Good day… And happy Thursday to everyone! Hope everyone made it through the ‘hump day’ with no worries. We started the morning here with rainshowers, but it ended up being a beautiful afternoon and evening. Currency markets were similar to the weather here, as most currencies started Wednesday in the loss column vs. the US$, but rallied as the day progressed. The dollar had strengthened over the past couple of days due to ’safe haven’ demand; but a surprisingly strong durable goods number (ex autos) combined with an ‘all clear’ signal from President Barack Obama had investors moving back into riskier assets. The commodity based currencies also got a boost as China signaled it would maintain an accommodative policy, easing speculation that the Bank of China would try to rein in bank lending. Lots to cover today, so lets get right to it.

Durable goods orders for June were released yesterday morning, and the overall number actually showed a pretty dramatic drop of 2.5% compared to the month prior. But the overall number includes automobiles, and with many of the big 3 automobile plants shut down for part of June, the markets were focused on the number ex transportation. Orders for durable goods, excluding automobiles and aircraft unexpectedly rose 1.1% in June following an adjusted .8% rise in May. The ex auto number was strong enough for some to reason that companies would have to start boosting output in the coming months. While the 1.1% jump in orders is nice to see, the overall drop was pretty dramatic, and the auto sector makes up a large percentage of overall output for the US.

Just after noon the Fed’s Beige book survey of economic conditions was released. The report said the pace of the US economic recession slowed or stabilized in most areas of the country and pointed to a protracted period of weakness as the economy transitions to recovery. The Fed said labor markets across the country were ‘extremely soft’ and wages and compensation were steady or falling in most areas. Not the rosiest of pictures for the economy, but not overly negative either.

The nation’s #1 cheerleader was out in full force yesterday afternoon, as President Barack Obama defended his administrations policies during a speech in North Carolina. President Obama’s poll ratings have slipped as unemployment continues to be a drag on consumer confidence. So he took a break from pushing his health care reform to defend his economic policies, saying he had helped avert an economic disaster as the US economy was in a “freefall”. He stated that the US “may be seeing the beginning of the end of the recession”, and that his stimulus plans had “helped stop a recession from becoming a depression”.

The British pound was one of the biggest gainers vs. the US$ yesterday after a report showed UK house prices rose in July for a third consecutive month. Another report showed the average cost of a home in the UK rose 1.3%. The pound will probably end up in positive territory vs. the US$ this month for a fifth consecutive monthly gain. The rally is a relief for pound sterling investors as the currency dropped more than 26% vs. the US$ last year. A Standard Chartered PLC analyst predicted further strengthening for the pound sterling in a report released yesterday. The analyst stated that the US$ is in a multi-year downtrend, and the pound will likely push up to $1.75 by year end.

But there is still the question of deficits in the UK. The BOE was one of the first central banks to institute ‘quantitative easing’ policies, and many are looking for them to be the first to stop the program. With the UK housing sector stabilizing, officials will likely pause the asset-purchase program which was set up to lower borrowing costs. But the UK is still going to have to deal with a record deficit, similar to the problems facing the US. The UK Treasury said it will sell a record 220 billion pounds of debt in the year ending March 2010 to offset falling tax revenues and increased government spending. Again, good news for the pound in the short term, but the storm clouds are still gathering.

Positive news out of Europe this morning has helped keep the Euro moving up in early trading. European confidence in the economic outlook increased more than economists forecast in July, as an index of executive and consumer sentiment climbed to the highest reading since November. But the economic recovery in Europe is still very fragile, as evidenced by another report which showed retail sales fell for a 14th month in July. Unemployment in the Euro region continues to be a concern, with the unemployment rate expected to reach 12 percent in 2010.

Both Morgan Stanley and BOA/Merrill Lynch told investors to sell the dollar vs. the Euro in research reports released yesterday. Morgan Stanley said investors should sell the dollar against the Euro, Norwegian krone, and Canadian dollar as the global outlook improves. “As the outlook continues to improve, we believe that currencies with strongest ties to the global growth cycle will outperform at the expense of the US dollar,” a currency strategist at Morgan Stanley wrote in a note to clients. BOA raised its forecasts for the euro predicting it would rise to $1.50 by year end. The report highlighted the diversification of reserves as a key driver of the Euro. The euro is predicted to continue to gain vs. the US$ as central banks diversify reserves into Euros from US$ as the US government is debasing its currency through its program of printing money to buy assets such as Treasuries.

One currency which hasn’t been performing well vs. the US$ recently is the Swiss Franc which is one of the few currencies to drop vs. the US$ over the past month. This is exactly what the Swiss National Bank has been trying to accomplish, as they have spent as much as $32 billion since March to keep the Swiss franc from appreciating. The SNB sold the franc and cut interest rates on March 12 to stem the currency’s gains. The Swiss continues to be a popular choice for investors, but problems with Swiss banking and the government intervention will likely keep the Swiss franc from rallying dramatically. However, as Chuck has pointed out several times in the past, no central bank (not even the Swiss) has enough money to fight the currency markets. The markets will eventually win out, and the longer term prospect for the Swiss franc is still positive. It is just that we feel there are other currencies which have better prospects in the near term.

Norway is one such currency. Norway’s central bank will likely be one of the first among the world’s richest economies to begin raising rates as the global crisis shows signs of abating. Inflation in Norway is likely to increase past the Norges Bank’s target, increasing pressure for Norway’s central bank to hike rates. The markets are beginning to price in an increase in rates at the beginning of next year as the Norwegian economy starts to heat up. Oil revenues, and a conservative fiscal policy helped to soften the impact of the global economic crisis, and Norway is now set to be one of first European economies to recover. Retail sales in Norway were up 2.6% in May since March and underlying inflation accelerated to an annual 3.3% in June, the fastest pace in eight months. The housing market in Norway is also pushing the recovery, as property values rose 5.3% in the three months ended June, the second quarterly gain.

