Mish: Expect Continued Rally in US Dollar

September 22, 2011 · Posted in Monetary Economics · Comment

I second everything Mish says in his latest post:

Those who think the Australian dollar or the Canadian dollar are some sort of safe haven will find out otherwise.

China is in a credit bubble and when it pops it will take commodities and commodity producing currencies down with it.
Australia’s property bubble has already popped, and a commercial real estate implosion will follow with a lag, just as happened in the US. Canada will join the implosion party as well.
The Canadian and Australian central banks will respond with liquidity measures or interest rate cuts, sending the currencies lower.

There is no reason to like the Euro, the Yen, the Australian dollar, or the Canadian dollar.

For that matter there is no reason to like the US dollar except things are about to get worse than expected everywhere else. That coupled with a messy default setup in Europe and a Fed that did “less than expected” on Wednesday are sufficient reasons to expect a rising US dollar.

… along with the Dollar I think gold will continue to do well also.

Tags: dollar, dollar rally

Dollar, Gold, Treasurys Continue to Act Well

October 9, 2010 · Posted in Investing · Comment

The Dollar

It’s important to cut out the noise you hear in the media from people who are incapable of looking at events past the duration of a week or so.

The dollar has been taking a break from its long term rally against the Euro, but continues to stay within the trading range that I have been eying for a while.

It’s even possible that the Dollar falls further against the Euro to somewhere around 1.45, and then again rises to levels below 1.20.

Gold

Well, what should I say about gold. It continues to rise to record levels, hitting $1344 on Friday, while those who don’t understand the concepts of money and in particular gold during deflation angrily observe the trend with clueless stares.

Treasury Yields

Treasury yields have hit a 20 month low and are now at 2.38 percent.

The alarm bells are ringing for equities … once more.

Tags: dollar, gold, treasury yields

China to Float Yuan More Freely – Roubini Predicts: Yuan Appreciation Against Dollar Unlikely – I Say: Yuan Has Already Begun Depreciating

June 19, 2010 · Posted in Monetary Economics · Comment

Reuters writes China forex move could thwart U.S. hopes – Roubini:

China’s decision to move away from its currency peg might mean the yuan weakens against the dollar instead of strengthens as Washington wants, Nouriel Roubini, one of Wall Street’s most closely followed economists, said on Saturday.

China said on Saturday it would gradually make the yuan more flexible after pegging it to the dollar for nearly two years, a move that the U.S. government and others around the world have long been calling for.

“This is the first significant signal in years of a change in Chinese currency policy,” Roubini, best known for having predicted the U.S. housing meltdown, told Reuters.

But it remains to be seen how China would put the new system into practice including the composition of a basket of currencies that Beijing will use as a reference point for the yuan — also known as the renminbi — and the base date for that basket, he said in an e-mail.

“Since they have not changed the previous range for the band — plus or minus 0.5 percent — most likely on Monday China will allow the renminbi vs U.S. dollar to move,” said Roubini.

The yuan has risen sharply in recent months against the euro, which sank over Europe’s debt problems, so a stronger yuan could not be taken for granted, he said.

If the euro were to continue to depreciate, “the renminbi would have to be allowed to depreciate relative to the dollar, a paradoxical outcome,” Roubini said.

His comments echoed those of an adviser to China’s central bank on Saturday.

Li Daokui, an academic adviser to the monetary policy committee of the People’s Bank of China, told Reuters in Beijing that the yuan could depreciate against the dollar if the euro falls sharply against the U.S. currency.

Roubini, like other analysts, said a major strengthening of the yuan looked unlikely.

“Even if the Chinese were to allow a gradual renminbi appreciation relative to the U.S. dollar, the size of such appreciation would be modest over the next year, not more than 3 or 4 percent as the trade surplus has shrunk, growth is likely to slow down on China and labor/employment unrest remains of concern to the Chinese.”

For more on this see my own predictions on this particular matter.

July 2009 – China Pegging Yuan to Dollar Again?

The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.

A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.

The Reuters article is also in line with something I pointed out recently:

An interesting side effect of the Dollar rally is what’s happening to Chinese exports. Since its currency is pegged to the US Dollar, the Yuan is strengthening against the Euro which is hurting the powerful Chinese export lobbyists.
…
Bottom line: The supposed Yuan devaluation everyone seems to be expecting, were the Yuan to be freely floated, is simply not gonna happen!

