Friday, June 29, 2007
Well, the initial market reaction has been to conclude that this is, after all, just another dip that we're meant to buy. While the SPX has stabilized, many other risky assets have roared higher, including the dreaded FX carry trade. Macro Man is among those who've been sucked back in, as his carry model filter is now flashing bright green. The P/L has been updated accordingly.
While it's tough from an intellectual point of view to get back in to an overvalued trade at a level above the recent exit point, at the same time it is strangely liberating to do so when instructed by a 'higher authority', e.g. a mechanistic model. As far as Macro Man can make out, those gaijin who do have the yen carry trade on in any meaningful size are those that follow a similar quantitative process. Those managers who engage in qualitative assessments, among whom number the legendary cabal of secretive macro hedge funds who rule the world in conjunction with the Pentavirate, the Illuminati, Opus Dei, the Rosicrucians, and Hermes Trismegistus, are relatively unexposed or even long yen, or so Macro Man believes from his conversations with a number of these types of players.
One topic of discussion and speculation today has been the news that China's yet-unnamed soverign wealth fund will be selling $200 billion worth of RMB bonds to pay for its initial assets from SAFE. Contrary to the general expectation, they will not be able to jam these bonds down PBOC's throat because it's against the rules. Of course, so is industrial espionage and copyright infringement, but that hasn't stopped those sorts of activities in China. Nevertheless, one should probably respect the fact that "no" in this case does appear to mean "no".
In which case, CIC and the authorities will need to find a home for these new bonds. A swift look at China's yield curve will reveal that the market probably isn't priced to receive $200 billion worth of bonds, particularly given the level of nominal GDP growth in China:
Macro Man has read one analyst's note that suggested that a drip feed issuance will ensue that will replicate the impact of a 0.5% hike in the reserve requirement every month for the next year or so. Given the general view that further hikes in the RRR might actually alter banks' behaviour, this is clearly an undesirable outocme. Where, oh where, therefore, to dipose of these bonds?
Macro Man has some ideas. Herewith, and with apologies to Cassandra, is Macro Man's Top 10 ways of disposing of RMB 1.55 trillion worth of debt:
1) Include RMB 1 billion worth of bonds with every DVD player sold in America and the EU.
2) Call the new debt Bond.com, pretend it's a stock, and let Chinese equity punters have at it.
3) Strip out the interest payments from the principal, and back each one with the production output of a different non-existent factory. Securitize each cash flow into an "asset"-backed CDO, and bribe the agencies to provide a favourable rating. Sell it all to Western hedge and pension funds at $10,000 on the dollar. Laugh.
4) Call your new best mate Steve Schwarzman and "suggest" that Blackstone buy a few.
5) Tell Senator Herb Kohl that if he wants to sign Yi Jianlian, he'll need to buy your bonds, too.
6) Pay the Pentavirate, the Illuminati, Opus Dei, the Rosicrucians, and Hermes Trismegistus to dispose of them for you.
7) Use diplomatic contacts to construct an "oil for bonds" transaction with regimes deemed unsavory by the West.
8) Default on the first interest payment, and then issue government-guaranteed debt to buy back the 'reserve issue' at half price.
9) Get Jim Cramer to pimp it for you on CNBC: Boo-yah! Back up the truck, baby!
9a) Trade the bonds to the Duke of Westminster for a small portion of his property portfolio. After all, London property is the fashionable investment of choice for kleptocrats the world over...
and finally, the least likely of the bunch....
10) Open your capital account and allow foreigners to have access to onshore rates and currency risk