Norway’s neighbor, Sweden, is another currency which has been performing quite well vs. the US$. The Swedish krona is second only to the Australian dollar in return vs. the US$ over the past week, and is among the top three currencies this month. Sweden’s krona is benefitting from a jump in exports as Sweden’s trade surplus almost doubled in June as exports to Europe and the US increased. The Swedish krona has also benefitted from recent IMF support of the Baltic region, where Swedish banks are heavily exposed.

The Australian dollar continued to climb overnight, and is the best performing currency vs. the US$ in the past week. Investors are betting that the Reserve Bank of Australia will be one of the first central banks to start raising rates. With the US Fed keeping interest rates near zero, investors are likely to search for yield, and interest rate differentials will push the AUD$ higher. We saw a similar pattern back in 2003, when the AUD$ rallied over 30% vs. the US$ on interest rate differentials. Australia’s economy unexpectedly grew in the first quarter, and recent rhetoric from RBA Governor Stevens suggests the start of a tightening cycle sooner rather than later.

Brazil’s real continues to be a strong performer and is expected to strengthen to 1.8 per dollar by year end according to JPMorgan Chase & Co. The real will strengthen due to faster economic growth and higher demand for commodities according to JPMorgan. The currency will benefit from a stronger trade surplus and increased foreign investment. In news released yesterday, China Development Bank Corp, the state run bank for public works projects, stated they plan on opening an office in Rio de Janeiro next year, one of its first branches outside mainland China. Close ties with China will continue to benefit Brazilian exports of commodities. The Brazilian economy will expand at an annualized pace of 4.2% in the second, third, and fourth quarters this year according to research by JPMorgan.

A great way to invest in 4 different currencies which should appreciate as the global recovery takes hold is our Global Power Shift Index CD. This newest CD offering combines the currencies of Australia, Canada, Brazil, and Norway; all countries which are perfectly positioned to take advantage of commodity price increases. The CD is available with 3 or 6 month maturities and a minimum deposit of $20,000. Call the desk for details!

Currencies today 7/30/09: A$ .8248, kiwi .6528, C$ .9213, euro 1.4061, sterling 1.6485, Swiss .9188, rand 7.7974, krone 6.2331, SEK 7.4434, forint 190.56, zloty 2.9674, koruna 18.1791, yen 95.09, sing 1.4437, HKD 7.7500, INR 48.3575, China 6.8323, pesos 13.2083, BRL 1.8935, dollar index 79.273, Oil $64.01, 10-year 3.70%, Silver $13.425, and Gold… $932.88

Chris Gaffney

Source: Dollar Rally Peters Out

This kiloton of Chinese gold makes the Middle Kingdom the world’s sixth largest holder of the yellow metal. The U.S. — courtesy of President Roosevelt’s gold confiscation in 1933 – tops this list of the world’s largest gold holders, followed by Germany, the IMF, France and Italy.

How did the Chinese accumulate so much gold? China purchased it over the past six years through its State Administration of Foreign Exchange (SAFE). SAFE is quite distinct from the People’s Bank of China (PBOC). The SAFE purchases meant that the gold did not appear as part of China’s officially reported monetary reserve figures.

The Chinese gold purchases, evidently, were part of a slow and steady buying program between 2003 and the present. It makes you wonder what the Chinese were thinking back in 2003. I happen to know, courtesy of an acquaintance at the Naval War College, that the Chinese were quietly forecasting that the U.S. would destroy its dollar by going to war in Iraq.

At any rate, SAFE bought all of the gold from domestic Chinese suppliers, so the overall impact was minimal on the international gold markets. Now the Chinese gold holdings have been transferred from the SAFE books to the PBOC. Hence, the official announcement. And here’s what REALLY matters. China is monetizing its gold!

This SAFE-to-PBOC transfer marks a profound decision by Chinese government leaders. Obviously, the Chinese government has bought gold over the past six years. But the Chinese have been engaged in an internal debate over whether to add the gold holdings to the official Chinese monetary reserves. That is, if the gold was not “monetary,” then it was just another non-monetary investment commodity like iron ore or copper or petroleum.

But now, with the announcement by the Chinese Central Bank, it appears that the debate is resolved. The gold has been added to Chinese monetary reserves. This action by China is part and parcel of an under-the-radar global effort to rehabilitate gold as a monetary reserve asset.

Gold has not been a factor in global trade and currency exchange since the late 1960s. But there’s a powerful movement afoot in the world to reestablish gold as part of an international monetary system. It’s because the U.S. dollar has been so badly mismanaged over the decades. No, you won’t read about it in your local newspaper, or even in the standard, mainstream business media. But that movement is out there. It’s happening.

At the same time, for many decades, the U.S. establishment has pooh-poohed the “gold effort.” U.S. policymakers, politicians, bankers and academics were collectively smug in their empirical certainty that, as Lord Keynes once noted, “Gold is a barbarous relic.” Apparently, the Chinese don’t agree. Not anymore. Indeed, the Chinese may well be thinking that the U.S. dollar is the real “barbarous relic.”

So now the Chinese are primed to begin using gold as a monetary asset. What’s the practical impact? I expect to see central banks worldwide start to add gold to their monetary reserves. The floodgates are opening. The PBOC and other central banks from here to Timbuktu are going to become net purchasers of gold in the years ahead. And people who own physical gold, as well as shares in well-managed mining companies, will benefit greatly.

One important commentator on gold prices is Peter Munk, founder of Barrick Gold, the world’s largest gold-producing firm. Recently from Switzerland, Munk remarked, “I have to think [gold prices] are going to be significantly higher than last year, just like last year was higher than the year before.”

According to Munk, the recent injection by the Federal Reserve of new currency into the money supply is an “enormous, enormous inflationary factor” for the dollar. This will make gold and silver “more and more desirable.” In addition, “Gold has got a very strong and stable support right now as long as we have this enormous uncertainty out there. And I think this uncertainty will probably last for a while, because I don’t see any major catalyst that can turn this around.”

