Keep It Simple

After months of lead time gyrations, the Fed Custody Holdings line item battled the missing 777 for top news item of the week. Like the plane, the story carried more questions than answers. The Fed H.1 had 'Marketable securities" down 34B for the week (Wed. settlement). This is a decent drop and roughly 1/3 of the 104B from the "custodial holding" report. Outside of hyping up a data set, what can we say about this action?

We do know that drops in reserve holdings have coincided with EM pain and funds sourcing stress. Conversely, stable and rising levels have signaled hot money play time and free money hi-jinx. We lay no claim to Russian allocation theories or cocktail party intellectualism with regard to these balance sheet changes. ("Did you notice the Custodial holding drop, Charles? Oh, those Russians, have you tried the Gouda?") The cloudy group we keep an eye on is #3 on the Holdings Chart behind China and Japan. This mysterious and poorly documented "group" accounts for $290B in heft under the heading of "Caribbean Banking Centers." You'd have to drop 8 more spaces on the Hit List to find Russia at #11.

Perhaps, the holdings were reallocated/swapped into gold. The image of huge carts laden with shiny metal being ushered into the vault sets more than Peter Schiff's heart aflutter. If the category semantically equating to the hedge fund community (and the gearing attached to it) is not adjusting, then should we even care? The US government placed a swath of issues easily during the alleged Russian sell out and Treasuries continued trade well and squeeze the best intentions of shorts (guilty).

Human nature pushes us to imbue meaning into the events that unfold around us. A cottage industry has sprung up for reverse engineering "explanations" to retro-fit capital market fluctuations. Color me numb but I don't stay up at night worrying about Russia's Govie trading. If the system is seizing up this quickly, the "Exit" is out of the question and our fears about Financial System 2.0 rigidity are too conservative.

I would keep an eye out for currency action now as transactions settle up. The natural path of a reserve currency is down. The transition and diversification into its replacement tends to be attenuated not abrupt. Few candidates could withstand the appreciation of their fiat as the next big thing. China clearly recognizes the domestic consequence and appears very in tune to the process. For now, I'm content to keep it simple and admit I'm unsure of what's going on. If FTQ is now Bobls and Bunds, then the yield pick up into the US looks better to us. I'm skeptical any of this changes the outlook and will wait for Hooper to tell me its safe to try and sell the rates space again.

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