Asian Decoupling is here and I told you So

[OMG]

coming from you wazzziz - absolutely priceless 

[alibb]

There is only one thing that has decoupled and that is V's brain.

[Not yet decoupled...]

From WSJ February 12, 2010

Asia’s Exposure to Europe’s Woes

By Alex Frangos

Europe’s debt troubles could damage Asia’s economies in a very basic way: depressed demand for exports.

Most analysts this week have downplayed Asia’s exposure to debt problems in Greece and its southern European neighbors. And the European Union deal announced Thursday to backstop Greece could stave off the worst.

On the surface, it seems right that there are no Greece-like sovereign debt problems in Asia. Asia’s government balance sheets outside Japan and Vietnam are in good shape, with about $5 trillion of foreign-exchange reserves backing up economies that have manageable budget deficits and limited borrowing from abroad. Local banks are better capitalized and solid economic growth should keep default rates low.

But there’s more to fear than just a sovereign default contagion spreading down the Silk Road. Asia’s real worry is that Europe’s debt woes will drag down the Continent’s economic recovery, dampening demand for Asian goods. A weak euro doesn’t help Asia either, as it becomes more expensive for Europeans to buy Asian products.

Rob Subbaraman, economist at Nomura in Hong Kong points out in a research note that the “quid pro quo of avoiding a full-blown financial crisis [in Europe] is weaker economic growth.”

And of course, a full-blown European financial crisis isn’t very good for economic growth either. Mr. Subbaraman lays out a negative scenario where Germany and France are saddled with southern Europe’s debts, hurting output throughout the region. Because southern Europe’s euro denominated nations can’t devalue their currencies to remain competitive, “it is conceivable that to support these economies, a new form of protectionism takes place, whereby countries such as France and Germany buy more goods from them at the expense of Asian exports.”

So how exposed is Asia to Euro-Zone trade? Quite a bit. It’s not as much as to the U.S., but there’s little doubt a wider European slump would hammer Asia.

Vietnam, already the sickman of Asia with its devaluing currency and inflation problems, counted on exports to the euro-Zone for 8.9% of its GDP in 2009, according to Nomura.  Exports to the U.S. were 13.1%. China’s exports to Europe were 3.6% of its GDP, compared to 4.7% for its exports to the U.S. Hong Kong and Singapore, important trading centers, counted on Euro area exports for 13.2% and 11% of GDP respectively.

Fears of a European slowdown hurting Asia aren’t theoretical. The EU reported today that euro-zone growth rose a weaker-than-expected 0.1% in the fourth quarter. Italy and Spain both shrank in the fourth quarter, perhaps a sign inventory restocking is over, and that the recovery – at least in Europe -  is running out of steam.

[Vulcanl]

Not Yet Decoupled,

Thanks for that.  Here are my thoughts:

"...On the surface, it seems right that there are no Greece-like sovereign debt problems in Asia. Asia’s government balance sheets outside Japan and Vietnam are in good shape, with about $5 trillion of foreign-exchange reserves backing up economies that have manageable budget deficits and limited borrowing from abroad. Local banks are better capitalized and solid economic growth should keep default rates low..."

This much is obvious.  We are now 15-18 months along after the GFC of 08.  If there had been any problems with Asian banks surely they would have come to light by now.

Japan is a perennial basket case (20 years and counting now) and I long ago excluded them from the possibility of playing a constructive role in decoupling.  As for Vietnam, they are still a 'frontier' country (along with places like Burma, Laos, Cambodia, etc) and so one would expect these types of problems for them as they continue on their path to development.  It is odd that the author of this piece is raising Vietnam at all

"....Asia’s real worry is that Europe’s debt woes will drag down the Continent’s economic recovery, dampening demand for Asian goods. A weak euro doesn’t help Asia either, as it becomes more expensive for Europeans to buy Asian products..."

