“Take time to deliberate; but when the time for action arrives, stop thinking and go in.” Napoleon

It has been a while since my last macro report, this is due to several things:  Having had to close my books/accounting in the family office, lack of directional sense, confusing price action and simple lack of something to write.

We are at major cross road for the markets here. The Keynesian way is up on points as low rates continues to feed optimisme and data manipulation out of China adds fuel to the fire.

China, BIS rules and divergence

The BIS III became so watered down it makes no sense - and I note with great interest how Soc. Gen this morning got excellent piece called: From Basel to Beijing - where the main points are:

• China is enacting tighther requirements which makes Soc. Gen conclude: "This is equivalent to a very effective monetary tightening, regardsless of what level the interest rates are"
• Chinese banks has major time bombs on their balance sheets: Loans to local governments and affiliated investment companies.  (LIC+ Local government loans stands at 7.4 trn CNY + 11 trn CNY or 1/3 of GDP or 300 pc of total fiscal revenues)
• Still time....before the local government loans turns bad, but the risk is very real. And to prevent the problem deterioating or re-emerging in the future, what China needs more than banking capital is a thorough reform of its fiscal system.

Strong words, but it seems "something" is going on in China:

• Divergence between US stock market & Chinese market: China vs US stock market
• Freight - through end of last week, the Chinese were busy contracting bulk ships, but all of the sudden the demand has dried up up! From good friends I hear market is about to come down hard....watch the Bulk-freight from here!   This is the broader Baltic Dry Index: Baltic Dry Index

Competitive devaluations

There new game in town - you only need to consult your local Financial Times to see this:

• JPY intervention
• SNB intervention
• Race to the bottom

We are now seeing serious "managing of foreign exchange rates" - the only lever left in the system which untill this year was left untouched.

The irony being Europe would probably, not correction, would have seen major devaluations during the ERM crisis in May, but did not - they are now slowly, very slowly trying to change the institutional system based on long-term goals of sustainable budget deficits and growth targets (there is still the issues of: demographics. lack of producivity, excessive tax but that's another story)

This is NOT the way we get recycling of global imbalances: We have China as the main culprit for now (with the US) fixing their rates. Everyone is playing game theory - doing what is best for themselves ignoring the total utility function is getting lower and lower due to this policy.

It is interesting to see how this develops, but the market response has been clear: Long Term gold chart and more importantly this time all commodities are bid at the same time:  Commodity overview

CORRELATIONS IS RISING ACROSS MARKETS ==> higher volatility and potential for MAJOR DROP - but the "Plunge Protection Team" is doing great job in keeping stock market bid, bid and more bid....but it time running out?

No one knows, as always merely simple European fund manager.

Good luck,

Winston aka Steen