Storm Fronts Gather – the last one is the BIG one.

Storm fronts are gathering and are going to collide. Possibly tomorrow. Today was just the rumblings of their approach.

First off the bottom has officially fallen out of the markets and the recovery. Dow is down 3.6% – 376 points. And there was nothing anyone could do about it. It fell like a stone, bounced and kept on going. the market has broken below all the technical levels of support ( Which roughly means levels the market has been to before but not gone below suggesting that there are some real reasons for stocks in the market to have that value). Now the market is below them it is basically a one way ride in a lift with the lights off.

Libor generally has continued to tighten. But much more significant and dangerous is the spread between the rate some banks can get and the MUCH higher rates others are facing. Interbank lending isn’t actually one rate for all, there is a spread. Basically there is a short list of banks that the pack looks like it is going to turn on. Weak members who may get cannibalised or at least badly savaged, by the others. Soc Gen may be one and WestLB – one of the ruined Landesbanks. This suggests to me Greek debt exposure is the issue.

Which brings me to another of the converging storm fronts – tomorrow the German Parliament votes on Germany’s participation in the ECB bail out. If they were to vote ‘No’ then that dark lift I just mentioned – well it becomes an express lift.
In fact if they vote ‘yes’ but don’t do it with conviction – it may have a similar effect. The bond market must be convinced this is never going to be questioned. It can’t be a “sort of OK, all right…for now,” sort of vote.

Because things are way, way too fragile for that. Today, the day before the storm fronts collide, both the FED and the ECB have been out there laying them out left and right. This afternoon the FED denied absolutely that FED swap lines were being used to bail out Greece and Spain with dollar loans to give them cash they CANNOT get anywhere else. So that’s that confirmed.

At the same time the ECB intervened several times to prop up euro. When I say intervened I mean it in the sense that Mike Tyson used to ‘intervene’ – in his opponent’s attempt to get out alive. Yesterday it was the Swiss Central bank which stomped all over people’s faces. Today the ECB did the same. Gargantuan moves in the Euro. All I feel sure to no lasting avail. But heroic in its own way.

And then the last, largest but slowest moving storm front. It is longer term than the others but potentially larger than them all.

SAFE ( State Administration of Foreign Exchange) the guardian of Chinas 2 Trillion dollars of US debt (China’s Forex reserves) has decided to start using this vast ocean of dollar debt to make loans to other countries. Might sound a little obscure but believe me this is large news. China is making , for example oil-for-dollar deals. It has already signed $60 Billion dollars worth of loan-for-oil deals with Russia, Venezuela, Kazakhstan and Turkmenistan. Altogether, these deals give China the right to import nearly 75 million tons of crude oil every year. On February 17th China agreed to provide Russia with $25 billion dollars in long-term loans, for 15 million tons of crude oil every year from 2011 to 2030.

This does several really interesting things to the balance of Geo-political power.

1) Because SAFE is doing this through Chinese banks this gives those banks absolutely vast capital flow, assured revenue and BIG global presence. Chinese banks will now have the explicit guarantee of Uncle Jintao at their back, to more than match the FED behind US banks. This could be humbling because the once mighty FED is broke and in debt… to the Chinese.

2) As SAFE moves now to global centre stage the amount of dollar debt coming back into play will could get HUGE and more interesting still the flow will NOT be under US control. How is that for a humbling situation and potentially destabilising situation!

3) As SAFE puts this debt back to work as cash in the global system – it transfers ownership and therefore exposure to this debt away from China. This is in effect a way for China to GET RID of its exposure to US inflation or devaluation without having to sell that debt and risk knocking the bottom out of its value by doing so. This has always been China’s conundrum. How to get shot of US debt without crashing its value by being seen to be selling it. This could be how.

4) At a time of massive and critical danger for lots of currencies, euro, dollar yen – and when sudden losses of liquidity in markets and for whole nations is now reaching crisis point – and I mean real crisis point – having this sort of money flow is like finding the Greenland Ice sheet has begun to melt FAST.