Luckily, such predictions are testable. Let’s see how we are doing so far. Let’s observe the direction the Dollar has begun to take against the Yuan:

Let’s see if the trend holds up …

Tags: dollar, roubini, yuan

Dollar Rally – Iranian Central Bank Dumps Euros, Buys Dollars

June 6, 2010 · Posted in Monetary Economics · Comment

As a corollary effect to the current Dollar rally, Iran Selling 45 Billion Euros of Reserves for Dollars:

Iran’s central bank began the first phase of the 45 billion-euro ($55 billion) sale of some of its reserves for dollars, the state-run Jaam-e-Jam newspaper reported, citing people it didn’t identify.

The bank is selling 15 billion euros in the first of three stages, which will be completed by Sept. 22, the newspaper reported on its website on May 31.

Iran will “substantially” decrease its oil sales in euros, the paper said. It informed Japan and other crude-oil customers of the change, Jaam-e-Jam said. The Persian Gulf country’s euro reserves are 55 percent of the total, and would be reduced to 20 to 25 percent after the sale is complete and after oil sales in euros have been reduced, the paper said.

Iran’s shift out of euros has been prompted by the single currency’s decline, said Jaam-e-Jam, which is owned by the state broadcaster. Other central banks, including those of the Persian Gulf states, also are selling their euro reserves, it said.

The euro was little changed against the dollar, rising 0.1 percent to $1.2241 at 12:45 p.m. in New York.

The euro made up 27.4 percent of global currency reserves at the end of 2009, according to the most recent data available from the International Monetary Fund. While that was down from 27.8 percent in September, it was up from 26.4 percent a year earlier.

Experts in Iran’s central bank have suggested the country buy gold because they forecast the precious metal’s price will increase, Jaam-e-Jam said.

Euro’s Decline

The euro has fallen 15 percent against the dollar this year, reaching a four-year low yesterday, amid concern the debt crisis that started in Greece will spread to other nations and dent economic growth. The slide forced European Union leaders to piece together an almost $1 trillion loan package last month as confidence in the euro’s status as an alternative reserve currency to the dollar faded.

Gold is up 11 percent this year and is headed for a 10th annual gain, the longest rally since at least 1920. The metal reached a record $1,249.40 an ounce on May 14 and traded at $1,223.05 an ounce in London today.

In essence, Iranian central bankers are jumping on the boat of the deflation trade …

I still think that a healthy mix of gold, Dollars, and Treasurys is the right recipe to protect one’s wealth in these turbulent times.

Tags: dollar, dollar rally, gold, iran

The Unstoppable Dollar Rally; Gold & Treasury Snapshot; The Great Depression 2.0 in Full Swing

June 5, 2010 · Posted in Investing · Comment

The Dollar Rally

I will be focusing on the Euro/Dollar, but what I will be saying is not necessarily limited to the Euro, but applies many other currencies (except maybe the Yen).

The Dollar has now reached a 4 year high against the Euro:

Those who kept on talking about a Dollar crash from 2008 on where a bit late in the game. The Dollar crash, that was a result of expansive and inflationary government induced credit and monetary expansion with the naturally ensuing business cycle, has already happened through the 2000s. The Dollar has essentially bottomed out in April 2008.

Since then it has moved up and down, but up on the net. A trading range seems to be emerging that I expect we will continue to stay within for years to come.

Thus, my (and other people’s) predictions of a coming Dollar rally were essentially nothing but an expectation that the fundamental long term trend that began in 2008 will continue:

3% Bullish Sentiment on Dollar – Indication of a Coming Dollar Rally

Has the Dollar Rally Started?

Here is another thing from January this year that I dug up from my Campaign for Liberty inbox, it’s a response I gave to John Dennis who asked me why I expect the Dollar to go up (, and who by the way is running for Congress against Nancy Pelosi in San Francisco this year):

John,

I am sorry I haven’t been checking my C4L inbox regularly. I will follow it more closely now. Keep me posted about upcoming meetings if possible.

Reasons why I think the Dollar won’t collapse (against the other major currencies, that is):

The debt load in the US is rather crushing, the general direction of credit is currently a net contraction with upticks from time to time which by no means are changing the general trend

The major Dollar crash HAS ALREADY happened from 2001 through 2008, years of massive credit and money expansion, but now we are on the other side of peak credit

The true money supply growth rate is now coming down in spite of massive and futile attempts to reflate and to destroy the Dollar

The global debt pyramid is one that builds on the dollar, that means that in an environment of global delevaraging, people divest from foreign currencies and need to get back in the dollar before doing anything else

China is inflating to the tune of 30% money supply growth, I believe that were China to depeg the Yuan might crash

Bullish sentiment on the Dollar is at an all time low, I believe a few months ago it was at 3%! Everyone and their mother are predicting a Dollar collapse; this is a strong indicator for a massively oversold asset …

On a side note: All paper currencies move toward zero in the long run when measured against gold, but they fluctuate amongst each other on their way down, the US currency is a bad one, but that doesn’t mean all other currencies are being printed by saints

Time will tell what to expect.

