US economy grows faster; US confidence up, house prices up; Japan data shows pickup; China to curb outbound investment; UST 10yr yield at 2.31%; oil and gold down; NZ$1 = 71.1 US¢, TWI-5 = 76.9

China trying to shut the barn door after some or most of the horses have bolted?

A world in which banks headquartered outside the United States intermediate a larger share of dollars may not prove more financially stable, despite more stable funding for US-chartered banks.Banks without a US charter have much of their dollar assets outside the United States, which cannot readily be discounted at the Federal Reserve. Their ongoing reliance on wholesale dollar funding could leave them more vulnerable to runs. To be sure, this concern remains hypothetical as long as foreign banks are flush with reserves at the Fed. However, we interpret foreign banks’ disproportionate take-up of Fed reserves as merely the initial manifestation of the reconfiguration of global dollar banking to which the new incentives lead.
This, we would suggest, is the heart of the issue for central bankers these days.

In the last few years, Fed liquidity has flown disproportionately to US branches of foreign-chartered banks. What’s more, that liquidity has largely remained stuck in the US.

To understand the implications you have to step back to the financial crisis and appreciate that if it was about any one thing it was about the rescue of dollars held abroad, rather than at home.

Everything begins and ends with the Fed having to uphold the integrity of the so-called “eurodollar”.

These are dollars which somehow escaped the US system (either through payment for imports, military programmes, aid, tax dodging, whatever) and consequently the Fed’s supervision as well.

In the opinion of Milton Friedman, eurodollars have always represented unsanctioned private money creation because they’re dollars which are transferred about without observation of the principles that govern dollar transfers in the US. Instead, eurodollar liability creation is based on the rules of foreign lands, and in the worst case scenario (just like err, Bitcoin) no rules at all.

The problem for the US is that because these mimic conventional dollars so well, they end up feeding back into the domestic network regardless. They’re encouraged to do so, meanwhile, because unless they’re put to work in line with the principles that govern the US system their value gets eroded, or worse still, ends up leading to destabilising black-market effects.

https://ftalphaville.ft.com/2014/09/05/1957231/all-about-the-eurodollar…

http://vancouversun.com/opinion/columnists/douglas-todd-canadas-public-…

What'll they find when our (complicit?) government stops stalling on extending AML to real estate and related industries? Lots of rocks sheltering creepy-crawlies that they're trying to avoid turning over.

“The real issue isn’t the volume of debt but rather the liability-side ‘plumbing’ that underlies the debt boom,” says Jonathan Anderson, principal at Emerging Advisors Group and longtime China-watcher. “If there’s going to be financial crisis in China, this is where it will come from.”
https://www.ft.com/content/1fcc5fd4-a719-11e6-8b69-02899e8bd9d1

Financial history shows that when debt outstrips GDP growth, accidents become more likely. But in China’s case, it’s not just the absolute increase in leverage that’s worrying. The speed at which debt has expanded also means there is an increasingly complex web of transactions and financial products which links China’s biggest banks with smaller peers and with shady financial institutions that operate outside the official safety net provided by the authorities.

So where are the trouble spots?

Chinese banks have added $7.1 trillion in new assets – equivalent to around two-thirds of GDP – since the end of 2014. Over the same period, deposits have only risen by around $3 trillion, according to official figures. Most of the increased lending is concentrated outside China’s four largest state-owned banks. That means smaller and medium-sized banks are competing hard for alternative sources of funding.
http://blogs.reuters.com/breakingviews/2016/10/31/breakdown-gauging-the…

"But there is one thing for sure," he said. "That's the goal of what we're doing with off-balance-sheet operations — they cannot continue this barbarian growth anymore."
http://m.english.caixin.com/m/2016-11-24/101018864.html

Shin hints this may be down to the reduced risk-taking capacity of dealer banks. From Shin:

In textbook settings where someone could borrow and lend without limit at prevailing market interest rates, the cross-currency basis could not deviate from zero, at least not by much, and not for too long. This is because someone could borrow at the cheaper dollar interest rate and lend out at the higher dollar interest rate. However, executing such a trade entails a sequence of transactions, often through intermediaries. As such, it makes demands on the risk-taking capacity of dealer banks as well as counterparties.
From Shin’s perspective, what’s really glaring however is that dollar strength is impacting not just emerging markets but other hard currencies zones as well, especially “safe haven” currencies such as the yen and the Swiss franc.

The reason for this may be down to how the dollar has for decades been recycled through the global banking system. Which is to say, it’s all about the eurodollars (yet again).

Key points to note there: the US dollar is used widely throughout the global banking system, even when neither the lender nor the borrower is a US resident. The dollar is used as an international bridging currency for cross-border transactions, especially in invoicing and trade. It’s used for hedging. It’s also the preferred currency denomination for financing real assets.

