Isn’t that a scary thought?

Just a couple of days after Obama touched down in Washington, China makes a very American decree. It’s telling its banks it had better shore up their capital situations or face strong sanctions from the government.

They say imitation is the sincerest form of flattery. America did it first, now the communists are following.

In case you missed the news over the past year or so, China’s economy is flat-out soaring ahead. While no figure that disseminates from Beijing is ever trusted, most analysts believe the country’s GDP is growing by a rate of 7% or so. Some even say it has eclipsed the 10% mark.

Just like here in the States, very little of that growth is organic. China’s government is just as fond of manipulating natural market forces as our friends inside the beltway.

And, of course, anytime the government gets involved, some unnatural and unexpected economic reverberations will be felt.

Just as their American brethren did over the past decade, China’s banks are taking advantage of a fixed currency and an optimal lending environment by sending all the money they can dig from the couch cushions into the streets of China.

As the economy grows, the leverage on their books multiplies. Like we learned just 13 months ago, the situation will eventually collapse under its own weight.

That’s why Beijing has stepped in and told the banks that they had better save some money for their backup coffers… or else.

This is bad, bad news for a country surviving on borrowed money (no, not us… this time). China’s economy has been artificially inflated by the government’s cash infusions. But now the leadership is starting to pull back, realizing enough is enough.

Continuing with Friday’s lead, this proves natural market forces are still alive and well. Better yet, it proves China is in for some bumpy traveling.

If you would have asked me early last week about China’s economic health, I would have told you I like what I see. But then something odd happened.

Obama visited. And it’s been downhill ever since.

*** I love it when the markets make a mistake. After some positive economic data from the consumer front this morning, the equities market put in quite a showing today. In fact, even the ultra-bearish natural gas sector followed the crowd of bulls today.

It has created another fantastic buying opportunity. Natural gas prices climbed by less than one percent, but much of the sector is up by two or even three times that figure. Investors mistakenly got caught up in the rally.

Over the next few days they are going to pay for it.

Late last week, we locked in gains of 400% thanks to the natural gas market’s recent selloff. Thanks to today’s action, investors that make their move now have yet another shot at triple-digit gains.

To find out how, read my updated report.

This is going to be a fun week for the energy markets.

*** Let’s face it, the dollar is in trouble. But so is the sun at the center of our solar system. The big question is which will implode first. Now that the dollar has slowed its decline, the race may be tighter than you think.

The dollar will eventually be tossed aside, but will it happen in the next million years?

Here’s a bit of what I told Contrarian Profit readers this afternoon:

“Is the drop in the dollar worth watching? Just like the sun will eventually shine its last ray of light, the mighty dollar will someday buy its last barrel of oil or its final container of Chinese imports.

“We all know it is going to happen, so why bother discussing it. Right?

“There is no doubt the world’s currency of choice has more pressure stacked against it than ever before. But even with $12 trillion in debt and nearly a trillion of annual interest payments due within the next decade, the greenback is still stronger than it was just sixteen months ago.

“While so many of us are betting against the dollar and calling for its demise, plenty more investors are using it as a security net, buying American treasuries to protect themselves in case the bottom really falls out.

“With the sun someday going to fade, I could sit in my basement and wait for the big day to come, or I could live my life without worry.

“It’s the same thing with the dollar. We could bet against the greenback and profit as it drops, or we could forget about the minimal return potential and keep our eyes looking forward, where the real money is at.

“Here’s the scoop. The dollar is likely to fade, at most, six percent below today’s value against the Euro. That’s major erosion for such a massively distributed currency, but six percent over a few years doesn’t stack up to a hill of beans in the grand scheme of things.

“I can list a couple of dozen stocks that are up by twice that figure today alone.

“No doubt, you should pay attention to the dollar, as a six-percent decay in the value of the world’s most important currency will change all sorts of valuations. But don’t invest in the cause, invest in the effect.” Keep reading here.

The dollar is going to fall, but you and I may not live long enough to get rich off the move. The smart money is looking somewhere else. I say we follow.

Oil hovered around $61 a barrel as worry about the strength of global fuel demand was offset by news of strong economic growth in China.

The U.S. dollar initially fell to a six-week low against major currencies after JPMorgan’s reported record investment banking and trading results, providing further evidence of recovery in the financial system, but weak U.S. manufacturing data and concern about the impact of the possible failure of U.S. lender CIT re-introduced a bid for safer-assets.

CIT’s talks about aid with the U.S. Treasury ended Wednesday night, leaving the lender to its own devices, and endangering the future of some of the one million customers of the lender to small businesses. U.S. Treasury debt prices rallied after three days of falls partly on a resulting flight-to-safety bid

A fall in a reading of the Federal Reserve Bank of Philadelphia’s index of business conditions in the U.S. Mid-Atlantic region to minus 7.5 in July from minus 2.2 the month before also helped push up bond prices.

The benchmark 10-year U.S. Treasury note was up 20/32 in price to yield 3.53 percent. The 2-year U.S. Treasury note was up 4/32 in price to yield 0.96 percent.

“We are in a difficult position at the moment because we are caught on the cusp between is this a sense of sustainable recovery or a possibility of a relapse?” said Richard McGuire, fixed income strategist at RBC Capital Markets in London.

“There’s no real convincing evidence yet on either side,” he said.

European shares hit a one-month closing high on improved sentiment following JPMorgan’s results and data that showed the number of U.S. workers claiming new jobless benefits fell last week.

But U.S. stocks faltered after a run-up this week that pushed the benchmark Standard & Poor’s 500 Index up 6.1 percent, the best three-day rally following a surge after U.S. equities hit a decade low in March.

Shortly after 1 p.m. (1700 GMT), the Dow Jones industrial average was up 3.18 points, or 0.04 percent, at 8,619.39. The Standard & Poor’s 500 Index was down 1.30 points, or 0.14 percent, at 931.38. The Nasdaq Composite Index was up 3.41 points, or 0.18 percent, at 1,866.31.

The FTSEurofirst 300 index of top European shares ended 0.4 percent higher at 866.81 points, fourth straight advancing session.

The number of U.S. workers filing new claims for jobless benefits fell last week to their lowest since January, but the seasonally adjusted government data was again distorted by earlier layoffs in the automotive industry.