I think is far as politics and this matter are concerned, Libertarians are opening themselves up to attack when they continue to predict a Dollar crash that may not happen anytime soon. On top of that, People can’t relate to the argument that says “what they are doing is destroying the Dollar”. Most people don’t get all the intricacies that are involved and tune out I believe.

We have so many better things to talk about that visibly affect everyone in their day to day lives.

Thanks for the interest.

Regards,

Nima

EconomicsJunkie.com

By the way: Good luck, John! Even though political action is futile, it would sure be nice not to have to see this pompous and terribly arrogant witch in the news anymore. :)

The Gold Rally

Those who predicted a dollar crash, thought it would coincide with a gold and soft commodity rally. And then there were those who said that a strengthening Dollar would make the gold price fall.

I have been saying again and again that I think strength in the Dollar may actually coincide with strength in gold and silver, while soft commodities and stocks will tank. Thus I responded to an article on Minyanville whose author predicted the Dollar rally but also expected gold to fall at the same time:

I agree with his bullishness on the dollar. I don’t necessarily agree with his conclusions on gold. I think gold may actually do OK during a dollar rally. Maybe it will drop a little, maybe rise a little, but it will most definitely outstrip other commodities. In fact, I think a smarter play when betting on a dollar rally would be to short any other commodity BUT gold.

Gold is a money commodity. A dollar rally would be a sign of further delevaraging and deflation. During deflation cash is king. And gold is the king of all cash.

Here’s gold over the past year:

And here is gold VS oil (an example for a soft commodity) since the Dollar rally resumed:

This is important to understand: All fiat currencies move down against gold in the long run. This is completely inevitable. However, they fall at differing rates.

The Treasury Rally

What about Treasury yields?

Flat since Dollar rally resumed. I expect the support to give way sooner or later. The way down is pretty much wide open then. On December 18th 2008 they dropped as low as 2.04% as the reality of Deflation was all to visible to everyone. Since then we have seen numerous efforts to bailout businesses and all the wildly unimaginative interventionist measures that already caused the Great Depression in the 30s.

People have been outdoing each other in calling an end to the recession and bureaucrats and central bankers have been lauding themselves about successfully preventing another depression. The funny irony is that they have in fact beautifully set the stage for The Great Depression 2.0 with all its unsurprising and predictable side effects …

Once existing stimulus programs and credit expansion attempts subside, there won’t be much left to pick up the slack. The consumer won’t be able to go back to business as usual unless he goes through a long period of reduced consumption, deleveraging, and savings, a period during which the majority of production and spending inside the US will have to be focused on capital goods, so as to restore a balanced ratio between the production of consumer goods and the production of capital goods.

At the point when these government stimuli wind down, Keynesian clowns will be jumping out of the bushes left and right, and demand that the government take on more debt and spend more money. But at some point their mindless tirades will no longer appeal to an overtaxed and overleveraged populace. Their ivory tower nonsense will be way too far detached from simple realities.

Any temporary recovery we witness now, is likely to be remembered as just that, a temporary phenomenon. All actions taken so far have set the perfect stage for a double dip recession of enormous proportions, the worst possible prolongation of the necessary correction.

If it was our dear government’s objective to repeat the playbook from the Great Depression one by one, then they have indeed succeeded phenomenally.

And here is Chief Clown Krugman, once again doing his duty in filling the role:

A similar argument is used to justify fiscal austerity. Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea — not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts. And the O.E.C.D. predicts that high unemployment will persist for years. Nonetheless, the organization demands both that governments cancel any further plans for economic stimulus and that they begin “fiscal consolidation” next year.

Hmmm, I thought the government has solved the crisis with its heroic spending intervention? Why don’t we all just lean back and let that magic Keynesian multiplier do its work in getting us back on track? Why spend even more when the crisis has been solved, when Big Government has saved us, as Krugman himself proudly pronounced not too long ago?

So it seems that we aren’t going to have a second Great Depression after all. What saved us? The answer, basically, is Big Government.

One might object that this all makes perfect sense since Krugman is actually not an economist, but rather a propagandistic, dishonest, and filthy mouthpiece for any Democratic agenda you throw at him. But that’s not a very nice thing to say about this poor fellow so I would never go down that path … oh wait, I just did it, damn, sorry Paul! It’s just … could you maybe try to be a bit less predictable??

And yes I know I know, he goes on in there talking about how the situation remains terrible and how we must remain careful and bla bla bla, but that nonsense just doesn’t matter. He did lead his readers to believe that “big government saved the day”! He did say that we’re NOT going to have another Great Depression. That’s the essence of his message.