This is nonsense.  Asian decoupling by definition is that Asia no longer requires demand from the West for its exports to continue to grow (a more self-sustaining, intra-regional domestic demand model is taking its place).  Western demand collapsed more than a year ago and it has not yet returned.  Asia has held up quite well in its absence.  Wringing one's hands over this is useless.  Western demand will not return to what it was before the GFC of 08, and Asia will not need it to

"...quid pro quo of avoiding a full-blown financial crisis [in Europe] is weaker economic growth..."

Obviously

"...And of course, a full-blown European financial crisis isn’t very good for economic growth either. Mr. Subbaraman lays out a negative scenario where Germany and France are saddled with southern Europe’s debts, hurting output throughout the region. Because southern Europe’s euro denominated nations can’t devalue their currencies to remain competitive, “it is conceivable that to support these economies, a new form of protectionism takes place, whereby countries such as France and Germany buy more goods from them at the expense of Asian exports.”

Again - the author is talking about the return of demand that has not existed for about 18 months now....Asia has doing just fine, thanks.  It doesn't matter if European demand for Asian exports returns or not.  I sniff gob fulls of Western media snobbery here

"...Vietnam, already the sickman of Asia with its devaluing currency and inflation problems, counted on exports to the euro-Zone for 8.9% of its GDP in 2009, according to Nomura...."

"...Exports to the U.S. were 13.1%..."

Why is this guy holding up Vietnam (of all places LOL!!) as any kind of example of the typical Asian EM?

"...China’s exports to Europe were 3.6% of its GDP, compared to 4.7% for its exports to the U.S. Hong Kong and Singapore, important trading centers, counted on Euro area exports for 13.2% and 11% of GDP respectively..."

I will take these numbers at face value, and these are indeed relevant Asian EMs (except for Singapore, whom I would consider a developed country in this conversation).   

China and Indonesia (for example) have done an excellent job of utilizing government stimulus to 'prime the pump' of domestic demand.  They have vast reserves on hand for just such as purpose and deployed them immediately (as I predicted they would). 

The best way to gauge whether their efforts will result in the desired result (sustained domestic demand as opposed to steroids-based growth) is to look at the changes in the destination of their exports (pre 2008 and now).  Unfortunately I am having a hard time getting my hands on information like this.  If anyone has any I would love to see it

"...Fears of a European slowdown hurting Asia aren’t theoretical..."

Crap!  absolute and total inanity.  Asian EMs have already proved that they can stand on their own in the absence of Western demand for their exports.  They still have deep pockets, as opposed to the West who are printing money out of the blue to 'fund' their stimulus. 

I will continue to put my cash in Asian EM equities, Gold and other metals, and commodities. Avoid any kind of debt instruments, and for goodness' sake if not already done, get out of Western equities!!

[Professional investor]

Western equities is a rather broad and generic term?? In fact I have done very well thank you out of "western equities" in the last 12 months. I am a contrarian and value investor. There are still some compelling investment stories in the "West"

[Vulcanl]

"...Western equities is a rather broad and generic term??..."

Yes it is

"...In fact I have done very well thank you out of "western equities" in the last 12 months...."

Good!!

"...There are still some compelling investment stories in the "West"..."

I would like to hear your what those are.  Western economies are massively saddled with debt that will crowd out investment.  Asia EMs by comparison are looking at clean balance sheets supported by equally massive reserves, huge populations and deep development needs. 

For the average investor the road fraught with less risk lies here in Asia

[Vulcanl]

CONFIRMED!!!!  China is bailing out of Treasuries (as I expected they would - they are not stupid).  This explains why the floor in the price of Gold has held above USD 1,050!

What happens next:

*The Yuan is revalued upwards
*Gold continues to go up
*USD will continue to weaken and eventually collapse in spectacular fashion
*US treasury yields will shoot up

This is definitive confirmation, folks.  It is no longer a 'what if' scenario.  Still not too late to profit from this

WSJ Online 10 hours ago

By Jeff Bater, Darrell A. Hughes and Tom Barkley
 Of DOW JONES NEWSWIRES
 
WASHINGTON (Dow Jones)--China slipped in December to the second-largest foreign holder of U.S. Treasurys behind Japan after holding the top spot for 15 months, raising concerns of a more permanent shift out of the dollar.

