Monday, November 04, 2013 Hitchhiker's VUE

Good Monday Morning to everyone who happens to stumble by this. 

The stock market overnight had an 'gasm I guess. It was way way up.  What I told people who read this blog, is that I would use the currencies worldwide to provide insight into the global marketplace.  One way to view the global economy is to focus on currencies, and pay less attention to economics that are hugely influenced by politics. 

Right now, China is attacking the USA dollar on every front, and our politicians love it.  Ever since Timmy Geithner was Secretary of Treasury, the USA beat on China to loosen control of the Renminbi and let it appreciate.  The leaders are getting their wish, but at some point in the very near term, they are going to start yowling about all the contracts being signed directly between China and the trading partners (except the USA). 

USA Dollar:

The dollar rallied against every major currency through the end of last week.  The rally began with the FOMC statement, then received support from inflation reports out of the Eurozone.  The ISM Manufacturing Index came in strong, as it appears the government shutdown had no effect (unless positive) on manufacturing. 

ISM came in at 56.4 stronger than expected, and the USA's major trading partner, Canada also reported stronger manufacturing.  ISM's gains were almost all from autos and housing. (All kinds of things have to manufactured to complete an auto or a home.)  

Before this good news, the dollar had been going down (as I showed you on Friday). 

Now, please consider this for your learning pleasure.  The weaker dollar (until this minor rally) played a BIG part in the manufacturing recovery.  Exports of US good became more competitive price wise.  Also put this into your memory banks.  Countries want their currency to lose value in order that exports are more competitive price wise in the global market.

This morning, every single major currency is up against the dollar, and the dollar index is taking a nose dive.  On a technical bases, the dollar rally from 10/25 until early last night in Europe, reach a technical resistance level at an even number on the dollar index (81.00).  So, we had a very nice rally that topped out (as of this moment) right at where the fall took place at the USA government shutdown.  Basically, for the country and the currency we are right back at the point we were before the shutdown.

Going further back, however, the dollar has been in a major decline since the first of July, and the little rally would seem to be very temporary.

Why one wonders?  Well, wonder not.  Look to the Federal Reserve's money printing and the USA short-term debt.  Add to the fact that China is working over-time to replace the US dollar as the trading mechanism of the world with gold to back up their play, and your dollars are going to purchase a whole lot less. 

I might suggest, however, the judge is still out.  When the world gets into trouble, they run to the dollar as a safe-haven.  While that no longer makes any sense whatsoever (just like Japan's Yen is a safe haven), it is the behavior of investors anyway.

The sword of debt hangs over the heads of every USA citizen.  I could be wrong, but it seems to me our Democratic leaders are not concerned, and they are unwilling to stand up and say we are in a crises. 

People (on the whole) may think things are all right as they hear about manufacturing and consumer confidence.  However, they are not looking deeper at the huge troubles in financing State Governments, and under States every state cities and towns that cannot pay their bills.

We, the people, are partying down while the unfunded debt is become overwhelming.  We are partying down while the debt ceiling is raised, and at the same time, there has been no budget passed by Congress and approved by the President for 5 years, and there is unlikely to be a budget in 2014. 

While the vast majority of the people blamed the Republicans for the debt ceiling circus, the fact is, the debt ceiling is the only place that anyone can call attention to the people that something is horribly horribly wrong.  As you will see when I cover China below, the rest of the world's governments see the problem, and are abandoning ship (without telling anyone why they are really doing so).  The ship they are abandoning is the US dollar. 

Am I just an old cold dishrag ragging on the problem?  I wish I was not, but the Federal Government being run by the Democrats is on the brink of financial disaster, and it is doubtful that printing money (via of buying debt) is going to help this time. Take something simple (or not): Foodstamps.  (Simpler than ObamaCare by a long shot.) 

There are approximately 47.6 million people on Foodstamps (and growing substantially month by month).  The bill (estimated by our President) will amount to $63.4 billion dollars.  Who is going to pay for that (albeit it is a small amount when measured in Federal reserve QE for the year)? 

On November 1st a cut was automatically implemented in Foodstamps.  Now that cut hurts people; it really does.  That cut will only cut $5B dollars out of the budget, and at the same time the government is still recruiting people to sign up for the program.  In the concept of a Trillion dollar per year deficit, and US debt at 17.2 Trillion and rising, $5B is not worth the pain the people feel who get cut. (That is my opinion, and I'm sticking to it as I help several people who are on Foodstamps).  

Is that a start?  NO!!!  It is piecemeal and miniscule in relationship to the debt and deficit.  Do you have to start somewhere?  Absolutely, but within a holistic strategy; not one minor program.

Want something very much bigger to understand?  There are $127 Trillion dollars in unfunded liabilities; liabilities that were/are mandated by law (and this does not include much of ObamaCare yet).  Today 10,000 of us Baby Boomers will retire, and tomorrow and the next day, and what will the unfunded liabilities be in 10 years just from that? 

Wow, that is depressing to say the least.

Canada

Canada is the USA's number one trading partner.  What happens there is important, and it gets lost in all the hoopla over the Euro (or the US dollar).  The Canadian Dollar (Loonie) is trading at about .95 right now.  While it is rallying against the dollar today, there are no strong fundamentals that would say that a new trend has started to the upside.

If the Canadian Dollar was truly freely traded, it would very likely be appreciating against the dollar big time.  The Canadian Central Bank is unlikely to let an major appreciation happen as the exports become too expensive.