Here is a good discussion about it on yahoo:

The truth is, we’re seeing precisely the expected scenario in action, the Japanese model:

From 1989 on, the Japanese government has launched one stimulus after another to no avail, leaving Japanese taxpayers with the largest public debt per capita of all industrialized nations.

A burden that the US government seems to be more than willing to have its taxpayers shoulder over the years to come unless someone picks up a history book and tries not to feverishly repeat mistakes others made in the past.

Thus the long term outlook for the US economy is the fate Japan took: A long lasting correction supercycle with one failing “stimulus” program after another, and with on and off periods where the economy slips out of and back into recessions from time to time.

Reality is kicking in again. We’re slipping out of a small break we took from recession, and back onto the inevitable path. As a result of foolish government intervention we are now, once again, in worse shape than we were at them time the real correction was supposed to occur. And this is rather likely to be reflected in consumer behavior, and by extension also in Treasury yields.

China

An interesting side effect of the Dollar rally is what’s happening to Chinese exports. Since its currency is pegged to the US Dollar, the Yuan is strengthening against the Euro which is hurting the powerful Chinese export lobbyists.

This is yet another case for a coming Yuan devaluation against the Dollar, that I already talked about almost 1 year ago:

The stabilization of the Dollar against the Yuan has almost coincided the reversal of the Dollar’s fall against other major currencies. It thus appears as if, since mid 2008, the Yuan/Dollar peg has been reinstated and continues to be in place as these lines are written. What is also noteworthy is that the US current account deficit has been declining sharply since then.

A first look at the above chart leads one to believe that Chinese and US authorities aimed at putting an end to the fall of the Dollar, and thus intervened accordingly. However, another possibility which I would like to propose is that the Dollar had fundamentally and truly begun to stabilize at the level of RMB 6.83 at that point and was actually in for a major revaluation upwards. Thus the current intervention by Chinese authorities could actually be aiming at a stabilization of its own currency at a higher level than the market would mandate.

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.

Bottom line: The supposed Yuan devaluation everyone seems to be expecting, were the Yuan to be freely floated, is simply not gonna happen!

That’s all I have to say for now. Have a good weekend everyone!

Tags: dollar, euro, gold

Chinese Inflation Spirals Out of Control

May 19, 2010 · Posted in Global Economics · Comment

CNN Money accurately makes the obvious observation that Chinese inflation might be out of control:

One of the most popular debates in global macro circles currently relates to China and whether its economy is in a bubble. On the side of the bubble callers is one of the more successful short sellers of our generation, James Chanos. Admittedly, Chanos is usually on the right side of these big calls and, for the time being, I’m not going to debate him. Great Chinese bubble debate aside for now, how does Chanos’s theory hold up in light of the data we’ve been reviewing?

Data from various sources within China that we’ve seen over the past few weeks has pointed us directly toward one simple conclusion: China is experiencing serious inflation. Some of the keys for us include:

* Chinese CPI (Consumer Price Index) and PPI (Producer Price Index) are up 2.8% and 6.8%, respectively, year-over-year. Combined, this is the largest spike in combined inflation in 18 months;
* Chinese property prices, based on a survey of 70 cities, were up 12.8% year-over-year in April, which is the largest spike since 2005;
* Chinese money supply growth was up 21.5% year-over-year in April;
* Chinese loan growth was up 51% sequentially from March to April at 774B Yuan; and
* Chinese industrial production was up 17.9% on a year-over-year basis in April.

While economists in the United States continue to argue over whether the U.S. is experiencing meaningful inflation, there’s little room for debate when it comes to China.

The direction in China: up

Prices for consumers and producers are up, real estate prices are up double digits, and money supply is accelerating in a big way. The key factor is money supply. If it continues to grow, inflation will continue to accelerate.

The beauty of the Chinese system, being a command economy, is that the leadership of the country can make real time economic decisions to adjust to the data they’re getting. And we are already seeing Chinese leadership implement policies in the hopes of tempering these inflationary tailwinds.

On the real estate front, the government has ordered 78 state-controlled companies to exit the real estate sector, banks are newly requiring a 50% down payment on second homes, and the Chinese government mandates 20% cash down at land auctions. Collectively, these actions should help slow the white-hot Chinese real estate market.

The other key policy that Chinese government is implementing relates to bank loans. After a period in 1998 where the Chinese banking system was in effect insolvent, Chinese officials are rightfully cautious about rampant loan growth, for more than inflationary reasons. To combat bad loans and hopefully stymie inflation, reserve requirement have been raised three times for Chinese banks. Currently they’re at 17% for large banks and 15% for smaller banks — just under the all time high for reserves. In effect the government is forcing banks to park some money, making loans for the booming property market harder to come by.

