we are paying, then we can inflate our way out of this mess. Things will be very out of control at that time in the currency market, but if we don't inflate then we simply default on our debt. This isn't conjecture to try and scare people, this is really going to happen.

Everything I have presented is fact. The debt, the deficits, the interest payments, the interest payment increases, etc.. Those running to stocks and shunning gold are ignoring those facts, and in the end they are going to wish they had been paying more attention.

Things might seem calm again but they are far from it. Any increase in interests rates will start everything back in motion. Gold will find a bottom very soon, if it hasn't already, and then it will continue its bull market

lunes, octubre 20, 2014



Chinese debt

A moral deficit

To rein in its debt, China must be willing to let companies fail

Oct 18th 2014

WEIGHED down by debt and running out of cash, Chaori Solar emerged this year as an unlikely poster child for all that was going right with the Chinese economy—because it was allowed to go under. China’s leaders had vowed to bring market discipline to a financial system that had grown lazy in its dependence on ever more credit. Chaori, the first company to default since China relaunched its bond market a decade ago, was a symbol of the new tough-love approach. But something unexpected happened this month: Chaori’s creditors were bailed out.

It is a disturbing omen for the Chinese economy. For all the talk of reform, many government officials still want to paper over bad loans. With credit going to keep moribund companies alive, China’s debt levels have soared even as growth has slowed. Overall debt, including government, corporate and household, has reached about 250% of GDP, up from 150% six years ago.

The precipitous rise began with China’s gargantuan stimulus in response to the global financial crisis in 2008. Its total debt-to-GDP ratio increased faster than that of any other big country during that time, according to a new report from the International Centre for Monetary and Banking Studies, a Swiss research institute. Similar rises preceded banking crises in much of Asia in 1997 and in America more recently. Little wonder that financial fragility “is seen as the biggest macro risk to China, if not the global economy,” according to Standard and Poor’s, a ratings agency.

Yet a sudden collapse is most unlikely. The same thing that got China so deep into debt is what keeps it from blowing up: state control of the financial system and the perception, often substantiated, of government backing for debts. Instead the biggest danger is “zombification’, a hollowing-out of China’s financial system along the lines of Japan’s slow decay over the past two decades. In this scenario there would be no sudden crisis, but a relentless corrosion of China’s economic vitality as loans are used to patch up old holes rather than to support new activity. The International Monetary Fund sounded a recent warning: China’s continued reliance on credit-fuelled investment “compounds the risk of an eventual sharp slowdown”.

Can China avoid this fate? Much rests on whether the government can uproot moral hazard from the financial system. By removing the perception of state guarantees and allowing failing companies to fail, the authorities could force banks and investors to allocate their capital much more carefully, slowing the rise in debt.

There are reasons for concern. Officials tend to go weak at the knees when even relatively inconsequential companies fall into distress. This year began with a last-minute rescue of Credit Equals Gold #1, an investment product marketed by Industrial and Commercial Bank of China, the country’s biggest bank, that only the wealthy were supposed to buy—because it was risky. Huatong Road and Bridge Group, a construction company in the northern province of Shanxi, was on the verge of defaulting on a 400m yuan ($65m) loan in July, when the local government stumped up the cash. And then there is this month’s rescue of Chaori’s bondholders, led by Great Wall Asset Management, a state-run firm initially set up to take bad loans off banks’ hands during a big bail-out a decade ago. “It strengthens investors’ expectations of an ironclad guarantee for bond repayment,” says Zhang Li of Guotai Jun’an, a brokerage.

Half the buildings at Chaori’s factory in Shanghai’s far southern suburb of Fengxian are abandoned, save for two security guards growing red beans on a patch of soil in front. But thanks to the rescue, the other half is creaking back to life. Workers load boxes of panels onto a flatbed truck, destined for a Chinese solar market that still suffers from severe oversupply. The potential price to the government for reviving Chaori is at least 788 million yuan—the size of the debt Great Wall has guaranteed. For solar companies that have stayed in business on their own merit, the price is injurious, government-subsidised competition.

Nevertheless, there have also been signs that China may yet manage to contain its debt problem. The market, when left to its own devices, has actually done a reasonably good job of cleaning up balance-sheets. Listed firms in industry and transportation have stabilised their debts (see chart). “A lot of companies that saw a deterioration in revenues decided to cut back their leverage,” says Helen Qiao of Morgan Stanley. The continued rise in debt has instead been driven by three groups: special-purpose vehicles controlled by local governments, state-owned enterprises and property developers (see chart).

The dukes of moral hazard
This concentration should make it easier to defuse the risks. The government may be willing to countenance defaults by property developers, not least because foreign investors are some of their biggest creditors. Breaking the implicit guarantees for local governments and state-owned companies is more of a taboo. A budget law that goes into effect on January 1st will allow cities and provinces to issue bonds directly instead of via opaque special-purpose vehicles. As part of the deal, the central government will refuse to bail out any localities that miss payments.