“There’s a lot of conflicting data here, and I think that the market is reflecting that,” said Kim Caughey, senior equity research analyst at Fort Pitt Capital Group in Pittsburgh.

Asian shares across the region outside of Japan rose 1.3 percent to their highest since mid-June, while Japan’s benchmark Nikkei underperformed with a rise of 0.8 percent.

China reported economic growth quickened to 7.9 pct in the second quarter, beating forecasts.

The U.S. dollar was down against a basket of major currencies, with the U.S. Dollar Index off 0.02 percent at 79.299.

The euro was up 0.14 percent at $1.4124, while against the yen, the dollar was down 0.74 percent at 93.56.

Crude oil prices fell as investors tried to decide how high oil prices can rise given a still fragile global economy, said Mike Fitzpatrick, vice president at MF Global in New York.

U.S. light sweet crude oil fell 49 cents to $61.05 a barrel.

“$60 is the fulcrum balancing the price lever that tips whenever one contention or another is bolstered by news or economic data,” Fitzpatrick said.

Gold slipped as the dollar pared losses against the euro, with lacklustre demand for physical stocks of the metal also pressuring prices. Spot gold prices fell $1.20 to $937.25 an ounce.

NEW YORK, July 16 (Reuters)

OK… Well, yesterday we saw the currencies stop the bleeding from the overnight sell off, and although they range traded on the day, the bias was to sell dollars once again. That bias has played through on our Turn Around Tuesday theme, and the currencies are higher today than yesterday, but lower than they were 3-weeks ago week ago. Yes, the month of June has not been kind to the currencies, as some of the euphoria that was going on from March thru May, regarding the global economic recovery is being thought about again, and this time, not with the same rose colored glasses…

Yesterday, I told you about the story in the Australian Morning Herald that shook the A$’s confidence, when the Economics Editor said the markets were wrong to believe the Reserve Bank of Australia (RBA) were finished with their rate cuts. Well, that story was followed up by one that shook the confidence of the Commodity Currencies… This one was about China, and how analysts had gotten the stimulus all wrong in China, and that the Chinese had NOT put the money toward infrastructure and Capital improvements but instead into investments, thus making the Chinese disguising the stimulus in China as a recovery… Hmmm… I don’t live in China, so I can’t really pass judgment here, but I will say that most people that comment on China in the past 6 years have been mostly wrong…. And more wrong than right for sure!

But… As they say on the farm, it’s too late, the cow’s out of the barn! That Chinese stimulus story, hit a nerve with the Commodity Currencies, and before you knew it, the high flying currencies of Aussie, kiwi, Brazil, and South Africa were all looking at figures that thought for sure were in their rear view mirror! The sell off was damaging for sure…

This looks like a classic case of “getting cold feet”… Traders were all lathered up to take these currencies higher last week, but read a story and “got cold feet”… They would say they are being prudent… I would say that they are being wimps! Because in the end, folks… This has nothing to do with whether or not the RBA cuts rates again or not! In the end, this is all about what the U.S. is going to do about all their debt! I’ve harped on this for years, and the thing that really gets me is that IT HAS GOTTEN WORSE! The National Debt, is now over $11 Trillion, and will probably reach $14 Trillion this year, after all the deficit spending by the administration… This is just awful folks, just awful… Because… And here I go again getting up on my soapbox, but come on, this is important! And Yes, I know, you’ve heard this at least 100 times if not more before!

But, the only way the U.S. is going to be able to pay down their debts, and the $11 Trillion is just the tip of the iceberg with the baby boomers starting to retire, is to pay it back with cheaper dollars… But… Hey! Don’t take my word alone for this… Let’s listen in to the IMF’s Chief Economist, Olivier Blanchflower, who was speaking at a conference in Paris yesterday…

“A U.S. economic recovery will only be sustainable if there is a “large increase” in net exports, which may require a dollar adjustment. It may not be very easy, It may require “an adjustment in the dollar, but it is needed.”

Did you hear that? The IMF Chief Economist is saying out loud, and not under his breath, like most economists that see this but don’t want to go out on a limb, that the U.S. needs to devalue the dollar!

Now… That might be a shock to you, folks… But it’s not to me! And if you’ve read the Pfennig for a long time, and heard me harp and harp about the deficits and not being able to pay them back unless we do so with a cheaper dollar, then now it might just all come back to you… Like what the blind man said when he spit into the wind, Ahhhh, it’s all coming back to me now!

But again… It’s not just me that thinks these things, although I will say that sometimes it sure feels like I’m the only one saying them out loud every day of the work week!

Today, I have a special treat… And once again, I’m as proud as a peacock this morning, because, I have a quote to share with you, from the one and only Richard Russell… This comment plays well with what I’ve just been talking about… Check this out!

Richard Russell – “It’s clear (at least to me) that Obama is following the path Roosevelt took during the Great Depression.

In 1933, the government devalued the dollar by 41% by raising the official price of gold from $20.67 to $35 an ounce. Devaluation makes debt easier to handle. In a devaluation, the dollar value of debt remains the same, but all other assets would be worth more (in nominal terms) whether it was a house, a stock, a car or an ounce of gold.

How our creditors who own trillions of dollar in their reserves will react to a dollar devaluation I really don’t know, but a devalued dollar is a lot better than nothing. The Bernanke Fed is trying desperately to bring back inflation, and devaluing the dollar is the surest and quickest way to inflate.”

WOW! It’s not every day that I get to use a quote by Richard Russell! But now… Think about this stuff that’s in the Pfennig this morning… And then think about what I told you last week, about how all this going back and forth in the currencies and precious metals, is just “noise”… Ahhh, now I want to hear you say… “I get it, I get it!”

Oh… And to follow up the Blanchflower, Butler, and Russell comments… Ty sent me a quote my Mark Twain that sums it all up… Mark Twain – “History doesn’t repeat itself, but it does rhyme.”

