Hello! Everyone! How nice it is to be with you again today! We’ll start out with a recap of yesterday… When I signed off the airwaves yesterday morning, the dollar was having its way with the currencies, and the euro was about to give up the 1.39 handle… Apparently, 1.39 proved to be a strong line of resistance, and the euro actually moved higher on the day.

Yes, the bias to sell dollars was there, just not very strong or committed to selling dollars… And in the overnight markets, the bias to sell dollars has remained, but again, not a very strong bias… But a bias nonetheless! Which is a good sign to me, because U.S. stock futures are down this morning, which would normally mean, risk assets, like currencies, are going to have a tough row to hoe today… But, not so, at least while I’m writing the Pfennig!

Could the nascent bias to sell dollars be a result of the fact that the U.S. will once again depend on the ignorance of strangers (foreigners) and issue $35 Billion in 3-year notes today… But then, with the “new” way the Treasury allocates “who buys” the Treasuries, the Fed could step in, buy up a HUGE Chunk, and make it look like “outsiders” bought them, which would make the “deficits don’t matter” flag wavers run into the streets shouting to the tune of Jimmy Crack Corn… We issue Debt, and the foreigners don’t care, we issue lots of debt, and the foreigners don’t care…

I told you yesterday about the sizes of the Treasury issuances that had happened, and are scheduled to take place… If that doesn’t scare the bejeebers out of dollar bulls, then I don’t know what will!

Oh! Maybe this will! Yesterday, I told you my opinion on the Chinese moves recently… 1. Calling for a replacement reserve currency… 2. Calling for the use of SDR’s… 3. signing currency swap agreements with countries… I said that the use of SDR’s was a stalking horse for China’s plan to gain wider acceptance for the renminbi… Which in turn, would set the renminbi up for an alternative world reserve currency…

Now, China won’t admit to this… As the Big Boss Frank Trotter mentioned yesterday in our brief conversation, “China thinks in centuries”…

Well, in this case, I believe China will move faster than that, and faster than most observers think they will… I think this will all take place within the next 3-years… And why do I say that? Do you remember when I told you a couple of months ago, that China has “shortened” their Treasury maturities? Yes, China had, under the dark of night, quietly shifted out of long-dated Treasuries, to ones with an avg. maturity of 3-years!

At the time, we thought, that China just didn’t want 30-year paper, for in 30-years, the U.S. fiscal situation will be very dire, unless something changes drastically, given the baby boomers and their draw on entitlement programs. But now… Maybe the Chinese shortened their maturities to line up with their big plan to gain wider acceptance for the renminbi!

And don’t forget those currency swap agreements they’ve signed with countries in Southeast Asia, and Argentina… (it’s rumored that Brazil is close to signing one too!) As they spread those currency swap agreements around the world, they remove the dollar from the settlement, and replace it with renminbi, folks… I read a story that was talking about trade, and never put these things together, but that’s OK, because the data on trade was good… The story reported that these currency swap agreements could total 1/2 of China’s total exports, which is equal to about $2 Trillion in annual trade flows! If they do that each year, within 3-years they would have one of the top 3 currencies in global trade!

And… Don’t forget the fact that they have effectively removed the dollar from those trade settlements!

So… Folks… I do believe the writing is on the wall here… And Yes, the dollar will have its fun from time to time, enjoying rallies… But they will be short-lived, as the die is cast on this folks… I do believe so…

So, what does this mean for us? OK, first of all, this is just my opinion on what’s going on, there are no “guarantees” this will happen this way! So, let’s not run out into the streets shouting doing out best Chicken Little! Let’s just calmly move to the exits, in an orderly fashion… If you get my drift there…

OK, let’s talk about something else, eh? Oh! How about the Reserve Bank of Australia’s (RBA) meeting last night? Yeah, that’ll work! The RBA left rates unchanged (as I suspected they would), and the accompanying statement was a strong endorsement for maintaining the RBA’s easing bias (as I suspected they would do!). It’s like a young couple that know they are in love, but are too scared to admit it… The RBA knows they are finished cutting rates, they are just too scared to admit it! For all this talk of China’s trade, with support their export side, and once again drive the Chinese economy… As long as China is in good shape, the Aussie exports will be in good shape, and if the Aussie exports are in good shape, the RBA won’t cut rates, and all this should lead to a stronger A$! Notice I said “should”!

