U.S. crude for October delivery settled down $2.78, or 3.8 percent, at $69.96 a barrel, having fallen as low as $69.13 in intraday trade. In London, Brent crude settled down $3.14 at $69.65 a barrel.

China’s key stock index dived 6.74 percent on Monday to a three-month low, prompted by concern that China’s government is trying to moderate economic growth and choke off some speculation in its stock market by tightening bank lending.

European equities closed lower and U.S. stocks fell after China’s index fall.

“The oil markets have been strongly affected by what’s going on in China, where the fear is that authorities will rein in on lending and in the process curtail growth,” said Phil Flynn, an analyst at PFGBest Research in Chicago

Jitters about the Chinese economy, the world’s second largest oil consumer, also weighed on other Asian stock markets.

The Organization of the Petroleum Exporting Countries meets to review output on Sept. 9 in Vienna. Several ministers and officials from the group have said it is likely to leave output targets unchanged.

Even though OPEC agreed to 4.2 million barrels per day of supply curbs late last year, and has kept output targets steady so far in 2009, actual production has been rising in recent months, according to industry surveys.

In a further sign of that trend, Abu Dhabi, the main producer in the United Arab Emirates, an OPEC member, will lift supply to Asia in October, the state oil firm said on Saturday.

Despite the indications of higher supply from some in OPEC, oil has rallied from a low of $32.40 in December, the weakest price in nearly five years, to a 2009 high of $75 a barrel last week.

Aug 31 (Reuters)

Like Japan did in the 1990s to get itself out of its own economic morass, China is splurging on massive public infrastructure programs. China’s banks are lending like crazy to fund these projects. In the first six months of this year, they loaned Rmb7.4 trillion (just over $1 trillion). That’s over three times the amount loaned out in 2008 and the biggest six-month lending surge on record.

Is China’s spending spree setting the global economy up for another leg down? China’s surging investment accounted for an unprecedented 88% of Chinese GDP growth in the first half of 2009.If that’s not a dangerous bubble in the making, we don’t know what is.

What we do know is that the quality of Chinese bank lending will suffer. And as Stephen Roach recently pointed out in the Financial Times, this is a trend that “could sow the seeds for a new wave of non-performing bank loans.”

We’re not economists, dear reader. And nor do we want to be. But that doesn’t mean we can’t spot a bubble in the making. This week, investors paid 40 times earnings for China State Construction Engineering Corporation. As Will’s father, Bill, points out in the Daily Reckoning , these investors have learned nothing from the crash of 2007-08.

As Bill says, it’s a secret of the underground that this kind of hyped investing rarely works out.

The rest of the world seems unaware of how the investment markets work…and they think credit is Miracle-Gro for the economy.But markets are not mathematical… nor mechanical; they’re moral. Their purpose is not to make people wealthy, but to make them wise. And then… only for a while.

It they were mathematical you might make people richer by adding zeros. But it’s not that simple. Zimbabwe tried it; it doesn’t work. A Dear Reader gave us a $10 TRILLION dollar bill – real money printed by the Zimbabwean Treasury. That – and about $5 US dollars – will buy you a cup of coffee in Harare… if they have any.

If they were purely mathematical, you might be able to anticipate price movements with computers and PhDs in math. Many have tried it. As far as we know, none has ever really succeeded.

It’s not a mechanical system either. When prices go down, there are no screws you can tighten…no levers you can pull… Nor can you add more fuel or slather on more grease. It’s not that simple.

What Bill understands better than most is that you’ve got to learn to take your lumps if you want to make money in the markets. And no matter how hard government tries to avoid what’s coming… the market will eventually give us what we deserve…

Instead, markets are complex natural systems. Like mistresses, they can be jiggled and jived… but they can never really be controlled or predicted. That’s what makes them so interesting, of course.

The markets are always teaching us… always correcting us… always giving us a kick in the pants. These are moral lessons…in the broad sense. That is, if you do the wrong thing you get punished for it. Step on a rake; it hits you in the face.

The purpose of a bear market is to correct the errors of the preceding boom. Most prominent among those errors is to think you can make money by speculating in the stock market. When this idea takes hold, good sense goes out the window. People will buy dotcoms with no business plans…and house builders at 40 times earnings!

But that’s how we’ll know when the correction is over – when people give up on the stock market… when they want nothing more to do with it. Judging by today’s news… we’re still a long way from there.

China has once again snatched the leadoff spot in our daily lineup. And once again, they’ve knocked the cover off the ball.

The Chinese economy expanded at a dizzying 7.9% in the second quarter, their government announced yesterday. That far exceeds analyst expectations and China’s still-impressive 6.1% first-quarter growth. Conveniently, the second-quarter jump — plus revised GDP growth expectations of 8% in the third quarter and 9% in the fourth — puts China perfectly on track for the 8% annual growth they promised earlier this year.

Looking through the fine print of today’s data… oy, these are some la-la land numbers:

• New lending in the first half soared 201% compared to the year before
• First-half property sales up 53% per annum
• Chinese home prices are growing at a 10% annualized pace
• First-half auto sales up 17% per annum
• Retail sales up 15% in the first half
• Inflation down 1.1% from a year ago.

Of course, not all is well over there. Exports, the backbone of the Chinese economy, are down 22% so far this year. Construction starts, another staple of Chinese growth, just ended 11 straight months of decline. But still, today’s numbers show nothing short of a V-shaped recovery for China. Too good to be true? Maybe.
But here’s one more amazing Chinese stat for today, one we don’t doubt: China’s official foreign reserves now exceed a record $2.13 trillion. At least $763 billion of this sea of money is pure U.S. debt. In spite of all the global turmoil and market ups and downs, China has remained the world’s steadiest accumulator of sovereign debt — namely American Treasuries… a fact of life that will surely haunt us one day.

