Reply #16: Tin Cups and Ponzi Boyz [View All]

[Demeter]

http://wallstreetexaminer.com/blogs/winter/?p=1593


On the question of foreign central banks, I spotted this item showing that of late it has been Russia who has been engaging USD buying interventions to stem the appreciation of the Rouble, (another defacto pegged currency). This operation in effect buys more overpriced USD securities and puts even more Roubles into the Russian economy to do so.

MOSCOW, April 25 (Reuters) - Russia’s central bank has bought about $20 billion on the forex market this month to prevent the rouble from appreciating against the dual currency basket, First Deputy Chairman Alexei Ulyukayev said on Friday. Dealers said Friday’s trade volumes at Moscow’s MICEX exchange reached $10.3 billion, with the central bank purchasing about $6 billion.

Next we see the familiar pattern of these countries trying to control their Mad Max inflations with monetary rather than currency policy. These countries tighten, the US eases, and the cheapened USDs come rushing in for exchange. Note however the discussion about allowing the Rouble to appreciate. By how much is the question. Increasing bank capital set asides is a rouble sterilization operation.

On Thursday, Ulyukayev said the central bank was ready to tighten monetary policy because foreign capital inflows have picked up again and inflation accelerated to 14 percent in April. Ulyukayev, who chairs the Bank of Russia’s monetary policy committee, said the bank may soon raise interest rates but did not rule out the use of rouble appreciation or an increase in the amount of capital banks have to set aside... These Dollar recycling and intervention operations are entirely a function of the needs and timing of the enabling country (Russia in this instance) and not the US. If Russia decides, say on a Friday, to engage in this conduct, it has little if anything to do with US Treasury or GSEs finance needs of the moment. It is entirely a function of the internal policy decisions of the FCB. I think that is why the indirect participations at the auctions have been so erratic.

So if the the US Treasury or Fannie Mae were to show up next week with a big tin cup, it may be tough shit Ponzi Boyz. Or if Ponzi Boyz were lucky, it may be that the FCBs generically had the “need” that day. However, with the kind of “storm the palace” inflations these countries are now experiencing, their real and proper need is currency appreciation, and halting USD recycling and by extension local currency printing. That way, some of the inflation can be transmitted off on the US, and other USD holders. It’s hard to see why Russia in particular would even care about those consequences for Americans. Buying USD securities at puny interest rates then becomes a hot potato right as US financings are gathering steam. The fact that FCB demand for US securities is so artificial and self directed will make these financings extremely difficult to conduct.

Also discussed in the backside of the podcast was the prospect for the Fed to start aggressively monetizing the Treasury’s finance onslaught. I have little doubt that some of this will be attempted, especially when the Ponzi Boyz can’t time these new debt offerings with foreigner’s needs. Also the broker-dealer network is too strained to hold the bag on tens of billions of routed marked down US Treasury notes. But the effect of monetizations will be limited and in my thinking very overrated. The amounts required are just too large. It is like going into battle against tanks and artillery with a 22 caliber. There are big problems with it as well, and one are traders (Berserkers). Once these Berserkers spot a few serious coupon passes, watch the swift and immediate reaction. And you thought $120 oil, and $5 milk was bad? The other problem is that FCBs hold $2.254 trillion (just custodial holdings) in US securities already. They will have to be kept sedated. Rattle even a few of those holders at the margin and rates could get hiked a couple percent over night.

The Ponzi Boyz do have a few tried and true short term Godfather protection racket tricks that could also be employed, especially with “incidents” in the Middle East. The idea is to get the USD holders there into a tizzy and panic them into “the safety” of US Treasuries and agencies. A version of this was produced last week, but had little effect. Perhaps something much bigger is in store? Don’t be too surprised if we get a “whodathunk” in that score.