Chuck Butler (The Daily Reckoning):

Front and center on the currencies this morning, we have the fears of a default in Dubai, fading, and that brings the risk takers back out… So, we had one day of bloodletting on Friday, and come Monday, the tourniquet had been applied, and things are back on track. The Big Dog, euro (EUR) is off the porch, chasing the dollar down the street once again, and is trading at 1.5050, as I begin to write this morning.

I had a long time customer send me a note on Friday, asking me about the selling going on in the currencies and commodities because of the news that Dubai World was asking for help with their loans… I replied that the research I had read led me to believe that this would fade, in that the ruling families of Dubai and Abu Dhabi have bloodlines, and even though they had feuded in the past, blood would run thick, and the country would step in to help with the loans, which would mean a return to dollar selling once it all got straightened out… WOW!

This morning, there is news that the UAE will back the banks and the loans, so… It’s a “risk on” day once again!

After the Treasury auctions of last week, and a supposed “good covering,” the end result is that we have this pile of debt, and Treasury yields very reminiscent of something right out of the time warp of Eisenhower! But! Here’s the thing that US Treasury Secretary Geithner is hanging is hat on… These low yields reduce the interest expense for the US. Yes, Timothy, that my be true… But when you are issuing the amount of debt that’s on your plate to issue, then the “net” reduction to interest expense is a fallacy. Go ahead, do the math, Timothy… I dare you!

Can you believe that tomorrow is December 1st? WOW! Let the Holidays begin! But what comes to us on December 1st? That’s right, it’s the Reserve Bank of Australia (RBA) meeting. I’ve pinned my colors to the mast of another rate hike by the RBA tomorrow, and by the looks of it, Traders are beginning to pin their colors to that same mast! The reason I say that is the performance of the Aussie dollar (AUD) overnight. The Aussie dollar has a 91-cent handle this morning, which is far better than that 0.8998 figure that Mike reported on Friday morning!

Before I headed home on Wednesday last week, gold had pushed to a $25 gain in one day! WOW! I thought, “Can’t wait to see what the price looks like on Monday when I return!” But the Dubai loan problems took the wind out of gold’s sails, and the shiny metal lost $25 on Friday! UGH! Oh well, it gives buyers the opportunity to buy more at a cheaper level, I thought to myself… Then I thought… You should go check out what your good friend Addison Wiggin has to say about gold… So I did!

Click here for the rest of Mr. Butler’s article at The Daily Reckoning.

Source: Investment News Briefs Tuesday, June 9, 2009

Given the response, I’d say that most had their eye on the ball with the jobs farce… And that’s all I’m going to say from here on out…

One person did ask me what the President had to do with currencies, in an attempt to obviously steer me back to what I DO know… Well, perception is a BIG thing in currencies folks, and if your leaders are perceived to be one way or the other, it can play big into currency direction. So, to say that what I had to say didn’t have anything to do with currencies is on the wrong path.

OK… Enough! The currencies did heal a bit yesterday, with the euro trading back to 1.39 and change during the day… After taking the euro down on Friday, and Sunday night, traders began to realize that the U.S. has to deal with more supply today… And… Once again, the fears that the U.S. won’t have anyone show up for a Treasury Auction, just brings back the reality that owning dollars probably isn’t a wise thing to do… $35 Billion in 3-year Treasury Notes will be auctioned today…

And… Treasury yields continue to rise… I keep coming back to the rising Treasury yields because, well… Because I want to! Seriously though, have you been keeping score at home on these rising yields? The 10-year Treasury hit a yield of 3.83% yesterday… Now that might not sound too high, but at year-end 2008, a mere 5 months ago, the 10-year’s yield was 2%… And if you just keep bringing more supply after more supply to the markets, they are going to demand that those yields get even higher!

And let me remind you that as the yield on a bond goes up, the price of the bond goes down! So… For example… At 2% the price was 110.08… And at 3.83% the price is 94.20… (according to my Bloomberg!) So… All those investors that bought Treasuries last summer in a flight to safety, need to check their statements! Any way… I’m going to add the 10-year Treasury’s yield to the Big Finish, so we can keep better track of it!