Another Chinese debt auction failed this morning. That’s the third time in the last two weeks that the Chinese government was unable to sell as much debt as it planned. In order to continue financing their rabid growth, maybe they’ll have to start selling some assets — like, call us crazy, American IOUs.
By the way, despite China’s unwavering appetite, global demand for American Treasuries fell by the most this year during May. According to yesterday’s TIC flow data from the Fed, the global community was a net seller of U.S. debt back then. Net selling exceeded $22 billion, the lowest demand for American debt since November.

Mexico is in deep trouble. The Mexican economy might shrink 7% in 2009, the U.N. forecasts.

“Mexico is the biggest concern in the region,” said Alicia Barcena, head of the UN’s Economic Commission for Latin America and the Caribbean. “It’s an economy that depends very heavily on exports to the U.S., it’s one of the countries with the biggest fall in remittances and it’s also being hit by swine flu. Recovery for Mexico will be difficult and highly complicated.”
Back in the U.S., here comes another financial systemic risk crisis. The drama du jour is at CIT, a commercial lender not to be confused with Citigroup.

CIT is a small-to-midsize business lender that actually has a lot more in common with Lehman Bros. Like Lehman, the company’s business model is reliant on debt and easy credit — CIT relies on money borrowed from capital markets to finance its loans. And also like Lehman, CIT is saddled with debt of its own — about $35 billion worth.

Having already bailed out CIT with $2.3 billion in TARP bucks, the Obama administration gave the company the cold shoulder (thank heavens) when CIT came knocking for more earlier this week. Evidently, their moronic board was counting on renewed government aid. Now the company has just a matter of days to raise as much as $3 billion. Fat chance, says the market:

This time last week, we compared some eerie similarities between 2008 and 2009… investor attitudes, market behavior and economic indicators are lining up a bit too close for comfort. And now this — what would be the biggest banking failure since Lehman. Oy, could get interesting. Most media outlets are downplaying CIT’s peril, but we’re not so quick to brush it off. Its bankruptcy won’t likely produce a Lehman style meltdown, but on Monday, tens of thousands of businesses might not have a primary source of financing. In this credit environment, do you think it’ll be easy for them to get fast loans from someone else?
CIT’s plight isn’t helping the dollar one bit. Coupled with the stock rallies this week, the dollar index fell as low as 79.3 yesterday, its lowest level since June 11. As we write, it’s at 79.5.
Sounds like a good day to by some gold, eh? You wouldn’t be alone today, or this month, for that matter… the spot price has risen to $935 this morning, up about $30 from early July.
“The idea that Chinese yuan could replace the dollar strikes us as ridiculous today,” writes Chris Mayer. “I am sure the typical British subject in 1922 — when the Empire ruled over 458 million people and a quarter of world’s land area — would have found equally ridiculous the idea that in two decades, his cherished pound would play second fiddle to the U.S. dollar of the former colonies.

“I don’t know what currency will be the currency of choice two decades hence. I will be surprised if it is the U.S. dollar alone. And not knowing is a good reason to own some gold.”
California’s lousy economy and gold’s worthy valuation has caused a second gold rush. We’ve heard more than one report lately of way more prospectin’ activity than normal in Southern California. For example, Keene Engineering, which makes gold-finding equipment for the average Joe, reported recently that business has doubled in 2009.

It makes sense. Times are tough, jobs are sparse, wages are low, taxes are rising… and here’s perhaps the one true “free lunch” in America. Good luck, fellas.
“If you’re American and are going to be storing things,”writes Doug Casey, “you probably can’t go wrong building a stash of cigarettes.” Of course, Mr. Casey advocates a healthy private stash of precious metals, but when pressed for what else we should stockpile, he said this:

“They keep raising the taxes on cigarettes — a pack now costs $10 in some places in the U.S. That’s 50 cents per individual cigarette. Even if you don’t smoke — or perhaps especially if you don’t smoke — every time you return to the U.S., you should buy the maximum amount of duty-free cigarettes allowed and store them.

“The other thing Americans should do is buy a lot of shotgun shells, 9 mm, .45, .223 and .308 ammo. Even if you don’t shoot, you can set those aside and store them too, because they’re going to be taxed and regulated to the nth degree. And properly stored, they keep for a very long time.

“In fact, anything regulated by the Bureau of Alcohol, Tobacco, Firearms and Explosives — one of the most corrupt, dangerous and useless of all federal bureaucracies — is likely to go up considerably in both price and value. It’s perverse that the U.S. has a bureaucracy to regulate the things you need for a hunting trip or a good party. Maybe their next trick will be to convert the DEA into the Bureau of Sex, Drugs and Rock ’n’ Roll.’”

That’s vintage Doug, for sure. Hearing him talk about stockpiling cigarettes reminds us of last year’s Investment Symposium, when Mr. Casey lit up during his presentation — not because he really wanted to, but because the (very accommodating) people at the Fairmont told him he couldn’t. What followed was an onslaught against Uncle Sam, the TSA, investment bankers and others who likely deserved it. We expect no less from Doug when we meet next week… stay tuned.
But market makers aren’t too concerned about all we’ve mentioned above. Earnings season is front and center, and blue chips are beating expectations left and right.

