Mish's Global Economic Trend Analysis

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• US Treasury Warns China Over Yuan Depreciation; Treasury Hypocrites; What If?
• Mortgage Loan Originations Lowest on Record
• Battle Cry of the Day: Save the Bondholders; Failed Bank Resolution on Verge of Unraveling Days Before Ratification

US Treasury Warns China Over Yuan Depreciation; Treasury Hypocrites; What If? Posted: 07 Apr 2014 07:12 PM PDT In yet another case of blatant US hypocrisy, Bloomberg reports U.S. Treasury Warns Against China Reviving Yuan Controls. A backtracking by China in its commitment to move toward a market-determined exchange rate for the yuan would provoke serious concern in the Obama administration, a U.S. Treasury official said. China allowed the yuan to depreciate before widening the exchange-rate band on March 17. The changes occurred as China continued to build current-account surpluses, accumulate excessive foreign reserves and attract significant net foreign-direct investment, the official said today on condition of anonymity. Since the start of this year, the People's Bank of China has guided a 2.5 percent loss on the yuan to help curb speculative bets on appreciation of the currency, according to Nomura Holdings Inc. Similarly, Reuters reports U.S. Warns China Over Currency Depreciation The United States warned Beijing on Monday that the recent depreciation of the Chinese currency could raise "serious concerns" if it signaled a policy shift away from allowing market-determined exchange rates. Washington has been pressing China for years to allow its currency to trade at stronger values. A weak yuan makes Chinese exports cheaper for U.S. consumers at the expense of U.S. producers. A weaker yuan also makes Chinese consumers less able to buy foreign goods. Last month, U.S. Treasury Secretary Jack Lew welcomed a decision by China to allow its currency to vary more against the dollar in daily trading. Monday's comments by a senior official from the Treasury Department suggested the United States was not completely sold on China's intention to reduce authorities' interventions in exchange markets. "If the recent currency weakness signals a change in China's policy away from allowing adjustment and moving toward a market-determined exchange rate, that would raise serious concerns," the official, who asked not to be named, told journalists in a phone call. In comments that outlined U.S. positions before meetings later this week of the International Monetary Fund and between Group of 20 nations, the official noted the widening of China's currency trading band came just after a drop in the yuan's value that coincided with reports of "considerable intervention" in exchange markets by Chinese authorities. That is exactly the sort of behavior Washington wants Beijing to ditch. What If? What if China floated the yuan? Is it really clear given the massive Chinese malinvestments in housing, in SOEs, in infrastructure,  and numerous other things, that anyone knows for certain which way the yuan would trade if it freely floated? Actually, no one can be certain of anything. That statement holds true even if there were no Chinese malinvestments in housing, in SOEs, in infrastructure, etc. Rigged Casino The US wants China to widen its trading band on one and only one condition: the yuan rises vs the US dollar. Treasury Hypocrites US hypocrites say nothing about Japan's all-out attack on the Yen. Moreover, and more importantly,  I have a simple question: Why is massive QE in the US acceptable when the sole intent is to drive the dollar lower and US asset prices higher? Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Mortgage Loan Originations Lowest on Record Posted: 07 Apr 2014 12:37 PM PDT Black Knight's February Mortgage Data shows Monthly Loan Originations Lowest on Record. Key Points Origination volume is the lowest on record with prepay speeds signaling more drops in refi originations Monthly sales were essentially flat year over year, but traditional sales were up almost 15% The government share of originations has decreased, led by a sharp drop in HARP originations Credit standards have shown few signs of loosening, with very little origination activity in the lowest credit score buckets Modification re-default rates for underwater borrowers about 30 percent higher than those with equity February's data showed the continued trend of declining origination activity we've been observing since mid-2013, with monthly originations falling to their lowest recorded point since at least 2000. In spite of this decline, residential real estate sales have remained strong due at least in part to investor activity and the fact that cash sales account for almost half of all transactions. In addition, while total transaction levels were flat on a year-over-year basis, traditional (or "non-distressed") sales were up almost 15 percent from last year as the share of distressed transactions continues to decrease. Credit standards have shown little sign of easing -- only about 30 percent of 2013 loans went to borrowers with credit scores below 720 -- which indicates that significant opportunity to expand mortgage origination activity is available, if risk appetites allow. Risk Appetites  Is it lenders who are risk adverse or borrowers? Either way, that is a healthy thing, not something to fear or complain about. Home prices have recovered significantly, and the recovery is getting rather aged by historical standards. Now is not the time for extended risk appetites, even as risk appetite for nearly everything else has soared to the moon. For further discussion of sentiment and risk, please see Framework for Understanding Market Tops and Bottoms. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com   Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Battle Cry of the Day: Save the Bondholders; Failed Bank Resolution on Verge of Unraveling Days Before Ratification Posted: 07 Apr 2014 11:17 AM PDT In lengthy negotiations last month the EU reached a deal on how to handle failed banks. The European parliament was set to ratify the deal in a matter of days. Today, the UK decided it doesn't like the deal. France, Italy, Sweden, and Portugal also decided they don't like the deal. The Czech Republic and Denmark don't want changes. Nor does the European Parliament. Please consider EU Deal on Bank Failures Risks Unravelling A landmark EU agreement on a common rulebook for handling bank failures is in danger of unravelling over the fine print restricting when a state can intervene to rescue a struggling bank. The political stand-off over the bank recovery and resolution directive – a centrepiece of post-crisis financial reforms – is extremely unusual because it comes days before the European parliament is supposed to adopt the agreed text of the legislation. While London insists it is belatedly rectifying a technical discrepancy, other diplomats suspect it is revisiting a fundamental element of the reforms, which aim to spare taxpayers from the costs of bank failure. "This is a complete mess, a nightmare and we have to decide what to do fast," said one person involved. At issue is what form of support a state can provide to a lender in difficulty without triggering a so-called bail-in, where losses are imposed on private investors who lent money to a bank. The British want to clarify that central banks can extend liquidity even when relying on a specific government guarantee, without triggering haircuts on bondholders. According to people involved in the talks, the Czech Republic is objecting in principle to making such substantial changes after a political agreement was reached, while Denmark is raising more substantial concerns about the specific British proposal. Copenhagen has taken a hard line against loopholes which could permit disguised governmental bailouts. At the other end of the spectrum, multiple countries responded by calling for broader exemptions in the text. France, Italy, Sweden and Portugal specifically want assurances that state guarantees can also be extended to help a struggling bank issue bonds without requiring bail-in. This, however, is opposed by the European parliament. The debate is also refocusing attention on "precautionary recapitalisation" – one form of state intervention that was exempt from requiring immediate bail-in. The drafting remained unclear, however, and officials are still pressing for clarity on how it could be used and whether it would clash with EU competition rules curbing state aid. Sharon Bowles, the chair of the parliament's economics and finance committee, said the revisions were essential to accommodate national central banks that "do not have big balance sheets" and need extra guarantees from the state when lending to struggling lenders. By contrast she wants state guarantees for bank bonds "outlawed" as it would open a loophole that protected private investors from risk. Save the Bondholders What's this all about? Saving the bondholders once again. On December 12, the EU Reached Deal on Failed Banks The deal was supposed to prevent further taxpayer bailouts. Taxpayers have put about €473bn into European banks since 2008. "With these new rules in place, massive public bailouts of banks and their consequences for taxpayers will finally be a practice of the past," said Michel Barnier, the EU commissioner responsible for the reforms. Really? No Not Really Under the deal, the nationalisation of a bank would be possible in exceptional circumstances, and only after 8 per cent of liabilities of a bank have been bailed-in. While a minimum bail-in amounting to 8 per cent of total liabilities is mandatory before resolution funds can be used, countries are given more leeway to shield certain creditors from losses with approval from Brussels. After the minimum bail-in is implemented, countries are additionally given an option to dip into resolution funds or state resources to recapitalise the bank and shield other creditors. The intervention is capped at 5 per cent of the bank's total liabilities and is contingent on Brussels' approval. Gunnar Hökmark, the lead negotiator for the parliamentary side, said: "We now have a strong bail-in system which sends a clear message that bank shareholders and creditors will be the ones to bear the losses on rainy days, not taxpayers. Battle Cry of the Day Seems like there was a fair amount of scope for "shielding certain creditors from losses". But now, at the last minute that is not enough for the UK, France, Italy, Sweden, and Portugal. Germany has not yet weighed in on the changes. Chancellor Angela Merkel will not want to see the deal unravel, so I suspect she will likely to go along with the majority. Thus, it's highly likely additional bondholder-protecting loopholes work their way into the treaty. Peculiarity  By the way, I find it peculiar there needs to be a deal at all.  Where is it written that bondholders can never suffer losses? Where is it written that taxpayers, not bondholders have to bail out failed banks? Seems to me that taxpayers never should have bailed out banks, and a simple structure of losses should apply. Equity investors Junior bondholders Senior bondholders Depositors 100% of each class should be hit before the next class is hit. Should that be insufficient, then and only then should taxpayers be at risk. Mike "Mish" Shedlock http://globaleconomicanalysis.blogspot.com Mike "Mish" Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

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