Jan

18

While the world was mesmerized with China currency "manipulation", and played hot potato with equities worldwide - the Japanese retail and institutional investors decided over the weekend that they've had it enough with chasing South African yields. The result was a 10% gap opening that produced a new all-time low in that country's currency. Of course, the opening was overdone, and the extreme quotes were way too wide to deal any substantial size. Yet, the signal went out - even if it was little noticed.

So the South Africa Reserve Bank will have to deal with run on their currency. Indeed, no Central Bank will allow overly rapid devaluation - so they'll have to be buying Rand in the open market, daily. With what? Obviously, they can't spend their meager reserves of US Dollars doing that - and they'll have to auction off or pledge some of their Gold reserves (I believe they hold Platinum bricks as well).

Now, when I pointed that out at last night's CME open, Gold was still up much bigger than Silver - on pure speculation. Speculation based on standard notion that Gold would be more valuable than Silver "during Stock Market uncertainty". That's pure speculation. The dynamics I point out about the South African Central Bank is less of a speculation - they are rather the actual procedural transactions in these kinds of circumstances. Thus buying Silver futures against a sale of Gold futures was a smart thing to do right from the Sunday night open. And that's as close to easy money as one can come!

anonymous writes: 

Just read the South African Reserve Bank's annual report and appendix: "Management of gold and foreign exchange reserves." They don't have any platinum. Their forex reserves have increased to over $60 Billion (according to this document). So they've got plenty of ammunition to intervene if they want to.

Markets will do what they want to do. However, if the gold and silver markets are behaving based on Anatoly's theory, the mkts are wrong on the facts.

John Floyd writes:

My African Grey parrot has learned to whistle the beginning of the Rocky theme song. I would frame the opening two rounds between anonymous and Anatoly more broadly by considering the following.

1. To what extent does the move in the South African Rand last night portend for future pockets of illiquidity, for example the stock flash crash, the fixed income flash rally, the Chinese currency devaluation, etc. ? How might that be best handling offensively and defensively?
2. Why has the decline in oil and gasoline prices not transpired to a more robust pickup in consumer spending?
3. Why are corporates generally more willing to buy back stock than increase capital spending?
4. Is it an issue that according to the BIS emerging market debt has risen from $15 trillion in 2010 to $25 trillion today?
5. What happens to domestic risks when foreign currency denominated debt has increased from $1.5 trillion to $5 trillion?
6. What happens to inflation when emerging market currencies plunge and how do central banks respond in an already weak domestic economy?
7. If the Fed was concerned about global risks in September how might this change their behavior?
8. In 2008 troubles in the US$10 trillion mortgage market had broad implications, are there parallels today?
9. What might occur to cause present market themes and trends to reverse?

That is enough for 9 rounds and hopefully we can all make a victory run up the Philadelphia Museum of Art steps and perhaps make enough to buy van Gogh's Sunflowers inside.

anonymous comments: 

We all must acknowledge that the stock market (and subsequently bond markets) seem connected at the hip with the crude price right now. Does this make sense? I don't know. But it is what it is.

This oil discussion got me to finally run some quick numbers. I'm sure similar numbers have been in the press, but I like to look things up for myself.

In my cheap-seat view of the world from my gopher hole, I've been thinking about how there are certain crucial parts of the global equilibrium that have gone through important changes, and that part the current volatility is a process of finding the new equilibrium.

The various QEx/on-off moves are part of this. And also China, in that they are (slowly [probably]) moving away from the mercantilist import/currency/capital control system, which created the macro-financial jet stream effect where we bought their stuff, and they sent the dollars back to their Fed account, to the tune of a few hundred billion a year, while they paid off their exporters with new yuan and thus created a global inflation sink.

But the biggest, quickest change has been oil. Some nice rounded numbers, referring to the change in $/bbl from June 2014 to present:

global avg daily consumtion: 90M bbl price change: -$77/bbl loss of revs to oil producers: $6.93B/day annualized loss: $2.53T

A big chunk of that money flows into Saudi (about 1/9 of global oil revs), and they have some kind of pattern of spending and investment. Used to be the Saudis spent a big piece of it on gold. Probably not so much now.

They are like one of those deep-sea hot-water vents where the life grows around it. There has been an equilibrium for a long time with that money flowing into oil producers and providing the hot water for those vents. In a very short time, ~$2.5B of flow has shifted away from that system, not to mention all the downstream segments like the integrateds, mids, E&Ps, etc.

I remember when big numbers had an M. Then we moved to B. Now to be big, a number has to have a T. I figure a $2.5T change in the global equilibrium is going to take a while to digest, not to mention the unrealized political consequences in the Middle East and elsewhere.

Again, without being overly precise, subtract US oil exports from imports, and you wind up with 9.2M bbl/day, which translates to a little over $700M/day in payments, which annualizes to $260B. Which, all other things being equal, should be less downward pressure on the USD.

Cui bono? The American consumer, of course. Again, June 2014 to present:

avg gas price/gal:
June 2014: $3.766
Dec 2015: $2.144
Change: $1.622
US est daily gas consumption: 375M gal
Daily savings: $608M
Annualized:  $222B

That's our piece of the action, and it has to be really good for somebody.

I can't think of a clever summary, so there it is.
 


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