Most indexes climbed over 1% yesterday, driven mostly by an earnings beat from JP Morgan. Their $2.7 billion in profits gave hope to Bank of America and Citigroup — which both topped earnings estimates before the opening bell this morning. We also saw GE, Google and IBM print better-than-expected earnings after the bell. Most of their earnings beats look to have been priced in yesterday. Thus, the market is at a standstill as we write.
Stocks also got a boost yesterday from the latest jobless claims report. New claims fell by 47,000 last week, says the Labor Department, to 522,000. That’s the lowest level since January. Continuing claims fell by a whopping 642,000, to 6.2 million… a record decline so large, it’s hard to believe.
Oil’s back on the rise, thanks to this week’s sudden stock optimism. Light sweet crude is at $62 a barrel as we write.
“I am sick and tired of people going on and on about the poor and health care,” writes a reader of our recent health care debate. “I’ve been poor. I’ve been ‘trailer trash.’ And you know what? I even got sick a few times. For the most part, unless you have a bone sticking out, blood gushing or some terminal illness, a person generally gets over it. Most anyone, even with a government indoctr- , er, education, can figure out to take some NyQuil, eat the lost days’ pay and sleep it off. On the rare occasion I had to see a doctor, I worked (what a concept!) and paid cash for the office visit. And if I had been unfortunate enough to be in a traumatic accident, the hospital would have patched me back together, insurance or not, because they have to by law. Granted, I might have still been working to pay off the debt even now, which is why I found myself being really freakin’ careful not to put myself in any accidents. Funny how that works.

”If people feel so obligated to help the poor, by God, give to charities. I, like most people who are grateful for the opportunity to earn a living, believe firmly in tithing and giving to charities regularly, even in this economic misallocation. Yes, that’s right. I didn’t say crisis, or downturn or anything else. Every problem we are now facing can be narrowed down to two things: the government legislating activities counter to what the market would normally do and the people who took advantage of it.”

The 5: It’s been fun bouncing these reader mails back and forth this week. Per usual, we’ll bump this one to the blog to make space for whatever evokes rabid response from you next week. If you’ve got more to say on health care, take it to the blog.

Source: China Booms, The CIT Crisis, A Bizarre Commodity Worth Stockpiling, Vancouver and More!

Conveniently, the second-quarter jump — plus revised GDP growth expectations of 8% in the third quarter and 9% in the fourth — puts China perfectly on track for the 8% annual growth they promised earlier this year.

Looking through the fine print of today’s data… oy, these are some la-la land numbers:

• New lending in the first half soared 201% compared to the year before
• First-half property sales up 53% per annum
• Chinese home prices are growing at a 10% annualized pace
• First-half auto sales up 17% per annum
• Retail sales up 15% in the first half
• Inflation down 1.1% from a year ago.

Of course, not all is well over there. Exports, the backbone of the Chinese economy, are down 22% so far this year. Construction starts, another staple of Chinese growth, just ended 11 straight months of decline. But still, today’s numbers show nothing short of a V-shaped recovery for China. Too good to be true? Maybe.

But here’s one more amazing Chinese stat for today, one we don’t doubt: China’s official foreign reserves now exceed a record $2.13 trillion. At least $763 billion of this sea of money is pure U.S. debt. In spite of all the global turmoil and market ups and downs, China has remained the world’s steadiest accumulator of sovereign debt — namely American Treasuries… a fact of life that will surely haunt us one day.

By the way, another Chinese debt auction failed this morning. That’s the third time in the last two weeks that the Chinese government was unable to sell as much debt as it planned. In order to continue financing their rabid growth, maybe they’ll have to start selling some assets — like, call us crazy, American IOUs.

Source:  China Booms… Too Good to be True?

Two important headlines this morning, both of them fraudulent:

“Chinese economy bounces back,” says one headline in theInternational Herald Tribune.

“JPMorgan profit soars despite downturn,” says another.

The average reader or TV viewer will go no further. “Ah,” he says to himself, “good news; the worst is over. China is a green shoot as big as the Amazon. And JPMorgan is a leader in the financial sector. If the financial sector is doing well, the whole world economy must be doing well.”

But here at The Daily Reckoning, we can’t help ourselves. If we see a silver lining, we look for the cloud. We see garbage…we look for the rat…

We begin with the JPMorgan profit announcement, because it is the most intriguing. Let us set the stage:

In the last half century, credit has expanded faster even than dress sizes. Naturally, this has made the business of hawking credit extremely profitable. Profits in the financial sector soared to 40% of the U.S. total. And every momma wanted her baby to grow up to be an investment banker.

But then, in 2007 & 2008, the bubble in the financial sector popped. Many banks and financial institutions went broke…or had to be bailed out by the government. Instead of being the world’s highest-flying industry…finance became the scene of its biggest crash.

And now, from all we’ve been able to detect, a fundamental shift has occurred. People are no longer eager to go deeper and deeper into debt. Instead, they are eager to pay off debt…that is, to rid themselves of finance…and to get as far away from the financial sector as possible. Savings rates, for example, have gone from zero to 7% in just the last 12 months.

But in the midst of this remarkable and historic change, we get news that at least a couple of the biggest firms in the financial sector – JPMorgan and Goldman Sachs – are making billions in profits:

“Even as it weathers the worst economic downturn in decades, JPMorgan Chase said Thursday that it had made a $2.7 billion second-quarter profit as a result of stellar trading and investment banking results.”

This was essentially the same story we got from Goldman. Neither bank made its money the old fashioned way — by lending to worthy projects; they made their dough by “trading” and “investment banking.” In other words, they made billions from speculation.

Anyone who takes this as evidence of a recovering economy should work for the government. Only a government economist or a mental defective (excuse us for being redundant) could believe that genuine prosperity can be built on a foundation of speculating by large financial institutions. You can see why by asking a simple question:whom were they trading against?

Speculating is a zero-sum game. No matter who wins, the economy is not a bit better off; it has not a centime more in resources. Goldman and JPMorgan report earning, together, more than $6 billion. Who was on the other side of that trade?