U.S. stocks sold off 200 points yesterday, making it a tough row to hoe for the Commodities, and Commodity Currencies… The Brazilian real posted the worst performance on the day, with the real moving back above the “2″ level for the first time in about a month… Recall, that the Central Bank Gov. said in the middle of May that he would everything he could to keep the currency above “2″, only to watch it move below and then well below “2″ in the next weeks. The Central Bank Gov. did try, by cutting interest rates about 10 days ago, but in reality, he has little at his control if the markets / traders / investors decide to buy the currency… He does not have a treasure chest of reserves like the Bank of Japan and Bank of China… No, in reality, the only way the real was going to move back above “2″, was to have the sentiment toward Commodity Currencies change…

And again, I can’t believe that the one story in the Australian newspaper, has caused a sea-change of sentiment like this! Maybe, the story’s writer will be proven to have been bang on… That’s not what I’m saying… I’m saying, his opinion, caused a sea-change of sentiment, and that surprises me!

I had someone write me yesterday and say, I might add, once again, that Europe is in worse shape than the U.S. that they didn’t even have stress tests there because they fear what they might show… Hmmm… I wonder what they’ll think when they read this… ECB member, and President of the Bank of France, wrote in his annual letter to French President Sarkozy, that the “worst has passed for the economy and that he was favorable to releasing the results of the banks’ stress tests.” Hmmm… Guess we’re back to the “ugly car” comparison, eh?

Recall last week when I told you about the Chinese announcing a “buy China” protectionist program? I said then that these things usually spread and other countries announce their own versions of protectionism measures… Of course, we all know who started this round of protectionist talking… The current administration and their “buy American” plan… The Chinese measures were placed to offset the U.S. measures… But now, Germany is feeling pinched… Germany’s economy minister, Guttenberg, is voicing concerns about the Chinese announcement last week, and that he would bring this up at the next G-8 meeting in July…

Well… The problem with that is that China isn’t a member of G-8, so this could just be a “you-know-what session” of finance ministers, getting them all wound up to write protectionist measures of their own! Watch for these protectionist policies to spread like Bermuda grass! And, if that happens, the global recession will get even worse, folks! Thanks to the “buy American” move… Geez Louise, when will they ever learn? When, will, they, ever… Learn?

Looks like more and more people are jumping on my bandwagon, that the stimulus would not work… Two months ago, 59% of Americans thought the $787 billion stimulus would restore the economy, but since then, the number has slid to 52%. And… As unemployment heads to 10%, even with the adjustments and ghost jobs the BLS adds each month, that number of those that thought the stimulus would restore the economy, will continue to slide…

And finally a not so serious story… Say it ain’t so Paul Simon! Kodak will retire Kodachrome! Eastman Kodak has announced it will discontinue the legendary 74-year-old film that revolutionized color photography because of slow sales and dwindling demand in the film, due to digital cameras…

Kodachrome
You give us those nice bright colors
You give us the greens of summers
Makes you think all the world’s a sunny day, oh yeah!
I got a Nikon camera
I love to take a photograph
So Mama, don’t take my Kodachrome away

On a sidebar… I saw Paul Simon in concert this past spring… A great concert!

Currencies today 6/23/09: A$ .7870, kiwi .6330, C$ .8670, euro 1.3960, sterling 1.63, Swiss .9295, rand 8.24, krone 6.5375, SEK 7.9650, forint 202, zloty 3.2535, koruna 18.71, yen 95.50, sing 1.4565, HKD 7.75, INR 48.54, China 6.8345, pesos 13.33, BRL 2.0325, dollar index 80.44, Oil $67.08, 10-year 3.68%, Silver $13.81, and Gold… $922.73

That’s it for today… OK… Are you as fearful of what could happen in this on-going N. Korean ship following by the U.S.? That kind of stuff is scary… Somebody gets a nervous trigger finger, and… Oh well, I had better think of more peaceful things this morning, eh? For those that send me notes asking me about my left eye… I don’t have anything new to report. My lack of vision with the eye is the same, the good news is that it hasn’t gotten any worse! I told a good friend of mine the other day, when he expressed his concern that I’ve taken more than one hit with this cancer… “So far, the Good Lord has only allowed me to be attacked by cancer in places where I have two of”… Kidney, hip, leg, and eye! And… That’s the way I see it! I love those east coast starting times, I can actually watch the whole game! Of course I didn’t like it last night when the Metropolitans took it out on my Cardinals… Time to go… I hope you have a Terrific Tuesday!

Source: So Far… It’s A Turn Around Tuesday!

If you grew up in the United States, you know that English literature is one of those subjects they foist upon you in 10th grade or so. I recall very little from English Lit 101. Most of the stories and poems we read (or pretended to read) have become a hazy blur.

But after all these years, one poem still stands out. Due to its oddness and simplicity, I have never forgotten it. The poem is “Red Wheelbarrow” by William Carlos Williams, and it goes like this:

so much depends

upon

a red wheel

barrow

glazed with rain

water

beside the white

chickens.

That poem comes to mind as I ponder the odd yet powerful simplicity of this global market rally. If you take a look around, it is quite impressive how everything has moved higher. And I do mean just about everything. Commodities are up. Currencies are up. Emerging market equities (and bourses around the world) are up. Dead duck U.S. consumer retail stocks are up. Crude oil, which has moved twice as far in half the time in comparison to all previous rallies of the past two decades or so, is way, way up.

So what’s going on? With apologies to William Carlos Williams, here’s the poetic take:

so much depends

upon

a red China

stockpile

paid for by

stimulus

beside the massaged

data points.

Translation for all you non-poetic types: China has taken the “industrial inflation hedge” concept and gone to town with it. It has been stockpiling raw materials and hard assets like crazy, and this in turn has popped the Baltic Dry Index (lots of shipping required) and driven commodity prices up.

At the same time, a steady stream of rosy data points on the Chinese economy has convinced investors that all is well, that “decoupling 2.0″ is at hand, and that the dragon shall boldly lead us into the land of milk and honey (i.e. global economic recovery).

Stockpilin’

The “industrial inflation hedge” concept was introduced in these pages some time ago (and originally to Macro Trader members some time before that). On April 22nd we observed the following:

Hard assets like copper and nickel and zinc are immune to the whims of the printing press, and China will need all those metals and more, in substantial quantities, to build out the vision of economic prosperity it holds for the coming years. And what better time to stock up than in the quiet period before a stimulus- and debt-fueled inflation tsunami returns?