The political turmoil in the U.K. looks to be water under the bridge now, and the pound sterling came back strong! I’m shocked at how strong this currency bounced back after the U.K. elections were over. But then I was shocked that the currency was 1.65 last week too! But, as I always say, don’t step in front of a run-away bus!

The high yielders and Commodity Currencies all saw some healing too, except Mexico, which is watching the price of Oil back off from the higher levels of last week. I saw a story on the Aussie dollar (A$) that struck me as strange… Now, first of all, I have a few detractors that tell me that I only write about things that make a currency look good and bypass the bad stories… I don’t see it that way, but be it as it may… I saw a story that said the technical charts show that the A$ is going to fall back to 70-cents… Of course last week, another guys charts had it going back to 80-cents… Hmmm… I need to get these two chartists together and iron this out!

There’s a preliminary G-8 meeting this weekend to set the agenda for the Big G-8 meeting in a couple of weeks. I have to think that the currency moves in the past 3 months have got to be on the agenda… That, and… China’s latest rumblings about the dollar as a reserve currency. Speaking of China, the World Bank President, Robert Zoellick, was talking at a conference in Montreal last night, and said that China may seek to diversify its foreign currency holdings over time, moving them away from U.S. dollars… Here’s more… “over time I could see china moving to some further diversification of its reserves.”

Well… He sees it… But do the Chinese see it as a need? One would think that they do, given their worries that a weaker dollar could hurt Chinese investments in U.S. assets, and the fact that they brought to the table an alternative currency as the reserve currency of the world… I’ve reported all of this numerous times in the past couple of months, so nothing new… Just a need to review it once again…

As I write this morning, I’m watching the euro, which was 1.3920 when I came in, lose some ground to 1.3875… Not much of a move, but a direction that is not likely to last, in my opinion… Not with the supply thing hanging over the dollar’s head.

Don’t know if you follow stuff like this or not… But the elections for the European Parliament took place last week. In Germany, France, Spain and the U.K. the representatives that believed that throwing taxpayer money at failing corporations, got hammered… Hmmm… I wonder how that would play out here? But I’m not going to go down that road…

I mention that piece above, because I think it had something to do with German Chancellor, Angela Merkel’s comments last week… Most of us thought she was taking a shot at the Fed and Bank of England… And she probably was… But her main goal, I believe now, after see the results of the elections, was to bring all this to light right before the voters went to the polls… I’m telling you… She’s one smart cookie!

Gold and Silver are having a tough row to hoe in finding a bid… The Bid winds have not filled the main sails of Gold and Silver for 3 days now… And with this following story that I’m going to provide, the bid winds will be even tougher to find… As it will signal to the markets that the tourniquet has been wrapped around the patient (financial institutions) and some are recovering…

It was reported last night that 10 Banks will be allowed to repay their TARP (troubled assets relief program) funds… Could total $50 Billion! With the Fed being so demanding in their grading of these banks before allowing them to repay the TARP, I would think that these banks will be well suited to move forward from here…

With Gold hovering around $950 and Silver around $15, it certainly provides an opportunity to buy at cheaper levels than last week’s lofty figures, eh? I would use these dips to my advantage… But then that’s just me… It doesn’t mean that it’s the right thing to do!

My friend, Bill Bonner, had a great piece in his Daily Reckoning (www.dailyreckoning.com) yesterday, regarding house prices… Check this out!

Robert Shiller was talking about Home prices in the NY Times, and this just kind of hit me like a V-8 slap… “Even if there is a quick end to the recession, the housing market’s poor performance may linger. After the last home price boom, which ended about the time of the 1990-91 recession, home prices did not start moving upward, even incrementally, until 1997.”

We’re also looking at $2.4 trillion worth of Alt-A mortgages that will need to be refinanced or reset. The peak in those resets won’t happen until January 2013.

Hmmm… That’s not anything that anyone selling a house wants to hear! But anyone that wants to buy, well… That’s not as devastating to hear!

Well, the data cupboard is empty today, with the U.S. Treasury auction the only thing to deal with today. Tomorrow we get the Trade Balance report for April… Yesterday, I made a mistake talking about the Trade Deficit saying it was “millions”… When I know all too well that it is in the Billions! Just put that down to being writing too early in the morning! But for those of you keeping score at home, the Trade Deficit is forecast to be $29 Billion in April!