Finally, Munk said, “Every year in the last three years, as the world becomes less and less secure in terms of normal investments and people lose faith and confidence in bonds, stocks, secured debt instruments, people turn to gold. It automatically attracts people in direct proportion to their fear, and that is fear of losing their money.”

Founded by Munk in 1983, Barrick Gold is among the world’s largest gold miners. Barrick has pursued growth through judicious expansion and a continuing process of acquisitions. “Barrick has grown,” said Munk, “primarily through an aggressive acquisition program in the last 25 years. So of course, we’d be on the lookout all the time for strategic acquisitions or mergers…The major gold deposits throughout the world in the main have already been found, so it’s getting more and more difficult, and that’s why you see global gold production heading downward, despite higher prices and increased spending on production.”

The bottom line in all of this is that you should be sure to pad your portfolio with gold and silver, both the physical metals and shares in quality mining companies. America’s political leaders have promised to fight recession by debasing the dollar. That may be the one and only political promise you can ever really trust.

Source: Why is China Buying Gold?

Needless to say, not all risks are the same.

As an example, let’s take a look at China’s surge in lending – and the potential for that country to have a credit crisis of its own. This year, the Bank of China Ltd. is expected to issue as much as $1.32 trillion (9 trillion yuan) in stimulus loans. That’s in addition to the $670 billion (4.58 trillion yuan) that the Bank of China had already lent during this year’s first quarter, and is almost as much as the state-run commercial bank lent during all of 2008.

China, of course, is legendary for its lack of financial transparency, and has actually brought financial misappropriation to an art form.

“Most companies have two, maybe even three sets of books, so when investors evaluate them, they have to know where the cash really moves … now more than ever,” Johnson Chien, managing director of Global Consultants and Services (Shanghai) Ltd., said recently.

While the numbers vary, estimates suggest that some 20% to 30% of all loans extended have actually been diverted for re-deposit or for “stir-frying” purposes.

Re-depositing is the practice of obtaining loans at extremely low interest rates and depositing them in the issuing bank to earn a profit in higher-yielding bank accounts.

“Stir frying” is the Chinese slang term for putting the money into Chinese markets in an attempt to manipulate share prices and profit. But most of the money has come back and remains “performing” at least to date.

In a related wrinkle, a hugely disproportionate amount of money (at least, by Western standards) is loaned out on a long-term basis, only to be paid back a month later. While this creates havoc with asset matching, this helps the borrowing company look more financially active than they are and presumably appear sounder at the same time. Asset matching, in case you are not familiar with the concept, refers to the practice of having long-term loans extended against long-term assets, and short-term loans extended against short-term assets.

When long-term funds are lent against short-term assets, or vice versa, there is a “mismatch.” I can recall a case in Japan – during that nation’s “Go-Go” era – where a major corporation used 90-day revolving debt to finance its new $45 million regional headquarters building. [Never mind that this was in complete violation of General Agreements on Tariffs and Trade treaties, because the 90-day loans were passed from bank to bank ... that's another story for another time.]

This kind of short-term/long-term mismatch is actually surprisingly common in many Asian markets – including China – because it’s a strategy that can help a company obtain still more funding, especially during times of high growth. The rough equivalent in U.S. terms would be a person who borrows money even though he or she may not need it and then pays it back in an attempt to boost his or her personal credit rating.

The lending crisis in the United States was the result of two things:

• Derivatives contracts that were unmonitored.
• And improperly categorized risks unseen by both management and regulators alike.

Here in China, however, the real danger stems from lending driven by guanxi, or “connections.” [Although the West defines guanxi as "connections," that's actually something of an oversimplification; some sociologists have actually likened it to "social capital." But even that doesn't capture all of the nuances that make the Asian culture so fascinating to watch and study.]

Because the social concept of “face” is so important in Asian cultures, there has historically been a tendency to lend money on a preferential basis to favored clients based on nothing more than the connection between lender and borrower – regardless of actual credit worthiness.

China’s bankers are learning quickly, however. Beijing is keenly aware that many banks may not have been properly checking the creditworthiness of their borrowers, so the government has taken steps to implement stricter lending requirements even as it has increased the amounts of lendable cash available.

While many Western executives claim to have been surprised by the credit crisis, I find it interesting that many of China’s bankers seem to be anticipating a credit crunch of their own. Indeed, a recent survey by China Orient Asset Management Corp. of 333 banking officials – including 89 risk-management officers – found that more than half the respondents expected their bad loans to rise in 2009. Additionally, nearly 40% of the respondents expected sharp increases in non-performing loans within the first half of the year.

Yet, few bankers expect Beijing to turn off the lending spigots anytime soon. Many of my contacts here in China concur. While Beijing could certainly do so, it wouldn’t be in its interest to cut back on new loans, or to change the rules when it comes to stimulus-driven-lending programs – at least not for the time being. After all, there’s just too much riding on China’s ability to maintain a high rate of economic growth.

Beijing remains optimistic it can hit its growth targets, although “caution” is becoming the watchword around here. And as long as the growth imperative remains in effect, consumers and businesses here can have every expectation that the money will continue to flow from the banking faucet – even if an increasing percentage of that credit is destined to turn into “bad.”

But that’s okay: Confidence is what Beijing wants right now.

Source: Investment Risks in China Outweighed by Growth Prospects

So… here’s something interesting. The two biggest countries to have been left out of the “stimulus” spending due to the “Buy American” provision have come out in support of an IMF-controlled reserve currency in the last week.

Hmmnn…
“What kind of international reserve currency,” asked Zhou Xiaochaun, head of the People’s Bank of China “do we need to secure global financial stability and facilitate world economic growth?”