We further observed, in that April 22nd piece, that China would employ three specific strategies in its “stealth abandonment” anti-dollar campaign:

1. Speak to those with ears to hear (i.e. test the waters with subtle trash talk against the dollar).
2. Quietly circulate the yuan (start small, with the intent of later challenge once strength has accrued).
3. Embrace the industrial inflation hedge (buy boatloads – literally! – of raw materials and hard assets).

All three elements have come to pass, as predicted and expected, with one major caveat. Your humble editor expected these strategic moves to be deployed gradually and quietly. Instead they have been deployed rapidly and loudly, to a shocking a degree.

The dollar trash talk has become anything but subtle… Chinese officials are now making aggressive, vocal demands that the yuan be used in more transactions, even going so far as to call for the issuance of yuan-denominated U.S. debt (!)… and, last but not least, the dragon has gone absolutely hog wild with the industrial inflation hedges.

In an eye-opening piece titled “China’s Commodity Buying Spree,” The New York Times chronicles just how much of a hoarding groove China has gotten into:

At least 90 large freighters full of iron ore are idling off Chinese ports, where they face waits of up to two weeks to unload because port storage operations are overflowing, chief executives of shipping companies said in interviews this week. Yet actual steel production from that iron ore is recovering much more slowly in China, and Chinese steel exports remain weak.

Commodities and shipping executives describe Chinese stockpiling in recent months of a range of other commodities as well, including aluminum, copper, nickel, tin, zinc, canola and soybeans. Starting in April, China began stockpiling significant quantities of crude oil.

No wonder commodities have been ripping and snorting like the good old days. And no wonder traders are looking around and starting to see inflationary pressures everywhere.

The Page One Problem

We went on record expecting this to happen, and it did. Man oh man, did it ever… and it’s still happening, right now. Copper and oil are breaking out to fresh highs as I write. The commodity currencies, too, are flying higher than a kite (great news for all of you who took our table-pounding currency diversification advice some months back). That’s all a reason to be happy, right?

Yes, but to be honest, for me it also creates a reason to be nervous. I look at some of these incredibly extended trends and I think about an old Yogi Berra line: “Nobody goes there anymore, it’s too popular.” Trends are like people – they can get frail with old age. Trends can also get winded. They need to breathe.

What’s more, China has been so blunt and upfront in its “down with the dollar, up with hard assets” campaign that I’m starting to wonder how far we are from the “page one” problem.

By page one I mean page one of the newspaper. The idea being, you don’t make money from news stories that are splashed above the fold in bold headline type. You make money from the story buried back on page sixteen, where few have really cottoned onto it yet.

It’s the process of migration from page sixteen to page one that produces the profits. By the time everybody and their brother know the deal, it’s pretty late in the game.

Then, too, I wonder how many checks China can write. Ninety freighters full of iron ore! Damn! Where are they going to put all that stuff? When it comes to hard assets, are they going to just buy everything available… or only buy as much as they can afford? Is there any distinction between the two?

It’s very tough to say, of course. We know little about China’s hidden intent, and Beijing likes to play it close to the vest. China-watcher energy analysts are so data starved, for instance, some of them are using the free satellite capability of Google Earth to make guesses about where China might (or might not) be storing crude. (Apparently there is a way to interpret building structures and ground movements with oil in mind.)

China’s strategic intent and spare buying capacity thus become key factors here. If the dragon intends to throw another couple hundred billion directly at hard assets, then maybe the page one treatment won’t matter. A buying spree with that kind of aggressive depth and duration could drive a move for quite a long time, regardless of how many caught wind of it… sort of how oil soared to triple digits and beyond even as the world gaped in awe.

But one has to wonder… could even cash-rich China find itself tapped for funds at some point? I mean, how much aluminum, copper, tin, canola, soybeans and so forth can a country sit on? And beyond a certain point, when the stockpiles pile up to the sky, aren’t there more pressing uses for the funds?

Dubious Data Points

The other disconcerting thing is the lack of visibility when it comes to China’s economy. We are told that China is doing amazingly well, and the official statistics seem to back this claim. Investors certainly seem to believe this, as China’s health is the rationale for bidding up emerging markets like gangbusters.

But there are all kinds of weird discrepancies on the ground. For example, China’s electricity usage has gone down when it should have gone up. That doesn’t make sense if factories are humming.

And then there’s this, via Grant’s Interest Rate Observer. In a recent Morgan Stanley fact-finding trip, the analyst who led the trip reported 11 out of 12 investors left Chinese soil with fresh concerns. “It’s not that the stimulus is not working,” the analyst noted, but more that “the trip exposed massive levels of excess capacity…”

So it sounds like China indeed has a leg up on the United States in terms of putting their half trillion bucks or so to immediate and aggressive work. But while the mandarins in Beijing know how to move fast, they aren’t necessarily the greatest at figuring out what to spend the dough on.

One might further think Western investors, as acquainted with the ills of government as they are, would be more skeptical than Chinese locals in regard to anticipating positive effect. But no… the outsiders buy the China recovery story hook, line and sinker, while the insiders maintain their doubts. “The local Chinese are clearly skeptical,” the same Morgan Stanley analyst tells Grant’s, “as savings rates are rising despite government incentives to consume.”

So Much Depends…

And now we come full circle back to the William Carlos Williams poem.

What we are experiencing now, I believe, is a massive sentiment-led rally (or bull move, or whatever you wish to call it)… and it is almost all pure sentiment so far, with buying rooted in hopes for the future rather than actual improvements reported. “So much depends” on China as savior – the cornerstone and lynchpin of the decoupling 2.0, turn-the-clock-back mentality that has now gripped the globe.

My slim hope is that the Chinese really and truly know what they are doing, because, in fueling investor optimism with such flair, they are playing a high stakes game. My worry is that they drop the ball, somehow, and the result shows up as a violent wake-up call for “high beta” assets… emerging market equities, energy, commodities and the like.

What happens next is far from clear. The huge stockpiles could continue to grow at a breathtaking pace – after all, Beijing has plenty of greenbacks to work through – and the dragon’s data points could continue to impress, or at least not frighten.

But with that said, a stumble from the dragon… and the shock of a sharp, swift deflationary contraction immediately following… does not feel like a far-fetched scenario at this point. It would certainly have profit potential as a surprise event, given how far the notion seems to be from Mr. Market’s mind.