I get emails from time to time telling me how wrong I was about something, and that’s fine, when I’m wrong I’m wrong, there’s no two ways about it! But, I always say… I was only speaking from a fundamentals standpoint, and the fundamentals said something “should” happen… Or, like I said the other day… “The markets always do what their supposed to do, just not “when”!

Oh, and how about this to brighten your day! Moody’s announced last night that they are placing Brazil’s rating on review for a possible upgrade! Now when was the last time we heard the word upgrade used? (and not the Beyonce’ commercial for direct TV!) I’m talking About a country here! Brazil! Part of the BRIC’s that are putting so much pressure on the dollar these days!

And then there was this… Recall how I told you that the President had given me the feeling that there was more stimulus on the way for the U.S. economy? Well… Now we have a Presidential advisor making that feeling even stronger! Laura D’Andrea Tyson, a Presidential economic advisor said yesterday, “We should be planning, on a contingency basis, for a second round of stimulus.”

Oh Great, just great! NOT! For you and I know all too well, that when the Government starts planning something, they do not do so with the thought of “scrapping” the whole idea! More stimulus will mean more deficit spending, which means more Treasury issuance… I can hear the foreigners saying… No Mas! No Mas!

I read a story yesterday, (thanks Ann!) about Big Ben Bernanke, and his upcoming reappointment… Most observers believe that Big Ben will get reappointed for another term as Fed Chairman, but not without a fight, for Big Ben has many detractors these days, that have too many questions about how the Bank of America / Merrill Lynch thing came about, and his money supply. While there are others, that somehow think that he is a “hero” for saving the economy. Of course, all they would have to do is check with Ms Tyson as she would tell them that the economy is probably in need of more stimulus!

I’ll head to the Big Finish on that note, I don’t want to end the Pfennig with a tirade on Big Ben! All I’ll say is let’s see him remove the $1 Trillion in stimulus / money supply without pushing the economy back into a recession… Yeah, that’s the ticket! Let’s see him do that, before you give him accolades!

And looky here! While I was writing, the euro steadily climbed back above the 1.40 handle! I guess that bias to sell dollars is growing, eh?

Currencies today 7/7/09: A$ .8015, kiwi .6390, C$ .8660, euro 1.4025, sterling 1.6250, Swiss .9255, rand 7.9550, krone 6.4590, SEK 7.80, forint 194.20, zloty 3.1150, koruna 18.4375, yen 95.30, sing 1.4550, HKD 7.75, INR 48.43, China 6.8328, pesos 13.20, BRL 1.9525, dollar index 80.25, Oil $64.81, 10-year 3.54%, Silver $13.31, and Gold… $927

That’s it for today… Starting today, and going through next Monday, I have a ton of doctor’s appointments, scans, blood tests, you name it… It must be a new quarter on the Calendar! OH BOY! It’s not THAT bad… And as long as they show I’m still clean, and in good health, then I’m all for them! I had a reader send me a note, and tell me that I should change the “my little buddy, Alex” to something else, as Alex is now 14! HA! When he’s bigger than me, I’ll stop calling him that! HA! No… I guess I should change… Just not ready! OK… Writing from home today, I have a doctor’s appt. first thing this morning, and then off to work! It looks like another beautiful day outside, so tell yourself… This is going to be a Terrific Tuesday!