With those words, Zhou added Beijing’s voice to the chorus begun by the Kremlin last week . “Beijing to Pitch New Global Currency; Dump Dollar” wrote Matt Drudge, for better or worse a master headline craftsman. While China made no such announcement, the governor of its central bank did author this rather poignant thought:

“An international reserve currency should first be anchored to a stable benchmark and issued according to a clear set of rules, therefore to ensure orderly supply; second, its supply should be flexible enough to allow timely adjustment according to the changing demand; third, such adjustments should be disconnected from economic conditions and sovereign interests of any single country.”

Hmmmn… really.
“Along come the Chinese,” notes our Byron King with a bit of a nationalist’s admiration of China’s stance, “who have morphed out of Communism, except where it suits their leadership cadre to maintain power and further the supreme geostrategic goals of the state. Even THEY understand the value of a stable unit of currency. They understand the need to preserve wealth over time, over generations. Very Chinese, no?

“I understand the Chinese argument that maintaining a stable currency should be a matter of national honor. It’s a very appealing point. It reflects the Asian concept of maintaining face, versus losing face.

“Of course, the U.S. lack of concern over the stability of its currency IS an issue of national honor, of which the current crowd of leadership has no concept. The roots of the Blame-America-First gang go back to the prep school progressivism, schoolboy socialism, college-kid communism and master’s degree Marxism of the 1960s and 1970s.

“Decades later, cultural Marxism has infected the entire society.” (And at least a few readers believe there’s more where that came from, below.)
In a small act of defiance, the dollar index rose a skosh, to 84. That’s about 5 points below its recent high, and still 13 points above the inflation-addled low it reached in April 2008.
In the stock market, the buying fervor of this bear trap has reached historic proportions:

You’re looking at the best 10 days for the Dow since 1938.

After yesterday’s 6.8% shot, the index is up 18.8% in the last two weeks of trading. If history does in fact rhyme, the Dow might be sitting pretty for a while:

In fact, the Dow at 110 in 1938 ended up being a long-term level of resistance. The market traded flatly for the next four years, briefly dipped below during the worst of WWII, and then staged a sure and steady rally for the next 30 years.

So all we have to do is fight and win another global war, pay down our debts and ignite another phase of industrial production… and then we’ll be fervently buying too.
Oil rose to a four-month high of $54 a barrel yesterday. The oil trade is a phantom of its former self. Last’s year’s counterdollar scarcity trade has given way to short bursts on glimmers of hope for the global economy — the “reflation” trade, if you insist on a buzzword.

Gold sat idly on its hands during yesterday’s stock spree. The spot price stayed flat around $950 and is under some pressure as we write. An ounce now goes for $920.
“Immigrants can help fix the housing bubble,” wrote Daily Reckoning contributors Gary Shilling and Richard LeFrak in a WSJ editorial over the weekend. What a radical idea… revive housing by enticing other people to spend money, instead of just printing it ourselves

“The Obama administration should seriously consider granting resident status to foreigners who buy surplus houses in this country. This makes more sense than the president’s $275 billion housing bailout plan, which Americans greeted with a Bronx cheer…

“A better idea is to offer permanent residence status to the many foreigners who are clamoring to get into the U.S. — if they buy houses of minimal values (not shacks). They wouldn’t need to live in those houses, but in order to remove the unit from the total housing market, they couldn’t rent them. Their temporary resident status granted upon purchase would become permanent after, perhaps, five years, if they still owned the houses and maintained clean records. The mere announcement of this program might well stop the ongoing collapse in house prices, especially in cities such as Las Vegas, Miami, Phoenix and San Francisco, where prices are down 40% — but where many foreigners like to live.

“Each year, 85,000 H-1B visas are granted for foreigners with advanced skills and education, and last year, 163,000 petitions were filed in the first five days after applications were accepted. The Ewing Marion Kauffman Foundation estimates that as of Sept. 30, 2006, 500,040 residents of the U.S. and 59,915 individuals living abroad were waiting for employment-based visas. Many would buy homes if their immigration conditions were settled.”

Somehow, we suspect this suggestion has and will run headlong into the nation’s renewed flirtation with xenophobia.
Another sign of the times: A public fund in Abu Dhabi just picked up a 9% share of Daimler AG, owners of Mercedes-Benz. Heh, its fitting, giving that there’s practically a Benz for every man, woman and child in the UAE. Aabar Investments spent $2.6 billion to pick up the largest single stake in Daimler. Ironically, the previous largest shareholders was Kuwait’s SWF, with a 7% chunk.

The WSJ asked the fund’s chairman, Khadem Al Qubaisi, if he was considering a similar purchase in a U.S. automaker: “I’m not interested,” he said.
This ought to assuage the populist rancor against executive bonuses:

One year ago, pretty good.

Yesterday, much better.

AIG, the lightning rod for the public’s anxiety over the economy, dropped its logo and nameplate from its New York headquarters yesterday. The corporation announced it would undergo a massive campaign of global rebranding. Its property casualty branch, one of the company’s solvent branches, has already changed its name to… drumroll, please: AIU Holdings.

That ought to fool ’em.
“Hey guys, give Judd Gregg a break,” writes a reader in response to yesterday’s issue. “Gentle Ben and Paulson came to Congress with their ‘the sky is falling’ scenario and said this is all we need to fix it. They operated on that premise and approved the money. What Gregg is referring to now is what ADDITIONAL funds have been approved by the bozos in power. This administration is brilliant at steamrolling through the legislation it wants at warp speed before the general population even begins to realize what has happened. Its goal is obvious — all must rely on the state. Seems a guy named Marx talked about that some time ago.”

The 5: Of course, the last administration encouraged debate and sought many different perspectives before steamrolling its own legislation through. Why you continue to see a difference between these parties is beyond us. These will all be moot points if the Russian, Chinese and U.N. proposals for an international reserve currency gain traction.
“I know you are trolling with your story of debris in the alley,” another reader writes. “There’s something beyond incongruous in ridiculing government while at the same time relying on government assistance to clean up the mess some evildoer did to public property. Don’t you see any contradiction here?