At risk of actually creating a bubble, Chinese officials cannot allow these inflationary factors to pick up speed. Therefore Chinese officials will likely continue to take policy actions to slow growth and cool inflation. These policies will have some predictable effects. But the most direct and knowable effect relate to commodities.

Chinese citizens have negative incentive to save: sound familiar?

China is the world’s largest producer of steel, and also consumes almost one-third of all global steel. As construction slows in China, the demand for steel and specific commodities related to construction, copper in particular, will slow on the margin. Any slowdown in Chinese demand will create a negative headwind for the prices of many of the commodities related to construction, but will also affect other commodities, like oil.

As of now, the Chinese economy is signaling the need for more aggressive tightening based on the points above. But there is also the reality of negative real interest rates. Currently, the consumer price index is outpacing the one-year interest rate on savings of 2.25%, meaning the Chinese have no incentive to save any money. The two policies needed to offset inflation are an increase in interest rates and an upward revaluation of the Yuan. Both actions would help slow Chinese growth and commodity demand further in the coming months.

What worries Chinese economic planners considering these fixes is that rather than just slow down and control growth, they have the potential of “popping” the bubble, making Jim Chanos a happy man but also causing serious damage to China’s export heavy economy. China would like to have it both ways right now: rapid growth and wealth creation, but also the safety of a properly valued, non-inflationary economy. That’s a tough task: nearly every time we’ve seen this movie before, the ending is the same.

Over the past 4 years the Chinese money supply has risen by more than 100%. Meanwhile, in the US the true money supply has merely increased by 22% in that same period.

In the US credit has been contracting heavily for the past 2 years. In China it has been continuing to overheat during that time.

Flashback July 2009:

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar …

You see now what I was talking about? That upwards valuation of the Yuan that US exporters, the US government, and hyperinflationis keep on dreaming of is most likely not going to happen!

Tags: china, dollar, yuan

Market Meltdown – Deflation Trade is Back

May 6, 2010 · Posted in Investing · Comment

Many things are being said about today’s market plunge by over 1000 points at some point. I won’t delve into that, just how today’s action beautifully shows the general idea behind my long term view.

Dollar

I have been writing for a while now about my expectation of mid to long term strength in the Dollar:

August 2nd 2009 – US Dollar Looks Bullish Fundamentally & Technically

August 13th 2009 – 3% Bullish Sentiment on Dollar – Indication of a Coming Dollar Rally

December 9th 2009 – Has The Dollar Rally Started?

Here is the Dollar over the past months through today:

This Dollar rally is best explicable as a symptom of global de-leveraging alongside deflation in the US. As investments the world over are being unwound, a flight into the world’s reserve currency is inevitable.

Today’s gains in the Dollar index were around 1% overall. In particular the Euro took a significant beating over the ongoing monetary insanities perpetrated by the ECB. A Dollar rally is at the same time usually a very bearish sign for stocks. Today’s moves beautifully accentuated this correlation, in particular during the intraday spikes and corrections. The fact that the Dollar has been moving up together with stocks over the past months is to me just a sign of how severe a correction stocks are going to be in for sooner or later.

Gold

Global delevaraging is also bullish for gold. As I have said many times: During deflation cash is king. And gold is the king of all cash. This is counter-intuitive to many people because they throw gold in one bucket with all other soft commodities. But gold is a categorically different commodity. It serves virtually no industrial production, except for some negligible applications. It is a money commodity. Silver has some money characters, but also has quite a lot of industrial uses.

Thus I explained in August of last year when commenting on an article by James Kostohryz at Minianville:

I agree with his bullishness on the dollar. I don’t necessarily agree with his conclusions on gold. I think gold may actually do OK during a dollar rally. Maybe it will drop a little, maybe rise a little, but it will most definitely outstrip other commodities. In fact, I think a smarter play when betting on a dollar rally would be to short any other commodity BUT gold.

And how has gold done throughout the dollar rally? Here it is:

You see? The Dollar has risen to a new 12 months high over the past 6 months, during that time gold dropped for a little while, but has gained back all those losses and is now actually up on the net as flight to safety continues. Meanwhile most other commodities are actually down on the net over that time. That’s what I meant when I said what I said above in my comment.

Today in particular gold was up around 2% while all other commodities got clobbered.

Treasurys

As a corollary of Dollar strength one can expect the prices of Treasury notes, pretty safe claims to Dollars at interest, and bonds to rise and thus their rates to fall. I have been arguing for a while that over time treasury rates will fall, but with quite some noise inbetween, sparked by false inflation fears:

I think Treasurys will continue to act well. There maybe some upward pushes here and there so long as inflation expectations pop up once in a while, but the mid-term trend remains unchanged: It is likely that yields are headed for new lows.