Source: $35 Billion More Treasuries To Auction

This from Taipan Publishing Group:

The world is clearly afraid that “Great Depression 2.0” could be at hand. Downturns come and go, but the global economy as a whole hasn’t contracted since the 1930s. Some think it could happen again next year.

We hear less about it in the news, but there is another fear that keeps investors up at night – the off chance that America turns into Japan.

The Nikkei index has made a truly awful round-trip. It’s as if Japanese equities had been transported in a time machine all the way back to 1983.

If U.S. equities were to take a similar trip, we would have to see the Dow fall below 800 – more than a 90% drop from today’s depressed levels.

But there are some powerful arguments as to why this won’t happen. In fact, if things go deeply wrong in 2009, America is more likely to look like Zimbabwe than Japan.

A Vivid Example

For one thing, the powers that be have Japan’s example staring them in the face. In hindsight, we can clearly see many of the things we don’t want to do.

Some of Japan’s key errors leading to the “lost decade” – now lost quarter century – were these:

• Propping up “zombie” companies that should have been allowed to fail.
• Being forever guilty of “too little, too late” in regard to aggressive monetary policy.
• Dropping the hammer too quickly whenever signs of inflation appeared.
• Tolerating the Keiretsu system in which entrenched managements locked arms to block change.

Of those four mistakes, the United States is most in danger of emulating the first.

When government gets into the business of picking winners and losers (or propping up the losers), the invisible hand of markets is stymied. The market relies on an ongoing process of “creative destruction” to channel capital to areas where it is most needed – and to drain it away from areas where it is not.

When we get in the way of that flow, our meddling tends to gum things up. As U.S. policies become ever more hands-on, this danger increases.

Fortunately the long-term risk is lower in this area because the creative destruction tides are stronger. America’s entrepreneurial culture stands in sharp contrast to the old Japanese motto, “the nail that sticks up gets hammered.”

Going for the Gusto

Washington will be sorely tempted to meddle in many unhelpful ways. One mistake the Obama administration will not make, however, is that of “too little, too late” on the stimulus side.

Larry Summers, one of the key members of the Obama “brain trust,” has clearly stated his view that, in times of crisis, doing too little carries far more danger than doing too much.

It’s like trying to put out a house fire in some respects. If you use too much water, that’s okay – the house might be waterlogged but it will still be saved. Don’t use enough water, however, and the house is in real danger of burning to the ground.

This is why the Obama administration is planning a $700 billion stimulus package for starters, and will have no fear of spending more if the situation calls for it. Britain is thinking along similar lines. No government wants to copy the Japan experience – the risk is too great. In the name of the greater good, fiscal propriety is thus being thrown out the window.

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Quantitative Easing

Ben Bernanke is a big fan of going for the gusto too. The Fed is now embarking on an aggressive campaign of “quantitative easing,” much like Japan did earlier on – but with some important differences.

Stephen Jen and Spyros Andreopoulos of Morgan Stanley point out that, for the U.S. Federal Reserve, “quantitative easing” means three broad strokes:

• Telegraphing to markets that interest rates will stay low for a very long time.
• Drastically expanding the Federal Reserve balance sheet – to wit, printing money. (When the Fed buys assets for its balance sheet, the banks that sell those assets get new dollars that circulate into the system.)
• Buying large quantities of U.S. Treasuries outright.

The first two elements are already underway. The third has been all but promised by Ben Bernanke. Part of the reason treasury yields dropped to record lows – and prices soared to record highs – is because Bernanke has openly stated that the Fed may buy treasuries outright, targeting long-term as well as short-term interest rates.

Use It or Lose It

You can think of the Fed’s quantitative easing as a form of friendly blackmail to force savers out of cash and treasuries and back into productive lending and investing activities.

For banks, consumers and businesses alike, the strong temptation is just to hunker down amidst all this turmoil. Safe government bonds and money in the mattress – i.e. three-month Treasury bills and other cash equivalents – are the way to do that.

But if everyone hunkers down, the economy stays in the tank.