“Government can’t do anything right, but when there’s an act that impacts the common good, you call government tout de suite. And then insult the poor sod that comes to check out the complaint. Kudos to you for loading the taxpayer-supplied truck. It seems like you did receive some benefit from those taxes after all, even if your own labor was needed as well.”

The 5: Incongruous? Or entertaining. We thought the episode was illustrative of how government actually works… rather than the theory of it. We did anything but insult the guy, by the way. It was more like we were dirt on the bottom of his shoe that he couldn’t be bothered with.
“The irony of all this,” adds another, “is that you are forever telling people NOT to rely on the government, yet that’s exactly what you’re doing and are pissed that they aren’t bailing you out with your poor little garbage pile left by someone else. Get a pickup and shovel and do it yourself just, as you’re always preaching!”

The 5: You really think we were pissed? There are a group of Mexican laborers being housed down the street by our contractor. Before the city “supervisor” showed up on Sunday, we were considering asking them to help clean up the mess.

“BTW, I love you guys,” the reader continues, “I’m saying this with a big ol’ 5 Min. Forecast smirk on my face. Keep up the good work, guys, and God bless.”

The 5: Cheers.
“In the past 10 years,” writes the last reader, ”there has been a significant increase in the productivity of the American worker… yet wages remain stagnant. Meanwhile, there has been an unprecedented rise in executive compensation. Now under the auspices of those selfsame overcompensated executives, the whole thing comes crashing down, hurting the working people in terms of jobs and savings the most.

“I know you probably have little or no contact with the working men and women of this country, but it doesn’t take a rocket scientist to understand that they are really, really pissed off, as they have a right to be, and that they are finally demanding their elected officials do something about it. If you live in proximity to the bloated plutocrats, I suggest that bags of construction waste in your driveway may soon be the least of your problems.

“The working people of America want their money back.”

The 5: Funny you should point that out. We were in Red Emma’s coffeehouse on Friday. An elderly gentleman who could have easily played the part of the academic Byron describes above asked when Red Emma’s radical book fair was being held. Apparently, he was visiting from New York City and wanted to come back to attend and lend support.

“It’s in mid-September,” the barista replied.

“Oh, well, we’ll be in revolution by then,” the aged man shrugged to his bereted friend and walked out.

We’re not convinced American workers have gotten more productive. That’s a claim Greenspan has been making for years, too. We are convinced they’re feeling a lot more entitled, though.

P.S. The city sent a different supervisor out yesterday. We found him poking through some bushes in our backyard. He said he was investigating a sewage leak reported by someone at our address. Heh.

Source:China’s Threat, Stocks Soar, A Housing Solution and More!

The creation of a new reserve currency to be issued by international financial institutions was one of the measures Russia proposed to the G20 on March 16, ahead of the group’s summit next week.

Russian authorities previously met with financial ministers and central bankers from China, Brazil and India on March 13. The group issued its first-ever joint communiqué ahead of the G20 finance ministers last Saturday, March 14.  The joint statement did not mention a new currency like Russia proposed, but an unidentified source told Reuters that the issue was discussed.

Chinese policymakers confirmed as much today (Monday) when Zhou Xiaochuan, Governor of the People’s Bank of China, released an essay entitled “Reform of the International Monetary System” on the BOC’s Web site.

Without explicitly mentioning to the U.S. dollar, Zhou asked what kind of international reserve currency does the world needs to secure global financial stability and facilitate economic growth.

According to Zhou, the dollar’s unique status as the world’s primary currency reserve has resulted in increasingly frequent financial crises ever since the collapse of the Bretton Woods system in 1971.

“The price is becoming increasingly higher, not only for the users, but also for the issuers of the reserve currencies,” Zhou said. “Although crisis may not necessarily be an intended result of the issuing authorities, it is an inevitable outcome of the institutional flaws.”

Zhou called for the “re-establishment of a new and widely accepted reserve currency with a stable valuation” to replace the U.S. dollar – a credit-based national currency. The central bank governor noted that the International Monetary Fund’s Special Drawing Right (SDR) should be given special consideration.

Created by the IMF in 1969 to support the Bretton Woods fixed exchange rate system, the SDR was redefined in 1973 as a basket of currencies. Today the SDR consists of the euro, Japanese yen, pound sterling, and U.S. dollar.

“The SDR has the features and potential to act as a super-sovereign reserve currency,” said Zhou. “Moreover, an increase in SDR allocation would help the Fund address its resources problem and the difficulties in the voice and representation reform. Therefore, efforts should be made to push forward a SDR allocation.”

Zhou proposed the following actions to move the SDR in a direction that could better accommodate demand for a more stable reserve currency:

• Set up a settlement system between the SDR and other currencies. Therefore, the SDR, which is now only used between governments and international institutions, could become a widely accepted means of payment in international trade and financial transactions.

• Actively promote the use of the SDR in international trade, commodities pricing, investment and corporate bookkeeping. This will help enhance the role of the SDR, and will effectively reduce the fluctuation of prices of assets denominated in national currencies and related risks.

• Create financial assets denominated in the SDR to increase its appeal. The introduction of SDR-denominated securities, which is being studied by the IMF, will be a good start.

• Further improve the valuation and allocation of the SDR. The basket of currencies forming the basis for SDR valuation should be expanded to include currencies of all major economies, and the GDP may also be included as a weight. The allocation of the SDR can be shifted from a purely calculation-based system to one backed by real assets, such as a reserve pool, to further boost market confidence in its value.

Many analysts view the campaign by emerging markets for a new reserve currency as an attempt by to gain more control in the IMF, which has traditionally been dominated by richer countries. But the new currency campaign is also further evidence that Beijing is becoming less and less comfortable with its large holdings of U.S. assets, namely Treasuries.

Concerns about the dollar losing value have escalated in recent weeks as the U.S. Federal Reserve pursues a policy of quantitative easing in an effort of taming the financial crisis.