There is also something fishy about the whole thing. Trading is not only a zero-sum game, it’s a game of chance. Traders lose money about as often as they make it. Of course, normally, the traders at the big banks have an advantage; they are not idiots. They make money by taking it away from the amateur traders, who are idiots. But what amateur traders put up $6 billion?

Our guess: the fix is in. They are taking advantage of the feds’ stimulus programs…and trading against the biggest patsy in the world, the U.S. taxpayer. How? We’ll find out how, later…

Meanwhile, there is the news that China is back in business.

“Government spending pushes GDP growth to 7.9% for 2nd quarter,” reports the IHT, “…fueled by a large economic stimulus package and aggressive bank lending…a surprisingly strong showing during the global economic downturn…

“…while most other major economies are contracting and suffering from the worst economic crisis in decades, China appears to have turned a corner…

“Growth in the second quarter was driven by strong auto and property sales, a rebound in manufacturing and huge infrastructure spending, which was propping up global commodity prices.”

Further investigation reveals that bank lending and property speculation have gone wild. (More on this in today’s essay, below…) And stocks in Shanghai are up 75% so far this year.

Now, let’s try to get this straight. The world is in a slump. China sells stuff to the world. And yet, China is booming.

How could it be? Again, there’s something fishy about it…as if the government were jiving the figures…as if the speculators had taken leave of their senses…and as if the whole thing were just the result of the same kind of misguided ‘stimulus’ that got us into trouble in the first place…

The Richebacher Letter’s Rob Parenteau agrees that something isn’t quite right. “Ask anyone who’s done business there. Keeping a double set of books in China isn’t just common, it’s considered ‘good strategy.’ You’ve also got under-regulated Chinese banks hiding as much as $500 billion in bad debts — China’s own version of ‘subprime’ loans to small businesses and Asian property speculators.

“On top of that, you’ve got a $40 billion tab left over from the Beijing Olympics… and a $140 billion tab for rebuilding Sichuan after their 2008 earthquake.”

Boom…boom…ka-booooom!

Source:  The Zero-Sum Game of Speculation

Consider the airport. While more subdued than it was just prior to the 2008 Summer Olympic Games, it’s still humming. And the airplane on the flight over here was packed, with nearly a vacant seat in sight. Of course, having my luggage actually beat me to the carousel was a big plus – just like it always is. There’s a policy that all bags are unloaded in 12 minutes.

From my hotel room in the Beijing Central Business District, I can see no end of sleek black cars, including the latest VWs, BMWs, Audis and Toyotas. Even Mini Coopers are becoming a common sight. But to many a guy’s dismay. According to my friend Chris Choi, a longtime Beijinger, the girls actually prefer big SUVs, including Range Rovers, Toyota FJs and, of course, the ubiquitous Jeep.

Speaking of cars, the Shanghai auto show kicked off here in China with the world’s automakers vying to get a foothold in this market, which is one of the fastest-growing in the world. Volkswagen AG (ADR: VLKAY), Porsche SE (soon to have closer ties to VW), Bentley Motors Ltd. are all here – and are enjoying record sales in China.

Some carmakers – such as China’s Geely Automobile Holdings Ltd. – are making noises about their global ambitions, too. To those who think that’s unlikely, take a moment to remember how dismissive American consumers were about the prospects of Japan’s automakers back in the late 1960s or early 1970s. And now Japan dominates the American market.

Are you listening, Detroit? I hope so.

I took a quick stroll around the block to shake off some jet lag. In that short time, I noted two new malls filled with Prada, Gucci, Versace and other upscale brands. Gone are the Citigroup Inc. (C) advertisements, but in their place are Deutsche Bank AG (DB) branches, as well as those of domestic China banks, which remain spectacularly liquid – meaning they’ve escaped the vast majority of the credit-crisis contagion.

Then there’s the media. Recent liberalization of media ownership and usage requirements have created a form of Wild West capitalism that our industries once dreamed about, but now only visit in the museums of their boardroom minutes. With ownership restrictions being substantially relaxed, companies that possess global brands are stepping up their efforts to reach consumers through increasingly direct advertising channels that are already making them known.

I’m excited about what I expect that I’ll be able to bring you over the next several weeks.

Stay tuned.

Source:  Despite Rumors to the Contrary, Beijing Economy Continues to Boom

[Editor’s Note: Money Morning Investment Director Keith Fitz-Gerald is one of the world’s biggest experts on Asia, especially China. Right now, Fitz-Gerald is leading an investment tour of the Red Dragon, and he’ll be sending along regular investment travelogues to update Money Morning readers on his latest observations. This is the first installment of that series.]

Good day… And a Thunderin’ Thursday to you! The “Day After” Tax Day… It still hurts! And to think, one of these days, I’ll be paying even more, thanks to the direction of our country… And you will be too! There’s no two ways about it, the Deficit in funding in Washington D.C. which will be a result of all the spending, is going to require greater revenue… Where does the Gov’t get the revenue? From taxes… Of course if it wasn’t a debtor nation, it would not have to pay out the large sums of interest on the Treasuries it issues… But, that… Is a discussion for another day.

The currencies saw more dollar strength yesterday, but it wasn’t a result of anything the dollar had going for it… In fact, the results of the data yesterday was all dollar negative… No, this time it came from the Eurozone. Right about the time I was hitting the send button yesterday, European Central Bank (ECB) minister, Axel Weber Opened Pandora’s Box of questions regarding future direction of the ECB… Let’s go to the tape!