But more importantly, tomorrow we’ll see the Budget Deficit, which is expected to be $180 Billion for the month of May… If it tallies there at $180 Billion, the Budget Deficit in the first 5 months of this year will have exceeded $650 Billion… And that’s before the $787 Stimulus gets added… And other items that will come along… And don’t forget that we posted a deficit in April! I still believe the Budget Deficit will be at least $3 Trillion this year!

That would push our National Debt to around $14 Trillion… You can keep score at home if you want by clicking on this link… http://www.brillig.com/debt_clock/

Time to head to the Big Finish…

Currencies today 6/9/09: A$ .7925, kiwi .6210, C$ .9025, euro 1.3890, sterling 1.6150, Swiss .9160, rand 8.1450, krone 6.4340, SEK 7.8150, forint 202.65, zloty 3.2350, koruna 19.3020, yen 98.30, sing 1.46, HKD 7.7515, INR 47.55, China 6.8354, pesos 13.40, BRL 1.9630, dollar index 80.83, Oil $68.85, 10-year 3.83%, Silver $15.07, and Gold… $952.45

Source: Rising Treasury Yields

What prompted us to tackle this bug bear now? Why aren’t we out on a Buenos Aires terraza sipping cold beer instead? Well, we couldn’t help noticing that the yields on long-dated US Treasuries are rising.

As underground investors Adam Lass writes in today’s Taipan Daily, last December future contracts for 30-year T-Bonds “were hovering around 142 and change with yields under 2%. Now we were looking 122, a drop of some 14%, forcing yields to just about double.” And last week the 10-year Treasury bond yield, which hit 2.07% in December, broke above 3% for the first time since the financial crisis started last September. It is currently trading at around 3.17%.

For those of you not familiar with the relationship between Treasury yields and inflation, higher yields on long-dated bonds is a sign that the bond market is anticipating higher interest rates in the future. (Higher interest rates being the typical monetary response of central banks to higher inflation rates.)

What could be pushing up pushing up yields on long-dated T-bonds? Look no further, dear reader, than the frantic action of the wonks at the US Federal Reserve.

This from Martin Hutchinson at Money Morning:

Monetary policy has been extremely stimulative for the last six months, with broad money growth running at more than 15%, and real interest rates substantially negative. The justification for this – that the United States was in danger of substantial deflation – was proved to be erroneous by last week’s report on first-quarter gross domestic product (GDP). In that report, the deflator – the rate at which domestically produced goods increase in price – was a surprisingly high 2.9%, indicating that inflation has by no means gone away.

In addition, the U.S. Federal Reserve is buying securities in the markets and financing others to do the same; its purchases of U.S. Treasury bonds, in particular, are nothing more than a pure monetization of the U.S. federal deficit, which can only lead directly to higher inflation.

As Martin points out, the German Weimar Republic did something similar. In the years leading the one trillion percent inflation of 1923, monetized 50% of government expenditure. The Fed isn’t that stupid, of course. In buying $300 billion of T-bonds in six months, it is only monetizing about 15% of government expenditure… Of course, as more pressure comes to bear on the Treasury’s bond auctions, the Fed may have to up its monetization efforts.

And that’s caused commodities to soar as currency speculators and safe-haven investors head for higher ground.

At the culmination of the policymaking Federal Open Market Committee’s (FOMC) two-day meeting Wednesday, Fed Chairman Ben S. Bernanke revealed that the central bank would purchase up to $300 billion in longer-term Treasury securities, as well as an additional $750 billion of mortgage-backed securities. The central bank also said it would buy debt issued by government-sponsored agencies such as Fannie Mae (FNM) Freddie Mac (FRE).

“To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion, to a total of up to $200 billion,” the Fed said in its statement.

“Moreover,” the statement went on, “to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months.”

Many analysts believe that Bernanke’s announcement was a bold attempt to instill confidence in the markets and loosen credit for consumers and businesses.

Harm Bandholz, economist at UniCredit Research in New York, noted that the Fed had bought only 19% of the mortgage-backed securities and only 40% of the agency debt that it had already said it was buying, so there was no rush to announce more purchases.