“We have lent a huge amount of money to the United States,” Chinese Premier Wen Jiabao said earlier this month. “Of course, we are concerned about the safety of our assets. To be honest, I am definitely a little bit worried. I request the U.S. to maintain its good credit, to honor its promises and to guarantee the safety of China’s assets.”

China is the world leader with $2 trillion in foreign currency holdings. About half of that is held in U.S. Treasuries and notes issued by other government-affiliated agencies, such as Fannie Mae (FNM) and Freddie Mac (FRE).

Half of Russia’s currency reserves – the world’s third-largest stockpile – consist of U.S. dollars, as well.

Source: Emerging Markets Seek to Dump the Dollar as World’s Main Reserve Currency

• With inflation easing, China has lifted temporary inflation controls on key commodities such as liquefied petroleum gas, power-station coal, grains and cooking oil. Ten months ago, China was facing inflation at a 12-year high, Bloomberg reported. Now it’s slowed to the weakest pace in nearly two years.

• India’s rupee slid 19.2% in 2008, its worst annual performance since 1991, and the second-worst among the 10 most-active Asian currencies excluding Japan. “It has been ecstasy to agony for the rupee this year,” K.V. Mallik, treasurer at state-owned UCO Bank, told Bloomberg. “The outlook isn’t any better as it appears far from certain as to when the financial markets will stabilize. I expect the rupee to be under pressure in the next few months.”

• Rates on 30-year mortgages fell to 5.1% this week, down from the previous record of 5.14% set last week, Freddie Mac reported. Mortgage rates have plunged by about 1.3 percentage points since late October.

• Online holiday sales fell 3% from last year, marking the first decline in online spending since comScore Inc started tracking online sales in 2001, Reuters reported. Online spending totaled $25.5 billion between Nov. 1 and Dec. 23.

• UBS AG (UBS) the Swiss banking giant struggling to rebuild its balance sheet after taking $49 billion in losses form writedowns, has sold its stake in Bank of China, Reuters reported. UBS said it offloaded about 3.4 billion Bank of China H-shares through a discounted placing for at a profit of “a few hundred million dollars.” The bank had paid $500 million for a 1.6% stake in Bank of China in 2005.

Source: Global Investing Roundups Friday, January 2nd, 2009

China also lowered its deposit rate by the same amount and reduced the proportion of deposits lenders have to hold as reserves by 0.5 percentage points to 15.5%, Bloomberg reported. All rate cuts will take effect Tuesday.

China’s slow burn of its interest rates is a calculated response to falling numbers across its board: gross domestic product could fall as low as 5% next year, way down from the 11.7% growth in 2007; exports fell for the first time in seven years last month; imports and manufacturing numbers also fell.

Unemployment figures are getting ugly, too. So far, the global financial crisis has taken 4 million city jobs from migrant workers and pushed urban unemployment up to 9.4%, the Chinese Academy of Social Sciences estimated last week. The result is rising gang violence and increased police measures and surveillances in cities hardest hit, Reuters reported.

China is also facing a dangerous decline in inflation, which limped at 2.4% annual pace in November, its fourth consecutive month-to-month drop and a sharp drop from the 4.0% posted in October, its National Statistics Bureau reported two weeks ago.

“The surprise is how small the move is,” Mark Williams, an economist with Capital Economics in London, told Bloomberg. “There’s been a sudden very rapid deterioration in all China’s economic data over the last 8 to 12 weeks.”

Last month, China cut interest rates by 1.08 percentage points, its biggest reduction in 11 years.

Also last month, China announced a massive $586 billion economic stimulus plan that will pump money into low-income housing, water and energy projects, airports, disaster relief and new railroads for the next two years.

“China understands that it’s gaining importance in the world economy and that it’s going to participate in that process,” said Keith Fitz-Gerald, Money Morning’s investment director and a former professional trade advisor who’s spent more than two decades focusing on investment opportunities in China, Japan and the rest of the Asia region.

“Many experts will see this as just a ‘bailout’ that’s directed at Chinese infrastructure projects, Chinese technology companies and at holding the global financial crisis at bay,” Fitz-Gerald said. “But the real message here is that Beijing is going to pull out all the stops to ensure that its economy does not falter. And that’s because China realizes that it’s become the super glue that’s holding the rest of the planet together.”

Source:Bank of China Tries to Spur Economy with Fifth Rate Cut in Three Months

No timetable or total dollar value for the deal was given. The magazine report was picked up by the Reuters wire service, and by other U.S. media outlets, such as Forbes.com.

To smooth the way for the share purchase by Bank of America, Central Huijin Investment Co. Ltd. – the investment arm of the People’s Bank of China that’s run by the Ministry of Finance – has asked China Construction Bank to audit its third quarter results using international accounting standards.

Caijing, an influential Chinese-language business-news publication, said it did not know how many shares that Bank of America intended to buy. Construction Bank is already 11% owned by BofA. As part of its strategic-investing agreement with Construction Bank, BofA has had the option to increase its stake at an agreed-upon rate of 1.2 times the China commercial bank’s book value, Caijing reported.

Construction Bank’s net asset per share jumped 13.26% from a year earlier to 30 cents (2.05 yuan) during the first nine months, according to the lender’s unaudited third quarter results.
China Construction Bank (CCB) is a state-owned, full-service commercial bank that primarily provides corporate and personal banking services. Additionally, the group offers wealth-management, credit-card and stock-brokerage services. It focuses on two key areas:

• Individual banking services, including deposit services, personal loan, long-credit-card services, long card services, housing system reform finance, foreign-exchange services, securities agent and gold business related services.
• And corporate-banking services,  which include corporate e-banking, deposits, credit business, services for government agencies, services for non-banking financial institutions, international settlement, international financing, fund settlement and fund custody services.

With its headquarters in Beijing, CCB employs about 298,000 people. It recorded revenue of about $19.07 billion in the fiscal year that ended in Dec. 2006, a jump of 17.8% from 2005. The net profit was $5.83 billion in fiscal 2006, a decrease of 1.6% from 2005.