By the way, there is a fallacy in the logic that countries should drive the value of the currency down in order to export.  The number one problem is that once a country aims to devalue their currency (such as Japan is doing directly), everyone else does the same.  Then it becomes a race to the bottom (as as my German friends say - it is a race to marry the least ugly partner). 

Canada's Manufacturing Index hit its highest level in 2 1/2 years.  All five components improved in October.  Good for them. 

At the moment, no currency in the world is traded freely because of Central Bank Intervention.  Fundamentally, Canada's dollar should be on the up side of $1.00 US, but it will not likely be allowed to trade freely to that level.

Eurozone

The Euro has had a significant drop.  Today it is leading the pack on a rebound.  What is up?

The Euro received a boost after hitting a six week low on Friday.  This was driven by a much stronger than expected Manufacturing report.

The ECB (European Central Bank) will meet this week.  No one is expecting any rate move by the ECB (either way).  What they will do is reiterate what the lipflappers from the USA Federal reserve are saying today: inflation is low.

That is setting the expectations that they will announce a rate-cut either before the end of the year (Merry Xmas?)  or early next year.  (Because every CB wants inflation.)

And what would the effect on the Euro be?  It will go down in value, and make German exports even more attractive.  France gets to come along in a trickledown effect, but the rest of the Eurozone will not like it very well.

Mr. Draghi could be restrained, but I think there is a currency war to drive fiat currencies down.  That means he is under pressure to drive the Euro down. Ultimately, China will appreciate their currency, and a bag of currencies made up of China and her "friends" will become the trading currency.  The USA will be left out of that "bag", and will not only lose her competitive advantage, she will gain a competitive disadvantage. 

It is the old adage: Make sure what you wish for...

Australia:

Australia is a place in all my world travels, I've never been.  I would love to go to Perth and visit the mint there.  I would love to take pictures, eat at European style restaurants, and walk the city. 

Australian currency  is really important in the world at this point.  Their major trading partner is China.  Therefore as the Australian dollar goes, there is a good chance the world economy is going. 

The Australian Central Bank meets this week.  Retail Sales were printed much better than expected (came in at +.8% where +.4% was expected).  Consumer Confidence was reported above expectations as well. 

I suspect the ACB will not do anything.  They should likely hike rates, but they won't even hint at doing so.  Why?  Because if there was even a whiff of a whiff of a rumor, the investors and traders world wide would drive the A$ out of sight.  That fear of an A$ rise very likely keeps house prices rising 1.9%, and the fear keeps them from a hike of rates.

China

The Chinese Central Bank is weakening the Renminbi on purpose.  The government (and with the help of the Central Bank) want to show investors world wide they are in charge of the currency evaluation. 

This manipulation of the currency is temporary if they continue down the path of replacing the USA dollar with Yuan.  Why?  When they put their pet currency in a basket of currencies, they must allow the renminbi/yaun to float.  They will not be able to fix the value of renminbi/yaun each day.  They will then have to resort to a "dirty float" (what the Forex market  terms it).  This dirty float is what all the rest of the world's central banks use to direct their respective currency's value. 

China would like to control the world's market, and set prices from the Politburo.  There will be a time, however, when they set up the trading currency basket, they won't have control.  Then one cannot help but wonder, what could / would they do to gain control of price setting? 

To see how this is evolving.  It was not long ago (not more than 10 years) China's percent of global trade in renminbi was zero.  Then along came currency swaps with the swaps taking place directly between China and its trading partners.  (I've attempted to educate my newsletter on how swaps work without all the technical details, but generally, swaps are an exchange of one currency debt for another.  Up until China did this, all trade was settled in US dollar swaps.) 

Get this; China generated 17% of the global trade in Renminbi.  Hello????  Can you hear me?  Currencies are important, and you hear very little in traditional news about them except when Japan has done something extraordinary. 

This rate of global trade in Yaun (and Renminbi) will accelerate in value almost exponentially with the Eurozone and UK agreeing to trade directly in Yaun.  Wow... 

And why has that taken place?  Well, my dear reader, it is because of the US's massive debt accumulation.  Countries are very worried what the US will or can do about the mess.  In other words, the only way out of it may be hyper-inflation, and no one wants to be holding the hot-potato when the big boss comes calling.

To bad no one reads my missives in the blog, and I rarely write in my newsletter this way. 

Let's check in with one of the more sane Federal Reserve Presidents: Richard Fisher Dallas Federal Reserve:

"I'm not a proponent of increasing government spending without restraint. The excessively over-indebted U.S. Gov't has, as mentioned, been hog-tied, prevented from providing stimulus. It has thus played a counter-cyclical, suppressive role. We have a government that hasn't been able to agree on a budget in five years; that has historically, under both Republican and Democrat presidents and congresses, spent money and committed itself to fund long-term programs without devising revenue streams to cover the current costs or fund future liabilities."

Right on, but the public listens to Dr. Krugman of Princeton, and he disagrees with this summation.  Mr. Fisher, you will not become Federal Reserve Chairman with that kind of rhetoric; albeit that is unfortunate. 

I put the analysis of the US under China at the moment, because China is like a poker player that is accumulating all the value.  Then if the US ever gets a "good" hand, they will lose because they have only fiat money that has no value to negotiate with.  (That is scary if you think about it, because then the only negotiation factor is nuclear, and China is moving every single day to inform the USA public, they can shoot missiles into US cities with the same accuracy as the US can shoot missiles to Asia.  No country would say this unless they are confident they can bully you.)