Source: The Fate of This Rally May Rest in China’s Hands

You’re hearing about it here first. But I promise that you’ll soon be hearing about it virtually everywhere.

Let me explain.

China’s New Profit Catalyst

Most investors are aware of China’s massive profit potential. But what they may not understand is this: Before all that potential can be transformed into actual profits, this Asian giant needs to develop a modern, fully functional financial system. That obviously can’t happen overnight, and China’s been smart – and avoided making major mistakes – by not rushing things.

In fact, despite some stinging criticism from the West, Beijing has held its companies and its financial markets in check to ensure an orderly development. It’s even left some protectionist measures in place to make sure that opportunistic foreign firms don’t overrun its markets.

Naturally, there’s been a near-term cost. It’s held some China-based companies back, making them less competitive in such developed markets as the United States and Europe. Chinese firms were severely limited in their access to funding, meaning they were also limited in their ability to capitalize on business opportunities in these overseas markets.

But I could see that the long-term profit potential for these companies was huge – and I’ve repeatedly said so to the audiences that I’ve spoken to at events all around the world, or that I’ve written to via my columns here in Money Morning. In both venues, I’ve told listeners and readers that the day would come when these companies were able to raise enough investment capital at home to finance their forays abroad.

The day that occurred, I’ve said, is the day when the real fireworks would begin.

Beijing finally lit the fuse.

By announcing the launch of a new market for dollar-denominated bonds that are issued by non-financial firms, China has now taken a major step toward modernizing its capital markets. The move hasn’t made much of a splash here in the United States. But I was in China, heading my annual investment tour of that country, when the announcement was made. And believe me when I tell you that China’s company executives, investors and government officials fully understand the implications of what’s just been done.

The move is very shrewd, for it brings about the confluence of highly complimentary trends.

• For China-based companies that want to invest abroad, or that want to buy foreign companies, product lines, or other assets, these new dollar-denominated bonds will make it possible to do these deals more easily, and at a much lower cost.
• Beijing had already launched an official campaign that urges “Corporate China” to acquire overseas companies and assets. But there had to be a liberalization of the financial system for this to happen. So back in August, in fact, for the first time in 11 years, China’s government eased rules governing its foreign-exchange systems.
• These new regulations permit companies to retain foreign-exchange income offshore, if they want, and thus helped pave the way for the new bond market because it stokes potential demand for dollar-denominated investments.
• And that comes at a perfect time for – up until now – the ongoing global financial crisis, which has made Chinese investors wary of buying foreign-currency bonds that were issued outside China. But these dollar-denominated bonds will be created inside China, effectively short-circuiting that worry.

Given what we know about China’s global natural-resource-acquisition ambitions, the first entrants into this new market will likely be one or more of China’s huge natural-resource concerns that are presently scouring the globe, creating captive supplies of the very commodities that will be necessary to ensure China’s future growth. My experience here suggests that high-tech and infrastructure companies will follow almost immediately. Many of those firms may head straight for Taiwan, thanks to newly inked agreements that make it easier for Mainland China companies to invest across the Taiwan Straits for the first time in decades. After that, these firms will direct their appetites for acquisitions elsewhere around the world.

Just how big could this new dollar-denominated financing market turn out to be?

At a time when Western debt markets remain mired in muck, it’s too soon to tell for certain. But Bank of China Ltd. analyst Shi Lei estimates that non-financial Chinese firms may issue as much as $30 billion during the next two quarters alone.

That amount tallies closely with China’s estimated $23 billion pipeline of outbound mergers-and-acquisitions deals that have been announced this year, but not yet consummated – especially if you factor in the $9.7 billion worth of deals that were announced in the past three years, but that are still pending, Thomson Reuters reports.

Could New Financing Deals Accelerate the U.S. Recovery?

Many Americans will clearly view a big uptick in investments from China with significant fear – especially if they remember the late 1980s Japanese shopping spree that sent ownership of Rockefeller Center, Columbia Records, Universal Studios and the Pebble Beach Golf Course back to Tokyo.

This is different. In fact, I think the new rules are likely to create entirely new funding sources that will boost international trade and that could actually accelerate the U.S. economy’s recovery from the global financial crisis. In fact, it’s entirely possible that this new form of financing will help facilitate a post-recovery golden age of expansion led by such as-yet unsaturated markets as China.

Call it the “Mother of All Carry Trades” – only this time it will be yuan-based, instead of yen-based.

A carry trade is an investing strategy in which an investor takes advantage of interest rate differences between two countries. He’ll borrow money in a country where rates are low and invest it in another market where rates are higher, profiting from the difference. The rate disparities are often caused by the respective central banks; one may be trying to combat inflation with high rates even as another is trying to nurture economic growth by reducing rates.

There are no actual examples to point to, yet, since the market isn’t yet up and running, but we can draw some inferences based on who’s filed to issue this dollar-denominated debt, and look at who’s likely to file in the months to come.

According to The China Daily News, China National Petroleum Corp., the Red Dragon’s biggest oil company, is planning to issue $3 billion in dollar-denominated bonds and is planning to auction as much as an additional $1 billion in three-year floating debt, whose rate will be tied to the London Interbank Offered Rate (LIBOR).

Traders familiar with the new market suggest that CNPC will probably pay a coupon of 60 basis points to 80 basis points (0.60% to 0.80%) more than six-month LIBOR – a much lower cost than the 2.8% coupon for the $2.93 billion worth of yuan-based, three-year, fixed-rate, medium-term bills issued back in December.

Last year, China’s yuan had appreciated steeply against the U.S. dollar, meaning funding costs were high for Chinese companies. Now, however, the situation is reversed, and companies can issue huge amounts of expansion debt for comparatively little money.

As a byproduct of all this, companies that take advantage of the new dollar-denominated funding markets help take the strain off of the People’s Bank of China, the central bank that has shouldered almost all of the dollar-based exchange risk to date.

In Shanghai, which is China’s financial capital, my trading contacts tell me that six-month dollars – which were quoted at 0.40% earlier this year in China, now reflect approximately 0.80%, which is roughly in line with onshore-dollar yuan forward rates for the same time period.

By comparison, the six-month implied forward rates hit 15% in March 2008. So you can see why Chinese companies have such a powerful incentive to use this new funding venue – especially when so many otherwise-solid global companies have been brought to their knees by the credit crisis.