Central Huijin Investment Co., established in 2003, is the investment company owned by the Chinese government. Central Huijin was created to act as the centralizing structure through which the government of China can operate as a majority shareholder of the country’s so-called “Big Four” banks, all of which, obviously, are state owned.

However, Central Huijin does not own shares in the smaller joint-stock commercial banks, as those which are largely owned by China’s local governments. The “Big Four” in China are:

• China Construction Bank Corp.
• Industrial and Commercial Bank of China.
• Bank of China.
• Agricultural Bank of China (PINK: ABGEF, ABGEY).

Central Huijin Investment Co. was acquired from China’s State Administration of Foreign Exchange by the state-operated China Investment Corp. (CIC) for roughly $67 billion. A so-called “sovereign wealth fund” (SWF), CIC is responsible for managing part of China’s record $2 trillion in foreign-exchange reserves. With $200 billion in assets under management, CIC is actually the fourth-largest sovereign fund in the world.

China Investment Corp. officially began operations in Sept. 2007. However, it actually bought a $3 billion stake in U.S. private equity player The Blackstone Group LP. (BX) in June 2007. And it bought a 9.9% stake in Morgan Stanley (MS), worth about $5.5 billion at the time, in December 2007.

Caijing, the independent, Beijing-based magazine that broke the BofA story, is a financial publication in that’s devoted to coverage of companies in China. The title actually means “Finance and Economics Magazine.” Caijing says its mission is to have an “independent standpoint, exclusive coverage and unique perspective.”

By most accounts, it’s been succeeding.

The Wall Street Journal called Caijing “The Leading Finance Publication in China,” while Wikipedia said the magazine’s “unique perspective and sharp writing have led to it receive enthusiastic responses from financial industry experts and casual individual investors alike.”

The magazine’s knack for exposing the darkside of the financial world has helped it to establish itself as an independent, “must-read” publication. Other publications have tried to copy its approach and style – and have fallen short. Caijing is China’s only magazine that has continued to strengthen its reputation solely through investigative reporting.

Source: Bank of America Seeks to Boost Stake in China Construction Bank, Influential China Biz Magazine Reports

Bank of America Seeks to Boost Stake in China Construction Bank, Influential China Biz Magazine Reports

“The pace of economic activity appears to have slowed markedly, owing importantly to a decline in consumer expenditures,” the Fed said in a statement. “Business equipment spending and industrial production have weakened in recent months, and slowing economic activity in many foreign economies is damping the prospects for U.S. exports.

“Moreover,” the statement added, “the intensification of financial market turmoil is likely to exert additional restraint on spending, partly by further reducing the ability of households and businesses to obtain credit.”

The Fed also lowered its discount rate – the rate at which it lends directly to banks and Wall Street firms – by a half-percentage point to 1.25%.

A wave of failures among banks and financial institutions have stymied lending and roiled global credit markets. The world economy faces a significant uphill battle as a result.

The U.S. economy expanded by 2.8% in the second quarter, but that expansion was largely the product of government stimulus checks and a weak dollar. The federal government returned roughly $168 billion back to American taxpayers in the form of rebate checks earlier this year. The tax rebates, which were mailed through May, kept U.S. consumers afloat, while a weak dollar accelerated a torrent of exports out of the country.

Since then, consumer spending has been undermined by rising unemployment and the dollar has strengthened substantially.  The advance estimate for third quarter gross domestic product (GDP) is to be released today (Thursday), and most analysts anticipate the U.S. economy shrunk during the three months ended Sept. 30.

“The growing reality is that this is not just a slowdown, but a true recession,” Joel Naroff, president and chief economist of Naroff Economic Advisors said in an interview with Money Morning.

“U.S. GDP contracted significantly in the third quarter,” said Naroff, who believes the economy may have contracted by 2.5% to 3.0% in the quarter. “Such a sharp slowdown is not expected.”

Citigroup Inc. (C) analysts Geoffrey Dennis and Jason Press said last week that they now expect an entire year of contraction before the economy gets back on track in the second half of 2009.

“We are now expecting one of the sharpest recessions in the post-war period,” Dennis and Press wrote in a report to clients on Oct. 21.

The Fed statement said the rate cut “should help over time to improve credit conditions and promote a return to moderate economic growth,” but noted “downside risks to growth remain.”

This is the ninth time that the central bank has lowered rates since September 2007. The Fed has also loaned hundreds of billions of dollars to banks through a new lending program and earlier this week began loaning money directly to major businesses by purchasing commercial paper.

The Fed yesterday lowered the interest rates it will charge to buy unsecured commercial paper to 1.84%, down from 1.89% on Tuesday. It lowered the interest rate on asset-backed commercial paper to 3.84% yesterday, down from 3.89% the day prior.

The central bank created its program to buy 90-day commercial paper directly from issuers on Oct. 7, meaning it’s now three weeks old.

The Fed’s new loan programs have expanded assets on its balance sheet by 104% during the past year to $1.804 trillion, or 12.6% of GDP, Bloomberg reported.
Rate Reductions Around the World

While the Federal Reserve struggles to keep the U.S. economy from sinking into a second Great Depression, central banks in Europe and Asia are also on the defensive and could soon join the Fed in slashing rates – if they haven’t already.

The British Office for National Statistics last week said that, after a flat second quarter, the U.K. economy contracted 0.5% in the three months ended Sept. 30. It’s likely that Germany, France and Italy have already entered into a recession, as their second-quarter GDP fell 0.5%, 0.3% and 0.3%, respectively.

The International Monetary Fund (IMF) said last week that the economy of the 15-country Eurozone would grind to a virtual standstill in 2009.

The European Central Bank (ECB), which raised rates as recently as July, backtracked and cut its benchmark rate by half a point on Oct. 8, dropping it down to 3.75%. ECB President Jean-Claude Trichet said Monday that the central bank’s Governing Council could take additional steps at its next meeting, currently scheduled for Nov. 6.