What this means is that the universe of dollar-denominated assets extends far beyond the United States, and for large institutional investors with a global portfolio of assets, there may be a currency mismatch between the assets they hold and the commitments they have to their domestic stakeholders.
If the Fed was now to raise rates in the conventional manner, all it would do is spook US institutions disproportionately — potentially prompting a rollback of liquidity from EM and risk assets instead — while rewarding foreign institutions instead.

With reverse repos, which take away cheap money-market liquidity from foreign institutions, the Fed has attempted to regain some level of control over the transmission mechanism level the funding playing field.

Without access to cheap money market funds, the hope is that foreign institutions will finally stop exploiting the Fed’s good will, and move more of their liquidity into circulation back home.

And that to a large extent is exactly what has happened. Eurodollar liquidity was sent back home over the course of the last year, strengthening the euro substantially whilst creating something of a European savings glut effect.

What the roll out of the term deposit facility does in all that context… well, it provides an incentive for large US institutions to repatriate short-term liquidity from abroad, and finally start transferring it to an interbank market which benefits smaller domestic US banks rather than foreign entities.
https://ftalphaville.ft.com/2016/06/09/2165690/textbook-defying-global-…

Dollar shortage *alert* (plus global trade *alert*)
Who funds the working capital that keeps globalised trade lubricated and in flow? Answer: hard currency investors.

And what justifies the funding of all that suspended-in-motion value that rests upon the seas of international supply chains? Answer: the fact that even after all the additional mileage, administration and energy costs that come with running irrationally complex supply chains, a profit can be derived from the arrangements.

So what ensures these bizarre global arrangements — which justify the sourcing of apples from half-way around the globe even when alternatives are available on your doorstep — are profitable? For the most part, it’s unfeasibly low wages and low living standards in manufacturing hub countries.

Now bear that in mind when you consider how much dollar capital must be dedicated to just making “globalisation” work?

And having thought about that, ask yourself what is the greatest risk to globalised supply chains and global trade if not a potential rise in living standards or cost of living among labourers in exporting manufacturing countries.

Expressed in this puristic fashion, we begin to understand a few key points.

Globalisation is a highly capital intensive economic set-up due to the sheer amount of working capital needed to make it work. It’s not necessarily optimum in a more equal world.
The beneficiary consuming states (the ones with the capacity to create hard currencies to fund the working capital and run trade deficits) effectively provide the rest of the world with the hard currency credit they need to source the global commodities and resources required to fabricate the end-products they themselves mostly end up consuming.
This credit is squared off with repayments in hard currencies once the manufactured goods arrive at location, with enough of a respective hard currency payoff to keep the manufacturing countries incentivised to keep the set-up going.
So what happens to international global supply chains if and when beneficiary countries decide the capital locked up in maintaining global trade can be put to better use domestically or that outsourcing production half way across the world doesn’t make sense when there’s untapped spare capacity at home, which is now much more cost effective?

The answer is that supply chains shrink, but the underlying credit arrangements live on. As the manufacturing hubs face up to the respective shortage of hard-currency repayment flows this brings — and potentially default — their hard-currency credit deteriorates. This compromises access to resources and hard-currency resources in general, especially if those countries which would like to keep producing for their own consumer benefit almost entirely.

At that point the global hard currency shortage — which let’s face it amounts to a global dollar shortage — stands to become the the most significant destabilising force in recent times and the most unanticipated global tail-risk.
https://ftalphaville.ft.com/2016/11/15/2179675/dollar-shortage-alert-pl…

How the hell has Key gotten China to do his dirty work for him?

But first, the American economy grew faster than initially thought in the September quarter, growing a very respectable +3.2% which is its highest rate in two years. emphasis added

Hmmm....

As the corporate sector, and thus the whole economy, lurches from one of these mini downturn/upswing cycles, the inappropriate emphasis on only those rebounds confuses the fact the economy is contracting in terms of time. Thus, by using each upswing to inappropriately set expectations about growth in the future, there is never any account for that lost time. Read more

Dont buy anything due to mature in over 10 years.
A VERY good read.
http://www.nzherald.co.nz/science/news/article.cfm?c_id=82&objectid=117…

Excellent news from China , with these new controls , or is it ?

Methinks nothing much will change

The level of under-invoicing by Chinese businesses to their counter-parties overseas is a widespread practice .

It causes widespread "leakage ' of hard currency

There are 2 motives for doing this .

Firstly it avoids the full tax impact in China , ( these folk are nowhere near as tax compliant as New Zealanders ) and
Secondly , due to present exchange controls , the Chinese business has to convert its US$ and other real money into the local monopoly money . Astute Chinese businessmen dont really trust the Chinese Government and they are aware of the non-convertibility of their own currency , so they really want US$ .

Its this laundered and under-invoiced money which washes up here and we dont have adequate controls for money laundering .

The legislative framework is in place , but the implementation has been delayed for Estate Agents , etc

I dont think it will stop the nonsense going on right under our noses , for which we seemingly turn a blind eye