Treasury rates have been moving pretty much up and down and are actually still a bit up from when the rally started, but one thing I just wanted to point out is the strong move today in long term treasury instruments, alongside a strengthening Dollar and strong gold, see Mish:

Yield Curve as of 2010-05-06 3:15PM EST

Bullish Flattening of Yield Curve

That chart shows a bullish flattening of the yield curve as I expected. Those expecting a bearish flattening (yields rising) got their clocks cleaned today as treasury bears were slaughtered.

What’s next?

… we shall see. I certainly expect this global sovereign debt contagion to spread rapidly and exert its effects, among other things. I would be rather surprised if US equities could somehow decouple from this avalanche. Personally I still think that a healthy mix of gold, Dollars, and Treasurys is the right recipe to protect one’s wealth in these turbulent times.

One should not think that I am suggesting that the US is immune against sovereign debt problems. The public debt in this country is crushing as well, I just think that before the US defaults outright on its Treasury bonds many much more serious things would need to happen. One thing you can be sure of: The US government will continue to raise taxes should there ever be doubts about its ability in servicing the public debt, and it will probably do so quite a few more times before the people would be ready and willing to do more than hang a few teabags on their ears, grab signs, and protest before Congress to express their inconsequential anger.

Tags: dollar, gold, treasury yields

Spending Freeze, Fed Scepticism, Political Gridlock a.k.a. “Hitting a Wall”

January 26, 2010 · Posted in General Economics · Comment

Markets have been sending stronger signals over the past few days:

The Dollar has continued to extend its rally as expected.
US stocks have dropped by over 5% in very short time
Chinese and other foreign stocks are beginning to lose ground again after a short bounce

Economic data most recently indicated that existing home sales suffered the biggest slump in 40 years:

Sales of previously owned homes took their biggest tumble in at least 40 years last month as the impact of a buying spree spurred by a tax credit for first-time buyers waned, according to industry data released Monday.

Those who rushed to meet the original November deadline to take advantage of an $8,000 tax credit for first-time home buyers caused a surge in sales earlier in 2009, but left the market wobbly by the end of the year. First-time buyers, who made up more than 50 percent of sales earlier last year, represented just 43 percent of the market in December. The shift also resulted in fewer sales of lower-cost homes, which first-time buyers typically seek.

After three months of increases, sales of existing homes, including condos and single-family residences, fell 16.7 percent to a seasonally adjusted annual rate of 5.45 million in December compared with the previous month, according to National Association of Realtors data. That was a bigger drop than analysts had expected and the lowest sales rate since August. It was also the biggest monthly decrease on records that date to 1968, according to the industry group.

The December decline “was payback for the tax credit,” said Patrick Newport, an economist for IHS Global Insight.

… once the tax credit incentive vanishes home prices will head south again, this is really something that intuitively nearly everyone I talked to knew from the get go, the only question is how much longer Congress wants to keep extending it. It seems like they don’t have a whole lot more to play with.

Today, the Obama administration leaked plans for a spending freeze:

President Obama will call for a three-year freeze in spending on many domestic programs, and for increases no greater than inflation after that, an initiative intended to signal his seriousness about cutting the budget deficit, administration officials said Monday.

The officials said the proposal would be a major component both of Mr. Obama’s State of the Union address on Wednesday and of the budget he will send to Congress on Monday for the fiscal year that begins in October.

The freeze would cover the agencies and programs for which Congress allocates specific budgets each year, including air traffic control, farm subsidies, education, nutrition and national parks.

Last but not least, there is growing skepticism among lawmakers about Ben Bernanke and of course the Federal Reserve in general:

Even if Mr. Obama and the Senate majority leader, Harry Reid, get the 60 votes necessary to surmount a threatened filibuster against Mr. Bernanke, the Fed appears to have taken a hit to its reputation.

“The public’s confidence in the Fed has been dramatically eroded, and that’s not good,” said Laurence H. Meyer, a former member of the Fed’s board of governors who runs a consulting firm, Macroeconomic Advisers. “The vulnerability of the Fed to a loss of independence is higher than it’s ever been. And the chairman’s credibility with Congress is very low, and that’s not good for the institution.”

… but of course good for the American people, I may add.

Not that any of the things I outlined above will change anything as far as the general direction of government growth and power grabbing is concerned. But in the short run it clearly looks like they are hitting a wall right here and now, at least it is hard to find many signs to the contrary.