“The Fed employed its shock-and-awe policy,” Richard Schlanger, a vice president at Pioneer Investment Management – who helps invest $13 billion in fixed-income securities – told Bloomberg News. “This has to have a profound impact on credit spreads going forward.”

However, others like BBC economics editor Stephanie Flanders said the only shock from the Fed’s decision was felt by investors who view the act as more desperate than bold.

“Why have this new spending spree at all?” she asked. “The answer may be that the Fed – and the administration more generally – is concerned that the apparent improvement in credit conditions the past few months is a false dawn.”

The Conference Board’s gauge of lagging indicators, which measures business lending, length of unemployment, service prices and ratios of labor costs, inventories and consumer credit, dropped 0.4% last month – after posting a 0.3% drop in January.

The London Interbank Offered Rate (LIBOR), the overnight rate at which banks charge each other for loans, stood at 1.33% last Wednesday – a week before the Fed’s announcement. That was near the highest level since Jan. 8 and up from this year’s low of 1.08% on Jan. 14, the British Bankers’ Association said. The rate stood at 1.29% Tuesday. The rate dropped about six basis points yesterday (Thursday) to 1.23% – its lowest level in two months. The LIBOR-OIS spread, a gauge of bank reluctance to lend, slid seven basis points to 100 basis points, Bloomberg reported.

Commodities Soar as Treasuries and the Dollar Lose Their Allure

Chairman Bernanke’s ambitious asset purchase plan may have unlocked the credit markets – at least for the time being – but it also capped Treasury yields, driving investors from the currency many had fled to as a safe haven.

The yields on 10-year Treasury notes fell 47 basis points – the most since 1962 – after the Fed’s announcement Wednesday. The yield on the notes, which climbed as high as 3.02% Wednesday, stumbled back down below 2.5%.

“The Fed is capping Treasury yields,” David Glocke, who manages $65 billion of Treasuries at Vanguard Group Inc., told Bloomberg. “I don’t think we will see rates drift back up above 3%; everyone looks at that as being the ceiling.”

Glocke added: “If rates drifted to that level I’d be a buyer.”

At this point, Bernanke is basically financing the national deficit by buying debt issued by the Treasury. In addition to capping Treasury yields, expanding the Fed’s balance sheet and printing more money to accommodate these purchases has sharply undermined the value of the dollar.

“This definitely introduces a longer-term current of downside pressure on the greenback,” Sacha Tihanyi, a Toronto- based currency strategist at Scotia Capital Inc., wrote in a note to clients. “The Fed pulls out all the stops and the U.S. dollar gets whacked. The market will be looking to find its feet over the next few sessions.”

The euro traded as high as $1.3716 yesterday (Thursday), the highest level since early January, according to Reuters data.

“Apart from being negative for the dollar, we expect yesterday’s events to be bullish for commodity currencies such as the Australian dollar, Norwegian crown and Canadian dollar, and currencies of countries less likely, for whatever reasons, to engage in the monetization of government debt such as the euro,” Barclays Capital (BCS) strategists said in a research note.

The Norwegian crown gained as much as 3.2% yesterday, while the Australian dollar touched 69.44 U.S. cents, the highest since Jan. 12, Bloomberg reported. And the Canadian dollar touched C$1.2193 per dollar, its strongest level since Feb. 10. The Canadian currency has climbed 2.8% in the last two sessions, the biggest two-day rally in three months.

Both gold and oil soared more than 7% yesterday, with gold for April delivery surging $69.70, or 7.8%, to end at $958.80 an ounce on the Comex division of the New York Mercantile Exchange. Oil briefly topped $52 a barrel before settling the day at $51.72 a barrel on the NYMEX.

By allowing the dollar to weaken, Bernanke is basically betting inflation will not return in force for sometime. Analysts are split on the tactic.

Some analysts believe the central bank has little choice but to put concerns about inflation aside for now and focus on sparing the economy a far worse collapse. But others, like Michael Farr, president of Farr, Miller & Washington LLC, are far more skeptical.

“Looking ahead, we fear inflation,” Farr told MarketWatch. “It may be that Dr. Bernankenstein has created a monster beyond his control.”

Source: Fed’s $1 Trillion Debt-Buying Plan Loosens Lending and Drains the Dollar