China Stops Buying Eurozone Debt

Good day. Here’s your second reminder — this coming Sunday is Mother’s Day. Don’t you dare forget! The Cardinals will be in town this weekend, making the Sunday game a Mother’s Day game. When I was a young man and played baseball, we always began our season on Mother’s Day. These days, the baseball season for youngsters has been going on for over a month!

I don’t know what the markets mean when they flock to dollars and yen (JPY), the two big dogs when it comes to debt creation. But it is what it is, so we carry on, and look for other things that make sense!

Like the Chinese buying eurozone government debt. I explained this all previously, but for those of you new to class, the eurozone is China’s largest export destination. Did that surprise you? I bet you thought it was the U.S. But no, it’s the eurozone.

China is making progress with its attempt to switch from being a country that depends wholly on exports to drive its economic growth, to one that shares the load of driving the economy with domestic demand, but they aren’t there just yet, and therefore, exports remain very, very important to the Chinese. Therefore, they cannot afford to lose their biggest customer.

And this is part of the plan, folks (China’s plan to replace the dollar standard). The Chinese have become the world’s financier, taking that away from the U.S., and they have also made big inroads to removing the dollar as the settlement mechanism — in terms of trade — by signing currency swap agreements with a boatload of countries.

These currency swap agreements allow China and the country with whom they are trading to exchange each other’s currencies and not use dollars, as the way it was done since the end of World War II.

Last year, I told you that the New York branch of the Bank of China had begun allowing deposit accounts in CNH, the new, deliverable Chinese currency. The account size is limited, but the idea of deposits was what stirred the drink, folks.

Now there’s word that the U.S. Fed had approved an application by ICBC (Industrial and Commercial Bank of China) to acquire retail bank branches in the U.S.  ICBC will pay $140 million to buy an 80% piece in Bank of East Asia USA.

People that should know better are not making a big deal of this, and saying things like, “This is too small to be concerned with,” and so on. But it’s a foot in the door, folks.

And just another baby step for China to remove the dollar as the reserve currency of the world.

OK, after going through all that, I see a news story go across the screen that says “China’s Sovereign Wealth Fund (SWF) Stops Purchasing European Sovereign Debt.” Let me try to break this down (and let this be a warning to the U.S.).

Obviously, China has bought enough European sovereign debt (ESD) to fill their desires. If The Chinese SWF can back away from its biggest customer, then it should have no problem backing away from its second-biggest customer (the U.S.).   I think that China will attempt to invest in Europe to help keep the ship afloat — they just won’t make a big deal of it.

OK, I didn’t mean for this Thursday Pfennig to carry on about China for the whole letter. So I’ll stop there, and return to our regularly scheduled programs.

The dollar’s mighty hammer stopped swinging so wildly yesterday, and in the overnight markets, we’re actually seeing a handful of currencies that are attempting to gain back some lost ground to the dollar in the trading days since last Friday’s jobs jamboree disaster.

The Norges Bank, Norway’s central bank, is meeting as my fat fingers fly across the keyboard. I don’t think the Norges Bank is going to cut rates today, so it will be interesting to hear what the Norges Bank has to say.

You see, right now, I’m not a fan of the Norges Bank, when normally I am a fan. What has soured my taste right now is the fact that the Norwegian economy and fundamentals are calling for higher interest rates.

But the Norges Bank has been struggling with a strong krone (NOK) (to the euro (EUR)) for some time now, and a rate hike would only make their struggle more difficult. But in Chuck’s world of “when I’m the head of a central bank,” I wouldn’t let those kinds of things bother me — especially if I were head of Norway’s central bank. They have oil revenue coming out of their ears, they have to offset the inflationary problems that oil revenues bring and they can do that with a combination of a strong currency and appropriate interest rate levels.

I see where global investors have given Fed Chairman Big Ben Bernanke a 75% approval rating. Of course they did! Big Ben has been responsible for keeping the stock market ship out to sea with his quantitative easing, and ZIRP (zero interest rate policy). Of course, with this highest rating for the Fed chairman comes the EXPECTATION that he take further action this year to accelerate a revival in U.S. financial markets.

I wonder what these people will say in a few years when we see the unintended consequences of Big Ben’s policies. I doubt they give him a 75% approval rating then, but on the other hand, maybe they will, for we could be talking about QE4 or QE5 or QE10!