In theory this will create the “hard budget constraint” that is needed to stop local officials from falling back on central government support. In practice, bond traders point out that there is still no bankruptcy law for cities or provinces, making it all but inevitable that the central government will pick up their tabs if necessary.

State-owned enterprises, especially those controlled by the central government, also enjoy a rock-solid backstop for their debts, and there is little chance of that changing soon. One glimmer of hope is that Chinese banks are becoming more discriminating. With their profits under pressure, the evergreening of loans to state companies is too costly for them; just over half their corporate loans went to private companies in 2012.

Most significant is the oft-repeated message from China’s top leaders that the quality of growth matters more than quantity. The implication for debt is straightforward. If local officials are less obsessed with GDP, they will also be less intent on pushing out the investments needed to rev it up.

“This is where the demand for funding has come from,” says Li Fuan, a senior Chinese banking regulator. “Of course there will be some pain in slowing down. It can’t be done without it”. But for officials accustomed to plenty, pain is still a hard sell.

5 Reasons The Oil Sector Is Due For A Big Rebound

  • A slide in the price of oil has led to what some are calling a crash in the energy sector.
  • This "crash" is overdone, especially since the price of oil has not been down for a sustained period of time.
  • A few policy moves by China or Europe or OPEC and oil prices could rebound sharply.
  • The recent talk by Saudi Arabia about being comfortable with lower oil prices could be a huge bluff for negotiation tactics in advance of the next OPEC meeting.
  • Oil stocks are extremely oversold and sifting through the wreckage and buying the "crash" in this sector could lead to big gains.
The price of oil has taken a hit in the past couple of weeks, but oil stocks (especially small cap) have been decimated in many cases with declines of 40% or more. Bespoke recently wrote an article for Seeking Alpha titled "Energy Sector Crashes." As some of us know, crashes are often huge buying opportunities. Chances are good, that this sell-off has gone too far and that means investors should consider wading into this sector now before a potential rebound. Many investors have decided to panic sell or have even been forced to sell due to margin calls. That usually represents a capitulation-like buying opportunity. Let's take a look at a number of reasons why oil and oil stocks could be due for a rebound:
1) The negative sentiment on oil and oil stocks has probably gone too far and the sentiment could quickly turn more positive. For example, On October 6, a CNBC article titled "Oil Steadies Above $92 On Signs Of Global Growth" was published. Just about one week later, the world seemed to be convinced that global growth was a thing of the past and oil prices dropped. However, there are a number of potential upside catalysts that could stabilize oil prices and even create a solid rebound. For example, concerns about excess supply due to a potential global slowdown could subside if China or Europe were to announce new stimulus programs. A geopolitical event could also quickly cause oil to surge.
2) It is not just the oil sector that is oversold, the entire market is oversold now and appears due for a significant rebound. A Seeking Alpha post details how oversold the market is now:
  • The S&P 500 (SPY -1.6%) is now lower by 6.8% from last month's record high, says the WSJ's Steven Russolillo, making this current pullback the market's worst in two-and-a-half years.

  • Checking in before today's sharp decline, Bespoke noted 63% of stocks in the index were considered to be in oversold territory, with just 10% overbought. It's surely a wider gulf now.

  • A bounce is in order.
3) Saudi Arabia recently said it would be comfortable with lower oil prices. However, other countries like Venezuela are pushing for production cuts in order to push prices back to about $100 per barrel. The reality is that many oil producing countries like Russia, Venezuela, Iran and others cannot maintain budgets with oil at current levels. While Saudi Arabia appears to be acting indifferent when it comes to supporting the price of oil, this could be a bluff. By doing so, Saudi Arabia might be able to negotiate production cuts with other OPEC members before the OPEC meeting on November 27.

CNBC's Bob Pisani believes Saudi Arabia is bluffing in order to negotiate serious cuts from other members; here is what he says:
"On the supply side, comments out of Saudi Arabia--indicating they are comfortable with oil in the $80-$90 range--is a clear ploy to get everyone on boat with cutting production. Venezuela is already complaining; other OPEC members will undoubtedly start complaining, and we will likely see some kind of production cut in the future."
4) Many analysts see a rebound coming for a number of reasons. For example, some analysts expect OPEC to cut production if Brent crude prices remain below $90 per barrel and many analysts also believe cold weather and increased oil usage will also contribute to a rebound. A recent CNBC article that predicts oil prices to rebound to $100 per barrel states:
"We look for a seasonal pick-up in oil product demand, a cold winter and OPEC production cuts as requirements to prevent a more dramatic slump in the crude oil price," Deutsche Bank (NYSE:DB) commodity strategists led by Michael Lewis said in a quarterly report on September 30."
Morgan Stanley (NYSE:MS) is also getting bullish on oil as consumption remains strong, which was detailed in this Seeking Alpha post:
  • "While fundamentals have been poor through much of the summer and fall, much of the last leg of downside has simply been a result of financial flows, sentiment and macro fears. Physical markets are strengthening, with more improvement ahead."