“I consider it possible that the Governing Council would decrease interest rates once again at its next meeting,” ECB President Jean-Claude Trichet said yesterday. “Taking into account the recent substantial decline in commodity prices together with a substantial weakening in demand which has emerged lately, upside risks to price stability have diminished.”

Nick Parsons, head of markets strategy at nabCapital (OTC: NABZY) in London, told The Guardian that the Bank of England (BOE) could also follow the Fed’s move with a one-point cut of its own. That would leave the BOE’s rate at 4.5%

China, on the other hand, wasted no time in following the lead of the U.S. Fed. The People’s Bank of China cut its interest rates yesterday, reducing its key one-year lending rate from 6.93% down to 6.66%.  The rate cut was the central bank’s third reduction in two months.

China’s economy registered a solid GDP expansion of 9% in the third quarter – a noticeable step down from the 11.9% pace set in 2007.  Beijing is clearly worried about the effects a global recession would have on its economy and wants to ensure growth does not slow any further.

Of course, lowering rates will also help keep the Chinese currency, the yuan, from appreciating against the dollar and the euro as central banks in the West pull out all the stops in dealing with the credit crisis.

“This cut was driven by the slowdown in the third quarter and the likelihood that the U.S. and other central banks will cut rates,” Xing Ziqiang, an economist at China International Capital Corp. in Beijing, told Bloomberg.

GDP growth in China has slowed for the past five quarters but so long as the nation keeps inflation in check it should be able to maintain a “reasonable” economic expansion of at least 8% next year, said Liu Erh-fei, managing director and chairman for China at Merrill Lynch & Co. Inc. (MER).

Whether Chinese banks were “wise, lucky, or better regulated,” they avoided exposure to the risky subprime mortgages and derivative products that caused the current financial firestorm,” said Liu. “There is no systemic risk in China’s banks that could spill over into a full blown financial crisis.”

China has more than enough economic weapons at its disposal to ensure strong growth going forward, including a world-leading $1.9 trillion in foreign currency reserves. China also has a budget surplus of 2% of GDP, according to Stephen Green, of Standard Chartered PLC. And public sector debt is just 16% of GDP.

Earlier this year, Beijing shifted the focus of its policy to growth rather than inflation – a choice analysts say is now paying dividends.

Inflation in China, and worldwide, is beginning to ease alongside commodities prices. Inflation in China receded to 4.9% in the year to August, from 8.7% in February. And Goldman Sachs Group Inc. (GS) forecasts that it will fall as low as 1.5% in 2009.

Source: Federal Reserve, Bank of China Cut Interest Rates as Financial Crisis Deepens

Too Late to Buy Gold?

It’s hard to be bullish on gold when there’s so much bad news in the world.

After all, gold offers a refuge against bad times ahead. Like all good insurance, it’s best bought before trouble arrives — not during or after.

And just how much worse can the news get from here?

1. The Dow’s on track to close out its worst June since the Great Depression, down almost 10 percent for the month.
2. GM’s stock is trading at a 54-year low, taking it right back to when CEO Charles Wilson declared “what was good for the country was good for General Motors (NYSE: GM) and vice versa.”
3. U.S. Dollars — the bedrock of world forex reserves — now buy one-third less against the rest of the world’s money compared with 2002.
4. The price of crude oil has risen more than five times over since U.S. and U.K. troops liberated the oil fields of Iraq in 2003.
5. Libya is threatening to cut its oil production in protest at U.S. anti-terrorism laws; Tehran just pulled $75bn worth of investments from Europe to avoid sanctions against Iran’s nuclear program.

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6. Global inflation has risen from three percent last June to more than 5.2 percent per year today; analysts at Barclays Capital (LON: BARC) believe U.S. inflation will hit 5.5 percent by August.
7. Real estate prices have turned sharply lower in the U.S. (down 15 percent year-on-year), Ireland (down 13 percent) and the U.K. (down 3.6 percent) as well as in Spain, Australia, South Africa and the emerging economies of east-central Europe. Price in Riga, Latvia dumped 38 percent in the year to May.
8. Western consumer confidence has sunk to multi-year lows; emerging-market consumers face the worst rates of inflation in more than two decades, rising 25 percent year-on-year in Vietnam and more than 13 percent in India; surging fuel and food prices have sparked protests and riots in Asia and now unionized strikes across Europe.
9. Investment and lending banks are being forced to take back “securitized” debt onto their balance sheets, destroying their capital adequacy ratios and halting new lending as pension & insurance funds try to flee risk. In the U.K. alone, new lending fell 95 percent in May after allowing for such “de-securitization.”

Watch out below! It’s every man for himself — women and children included! Or so the financial pundits now claim.

Makes you wonder where they’ve been during the bull market in gold starting in 2001. But with inflation surging and new credit shrinking, “we’re in a nasty environment,” said Tim Bond, head equity strategist at Barclays bank in London, this week.

Above all, “there is an inflation shock underway,” he said in Barclays’ latest Global Outlook. “This is going to be very negative for financial assets. [So] we are going into tortoise mood and are retreating into our shell.

“Investors will do well if they can preserve their wealth.” And investors who choose to buy gold are usually looking to achieve just that.

Indestructible, un-inflatable, and instantly priced in the world’s only true globalized market, gold bullion stands apart from all of those boom-time investments. Stocks, bonds, securitized debt, real estate…you can keep ‘em when the end of the world strikes.

These happy assets promise to pay you income. They also rise in value as the economy grows. Whereas gold, in sharp contrast, just sits there — neither smiling nor frowning, and never paying an income. Its value comes from, well, from its gold-ness alone.

And as the spike above $1,000 an ounce showed in mid-March — just as Bear Stearns collapsed — you need the end of the world to make buying gold worthwhile.

Right?

Well, perhaps not.