As I explained before:

The key thing to keep in mind in all of this: The recent rally, green shoots, and recovery hopes have been created and/or fueled by massive government expenses, and by a believe in the omnipotence of our leaders in Washington.

But government spending sprees, too, will have to come to an end sooner or later. On top of that, all that the recent government programs have accomplished is to get marginal individuals back to the same flawed habits, such as owning unaffordable homes, buying too many cars, etc.

The interest that the government has to pay on its debts when it runs up sky high deficits, and the taxes it will have to raise in order to make those payments, will be hanging over the recovery like a Damocles Sword. The Federal Reserve, too, will be faced with a similar situation. Let’s assume, for the sake of the argument, that lending activity on homes, cars, etc. were to pick up again. What will the Fed do then? Cut interest rates? Add more bank reserves? Surely not, quite the opposite.

Once existing stimulus programs and credit expansion attempts subside, there won’t be much left to pick up the slack. The consumer won’t be able to go back to business as usual unless he goes through a long period of reduced consumption, deleveraging, and savings, a period during which the majority of production and spending inside the US will have to be focused on capital goods, so as to restore a balanced ratio between the production of consumer goods and the production of capital goods.

At the point when these government stimuli wind down, Keynesian clowns will be jumping out of the bushes left and right, and demand that the government take on more debt and spend more money. But at some point their mindless tirades will no longer appeal to an overtaxed and overleveraged populace. Their ivory tower nonsense will be way too far detached from simple realities.

Any temporary recovery we witness now, is likely to be remembered as just that, a temporary phenomenon. All actions taken so far have set the perfect stage for a double dip recession of enormous proportions, the worst possible prolongation of the necessary correction.

If it was our dear government’s objective to repeat the playbook from the Great Depression one by one, then they have indeed succeeded phenomenally.

Tags: dollar, double dip recession, markets, stimulus, stocks

Has The Dollar Rally Started?

December 18, 2009 · Posted in Investing · Comment

The rally of the US Dollar vs. other major currencies is something that I have been expecting for a while now. The dollar made some bold moves recently. It is conceivable that this may be the kick off to that said rally. Just as an example, below see the Euro/Dollar chart:

The upward trend in the Euro since March seems to have begun reversing. Dollar perma-bears will look at this as just another temporary counter trend move. I believe that it is possible that a longer term Dollar rally is quite conceivable, for all the reasons I stated again and again and that I will not delve into here again. You can read the “Related Posts” below if you like.

Daily FX writes US Dollar Closer to Beginning, Rather than End, of Bull Move:

This is the same chart that was published yesterday. I wrote then that “the clearest portion of the decline is the initial decline that ends at 14670. Since then, price has stair stepped lower in what could be the beginning of a 3rd wave. Staying below 14785 keeps this extremely bearish count on track. A loose target is 14000, which is the 161.8% extension of wave 1.” This analysis remains on track. Risk can be moved to 14600 and resistance is 14420-50.

Sometimes Mish tends to have the amazing tendency to call certain trend reversals almost exactly on the day of the peak/low. This is him on Nov 27: New Record Low Yield On Two Year Treasuries; Is This The Start Of A Dollar Rally?

Given the US markets were closed yesterday, I have the same question floating in my mind as a day ago, wondering if this is another one day wonder rally in the dollar (and another one day wonder selloff in equities) or if this is the start of a long awaited correction in both the dollar and equities.

A significant Dollar rally is, at the same time, very bullish for Treasurys and and very bearish for stocks. Gold may continue to do fine. Time will tell …

Tags: dollar, dollar rally, us dollar

Free Floating Yuan = Stronger Yuan ??

November 18, 2009 · Posted in Global Economics, Monetary Economics · 6 Comments

An interesting assumption in virtually all debates concerning the Yuan is that it would appreciate against the Dollar, once let float freely. A good example is the article below in which this premise is applied, set in stone and unquestioned from start to finish:

A growing number of global leaders are urging China to look to its long-term interests and allow its tightly controlled currency to rise. But they are encountering reluctance from a government still very much worried about the economy in the short term.

President Barack Obama and Dominique Strauss-Kahn, managing director of the International Monetary Fund, in Beijing on separate visits Tuesday, told Chinese officials that yielding to market pressures for a stronger yuan would help the global economy recover.

Nonetheless, Chinese President Hu Jintao didn’t announce any new commitment on currency policy to Mr. Obama. Other Chinese officials and economists continue to defend China’s policy of keeping the yuan steady against the dollar to aid Chinese exports, which are still vital in sustaining the nation’s economic recovery despite growing domestic consumption.
[Geithner] Reuters

Treasury Secretary Timothy Geithner took a softer tone on China’s currency at a Senate Foreign Relations Committee hearing on Tuesday.