The Three Keys for Investors

So what does this mean for investors?

In a word, plenty.

First, it’s conceivable that the sheer volume of dollar-denominated bonds could indirectly prop up the U.S. dollar. Not only would that potentially wreck traders who are betting that it’s headed the other way, it could actually solidify U.S. and global markets that are still searching for an anchor. By implication, this could also wreck the “gold bugs” who are betting the farm, instead of investing in the precious metal as part of a disciplined investment strategy.

Second, for those on Wall Street who continue to believe they are the “masters of the universe,” the strength and ferocity with which China’s dollar-denominated bond market may develop will probably come as a rude shock. Not only are the vast majority of Wall Street firms likely to be cut out of the underwriting process, but chances are very good that they’ll probably be relegated to the back seat when it comes time to pony up in the never-ending game of global one-upmanship.

And third, depending on the ultimate size of this new bond market, the prices of resource-based companies and commodities could go sharply higher as investors realize there is a potentially unlimited source of funding chasing relatively few quality assets. To the extent that Chinese companies mirror Beijing’s plans for the future, the same will be true for technology, medical and infrastructure plays.

Will this happen immediately?

Probably not. Even though the market is potentially huge (like just about everything else here in China), Beijing will almost certainly keep its hand on the throttle, meaning it will grow at a reasonably impressive – albeit measured – pace.

Beijing is very aware that an imprudent use of debt was a key part of the elixir that created the global financial crisis, meaning government officials will work hard to make sure the tiger stays in its tank – so it can’t bite anyone.

Over the long haul, however, there’s no question that this new market is an important – and much-needed – step in China’s continued development into a global financial juggernaut that investors cannot afford to ignore.

Source:  How the New ‘Yuan Carry Trade’ Will Add to China’s Global Muscle, and Possibly Even Accelerate the U.S. Recovery

[Editor's Note: Money Morning Investment Director Keith Fitz-Gerald is the editor of the new Geiger Index trading service. As the whipsaw trading patterns investors have endured this year have shown, the ongoing global financial crisis has changed the investment game forever.

Uncertainty is now the norm and that new reality alone has created a whole set of new rules that will help determine who profits and who loses. Investors who ignore this; "New Reality"; will struggle, and will find their financial forays to be frustrating and unrewarding. But investors who embrace this change will not only survive - they will thrive. With the Geiger Index, Fitz-Gerald has already isolated these new rules and has unlocked the key to what he refers to as"The Golden Age of Wealth Creation" The Geiger Index system allows Fitz-Gerald to predict the price movements of broad indexes, or of individual stocks, with a high degree of certainty. And it's particularly well suited to the kind of market we're all facing right now. Check out our latest report on these new rules, and on this new market environment.]

]]> http://www.contrarianprofits.com/articles/how-the-new-%e2%80%98yuan-carry-trade%e2%80%99-will-add-to-china%e2%80%99s-global-muscle-and-possibly-even-accelerate-the-us-recovery/16649/feed 0 http://www.contrarianprofits.com/articles/its-all-about-the-stress-tests/16356 http://www.contrarianprofits.com/articles/its-all-about-the-stress-tests/16356#comments Thu, 07 May 2009 14:54:39 +0000 Chuck Butler http://www.contrarianprofits.com/?p=16356 Tired of reacting to rumors!  Aussie dollar continues to rally…  More on China…  Bank of England keeps rates unchanged… And Now… Today’s Pfennig!
Well… The Stress Tests get their public showing today… The rumors continue to be something strange… Strange in that, one it’s Bank of America (BOA) needing to raise $10 Billion, the next day it’s $35 Billion, and then later in the same day, BOA doesn’t need to raise any capital! Talk about wild swings of emotion! WOW!

The rumor going around this morning, is that the banks are all right on the night, and not in major deep dookie any longer. Hmmmm… Didn’t I tell you over a week ago that this was going to be the case? I…

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

The Silverton Bank was supposedly a key cog in the Southeast, according to the Wall Street Journal, and bankers in Georgia are saying that Silverton’s collapse could take down at least 8 to 12 other banks with ties to Silverton. Domino dancing…
(All day, all day) Watch them all fall down
(All day, all day) Domino dancing
(All day, all day) Watch them all fall down
(All day, all day, domino dancing)

I’m not being flippant about this folks… I’m trying to point out that the rot on the vine is deeper than the media and the leaders of this country would have you believe them to be. I keep coming back to that interview with Ron Paul that I saw in March, where he said, “people are saying that problems in other countries are worse than ours… Those people are wrong!”

Oh, and did you hear that Boston’s most storied newspaper, the Boston Globe, is going to be shut down? And one more item… Those “stress tests”? Well, wouldn’t you know it, the results are being delayed, due to the Banks debating the findings… Well, they have that right to do so… Maybe, the regulators didn’t understand something in their accounting methods, or something like that… Unfortunately, I believe the banks’ debating will be like arguing with an umpire over balls and strikes!

OK… Enough of the blood in the streets! Let’s talk about some good things… Like last week when the Bank of Canada (BOC) decided to do a Nancy Reagan, and just say “no” to Quantitative Easing… Let’s hope they don’t end up with egg on their collective faces should they need to implement Quantitative Easing at some point in the future… But I’m sure they have weighed all the facts to this point. Canada’s Banks are in tip top shape, compared to their neighbors to the south, and I’ll explain this about the Canadian dollar / loonie once more for those new to class… When Oil returns to higher levels, the loonie will follow… This currency is so juiced by energy prices, and Oil is the Big Kahuna…

And remember what you heard here first, last month, and that is that China would be the first to come out of the economic doldrums… I had someone ask me last week, why I thought China’s stimulus worked better than anyone else’s… Ahhh grasshopper, I’ve explained that before… But again, it’s very simple… With China being a Communist Country, they can dictate not only to whom the stimulus goes to, but HOW the stimulus is used… Imagine if you will the initial $150 Billion that was sent out last spring… If there were stipulations on how it was to be spent, maybe you’d have something, or better yet… The initial $700 Billion in TARP funds… They didn’t have strings attached, and the receivers didn’t use the funds to loan out, as “requested by the Treasury”, they threw it in the nearly empty treasure chest and sat on it… See the difference in the two methods?