Foreigners were net buyers of long-term U.S. assets in December, though the pace slowed and a record amount of Treasury bills were dumped.

China was a major net seller of Treasurys, as its holdings fell over $34 billion to $755 billion in December, the largest monthly drop since at least 2000, when the Treasury Department began tracking the data online. Japan, a net buyer, moved into first place with $769 billion of Treasury holdings in December.

While some of China's Treasury holdings were shifted into longer-term bonds, the overall drop suggests that China is moving forward with plans to diversify out of U.S. assets. About 70% of China's $2 trillion-plus reserves stockpile is estimated to be denominated in dollars, and China is increasingly concerned about the growing U.S. debt load.

The Treasury sales also come amid rising tensions on a number of fronts between the two countries, with the Obama administration recently imposing duties on Chinese tires and other imports and talking tough on currency policy and Internet censorship.

"China is trying to send a subtle economic and political message to the U.S. through the deployment of its foreign exchange reserve holdings," said Eswar Prasad, a senior fellow at the Brookings Institution.

While the diversification process will be gradual given the few attractive alternatives to the dollar as a reserve currency, China is sending a message to back off on its tightly managed currency policy, in particular, and its internal affairs overall, said Prasad, who was previously head of the International Monetary Fund's China division.

Alan Ruskin, an RBS analyst, said net Treasury sales totaling about $45 billion since July is long enough to "hint strongly at a trend."

"This data is only going to add to second guessing of Chinese behavior and raise concerns that they are not showing much enthusiasm for U.S. dollar paper, at least while they trim down their 'excess' T-bill holdings," Ruskin said in a research note.

However, some analysts cautioned not to read too much into the volatile flow data. "There's no reason to panic," said Michael Woolfolk senior currency strategist at BNY Mellon.

Pointing to China's net purchase of $4.6 billion in longer-term Treasurys, he said that rather than unloading Treasurys, China is mostly just shifting into longer-dated bonds that offer a higher return.

China and other emerging economies built up fewer reserves in December given weak markets, which could also help explain the drop, said Win Thin, senior currency strategist at Brown Brothers Harriman.

"While the December data is a cause for modest concern that bears watching, we do not think the big global reserve managers are dumping U.S. dollar assets on a sustained basis," said Thin.

Overall, net foreign purchases of long-maturity U.S. securities totaled $50.9 billion compared to the prior month, Treasury said Tuesday.

In November, purchases totaled $114.1 billion, according to the monthly Treasury International Capital report, known as TIC.

While foreigners still bought long-maturity debt, they sold Treasury bills, at a record $53.0 billion.

Yields Tuesday on the four-week bill were 0.043%. The 10-year was trading at 3.714%.

"The unwind of the safe haven trade in US T-Bills continues," ING Bank said.

The monthly Treasury report highlights cross-border acquisitions of securities with maturities of more than one year, including non-market transactions such as stock swaps and principal repayment on asset-backed securities.

The closely watched figure excluding transactions that didn't occur on an open market recorded net buying of $63.3 billion in long-term U.S. securities, after purchases of $126.4 billion in November, the report said.

The report's most comprehensive category, "monthly net TIC flows," includes non-market flows, short-term securities and changes in banks' dollar holdings. This measure of net foreign capital inflow was $60.9 billion in December, versus an inflow of $30.7 billion the previous month.

Financial market analysts consider the monthly data from the Treasury Department to be a significant, but imprecise, gauge of how easily the U.S. can finance its trade deficit.

The government last week reported it ran a $40.18 billion trade deficit during December, up 10.4% from $36.39 billion in November. Imports grew faster than exports.

Within the long-term securities category of the TIC report, foreign net purchases of U.S. Treasury notes and bonds were $69.9 billion in December, compared with net purchases of $117.9 billion in November.

Private foreign investors bought a net $48.06 billion in Treasury notes and bonds in December, after buying $86.64 billion the previous month. Official foreign buyers, such as central banks, bought a net $21.98 billion of these Treasurys, compared with net purchases of $31.18 billion the month before.