The price of oil seems to have found a bid at $96, as it has held that figure for three consecutive days now. The petrol currencies of Norway, Canada, Russia, Brazil, the U.K. and even Mexico will breathe a sigh of relief if $96 is the bottom for this sell-off.

While I like seeing the price of oil lower, I know in my heart of hearts that this sell-off was overdone. You see, it all started with the Jobs Jamboree disaster last week, and has continued until reaching $96. That’s a fall of $8 in a week. Talk about overdone!

Gold had a very interesting day, as the price dropped, recovered, dropped, recovered and finally gained a bit. When I see this happening, I think that the “price manipulators” are being matched by the Chinese and Indians taking advantage of the cheaper price. And talk about a sell-off being overdone! But when the “price manipulators” smell blood, they attack, and attack they did this past week. I would love to give these “price manipulators” my version of Jackie Gleason on The Honeymooners. One of these days, price manipulators, to the moon!

The eurozone has approved the next scheduled payment to Greece. There was some thought going around yesterday that eurozone leaders would hold up the payment, as penalty to the Greeks for attempting to elect an “anti-euro” government. Of course, that government didn’t have enough seats and couldn’t put together a coalition that worked, so it dissolved, and the Greeks will have to vote again.

There are renewed calls for Greece to leave the euro. I still don’t think that will happen, as the problems for Greece would multiply, not be reduced, by leaving the euro and going back to the drachma. But hey, that’s never stopped leaders of a country from doing stupid things before!

I would think the euro would be better off without the baggage in the long run.

The Swiss franc (CHF) continues to be strong. Not as strong as a year ago, but strong, nevertheless. And that’s killing the Swiss National Bank (SNB). The cross to the euro remains stuck at around 1.2015 — spittin’ distance to the floor set by the SNB last September. I’m surprised that the markets haven’t tested the SNB’s resolve here. But they haven’t, so life goes on in Switzerland.

The Bank of England (BOE) just ended their meeting today and left rates unchanged. No surprise there — what can they do? They’ve cut rate to the bone, they’ve increased their version of QE/ bond buying… yet the economy does a double dip in the recession pool..

I told a small group of people yesterday that just like the euro and dollar are an ugly contest, so too is the British pound sterling (GBP) and the euro. And here, the euro loses. But really? Investors think that things in the U.K. look better than in the eurozone? Really? Maybe they are, but I sure would be looking elsewhere in Europe. (Remember, Norway, Sweden, Switzerland, Poland, Hungary and the Czech Republic don’t use the euro!)

Then one of my fave reads on Bloomberg is the author and columnist Caroline Baum. She always makes sense to me, and you don’t find many writers on economics that do that! Her latest column on Bloomberg is about the labor picture here in the U.S., titled “Government’s Snake Oil Won’t Cure Jobs Ailment.”

In the column, Ms. Baum talks about how the jobs problem could be structural. “What if the Fed, through all its efforts, can’t buy more employment? What if unemployment is structural, with an inadequately trained workforce or labor immobility preventing employers and job seekers from hooking up? Signs are pointing in that direction.”

She goes on to say: “Structural unemployment, like the nation’s other fundamental deficits, is a tough challenge for policymakers all around. Jobs are a big issue in the presidential election. No elected official wants to see the public suffer, financially or emotionally, from being unemployed. There a strong desire to do something even if nothing is the lesser of two evils.

“On the fiscal front, attempts to correct long-term structural imbalances with short-term tax-and spending are doomed. Cyclical medicine leaves the patient with more debt and the same old ailments.

“What happens if the monetary authority misdiagnoses the cause of high unemployment and uses its usual tool, the printing press, as a cure? For the same money, the Fed will buy itself more inflation and less growth. That’s the sort of jolt the economy can do without.”

As I’ve said since the financial meltdown and the jobs problem began, that a lot of those jobs were not going to return. It appears that I hit that one bang on.

To recap: A few of the currencies are showing some life this morning, while the majority are still under the spell of the dollar and the flight to safety that began after the Jobs Jamboree disaster last week. China gets approval to buy a U.S. bank. Another baby step, folks. The Norges Bank meets today and will probably follow the lead of the Bank of England and leave rates unchanged. And we have a special treat with a snippet of a column by Caroline Baum!

Chuck Butler
for The Daily Reckoning