Weber was so kind to mention that the ECB will announce a package of “non-standard” monetary measures at their next meeting in May… Brother, you should have seen all the different angles that were taken by the pundits after this announcement! Some believe he was telling the markets to get ready for Quantitative Easing. (not sure why he would do that, the ECB still has room to cut rates lower) Some believe he was telling the markets to get ready for rate cuts down to 0%. (not sure why they would need to go to 0%, or why he would make that announcement now, when rates are 150 BPS away from 0%)

Either way, the euro took the brunt of the message, and got sold, leading the other currencies to a day of dollar strength across the board… The board that stops in Japan that is! The Japanese yen continues to get back in the good graces of currency traders.

So… What about the data prints yesterday? ZOWIE! Talk about negativity! First, let’s look at Capacity Utilization, since I talked so much about it yesterday. Capacity Utilization fell to 69.3%, a new all-time low for the series. And, the manufacturing component of the data fell to a new all-time low! Recall, I told you this was a “forward looking” piece of data… So the future doesn’t look so bright, eh? Guess I won’t have to wear those shades!

Industrial Production also posted a negative number for the month of March posting a -1.5% decline. And… CPI? Well… Consumer inflation posted the first year-over-year decline in the headline rate in over 50 years! 1955 (it was a great year!) was the year… Prices were 0.1% lower in March than in February, contrary to the “experts” that thought prices would increase by .1% This resulted in the annual inflation rate falling to -0.4%, the first negative number since 1955!

So… Don’t look for interest rates in the U.S. to be going anywhere for some time… The one thing you can look for though is more Quantitative Easing…

And… Leave it to the media to spin the TIC Flows in a positive manner… TIC Flows (net security purchases by foreigners) posted a figure of $22 Billion in February, which is below the amount needed to finance the Current Account Deficit. However, the media spun it like this: “International demand for long-term Treasuries rose in February as China and Japan added to their holdings.” Hmmm… Well, it’s a true statement… But, not complete!

OK, enough on the data yesterday… Talk about putting someone to sleep! ZZZZZZZZZZ!

Did you hear about the U.S. Treasury turning yellow belly? OK, let me first set this up… During the Presidential campaign, Obama indicated that China had indeed manipulated their currency… But when it comes down to the cheese that binds, the Treasury Dept declined to name China as a currency manipulator… Bawk, Bawk, Bawk… Chic-ken!

Well, the Fed’s Beige Book printed yesterday, and believe it or don’t, half of the Fed Districts are seeing a moderation in the pace of the economy’s decline. That plays well with the mental note I made yesterday about full planes and restaurants. But is this just U.S. consumers refusing to batten down the hatches and save for a rainy day? You know, denying the recession and maintaining their spending habits? I mean, you know, the generation that comes after me, has never experienced a major slowdown… Maybe they don’t know how to act? HA!

China posted at GDP for the 1st QTR of 6.1% Pretty darn good for an economy that was slowing down so much the Gov’t had to implement a stimulus package. While it’s a far cry from the 11 and 12% growth rates of a couple of years ago, it’s still better than a sharp stick in the eye! I still believe that China will be the first economy to come out of the global recession.

Japanese yen got bought on the China GDP number, as traders were disappointed with the figure… I believe this all to be overdone, a little to much drama for my taste… I would be careful with this kind of trade, for you never know what the Chinese (a communist country) will do…

So… If yen is getting bought, that means the high yielders are getting sold, and so it is for the once high flying currencies of Australia, New Zealand, Brazil and South Africa. I still believe that eventually hedge funds, and investors are going to grow tired of the paltry yields on U.S. assets, and look to go elsewhere… Therefore, I like to be ahead of the crowd, if you get my drift…

Indian rupees are stealth like these days in gaining ground once again… I’ve had my foot stepped on plenty of times by the Indian Central Bank and their intervention whenever the currency gets stronger… But much like most things, I forget the pain, and talk glowingly about rupees once again… Talk about a country that is least likely to implement Quantitative Easing!

And finally, Gold… It just hasn’t been a good week for Gold. Every morning the shiny metal posts a gain at the London Morning Fixing, but gives it all back by the end of the day. Today, Gold posted a loss at the Fixing, so maybe, it gains all day! A reversal of fortune if you will! The Uncertainty Hedge is still just that folks… And in these days of uncertainty you have to wonder, just what’s going on in the minds of investors without Gold… But that’s just my opinion…

Currencies today 4/16/09: A$ .7195, kiwi .57, C$ .8285, euro 1.3165, sterling 1.4850, Swiss .8710, rand 9.0250, krone 6.7150, SEK 8.3075, forint 222, zloty 3.2550, koruna 20.44, yen 98.70, sing 1.4975, HKD 7.75, INR 49.75, China 6.8325, pesos 13.08, BRL 2.1835, dollar index 85.23, Oil $49.71, Silver $12.66, and Gold… $889

Source: Awful Data!

We have the Bank of England (BOE) and the European Central Bank (ECB) meeting today. Look for rate cuts from both of them, as recessions are deepening in both camps. The BOE doesn’t have many arrows in their quiver, while the ECB has held some in reserve. I doubt the ECB would go for a “huge honkin’” rate cut today, as they are normally more stick in the mud thinking… The BOE will probably move rates nearer to zero…

The currencies all had a day to bounce yesterday, more on that in a minute… But the day on the trampoline had to end, and as the day turned to night, the overnight market participants took a look at the rate cut meetings and decided to sell… So, last night when I went to bed, the euro was 1.2645… And right now it’s 1.2585… Not a huge change, but one that’s going the wrong way for euro holders.

OK, back to yesterday… All my troubles seemed so far away… Now it looks as though they’re here to stay, oh I believe in yesterday… Suddenly… NO WAIT! My fingers were going to continue that tangent! UGH! Any way… Yesterday, the currencies all rallied on the news that China was going to introduce a new stimulus package and their leader Wen Jaibao said he believed there would be a return to 8% growth for the Chinese economy. This news got commodities rolling, and risk takers dipping their toes back into the water. But then… Stephen Green, head of China research at Standard Chartered Bank in Shanghai has this to say in rebuttal of Wen… “Every day the world economy gets worse and they’ve probably got two years of very slow global growth to get through.”