It appears that the so-called “decoupling” is back on the table, as China and India seem to be coming out of the economic doldrums long before the U.S., Europe, and Japan will… Hmmmm…

OK… The Chinese renminbi has begun to move higher again, just when everyone thought the Chinese would batten down the hatches on currency appreciation. This is only happening because the Chinese economy is beginning to show signs of improvement.

Those signs of improvement in China are doing wonders for the Aussie dollar (A$)… Don’t look now, but the A$ has climbed past 73-cents! Aussie’s kissin’ cousin across the Tasman, New Zealand, is not seeing the same kind of McLovin the A$ is seeing… The Reserve Bank of New Zealand (RBNZ) left the door open to further rate cuts last week, while the Reserve Bank of Australia (RBA) is giving signals that the rate cuts may be nearing an end. The Tale of Two Central Banks…

A long time readers sent me a link to a story on Morningstar regarding our fave shiny metal… Gold… Here’s a snippet…

“Jon Nadler, a senior analyst at Kitco Bullion Dealers, points out that all of the world’s above-ground gold amounts to around 0.6% of total global wealth, so even if gold were at $10,000 per ounce, the metal would only amount to 6% of total global wealth.” (I know Jon, so I just had to use his quote!)

Here’s another snippet from someone else… “Singapore, Norway, Saudi Arabia and other member nations of the Organization of the Petroleum Exporting Countries are likely already increasing their allocation to gold, or likely to do so in the coming months. They would be somewhat ignorant and financially and economically illiterate not to do so.”

Everyone at the Total Wealth Symposium in Bermuda last week was talking about Gold… I see that it has slipped back below the $900 level, which I have taken as the line in the sand for buying opportunities… Could it go lower? Of course it could, but that wouldn’t change my mind as far as a sub $900 level being a buying opportunity to get it cheaper than where most people see it going…

Did you see that China announced last week that they had increased their holdings of Gold by 76% in the past 6 years? Hmmm… No wonder the last 6 years have been so kind to holders of the shiny metal, eh?

And… How about this for some “good news”… Ford outsold Toyota in April! Now, that’s something you don’t see every day! Well, maybe when Ford was selling their pick-em-up trucks like funnel cakes at a state fair… But not often, at least not to my recollection.

OK… The data cupboard is pretty feeble this week until we get to the end of the week, where the April Jobs Jamboree gets printed. We’ll see Pending Home Sales, Construction Spending today, and then not much, until later in the week… The initial forecast for jobs in April are showing a job loss of 606K… The weekly numbers show this forecast to be quite understated… But, as I’ve explained many times in the past, the Bureau of Labor Statistic (BLS) doesn’t use those Weekly Initial Jobless Claims… The BLS uses a survey of corporations, and then puts the survey in their witch’s caldron and stirs in the Birth / Death model, and comes out with “their number”…

Bad news for my little river town this past week, as Chrysler closed down the plant that had been operating in our city since the 60’s. Good thing we decided back in the late 90’s to diversify our income stream in the city! I was an alderman then, and recall this to be my greatest fear, that the city depended on one corporate entity so much… And the alderman at that time made great strides to diversify the city’s portfolio of income streams… So… That today, when the bad news hits, it doesn’t hit as hard as it would have if no diversification had taken place. You see… The overall risk to the portfolio was reduced!

Well, what does that lesson teach us? It should teach us the diversification is the most important monetary thing anyone should be thinking about! Diversification so that the asset classes in your portfolio have a low correlation to one another. That they have different pricing mechanisms. Currencies and metals represent the best diversifying assets to your already existing portfolio of stocks, bonds, mutual funds, and land… It is a proven fact that by adding currencies and metals to a portfolio, you will reduce the over risk in the portfolio! And…. Remember… 94% of a portfolio’s return is based on asset class selection…

Just thought I would give you an example of diversification in real life, and then apply it to the lesson for today… That’s how I always tried to explain things to my kids, and the older two are teachers today, and probably use the same methods for explanation!

The U.K. is on holiday today, as they decided to do May Day on the 4th! Either way, it was a 3-day weekend for those that celebrated May Day!

Currencies today 5/4/09: A$ .7330, kiwi .5720, C$ .8415, euro 1.3230, sterling 1.4845, Swiss .8770, rand 8.38, krone 6.5750, SEK 8.08, forint 218, zloty 3.33, koruna 20.14, yen 99.30, sing 1.4815, HKD 7.75, INR 49.90, China 6.8220, pesos 13.76, BRL 2.1725, dollar index 84.77, Oil $52.89, Silver $12.61, and Gold… $890.60

Source: The Rot On The Vine Goes Deeper

]]> http://www.contrarianprofits.com/articles/the-rot-on-the-vine-goes-deeper/16138/feed 0 http://www.contrarianprofits.com/articles/what%e2%80%99s-china%e2%80%99s-gameplan/15904 http://www.contrarianprofits.com/articles/what%e2%80%99s-china%e2%80%99s-gameplan/15904#comments Fri, 24 Apr 2009 14:00:40 +0000 Bill Bonner http://www.contrarianprofits.com/?p=15904 Buenos Aires, Argentina Is the rally still on? We’re not sure. Wednesday, the Dow fell 83 points…after a weak bounce on Tuesday. We expected the rally to last until June and to take the Dow back to the 10,000 range. But anything could happen.
And if you depend on 91-day T-bills for your spending money, you’re in a world of hurt. The yield is only 0.13%.

But maybe things are better on the other side of the planet. How’s China doing? Analysts are “cautiously optimistic,” says a New York Times report.

Retail spending in China is said to be up 15%.

Meanwhile, a report tells us that China is stepping up its purchases of U.S. Treasury debt.

Hmmm… Why would China be doing that? The official response to…

Good day… The currency markets took back what little strength the dollar mustered over the past two days with the Euro moving back above popping back above 1.36 and the Australian dollar moving back up over .70. The cause for this dollar weakness? Data released in the US yesterday was surprisingly strong again, so investors dumped the ’safe haven’ holdings of Treasuries and moved money back into higher yielding investments.