So the Fed in effect says, “We are going to penalize all you hunker-downers for holding onto T-bonds and cash. If you keep your money in dollars, you’re going to get burned as we flood the system with dollars. If you try to buy bonds, we’ll be in there buying too… pushing bond prices ridiculously high and long-term yields ridiculously low.”

It’s basically a question of “use it or lose it.” As we have stated before in these pages, inflation is a form of hidden tax. Through aggressive pursuit of inflationary monetary policies, the Fed seeks to tax the daylights out of dead money in order to get things moving again.

Someone’s Gonna Spend It

The main reason America won’t look like Japan is because we know the stakes now. The Fed, the Treasury and the incoming Obama administration are all focused on the dangers of doing too little, rather than doing too much.

So they will do whatever it takes in that respect – with little to no regard for the inflationary forces that are stirred up. That’s the legacy of Japan’s historic tendency to slam on the brakes at any small sign of inflation. We’ve learned to lay off the brakes and hit the gas instead.

And if you and I don’t get out there and lend and spend, the government will. All the panicked investors buying Treasury bonds hand over fist may have safety on their minds first and foremost, but what they forget is that they are lending to Uncle Sam. And Uncle Sam is not afraid to run wild.

We have already seen the Fed and Treasury “leverage up” to the tune of trillions. If 2009 is as rough as some forecasters fear, then the government’s leveraging up has only just begun. To keep socking away money in cash and treasuries will only encourage the torrent of spending to pour forth.

To sum up, we won’t walk down Japan’s road because we have seen that road, we know where it leads, and we will avoid it by any means necessary. And I do mean any. While Japan embarked on its own path of “quantitative easing,” the measures taken were timid, uncreative and downright puny in comparison to what the U.S. government is prepared to do.

If we err, it will not be on the side of caution. It will be on the side of breathtaking aggression. That’s the monetary policy lesson learned. If nothing else, the implications of this are surprisingly positive for equities.

The Endorsement From Hell

The frightening aspect of all this is what we haven’t learned – and the risks we are taking with our no-holds-barred, win-at-all-costs mindset.

As Marc Faber and others have pointed out, the USA and UK monetary authorities received the endorsement from hell earlier this year – a thumbs up from the Reserve Bank of Zimbabwe.

On Page 9 of the RBZ’s “First Quarter Monetary Policy Statement,” Dr. G. Gono, Governor of the Reserve Bank of Zimbabwe, gives the following praise (bold emphasis his):

Banks, including those in the USA and the UK, are now not just talking of, but also actually implementing flexible and pragmatic central bank support programmes where these are deemed necessary in their National interests.

That is precisely the path that we began over 4 years ago in pursuit of our own national interest and we have not wavered on that critical path despite the untold misunderstanding, vilification and demonization we have endured from across the political divide.

As of July 2008 (the latest month for which figures have been calculated), Zimbabwe’s inflation rate hit 231,000,000%. You read that right: two hundred and thirty-one million percent.

Hard assets anyone?

Source: Why America Won’t Look Like Japan

This from The Rude Awakening:

Citigroup did not go bankrupt yesterday, therefore the Dow Jones Industrial Average soared nearly 400 points. If Citigroup does not go bankrupt tomorrow, there’s no telling how high the Dow might go.

Joy and jubilation returned to Wall Street yesterday because the federal government tossed a $326 billion lifeline to Citigroup – $306 billion worth of loan guarantees and $20 billion of actual cash. Unfortunately, Dow points aren’t as cheap as they used to be. Remember last March, when the Treasury handed a $30 billion check to J.P. Morgan to finance the Bear Stearns takeover? The Dow rallied 187 points on the news – or about one point per $160 million of bailout money.

By comparison, each one of yesterday’s Dow points cost $823 million. Alas, a law of diminishing returns seems to be taking hold. So even if we believed that the Treasury could buy a new bull market, the results would not come cheap. At $823 million per point, the price of sending the Dow to a new record high would be a whopping $4.7 trillion.