So… Either Wen was saying what he truly believed was going to happen… OR… He has taken a page out of the Bernanke / Paulson, un-dynamic duo’s book on how to deceive the public as to how bad things are… Oh, I know the un-dynamic duo eventually came around to say things were bad… But, all you have to do is go back to the last part of 2007, and the first part of 2008, to find all the quotes you need to fill your bag, from these two regarding how things weren’t that bad… It wasn’t a recession… And subprime won’t filter out into the economy…

What I believe is taking place in China is a move away from a dependence of U.S. consumers… Which won’t happen overnight… But, if I’m correct in this thinking, it would eventually lead to a HUGE problem for the U.S. For, if China can make this move, they won’t need to keep buying U.S. Treasuries… Uh-Oh!

There was other news that goosed the risk takers yesterday, and that came from the U.S. as reported by Reuters… “A U.S. House Financial Services subcommittee is expected to hold a hearing on mark- to-market accounting rules, which have been blamed for forcing banks to record billions of dollars in write downs, a source briefed on the matter told Reuters.

The congressional subcommittee on capital markets has tentatively scheduled the hearing for March 12, the source said.  The U.S. Securities and Exchange Commission’s chief accountant and the chairman of accounting rule maker, the Financial Accounting Standards Board, will be asked to testify, the source said.”

So, recall about 10 days or so ago, I told you there was a rumor going around, that someone’s underground, and she will rock you in the, NO WAIT! Darn it! I’m really going off on song lyrics today, because it’s a Tub Thumpin’ Thursday! Any way, I told you about the rumor that was going around about how the dropping of the mark-to-market was being considered… Well, I said then, that I smelled smoke… And when there’s smoke there’s a fire… And here’s the proof in the pudding folks… They congressional subcommittee will talk about this next week!

I can’t believe that they will go through the effort of talking about his, dragging everyone up to Capitol Hill to testify, without suspending the mark-to-market… Now… Talk about unlocking the credit crisis! All those reserves being held to cover the mark-to-markets, could be released on the economy!

But wait! With over 500K being placed on the unemployment rosters every month these days, and most likely a number of 600K being placed on the roster last month, who in their right mind would make loans to consumers in an economy like that? Well, that will be the next hurdle, but don’t tell the markets now, as stocks really liked this news about the mark-to-market, and rallied on the day!

So… Commodities had a day in the sun, much like I will be doing in about a week from now! Or, should I say “hope there’s sun?” Doesn’t matter much to me, as I’ll be in the ball-park next Saturday watching my beloved St. Louis Cardinals with my family at my side… It doesn’t get any better than that my friends! Oh! I was talking about commodities… Well, the commodities that rallied didn’t include Gold, as the shiny metal has seen better days this past week after hitting $1,002… I would have to think that $900 or $890 is a level it will hold. Consider, if you will, the fact that there’s so much uncertainty in the world today… And… Surrounding that uncertainty is the fact that so many Central Banks are near zero with their rates, and have announced quantitative easing as their next move… Recall, I told you a day or two ago that the Bank of Canada has joined the ranks of those employing the quantitative easing measures… The list is getting longer all the time, and now includes the Fed, the BOE, the Bank of Japan, and Bank of Canada… There’ll be more, as we go along… What else can a Central Bank do, after they’ve cut rates to the bone?

So… As I said the other day… I truly believe that Gold is trading at a discount right now… But, that’s just my opinion, not that of EverBank’s, and I could be wrong… I certainly was wrong about the Obama bounce, eh? I wasn’t wrong about calling the end of the Great Unwinding of the Carry Trade, though! Nailed that one to the wall!

Speaking of the end of the unwinding of the Carry Trade (let’s see how would my friend, the Mogambo shorten that… EOTUOTCT!) Japanese yen continues to weaken, after being the best performing currency of 2008, it is now the worst performing currency of 2009! And there doesn’t seem to be any change in that selling patter for yen… In fact, there was a story yesterday on Bloomberg that caught my eye… “Scottish Widows Investment Partnership, which oversees 42 billion pounds ($59 billion) in bonds and currencies, cut its yen-denominated holdings by a fifth because of Japan’s worsening economic situation.”

Before I head to the Big Finish, I wanted to mention the Richard Russell Tribute Dinner that is going to take place in one of my fave cities, San Diego, on April 4… My friend, John Mauldin, is putting this all together, so if your interested in attending, here’s a link to click for more information…. https://www.johnmauldin.com/russell-tribute.html

Currencies today 3/5/09: A$.6425, kiwi .5010, C$ .78, euro 1.2565, sterling 1.4245, Swiss .8510, rand 10.5250, krone 7.1150, SEK 9.1325, forint 247.55, zloty 3.7675, koruna 21.9925, yen 99.40, sing 1.5540, HKD 7.7580, INR 51.70, China 6.8405, pesos 15.30, BRL 2.3680, dollar index 88.98, Oil $44.41, Silver $13.09, and Gold… $916.60

Source: China Announces A Stimulus Plan

These delectable little guys are usually served steamed, with a splash of soy sauce. When China’s booming like it was in recent years, shoppers are hard-pressed to find a store that can keep them on the shelves. And at 720RMB, or $420HK (about $60 U.S.), that’s no small feat for a palm-sized morsel. They’re expensive, and taste great.

A hairy crab, if you’ve never seen one, is usually a bit smaller than the Dungeness crabs many Americans are more familiar with. These freshwater crustaceans start to fatten as soon as the autumn chill cools the Yangtze River Delta. That adds to their taste and desirability.

