C.M.O. 11.23.2009
Credit Market Overview
November 23, 2009
This past weekend I went to see the film titled “The Sun”. It depicts the final days of Hirohito’s reign as Emperor Showa of Japan at the end of WWII. During one scene the still Emperor and Gen. Mac Arthur are dining in the palace and the general asks Hirohito why he thinks Japan lost the war.
The Emperor begins to state a few causes including over confidence in Japan’s military might and an underestimation of the enemy but stops himself and then says he believed they lost the war because they became “insular and arrogant”.
This struck me as I thought about the film over the weekend especially in light the reception our President received on his recent trip to China as well as the way in which the current administration is using “Chicago” style politics to push through its health care agenda along with meddling with “American” style capitalism in dictating how GM and the banks will conduct business in the future.
From recent poll results it would appear that “insular and arrogant” are just about as good descriptors as any as it appears we are going to get what the government wants us to have whether we want it or not; which is ironic in that as freely elected officials they are supposed to represent us not resent us.
To the extent that Thomas “Tip” O’Neill, a congressman for 34 years and the Speaker of the House for 10, was correct when he said “All politics is local” as was Bill Clinton when he said, “It’s the economy stupid”, the observation made above is not a political rant but more about how the outside world is beginning to see America and how that will affect our financial system.
Recent trade spats with the Middle Kingdom did little to warm the hearts of his Chinese hosts and President Obama’s access to the people was extremely limited during his trip according to observers. “The mystery is the lack of public contact” David Shambaugh, a professor of Chinese studies at George Washington University, said, “He’s a populist politician but he’s not getting any interaction with the Chinese people” he went on to say.
The tug-of-war is well known by this point. The U.S. would like China to bolster domestic demand and allow the Yuan to float more freely. China would like to see more fiscal restraint from its biggest lender.
Liu Mingkang, China’s top banking regulator was said to be very vocal with regard to the threat to the global recovery the U.S. was causing as its near-zero interests rates were seen inflating speculative bubbles around the world.
Whether the trip yields any successes will be easily determined by watching the yields on Uncle Sam’s I.O.U.’s according to Sebastian Galy, senior currency strategist with BNP Parisbas. Monsieur Galy says his firm’s research shows foreign central banks putting more money into commercial banks and the shorter end of the Treasury curve. “You do that because you don’t necessarily trust the U.S. government and you’re afraid they’re going to inflate their debt”, was the reasoning he gave for the shift.
So far it would seem there is still some desire for longer dated paper as the 10-year note ended last week at 3.37% down 6bps from the previous Friday. Richard Ross, the chief global strategist at Auerbach Greyson, believes the yield on the 10-year is in a downward sloping channel that started back in June and should test 3% before all is said and done.
It should be noted that low yields will add more fuel to the “carry trade” fire and continue the pressure on the Dollar.
CDS spreads for China touched 58bps on 7/30 and again on 9/23. Since then they have been as high as 87bps on 11/3. They closed Friday at 80bps.
CDS spreads for Uncle Sam got down to 20bps on 10/21 but have risen a bit more dramatically closing at 31bps on Friday. A 50% increase in just about 1 month.
Enjoy the week.
Jim Delaney
