Category: Investing

Brazil ready to retaliate for US move in ‘currency war’

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John Paul Rathbone & Jonathan Wheatley

Brazil, the country that fired the gun on the so-called “currency wars”, is girding itself for further battle.
Brazilian officials from the president down have slammed the Federal Reserve’s decision to depress US interest rates by buying billions of dollars of government bonds, warning that it could lead to retaliatory measures.
“It’s no use throwing dollars out of a helicopter,” Guido Mantega, the finance minister, said on Thursday. “The only result is to devalue the dollar to achieve greater competitiveness on international markets.”
At a joint press conference with president-elect Dilma Rousseff, outgoing president Luiz Inácio Lula da Silva said on Wednesday he would travel to the G20 summit in Seoul with Ms Rousseff, ready to take “all the necessary measures to not allow our currency to become overvalued” and to “fight for Brazil’s interests”. “They’ll have to face two of us this time!” he said.

The Subprime Debacle: Act 2, Part 2

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John Mauldin

At the end of last week’s letter on the whole mortgage foreclosure mess, I wrote:


“All those subprime and Alt-A mortgages written in the middle of the last decade? They were packaged and sold in securities. They have had huge losses. But those securities had representations and warranties about what was in them. And guess what, the investment banks may have stretched credibility about those warranties. There is the real probability that the investment banks that sold them are going to have to buy them back. We are talking the potential for multiple hundreds of billions of dollars in losses that will have to be eaten by the large investment banks. We will get into details, but it could create the potential for some banks to have real problems.”



Real problems indeed. Seems the Fed, PIMCO, and others are suing Countrywide over this very topic. We will go into detail later in this week’s letter, covering the massive fraud involved in the sale of mortgage-backed securities. Frankly, this is scandalous. It is almost too much to contemplate, but I will make an effort.

On China’s Renminbi

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Michael Pettis

As my reference to the Japanese yen might suggest, I am pretty skeptical about the likelihood of this happening, at least with some of the more excited predictions. So, by the way, is the ADB, whose recent report (“The Future Global Reserve System — An Asian Perspective”), suggests that by 2035, the RMB may comprise about 3 to 12 per cent of international reserves. This is a pretty reasonable prediction, in my opinion, and far from the more feverish claims we see reported almost daily.



If the renminbi ever becomes a major trading or reserve currency, it is going to take a long time for this to happen and will require a radical transformation of the Chinese economy and the role of the government. This may seem like a surprising statement. After all nearly every week we see reports about a new breakthrough for the renminbi, and almost every day someone important somewhere speculates publicly about what the world will be like when (never if) the renminbi displaces the dollar.



But away from all “qualitative” arguments about why this is unlikely, and there are many, I think there is a problem with the arithmetic of reserve currency accumulation. If the rest of the world is going to use the renminbi as a reserve or trading currency, clearly it needs a mechanism by which to accumulate renminbi. This is something on which a surprisingly large share of people who talk about the future of reserve currencies don’t seem to focus.

Why America is going to win the global currency battle

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Martin Wolf:

The US is going to win this war, one way or the other: it will either inflate the rest of the world or force their nominal exchange rates up against the dollar. Unfortunately, the impact will also be higgledy piggledy, with the less protected economies (such as Brazil or South Africa) forced to adjust and others, protected by exchange controls (such as China), able to manage the adjustment better.



It would be far better for everybody to seek a co-operative outcome. Maybe the leaders of the group of 20 will even be able to use their “mutual assessment process” to achieve just that. Their November summit in Seoul is the opportunity. Of the need there can be no doubt. Of the will, the doubts are many. In the worst of the crisis, leaders hung together. Now, the Fed is about to hang them all separately.

Moahmed El-Erian has more.

Currency Wars

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Alan Beattie:

If the world is on the brink of an out-and-out currency war, a variety of battalions has been out on manoeuvres in the past few weeks. The Bank of Japan, after six years off the battlefield, has launched a fusillade of intervention to hold down the yen in foreign exchange markets. Brazil used the guerrilla tactic of doubling taxes on capital inflows to stop the real surging. India and Thailand warned that they too might bring heavy ordnance into play.



The main combatants, the US and China, continued to exchange rhetorical salvos. Washington (and Brussels) identified undervalued currencies such as the renminbi as a prime cause of global macroeconomic imbalances. Beijing retorted that such aggression risked bringing mutual destruction upon the great economic powers.



On Monday Dominique Strauss-Kahn, managing director of the International Monetary Fund, voiced his concern. “There is clearly the idea beginning to circulate that currencies can be used as a policy weapon,” he said. “Translated into action, such an idea would represent a very serious risk to the global recovery.”

Currencies clash in new age of beggar-my-neighbour

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Martin Wolf

“We’re in the midst of an international currency war, a general weakening of currency. This threatens us because it takes away our competitiveness.” This complaint by Guido Mantega, Brazil’s finance minister, is entirely understandable. In an era of deficient demand, issuers of reserve currencies adopt monetary expansion and non-issuers respond with currency intervention. Those, like Brazil, who are not among the former and prefer not to copy the latter, find their currencies soaring. They fear the results.