When China’s feeling pinched, hairy crab sales drop and prices plummet. At the moment, hairy crab prices are off by more than 80%, which is a steeper drop than during the Asian Financial Crisis a decade ago, or during the SARS epidemic in 2003. After the best sales in history last year, that’s significant because of what falling hairy crab sales imply about the state of China’s economy at a time when it is struggling to stave off the effects of a global recession and growth may drop to the slowest pace China’s seen in nearly a decade.

Since hairy crabs are a luxury both in the home and at restaurants, the falling prices suggest that people are “eating cheaper.” Rather than ordering up haute cuisine – including hairy crabs – at such restaurants as Cuisine Cuisine in the International Financial Centre (IFC) Tower, or the famous Jumbo Floating Restaurant in Hong Kong Harbor, most Chinese are eating “cheap” and seem to prefer smaller, more modest places these days.

They’re also apparently “shopping cheap,” too. Call it a Chinese version of the “Wal-Mart Effect” (WM), but that’s what’s happening as savvy Chinese consumers downshift. They’re still spending – as reflected by Chinese retail sales figures, which suggest year-over-year growth of 21% in 2008 – but they’re spending differently.

Nowhere is this change more evident than in those stores where luxury items are sold. Shanghai and Hong Kong store managers I’ve spoken with recently told me privately that such big-ticket brand names as Dior, Chanel, Hermes and others aren’t moving as fast as they were a year ago.

Knock-offs, of course, are still flying off the shelves.

On a related note, many Chinese merchants are actually refusing to take credit cards these days, at least from Chinese consumers. Don’t think for a minute this is limited to convenience store items, either. Big-ticket items like tours and holiday excursions that have long been paid for on credit are now cash or check only as many travel companies – like Hong Kong’s Sincere International Travel Service Co. Ltd. – look to avoid getting caught short.

Many merchants say that banks are hoarding cash and delaying payments on personal credit cards. While no banks would comment officially in response to my inquiries, it’s clear that Chinese lenders are dumping riskier credit-card holders just like their Western banking brethren. Only faster.

Unlike their Western cousins, for whom credit has been a bonanza, Chinese banks have only relatively recently gotten into the credit game after being so cash-centric that the rest of the world’s bankers viewed China’s lenders as antiquated. But now that generation of cautiousness is paying off.

Chinese banks are apparently also going the extra mile to ensure they don’t get burned. Lenders are making credit-card transactions as unattractive as possible for the merchants who process the charge slips and they’re doing so by using the most effective tool of all – delayed payments.

Only a year ago, most banks paid credit-card transactions in 14 days. But now, according to reports by CNN and other news outlets, it’s not uncommon for a merchant to have to wait 20, 40 or even 90 days to get paid. And that obviously affects cash flow at a time when luxury businesses in China are already under pressure.

This all speaks to something we at Money Morning have talked about repeatedly over the past 12 months: Investing in China is not about luxury as so many investors have mistakenly thought. It’s about the basics. To be sure, luxury items and top-shelf brands have enjoyed a heyday in China that coincides with the dramatic growth spurt the country has experienced in recent years. But luxury brands are hardly the key to steady growth and profits over the long term.

That mantle, instead, belongs to much more basic industries, such as power-generation, railway-and-infrastructure construction, water filtration, and pollution control. All will benefit substantially from China’s $583 billion stimulus package, which is designed to fuel growth that not only benefits the economy, but also staves off social unrest, which is what Beijing’s power elite fears the most. To China’s Politburo, running out of power is a far more significant risk than running out of Gucci.

So for investors who are interested in grabbing the best that the Red Dragon offers while avoiding the risks there, hairy crabs are yet another harbinger of where and how to invest in China in 2009.

If You Want a Forecast for China’s Economy, Ask a Hairy Crab

Good day…It was actually a Great day for the currencies yesterday as the dollar index dropped another full point. The Euro moved past $1.35 and then blew through $1.36 to end the day over $1.37. And the Euro wasn’t even the best performer, as the New Zealand dollar rallied over 2.1% vs. the US$ to take the title of best performing currency against the greenback. The South African rand was the only currency turning in a negative performance yesterday with the other commodity driven currencies of Norway and Brazil just barely holding their ground vs. the US$.

The currency rally caught Chuck’s eye and he fired off the following email for me to include this morning:

“Quite a day in the currencies again… Looks like that Santa Rally for the currencies that I first mentioned on December 8th, is coming to fruition. Of course “I didn’t know this would happen” I was just giving market commentary on what looked like was happening!

So… 1.37 and change for the euro, the move from 1.27 and change has been swift and fast. And why not? I’ve said all along that the dollar’s rally was just a bear market rally. Now, we’ll have to see if this can continue, which I believe it will, or if this was just a false dawn.

Well… It’s Christmas time, so the giving is going on… And it looks like we’ll see the Gov’t “give” more once the calendar turns to 2009. What was once a $150-200 Billion stimulus package that would be sent through in January when the new lawmakers take their oath, now looks as though it will be in the neighborhood of $600 Billion, that is according to Nancy Pelosi who made that announcement yesterday. Shoot Rudy! What’s another $400 Billion among friends?

By my calculations, that will put us nearer to $3 Trillion in bailouts and stimulus packages… There’s a total of over $8.5 Trillion that has been allocated with funding facilities, but the actual output of cash is around $2.5 Trillion before the next deal in January gets done.

No wonder the dollar is getting pummeled once again!