  • The team says analysts are too concerned with demand for gasoline and heating oil and thus missing the big picture of a strong long-term demand for crude. There's no sign, they say, of a sharp decline in demand outside of Europe,

  • Japan, and Mexico (i.e. the U.S. and China are still gobbling it up).

  • "From a crude standpoint, OPEC is right to expect a material improvement in demand."

5) Based on the drop in oil prices of just several dollars per barrel and the fact that this is not even yet a sustained price drop, the decline in the major integrated oil stocks like Chevron (NYSE:CVX) seems overdone. Investors are reacting way too quickly and too negatively to what has not even yet been a sustained decline. The drop in small cap oil stocks has been even more severe and possibly even downright hysterical in nature due to unfounded fears, margin calls, shorts and emotionally based panic selling. Let's take a look at charts of Chevron and a couple of small cap oil stocks to view the carnaje:

(click to enlarge)

Chevron shares were trading at $128 just about four weeks ago, but have since plunged to roughly $109. With a Relative Strength Index or "RSI" of 21, this stock is oversold. It also offers a yield of nearly 4%, which will reward investors while waiting for a higher share price.

(click to enlarge)

Abraxas Petroleum (NASDAQ:AXAS) shares were trading for about $5.50 per share just a couple of weeks ago but have been decimated and now trade for $3.30. Abraxas is expected to announce earnings around November 6 and the third quarter estimate is for a profit of 16 cents per share. It is worth noting that Abraxas has beat earnings estimates for the past couple of quarters. Furthermore, in mid September, the company announced an increase in production guidance by about 5% and said its lease operating expenses were lower than expected which is just another positive. On Monday, October 13, analysts at Zacks Investment Research gave this stock a strong buy rating. Consensus estimates are at 71 cents per share for 2015. There are not a lot of $3 stocks in this market that have the potential to earn 71 cents. Furthermore, Abraxas has a strong balance sheet with just around $47 million in debt. This financial strength greatly reduces potential downside risks for investors.

Here are a few other points to consider which also make the recent oil sector crash appear to be overdone: The oil price may have overshot to the downside because of traders in the futures market.

With oil futures it is possible to control about $85,000 with only around $2,000. That is a huge amount of leverage, which can really accelerate losses when markets plunge. If there has been a significant amount of forced or fear based selling in the oil market, the current price may not last long and rebound soon. Many small oil companies have hedges in place, which means that unless the decline in oil is sustained for many months, the impact from the recent drop could be fairly immaterial. Also, some smaller oil companies are growing so fast that production is increasing at levels that offset any price reductions. Major oil companies can also choose to increase production in order to offset any profit margin loss. Also, consumers are likely to quickly increase oil usage when prices drop and this could end up taking a significant amount of supply off of the market.

For some more small cap oils stock picks, read this article I wrote on McDermott International (NYSE:MDR), a $4 stock in which hedge fund billionaire David Einhorn has made a major investment in. Or for about $2.50 per share, consider the small oil producer with high potential discussed in this article. Finally, it is important to consider that oil stocks might hit rock-bottom levels even before oil does. That means that even if you believe oil prices could go lower, these stocks may already be at or near the bottom now. All in all, the decline in many oil stocks has been very excessive, especially considering that there has not even yet been a sustained drop in the price of oil.
Again, many oil companies have hedges in place and can increase production to keep profits strong.

Finally, any number of events could occur fairly soon and put oil right back into the $90 to $100 range which will make investors wonder what they were thinking when they either panicked and sold these stocks or failed to buy this hugely oversold pullback.

October 17, 2014, 9:26 AM ET
U.S. Debt Held by Foreigners Hits Record $6.07 Trillion
By Ian Talley
Foreign holdings of U.S. Treasury securities hit a record high $6.07 trillion in August, up nearly $70 billion from July, as the dollar began its climb to five-year highs and the U.S. recovery showed signs of gaining steam.

Japan added more than $11 billion to its stockpile – largely in bonds and notes – while China and Belgium, a proxy trader for Beijing, added a net $12 billion to its holdings. The figures came in a monthly Treasury Department report released Thursday afternoon.

The U.S. Treasury said in its semi-annual currency report published late Wednesday that China bought roughly $135 billion in foreign currencies in the year through August to keep the value of the yuan down as growth in the Asian powerhouse slowed.

There’s a good chance that September and October could continue to set new records for foreign holdings of U.S. debt, as indicated by the steady strengthening of the dollar since August and plummeting bond yields.

Amid increasing worries about slowing emerging-market growth slowing and recession risks in the eurozone rising, investors have plowed their cash into the relative safety of U.S. debt.