Now, having said all that… It doesn’t mean the RBA won’t cut rates again in the future… It just means that they were being prudent, and taking a step back to see what their previous rate cuts had done to the economy, and how the economy would be affected by them. So, the proverbial “pause for the cause”… But, I believe it to be warranted, given the RBA had cut 400 BPS away from their once lofty rate in 7 rate cuts…

Fundamentally speaking, the A$ represents an economy that has fared better than most of its G10 counterparts, with a growth outlook far exceeding that of the G10 nations. Australia’s 2009 GDP growth is expected to reach +1.0%, compared to -2.0%, -2.20%, -5.0%, -2.7% and -2.2% in the US, Eurozone, Japan, UK and Canada respectively. (and we all know that the U.S. growth outlook is a big fat joke! Instead of -2% it should be -4 or -5%!) Then, add in the fact that Australia’s current account deficit is seen at 4.4% of GDP in 2009, its lowest level since 2002. Recall, I kept telling you that their Current Account Deficit was narrowing? Its Budget SURPLUS is expected to hover at 1.0% of GDP–a far superior display than the deepening deficits of the US, Eurozone, Japan and the UK.

So… Like the spotlight that I directed to Norway last week… Here’s another example of a country that could be in the front of the race when this financial turmoil ends…

So… The A$ is stronger this morning, but I wouldn’t go racing to the currency kiosk to buy A$’s because you believe this to be a turn / reversal in the A$’s fortunes… There’s no end in sight to the financial turmoil that has a grip on the world right now, and knowing that, tells me that the risk takers are not participating in the markets right now, and without the risk takers, any run-up in A$ or any other currency for that matter, is not of the “reversal of trend” kind of run-up… But… There will come a day, when all these fundamentals will matter once again…

The Bank of Canada (BOC) will meet today, and they are expected to cut rates again… Don’t look for any RBA-style surprises here… Canada, just fell into a deficit status, and that came as a result of the slowing economy, which fell 3.4% in the 4th QTR… So, you can expect the BOC to cut rates this morning…

Yesterday, we saw everything under the sun trade heavily except U.S. Treasuries… Even Gold has faded in the past 5 days… Sort of like my beloved Missouri Tigers Basketball team did under the bright lights of national TV on Sunday! UGH! But, nonetheless, everything is trading heavy… Stocks, corporate bonds, muni bonds, commodities, and currencies… And I could even go further in that list and say real estate, and housing!

I’ve gone on record with my feelings about how I believe U.S. Treasuries are the next bubble… And I read a report from one of my fave economists, Brad Setser, yesterday that tells me I’m really on to something with that belief… Here’s a snippet… “That implies, if the Pandey/Setser estimates for official purchases are right, that private investors snapped up more Treasuries than the world’s central banks. Central bank demand accounted for a far smaller share of total issuance than in the past few years. In 2007, for example, central bank purchases easily exceeded total issuance. The big increase in demand for Treasuries in 2008 came from private investors in the US.”

Hmmm… Private investors buying Treasuries… Now that’s something I’ve been telling you for some time now, but Brad has all the facts and figures in his report to prove it, and knowing that Private investors have bought all the Treasuries, that Central Banks didn’t want, tells me that a bubble is in the making…

Speaking of Central Bank ownership of Treasuries… I read yesterday that China used to keep 100% of their dollar reserves in U.S. Treasuries. Today they keep only 70% of their reserves in Treasuries, with the difference in gold, euros, and other Asian currencies. Hmmm… What if they would decide to diversify more?

OK… The devastation the manufacturing sector has experienced in the past 14 months, looks like it might have found a bottom… The February ISM Index, which measures the pulse of manufacturing, registered a slight increase! The index rose slightly to 35.8 from a previous level of 35.6… The employment component of the index though continued to slide… Production was the biggest gainer of the report… So, something is producing a heart beat for the economy…

Speaking of producing a heart beat for the economy… I’m going to go in a different direction occasionally here in the Pfennig, and instead of always beating on the dolts in Gov’t, and the talking about the rot on the vine in the economy… And… I’m going to ask you dear readers to provide the input!

Here’s the skinny… I would like for readers that have businesses that might be doing well in these times, to fire me off an email and tell me of their successes, how they’ve done better than others, or any kind of information you would want to see printed about your company… One to two paragraphs… And if you don’t want to include the name of the company, don’t! But… This will be free advertising for you! But, I only want the “feel good stories”…

The other thing to think about with this offer is that the Pfennig gets picked up by news agencies all around the world… It’s circulation just keeps growing and growing… So… Come on! Send me your stories! pfennigreplies@everbank.com

I just received some “hate mail”… I opened it up, and the guy said he “hated me” because of my call for an “Obama bounce” after his inauguration, that obviously didn’t come to fruition… Yes, I was wrong… How was I to know that Obama would opt for a stimulus package that has more spending in it to produce short term jobs, and start nationalized health care, than shore up financial institutions? He said he was going to “fix the problem”… Unfortunately, his idea of a “fix” is create jobs, when the economists all agree that the banks and financial institutions need to fixed first… Maybe he’ll be right… But right now the markets don’t think so… Especially stocks…

So, the markets are tanking, with no Obama bounce… No reason to “hate” someone! And… I always say… “I’m not even your last choice as a stock jockey”… But, how could we NOT have an Obama bounce? This guy was so popular! Right?