I did a 1 hour interview yesterday… It was a “the world according to Chuck” interview… Long time readers all down about what I probably had to say, but it was cool getting to go “free form” and just let it all hang out. I will go to my darling daughter’s (Dawn) kindergarten classroom tomorrow and read to them… Dawn has always been a fan of the way I read, The Night Before Christmas… And her kids always get a kick out me doing this, most of them think I AM Santa Claus!”

Chuck loves the holidays, and I think reading to the kindergarten class is one of his favorite parts!

Today the markets will be awaiting the FOMC rate decision and the accompanying statement which should be released around 1:15 CST. As I stated yesterday, a cut of 50 basis points is already cooked in, but noise from the street indicates we could actually see a 75 basis point cut. The market is currently trading Fed Funds at .125%, so a drop of 75 basis points would move the target very close to where the market is trading. But as we have said in past Pfennigs, the FOMC has almost used up all of their interest rate ammunition, and will have to look for other ways to try and steer our economy out of the recession. The markets will be looking at the accompanying statement for any guidance as to the direction the FOMC will take next. ‘Quantitative Easing’ will be the big buzz words of the next few weeks. We will just have to wait and see just how creative our Fed is going to get.

The Fed will start to use its balance sheet as the key tool for monetary policy. Since he can’t cut rates much further, Ben Bernanke will likely start channeling credit directly to businesses and consumers by further enlarging its $2.26 trillion of assets. Bernanke and his compatriots will have to try some new experiments to manipulate the supply of money to try and prevent the worst recession in a quarter century from turning into a depression.

The data released yesterday continued to indicate the US economy is faltering, as the Empire manufacturing and Industrial Production numbers showed pretty large losses. Industrial Production decreased by .6% during November, as US manufacturing output continues to fall. Production has now decreased 7 out of the last 11 months, and the more important Capacity Utilization number also fell. We won’t be seeing the manufacturing sector pull us out of this recession any time soon, as the utilization number shows we are only using 75% of our manufacturing capabilities.

The manufacturing numbers were bad, but these negative numbers were largely expected. The surprise of the day came as the Net Long-term TIC flows for October were released. TIC flows were expected to be right around $40 billion, just slightly below what is necessary for us to fund our deficits. But the actual TIC flows were barely positive at just $1.5 billion. Could the rest of the world finally be tiring of our US Treasuries? Actually, foreigners continued to purchase treasuries, but sold a record amount of debt issued by mortgage-finance companies Fannie Mae (FNM) and Freddie Mac (FRE)  and other agencies, offsetting the treasury purchases.

So investors were shortening up the duration of the US$ holdings, selling longer term securities to buy short term treasuries. This has to have the Fed shaking in their boots, as no investor buys short term paper at near zero rates with a plan to hold them. This money is being parked short term, and will move out of the dollar as soon as the markets start to calm down. China remained the biggest foreign holder of US Treasuries, after its holdings rose by $65.9 billion to nearly $653 billion. Japan is the second largest holder with nearly $586 billion of US debt.

For those of you who may be wondering why the TIC data is so important, this is how we finance our deficits. As Chuck reported last week, the US trade gap unexpectedly widened 1.1 percent in October to $57.2 billion. Yesterday’s numbers show we only were able to attract $1.5 billion of foreign capital to finance this gap. So the remaining balance had to be financed with additional debt. It seems we just keep digging the hole deeper and deeper!!

The Euro was helped out by ECB President Trichet who indicated he would pause interest rate cuts in 2009. Trichet told journalists in Frankfurt that ECB policy makers want to “concentrate at this stage on getting what we already decided to be really operational.” He went on to say there is a limit to how far the bank can cut rates. “Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes.” Sounds like the ECB doesn’t want to follow the US into the zero interest rate environment. Maybe Trichet and his colleagues realize just how dangerous a zero rate policy can be with regard to future inflation.

Data released this morning caused the euro to back off its high of $1.3737 as reports showed European manufacturing and service industries contracted at the fastest pace in at least a decade. These reports showed the Eurozone faces some of the same challenges as the US, but in my opinion, their central bank has done a better job of dealing with the slowdown. With the FOMC cutting rates today, and the ECB indicating that they are going to pause, the Euro will likely continue to gain back some of the losses of the past 6 months.

The Australia and New Zealand dollars both rose for a second day on interest rate differentials. The Australian dollar extended gains after the central bank indicated it would slow the pace of further rate cuts. The Reserve Bank of Australia trimmed its forecast for inflation to 2.5 percent from a November prediction of 3 percent. Policy makers have a target range of 2 and 3 percent for Aussie inflation. With inflation in their target range and a simulative monetary policy, the RBA doesn’t need to do much more with rates. Commodity prices have hurt both the AUD and NZD, and any increase in commodity prices during 2009 would have a big positive impact on both these currencies.

Any hope for commodity prices will center around the rebound of the Chinese economy. China’s central bank Governor Zhou Ziaochuan continues to call for aggressive action to keep China’s growth rate from dropping below 8%. The Chinese govt. pledged last week to boost liquidity after cutting interest rates last month by the most in 11 years to spur lending and consumption. China’s economy has slowed, but will likely grow at 6 percent during 2009. This is still an excellent growth rate for the world’s fourth largest economy, but below the 8% rate many believe is necessary to avoid social instability.

Currencies today 12/16/08: A$ .6694, kiwi .5589, C$ .8102, euro 1.3659, sterling 1.5246, Swiss .8661, ISK 218, rand 10.3118 krone 6.9629, SEK 8.0583, forint 195.84, zloty 2.9716, koruna 19.319, yen 90.01, baht 34.78, sing 1.4781, HKD 7.7502, INR 47.91, China 6.8457, pesos 13.3631, BRL 2.39, dollar index 82.16, Oil $45.02, Silver $10.49, and Gold… $832.77

Source: Santa Rally for the Currencies