At one point yesterday the dollar index dropped precipitously (more than 1.5% in less than 10 minutes), and then bounced back up within a half hour. Jennifer McLean, who takes care of our currency trading while Chuck is away from the desk, said the sudden moves were due to Treasury Secretary Geithner’s comments. Apparently Geithner was asked about China’s call for a new international reserve currency yesterday at a NY event. He said that while he hadn’t read the proposal, he understood it as a plan “designed to increase the use of the IMF’s special drawing rights. And we’re actually quite open to that.” After hearing those words, currency traders immediately starting selling off the dollar. After all, if the Treasury Secretary of the US says the administration is open to a new international reserve currency, why do you want to hold dollars? I guess Geithner got wind of what he had done to the currency markets pretty quickly (the power of Blackberries!) and 15 minutes later he clarified his comments to say the US dollar should remain as the world’s reserve currency.

So the Treasury Secretary got a quick lesson in just how sensitive the currency markets are. The props which have held up the US dollar can be kicked out from under it with a few words from him. I have got to believe the quick sell off yesterday is a sign of what will happen in the coming months as we here more and more rhetoric about the need for an alternative reserve currency. Foreign nations are not going to want to continue to invest a majority of their reserves in a currency which is likely going to be losing value because of the inflationary impact of all of the debts and deficits here in the US. If the Euro zone can show some signs of stability, it could take advantage of the weakened state of the US$ to challenge for the reserve currency status. Just what Chuck has been talking about over the past few years.

The big story out of Europe yesterday was the failure of the UK bond auction. The UK Government held an auction to sell 1.75 billion pounds of bonds (commonly called gilts) yesterday. For the first time in 7 years, not enough buyers showed up at the auction so the UK couldn’t sell all of the gilts. This auction ‘failure’ sent interest rates up in the UK as investors demanded higher yields. The main reason the UK couldn’t attract enough buyers were their quantitative easing efforts of late. You see, the Bank of England was one of the first to announce they would be buying UK gilts in an effort to bring down interest rates and stimulate the economy. Sound familiar? This is what the Obama administration is going to do with last weeks announcement that it would be purchasing $300 billion of US treasuries.

This effort to drive rates lower than what the market dictates causes investors to just stay away from the auction. So it creates an environment where the government is the only willing buyer of their own debt, a situation that can become hyper-inflationary. So the government must eventually attract outside investors back into the debt auctions. To do this, they either have to let interest rates rise or let their currency value fall, making the purchases more attractive to outside investors. A combination of the two is the most likely scenario. This is the path the UK has started to walk down with the US close on their heels.

Chuck alerted me to the failed gilt auction yesterday, and sent me this note: “Oh… And did you hear that in the U.K. their Gilt auction (their treasuries) failed yesterday? Now, hasn’t just about everything that happened here in the U.S. during this financial meltdown happened first in the U.K.? Well… I think this is an ominous omen that they couldn’t get enough buyers for their debt auction… ”

As I reported in the first paragraph, the US data releases continued to be surprisingly strong. Both durable goods and sales of new homes unexpectedly rose in February according to yesterday’s reports. Durable goods orders jumped 3.4% in February, after dropping a revised 7.3% in January. This increase was the largest in more than a year, and the first positive move in seven months. The other big piece of data released by the Commerce Department showed New home sales increased 4.7% vs. the January sales. These two positive numbers eased fears in the equity markets, and encouraged investors to take more risks. This is why positive economic data releases in the US cause a sell off in the US$ (the reversal of the trend we were seeing earlier this year).

Does anyone find it odd that all of the data we are seeing this week are surprisingly strong, while the revisions to the prior month’s data show even bigger drops? I’m not accusing the government of massaging the numbers (wink wink) but it just seems odd. Today we will see the GDP numbers from 4th quarter of 2008. The economists are predicting a drop of 6.6% during the last quarter, but the trend with data releases this week would suggest the number will come a bit stronger. We will also see the weekly jobless claims which are expected to show another 650k US citizens were out of a job last week.

This would be the eighth consecutive week of a 600k+ number for jobless claims. The jobs numbers will have to start improving if the US is going to really turn things around.

The strength of the Euro was somewhat tempered by the release of German business confidence data which fell to the lowest level in more than 26 years. The global economic slump is weighing heavily on German companies who rely on exports. The data gave support to those calling for another rate cut by the ECB. The Euro has been caught in a fairly narrow trading band this week, as it has benefited from calls for an alternative reserve currency, but sold vs. poor European economic data.

China’s central bank Governor Zhou Xiaochuan helped investor confidence with a statement that the Chinese economy is recovering. “Leading indicators are pointing to recovery of economic growth,” Zhou said in an article on the central bank’s website today. The government “has taken prompt, decisive and effective policy measures, demonstrating its superior system advantage when it comes to making vital policy decisions,” he said. China continues to try and keep their economy growing above 8%, and will continue to be the growth engine of the global economy. A strong Chinese economy is good for the commodity markets, and global recovery.

As predicted, New Zealand’s current account deficit widened to a record last year as exports fell. Finance Minister Bill English said this week the deficit is “uncomfortably large” and makes New Zealand dependent on foreign funding. It is actually nice to hear a Finance Minister worried about the long term impact of running large current account deficits! Here in the US all we hear is ‘deficits don’t matter’. But the growing current account deficit is the main reason Chuck suggested investors move out of the kiwi last year, and we still think the Australian dollar is a better currency to own.

Both currencies rallied again yesterday, as investors moved out of ’safe haven’ US treasuries and into these higher yielding currencies. The Australian dollar also benefited from an statement by the Rio Tinto Group that predicted the metals markets would recover in the second half of 2009. Commodities account for over 60 percent of Australia’s exports, and 70% of exports in New Zealand. If data continue to show China is on solid footing, these two currencies should continue to appreciate.

It is getting late, so I will head right to the currency wrap-up:

Currencies today 3/26/2009: A$ .7020, kiwi .5770, C$ .8142, euro 1.3574, sterling 1.4561, Swiss .8883, rand 9.4226, krone 6.4553, SEK 8.0229, forint 222.57, zloty 3.3561, koruna 20.1542, yen 98.35, sing 1.5080, HKD 7.75, INR 50.5625, China 6.8319, pesos 14.172, BRL 2.2378, dollar index 83.77, Oil $53.53, Silver $13.575, and Gold… 935.77

Source: Geithner Tanks the Dollar, but then Pushes it Back Up