Speaking of stocks… The DOW lost 300 points yesterday to trade below 7,000 at 6,763… The first time below 7,000 in 12 years! But how can the little guy make money in stocks when the greatest investor of all time lost money in 2008? Here’s the skinny as reported by the Wall Street Journal…

“Berkshire Hathaway, the holding company led by famed investor Warren Buffett, reported its worst year ever in 2008, with its net falling to $4.99 billion from $13.21 billion in 2007. Book value per share declined 9.6%, a performance far better than the S&P 500 stock index but only the second negative year suffered by the company since Buffett took over in 1965.

Berkshire predicted the economy “will be in shambles throughout 2009 — and, for that matter, probably well beyond.”

Today, we’ll see the color of the Pending Home Sales, and Vehicle Sales… In addition, we’ll get some verbiage from Fed Head Lockhart speaking on the economy in Tampa, Fed Chairman, Big Ben Bernanke goes before the Senate Budget Committee, and U.S. Treasury Sec. Geithner, goes before the House Panel on Federal Budget… So… Lots of opportunities for these guys to give us a sound bite that sends the markets one way or the other. So, keep your ears to the ground… Or, just turn on cable news!

Currencies today 3/3/09: A$ .6420, kiwi .4975, C$ .7750, euro 1.2605, sterling 1.4040, Swiss .8510, rand 10.4850, krone 7.1575, SEK 9.1375, forint 243.75, zloty 3.7675, koruna 22.2650, yen 97.80, sing 1.55, HKD 7.7575, INR 51.97, China 6.8410, pesos 15.32, BRL 2.4250, dollar index 88.88, Oil $40.75, Silver $12.72, and Gold… $924

Source:  RBA Surprises The Markets!

The pan-European FTSEurofirst 300 was down around 1 percent, hitting a lifetime low. Earlier, Japan’s Nikkei ended down just shy of a 26-year.

MSCI’s main world stock index was down 0.2 percent on the day, after having tumbled 4.9 percent on Monday, its worst performance since early December.

Global stocks have been pummelled this year by a left-right combination of poor economic news and continuing travails within banks and the global financial system in general.

The MSCI index is down more than 22 percent on the year so far and has lost around 58 percent of its value since hitting an all-time high in late 2007.

The Nikkei ended down 0.7 percent. The benchmark hovered just short of a 26-year low amid worries about the U.S. financial system. The broader Topix slipped 1.1 percent to 726.80, its lowest close since December 1983.

Gargantuan losses on world stock markets, however, are piquing the interest of investors who see value appearing and the potential for at least a short-term reversal.

“Stocks do appear to be oversold at current levels, meaning there is a possibility for a near-term and significant rally,” Bob Doll, chief investment officer for global equities at BlackRock, said in a note.

But he added: “The downside risks remain troubling.”

WAIT AND SEE

The dollar weakened as traders bought the euro and other relatively higher-yielding currencies after the Reserve Bank of Australia unexpectedly left interest rates on hold.

But activity was subdued as investors took a wait-and-see stance over the financial system and deepening global recession.

The dollar index, a gauge of its strength against a basket of six other major currencies, hit a three-year high in overnight trade as investors sought shelter in the world’s most liquid currency. It was down 0.5 percent on Tuesday.

The euro rose 0.4 percent from late U.S. trade to $1.2629 , recovering losses suffered in the wake of European Union leaders’ rejection of a mass bailout for eastern Europe, which weighed on the single currency the previous day. Euro zone government bond yields pushed higher.

The interest rate-sensitive two-year Schatz yield was up 2 basis points at 1.227 percent. It remained within orbit of a euro lifetime low 1.15 percent struck on Feb. 18.

The 10-year Bund yield was up 3 basis points at 3.061 percent. Bond yields move inversely with prices.

REUTERS (March 3, 2009)

The bank cited a variety of reasons for the cut, including turbulent financial markets, falling commodity prices, slowing economic growth China, and the recent rash of rate cuts issued by other central banks around the world.

Specifically, Australia joins the United States, China, India, Japan and South Korea, all of which lowered borrowing costs in the past week. The European Union and United Kingdom are expected to follow suit this week.

“International economic data have continued to point to significant weakness in the major industrial economies, and there have been further signs that China and other parts of the developing world are slowing as well,” Reserve Bank Governor Glenn Stevens said in a news release. “These conditions have contributed to further falls in world commodity prices.”

Also in the bank’s release, Stevens said the rate cut could hamper the central bank’s goal of reigning inflation to 2% to 3%. CPI inflation in year‑ended terms picked up to 5%, while underlying measures were just over 4.5%.

But Stevens said he expects inflation to cool by the end of the year.

“Global disinflationary forces will assist in this regard, though the depreciation of the exchange rate means that the decline of the inflation rate to the target could take longer than would otherwise be the case,” he said

Possible Recession

Last month, Australia’s All Ordinaries stock index plummeted 14%. And that’s on top of falling home prices and retail sales.