This is not the first time for such currency conflicts.?In September 1985, now 25 years ago, the governments of France, West Germany, Japan, the US and the UK met at the Plaza Hotel in New York and agreed to push for depreciation of the US dollar. Earlier still, in August 1971, the US president Richard Nixon imposed the “Nixon shock”, levying a 10 per cent import surcharge and ending dollar convertibility into gold. Both events reflected the US desire to depreciate the dollar. It has the same desire today. But this time is different: the focus of attention is not a compliant ally, such as Japan, but the world’s next superpower: China. When such elephants fight, bystanders are likely to be trampled.

Here there are three facts, relevant to today’s currency wars.

Insider Trading Inside the Beltway

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Professor Bainbridge:

My new article, Insider Trading Inside the Beltway, has been posted to SSRN. Now it just needs to find a nice law review home somewhere in the top 50.


Abstract: A 2004 study of the results of stock trading by United States Senators during the 1990s found that that Senators on average beat the market by 12% a year. In sharp contrast, U.S. households on average underperformed the market by 1.4% a year and even corporate insiders on average beat the market by only about 6% a year during that period. A reasonable inference is that some Senators had access to – and were using – material nonpublic information about the companies in whose stock they trade.


Under current law, it is unlikely that Members of Congress can be held liable for insider trading. The proposed Stop Trading on Congressional Knowledge Act addresses that problem by instructing the Securities and Exchange Commission to adopt rules intended to prohibit such trading.

RBS tells clients to prepare for ‘monster’ money-printing by the Federal Reserve

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Ambrose Evans-Pritchard:

As recovery starts to stall in the US and Europe with echoes of mid-1931, bond experts are once again dusting off a speech by Ben Bernanke given eight years ago as a freshman governor at the Federal Reserve.

Entitled “Deflation: Making Sure It Doesn’t Happen Here”, it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.
The speech is best known for its irreverent one-liner: “The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost.”


Bernanke began putting the script into action after the credit system seized up in 2008, purchasing $1.75 trillion of Treasuries, mortgage securities, and agency bonds to shore up the US credit system. He stopped far short of the $5 trillion balance sheet quietly pencilled in by the Fed Board as the upper limit for quantitative easing (QE).


Investors basking in Wall Street’s V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing.

“The Time We Have is Growing Short”

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Paul Volcker:

If we need any further illustration of the potential threats to our own economy from uncontrolled borrowing, we have only to look to the struggle to maintain the common European currency, to rebalance the European economy, and to sustain the political cohesion of Europe. Amounts approaching a trillion dollars have been marshaled from national and international resources to deal with those challenges. Financing can buy time, but not indefinite time. The underlying hard fiscal and economic adjustments are necessary.



As we look to that European experience, let’s consider our own situation. We are not a small country highly vulnerable to speculative attack. In an uncertain world, our currency and credit are well established. But there are serious questions, most immediately about the sustainability of our commitment to growing entitlement programs. Looking only a little further ahead, there are even larger questions of critical importance for those of less advanced age than I. The need to achieve a consensus for effective action against global warming, for energy independence, and for protecting the environment is not going to go away. Are we really prepared to meet those problems, and the related fiscal implications? If not, today’s concerns may soon become tomorrow’s existential crises.



I referred at the start of these remarks to my sense five years ago of intractable problems, resisting solutions. Little has happened to allay my concerns. But, of course, it is not true that our economic problems are intractable beyond our ability to react, to make the necessary adjustments to more fully realize the enormous potential for improving our well-being. Permit me a note of optimism.



A few days ago, I spent a little time in Ireland. It’s a small country, with few resources and, to put it mildly, a troubled history. In the last twenty years, it took a great leap forward, escaping from its economic lethargy and its internal conflicts. Responding to the potential of free and open markets and the stable European currency, standards of living have bounded higher, close to the general European level. Instead of emigration, there has been an influx of workers from abroad.

Wall Street’s War

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Matt Taibbi:

Congress looked serious about finance reform – until America’s biggest banks unleashed an army of 2,000 paid lobbyists.


t’s early May in Washington, and something very weird is in the air. As Chris Dodd, Harry Reid and the rest of the compulsive dealmakers in the Senate barrel toward the finish line of the Restoring American Financial Stability Act – the massive, year-in-the-making effort to clean up the Wall Street crime swamp – word starts to spread on Capitol Hill that somebody forgot to kill the important reforms in the bill. As of the first week in May, the legislation still contains aggressive measures that could cost once-
indomitable behemoths like Goldman Sachs and JP Morgan Chase tens of billions of dollars. Somehow, the bill has escaped the usual Senate-whorehouse orgy of mutual back-scratching, fine-print compromises and freeway-wide loopholes that screw any chance of meaningful change.


The real shocker is a thing known among Senate insiders as “716.” This section of an amendment would force America’s banking giants to either forgo their access to the public teat they receive through the Federal Reserve’s discount window, or give up the insanely risky, casino-style bets they’ve been making on derivatives. That means no more pawning off predatory interest-rate swaps on suckers in Greece, no more gathering balls of subprime shit into incomprehensible debt deals, no more getting idiot bookies like AIG to wrap the crappy mortgages in phony insurance. In short, 716 would take a chain saw to one of Wall Street’s most lucrative profit centers: Five of America’s biggest banks (Goldman, JP Morgan, Bank of America, Morgan Stanley and Citigroup) raked in some $30 billion in over-the-counter derivatives last year. By some estimates, more than half of JP Morgan’s trading revenue between 2006 and 2008 came from such derivatives. If 716 goes through, it would be a veritable Hiroshima to the era of greed.