At a congressional hearing Tuesday, Treasury Secretary Timothy Geithner sounded a much softer tone than in the past on China’s currency, saying it’s “very important” that the Chinese government pursue “broader reforms to their exchange system over time.”

“China has to take steps to move away from excessive reliance on exports” and find ways to stimulate domestic consumption, Mr. Geithner said at the hearing before the Senate Foreign Relations Committee, refraining from harsh rhetoric toward the Asian giant. He said that China is already making progress on rebalancing its economy and that “we’re seeing very promising, early signs” of a shift toward growth that relies on “domestic consumption and investment.”

The discussions highlight how China’s heavily managed currency is once again at the center of debates over global economic policy, after being pushed to the background by the financial crisis.

Though Mr. Hu, Mr. Obama and other world leaders have promised to cooperate in pulling the world economy out of its deepest slump in a generation, coordinating economic policies across very different countries remains difficult.

High unemployment makes trade with China a volatile political issue in the U.S., but similar pressures make it difficult for China to yield to U.S. pressure on the currency. A stronger yuan would make Chinese exports less competitive, which is unappealing for China in a year when exports are down about 20% and many manufacturers have closed.

Chinese leaders who have criticized the West’s economic management may also find it politically difficult to yield to demands on the currency.

On the other hand, China’s economy has recovered faster than most. Because the yuan has weakened sharply against other currencies, European and Asian competitors complain that China has an unfair advantage.

Meanwhile, some economists worry the extra juice to the economy from the cheap yuan, in addition to huge government stimulus, risks new bubbles in real estate and stocks.

Mr. Strauss-Kahn said keeping the currency down may help exports in the short term, but it imposes other costs. “You have to balance your needs in the short term with the long term,” he said. For instance, an undervalued currency encourages companies to invest in ways that may not be viable once the currency rises.

“If you have wrong prices, you make wrong decisions, especially concerning investment in the long run,” he said, adding that it is time for China to look more toward long-term stability now that it has accumulated advantages from an undervalued currency.

A stronger currency also would boost the purchasing power of Chinese households, which would support the Chinese government’s drive to make economic growth less dependent on exports, Mr. Strauss-Kahn said.

Chinese officials frequently counter that big swings in the exchange rate can harm companies and disrupt the economy, which is of particular concern at a time when confidence is fragile. They sometimes contrast the stability of the yuan’s exchange rate — which makes it easier for firms to plan ahead — with the wild swings in the dollar’s value.

“China keeping a basically stable exchange-rate policy is, in reality, good for the global economic recovery,” Yao Jian, spokesman for China’s Ministry of Commerce, told reporters Monday. “If the request is to strengthen other currencies, while allowing the dollar to keep weakening, that’s not very fair.”

Chinese officials aren’t totally closed to arguments for a stronger yuan. In a statement many interpreted as a gesture to the growing concerns about the currency, the People’s Bank of China last week said exchange-rate policy would take into account “changes in international capital flows and the trends of major currencies.”

Still, many private analysts don’t think a move on the yuan is imminent.

Authorities may feel freer to shift once exports are growing again and inflation has turned positive, which could happen early next year. In coming months, China will have to tell other members of the Group of 20 leading economies how it plans to boost consumer spending.

Although China’s government publicly has grown more confident about the strength of its recovery, growth still remains heavily dependent on government stimulus programs.

“China needs the U.S. economy to recover strongly and renew its import growth. Otherwise, China will have a tough time sustaining its recovery,” said Eswar Prasad, an economist at Cornell University.

That is one of the key reasons China is reluctant to lift its currency now. World Bank chief economist Justin Yifu Lin, a former Chinese government adviser, has argued that if a stronger yuan snuffs out a recovery in China’s export sector, it could weaken China’s entire economy and have negative consequences for global growth.

As I noted before on this matter (and so far I see no reason to change my mind on that):

Some points fundamentally support the thesis that the dollar should gain in value against the major currencies:

- Global deleveraging is driving investors from other currencies back to the Dollar
- Deflation hitting the US first, and other countries only later
- Imports into the US are falling rapidly
- Significant domestic spending sprees by the Chinese government

All this may indicate that if the Chinese government were to let the Yuan float freely at some point, it may actually drop significantly against the US Dollar. Such an event could possibly be the ignition for a significant Dollar rally in the years to come.

We will see how things develop over time. I am not saying that my scenario HAS to occur. But I think it certainly is a possibility over the next 2 years or so. What I reject is a completely one-sided approach to this question. As Ayn Rand always used to say: Whenever you encounter contradiction in your thinking, check your premise. I will surely check mine if I turn out to be wrong.

Tags: china, dollar, yuan