Net foreign purchases of debt issued by U.S. government-sponsored agencies like Fannie Mae (FNM) and Freddie Mac (FRE) totaled $49.0 million in December, compared with a $5.91 billion in purchases in November.

For U.S. equities, net foreign purchases totaled $20.15 billion in December, compared with purchases of $9.66 billion the previous month.

For corporate bonds, net foreign sales were $7.94 billion, versus sales totaling $4.56 billion the previous month.

[Parrot22]

Once again you are incorrect. China did not sell Treasuries. They alowed short term t-bill to mature and BOUGHT longer dated securities (less than usual) but a purchase none the less

[think about this]

This thread started by Vulcanl and he is the most frequent poster on it. Seems like everyone else has given one great big yawn and Vulcanl seems to think he has to keep the thread alive so he just keeps on cutting and pasting! Way to go boy! Probably soon he will start debating with hinself.

Vulcanl it is about time that you realise tat not everything, in fact hardly anything, that you read in the media, especialy the ST is totally correct. Many articles contain factual errors and significant spin.

I am pleased that the PP clafified the situation.

[Vulcanl]

Parrot22,

"...Once again you are incorrect. China did not sell Treasuries. They alowed short term t-bill to mature and BOUGHT longer dated securities (less than usual) but a purchase none the less..."

Even if your statement above is correct (which it is most definitely NOT), the net result vis a vis decoupling is the same: China's mere slowdown in accumulation will result in less demand for USD

I will requote this bit from the news story:

[China was a major net seller of Treasurys]

I really have no idea what you're talking about...this story has made the rounds already and I have seen the same news across different outlets. 

think about this,

"...Vulcanl it is about time that you realise tat not everything, in fact hardly anything, that you read in the media, especialy the ST is totally correct...."

I stick to FACTS from well established sources.  This particular story is from the Wall Street Journal....where have I copy/pasted anything from the ST on this topic?!?!? 

"...Many articles contain factual errors and significant spin..."

May be so, but not the ones I paste here....show me an example of anything errant or 'spun' that I have pasted!!

"...I am pleased that the PP clafified the situation..."

The PP has attempted to distort the situation....I am happy to allow the facts to continue to speak for themselves.

[Parrot22]

The news story is 100% incorrect.

[Vulcanl]

OK, here is the TIC data...from the horse's mouth - the US Treasury Department:

http://www.treas.gov/tic/mfh.txt

I will even go to the trouble of pasting here for you:

 MAJOR FOREIGN HOLDERS OF TREASURY SECURITIES
                                                 (in billions of dollars)
                                               HOLDINGS 1/ AT END OF PERIOD

Country   Dec 2009   Nov 2009   Oct 2009
         
Japan           768.8    757.3   745.9
China, Mainland   755.4   789.6   798.9

[Parrot22]

Do you understand anything about the fixed income markets that you claim to be an expert on? Do you understand what maturing means? They did not sell..Short term obligations(3 month bills) from the U.S treasury MATURED..look it up..I'll prove it if you promise to close this stupid thread

[Vulcanl]

Parrot22,

"...Do you understand anything about the fixed income markets that you claim to be an expert on?..."

Distortion #1: I have never claimed to be an expert in any of this...indeed I have said many times I am merely enthusiastic amateur

"...They did not sell..Short term obligations(3 month bills) from the U.S treasury MATURED..."

Distortion # 2:  My carefully worded (as they all are) post from 17 Feb states:

"...CONFIRMED!!!!  China is bailing out of Treasuries (as I expected they would - they are not stupid)..."

Are the Chinese 'bailing out' of USTs?!?!  Sure as f**k looks like they are (since Oct 09....per the TIC data).  Whether this is by attrition or actual sales doesn't matter...they are still bailing out.

I am on record as stating that China merely slowing down accumulation of USTs will be sufficient to bring about further USD devaluation. 

Now, all of this being said...you're STILL wrong.  China was a [major net seller of Treasurys]

"...I'll prove it if you promise to close this stupid thread..."

No, you WILL prove it because if you don't you will look like a Jackass. 

I am waiting...

[Parrot22]

There's only one donkey on this board