Unfortunately, an opposite tendency pertains: the more the Treasury spends, the more the market tumbles. Would you believe that the federal government has ACTUALLY committed $7.7 trillion worth of bailouts, loans and guarantees since the credit crisis erupted last year? And would you believe that the Dow has tumbled more than 5,700 points since this bailout bonanza began?

So, let’s see, that about one Dow point LOST for every $1.3 billion of bailout monies.

In no small bit of irony, the Treasury unveiled its very first bailout facility, the $80 billion “Master Liquidity Enhancement Conduit” (MLEC) on October 15, 2007 – just one week after the Dow registered its all-time high. Although the much-ballyhooed MLEC never actually materialized, it launched a wacky, new era of subsidized corporate failure and governmental caprice. Each new bailout has arrived on the scene as a “necessary evil.” But now we’ve got so many of these little devils running around that all hell has broken loose.

It’s entirely possible, of course, that all these devilish bailout programs will transform the devastated financial markets into a heaven on earth… or at least a heaven on Wall Street.  But the early evidence is not very comforting.

According to a team of number-crunchers at Bloomberg News, “The U.S. government is prepared to provide more than $7.7 trillion on behalf of American taxpayers…This unprecedented pledge of funds includes $3.2 trillion already tapped by financial institutions in the biggest response to an economic emergency since the New Deal of the 1930s.”

The Bloomberg calculation includes a broad array of both direct and indirect bailout programs.  In addition to the Treasury’s $947 billion TARP program, for example, the Federal Reserve has pledged to protect $2.3 trillion worth of money market funds and the FDIC has promised to guarantee $1.4 trillion worth of bank deposits. Various other programs and “facilities” provide the other $3 trillion worth of loans or guarantees.

Where does all this money come from? No one can really say exactly.  But we know where it does NOT come from. It does not come from an enormous piggy bank that is sitting in some federal building in Washington, DC.  Nor does it come from a traditional bank account that holds traditional savings.  No, this money comes from that elaborate hall of smoke and mirrors known as the Federal Reserve.

This money comes from a monetary “system” that is not really a system at all; it is a work of performace art – an improvisation of a monetary system. The system utilizes an artful combination of promises, accumulated goodwill, foreign borrowings and government IOUs to validate trillions of dollars worth of a paper currency that America prints for itself. As long as this improvisation delights the dollar-holders of the world, all is well. But at some point, they might tire of the performance.

A few dollar-holders may be tiring of the performance already. On news of the Citigroup bailout, for example, the dollar slumped against both gold and the euro, while Treasury bonds also fell. One day does not make a trend, of course. But one year does. For more than a year, the U.S. government has been piling bailout liability upon bailout liability, while simultaneously forcing the Federal Reserve to bury the actual costs inside the complexity of its balance sheet and the opacity of its monetary machinations.

For now, the exact cost of socializing America’s recent financial sins remains a mystery. But even without the details, a couple of observations seem self-evident:

1. Nation’s do not usually purchase their prosperity, especially not with banknotes that they manufacture for themselves. Nations EARN their prosperity by the sweat of their brows.
2. The American government and its monetary authorities do not actually possess all the money they are spending, loaning and pledging in their various bailout programs. To the extent, therefore, that these bailout programs must deliver actual cash, the risk of inflation mounts. In other words, the money that does not really exist must come into existence somehow. And all of the possible sources of non-existent cash are inflationary.

Net-net, an inflationary cycle may return sooner than most folks currently imagine. To be sure, a sort of deflation now envelopes the globe. But if the current bailout bonanza continues, this deflationary episode may yield very suddenly to a new inflationary episode…in which case the bull market in commodities might resume on very short notice. Already, gold has rebounded more than $120 from its recent lows of $700 an ounce. And many other commodities are showing signs of life as well.

Source: Meal Ticket