The Reserve Bank hasn’t been this aggressive in cutting rates since Australia’s last recession in 1991, Bloomberg reports.

And more cuts could still be in store.

“We think the cash rate will bottom at 4% by early next year,” Stephen Halmarick, co-head market economics at Citigroup Inc. (C), told Reuters. “They are obviously very concerned about the outlook for global growth, I think that is warranted.”

The caution is warranted given the carnage around the world, but Australia’s economy could be one of the few to emerge relatively unscathed.

Housing prices haven’t fallen nearly as bad as those in the United States. Australia’s government budget is in surplus – a likely effect of soaring commodity prices earlier this year.

And by Christmas, $8.7 billion of a $10.4 billion stimulus package will arrive in mailboxes around the country – which may be the life preserver the economy needs to keep GDP from sinking into the red.

Source: Sensing Recession, Australia’s Central Bank Cuts Interest Rate 75 Basis Points

The RBA was pretty clear in its Statement of Monetary policy that it would like to cut rates. The Aussie dollar fell in response. So why bother making the point as directly as he did yesterday? Because he knows the banks have no intention of passing on lower borrowing costs to Australians and like the Treasurer he wants to put “maximum downward pressure on inflation.” Good luck with that.

Do you think the Reserve Bank is a tad premature and a tad triumphant in declaring victory over inflation? After all, the Bank has conceded recently that it’s the tidal wave of cash coming onshore from the favourable terms of trade that it fears the most. All that coal and iron ore money has to turn into someone’s wages or profits, doesn’t it? Has that changed?

Probably not. But everywhere the mainstream economists look, they find an excuse to lower the price of money and encourage people into taking on more debt. It’s not a coincidence most of these economists work for banks, which make money when people owe money.

And perhaps these bank economists-and the folks at the RBA-can see further into the future than the rest of us mere mortals. We don’t even know what we’re having for lunch today, much less whether consumer prices will moderate in the next quarter. But the RBA apparently DOES know, and thinks it’s safe to cut rates now, even as wages and prices rise.

“We cannot wait to see a fall in inflation before we start cutting rates, because by then it would be too late,” Battelino said yesterday. He did admit that at 4.5%, inflation was high and likely go higher. But he also insisted it was going to come down later this year, thanks largely to the Bank’s heroic efforts.

“Things have worked out, broadly speaking, the way we intended them to,” he modestly told a parliamentary committee. “As well as costs going up, businesses were widening their margins, so there was a pronounced increase in inflationary pressure. The danger was that if that continued, it would cause severe difficulties for the economy in the years ahead.”

“We’ve asked households to cut back on spending and we’ve given them the inducement to do so (with higher interest rates). Households have responded favourably. Households have been prudent in cutting back on spending and lifting savings. That is why the Reserve Bank can talk about cutting interest rates.”

If we had more time today we would provide you with an amusing vignette from Kafka or Dostoevsky in which something patently absurd is taken at face value by most people because they are too polite (or scared) to point out the absurdity. After all, everyone else seems to take it seriously. It must be serious!

But blaming household spending for inflation is grotesquely absurd. Have households cut back spending in a careful and thoughtful response to the RBA’s policy? Or is the price of petrol and food and health care going up while property and shares go down? Does the Reserve Bank really insist that inflation is caused by consumer spending and not an increase in the money supply?

As we’ve said before, prices can rise naturally for many good reasons. Demand exceeds supply, or a good or service is relatively scarce are just two examples. But inflation is always and everywhere a monetary phenomenon, as Milton Friedman said.

Pretending that consumers are responsible for inflation and have to be punished by higher rates is what makes central bankers so nauseating…that and the conceit that they manage a complex economy the way you might pilot a remote control boat on Albert Park lake. It’s the height of arrogance.

Meanwhile, beneath the summit of Mt. Olympus, Aussie purchasing power looks like it’s in decline. This is the end result of all central banking, which as Bill mentioned earlier this week, is an inherently inflationary enterprise (since it assumes a regular increase in the money supply and a tolerable 3% annual increase in prices).

According to figures published by the Australian Bureau of Statistics yesterday, wages are rising at about 4%, half a point less than the rate of inflation reported at the end of July. Why is the Reserve Bank worried about wage inflation when the opposite is clearly the case? Wages aren’t even keeping up with inflation in consumer prices.

By cutting rates, does the RBA assume that consumer price inflation will come down in coming months because consumer demand has moderated or because food and petrol places are permanently lower? People are spending less money on discretionary goods for a simple reason: they have less money to spend. Petrol and food prices have made sure of that. Aussies are “binging on debt” as an article at News.com.au reports today to keep up with the Joneses.

A word to the wise: the battle against inflation isn’t won. At best, it’s a cease fire or a truce. But you know how those things go. They can blow apart at any second. July inflation in the U.S. came in at a 17-yearh high of 5.6%. While you can expect to see debt-deflation (falling financial asset values), we’d expect the global central bank response to this to be what it always is: money-printing leading to inflation.

Dan Denning
The Daily Reckoning Australia

Source: RBA Declares ‘Victory’ Over Inflation in Australia