China's Recovery a Myth?

Yesterday we saw the currencies stop the bleeding from the overnight sell off, and although they range traded on the day, the bias was to sell dollars once again. That bias has played through on our Turn Around Tuesday theme, and the currencies are higher today than yesterday, but lower than they were 3-weeks ago week ago. Yes, the month of June has not been kind to the currencies, as some of the euphoria that was going on from March thru May, regarding the global economic recovery is being thought about again, and this time, not with the same rose colored glasses…

Yesterday, I told you about the story in the Australian Morning Herald that shook the Aussie dollar’s (AUD) confidence, when the Economics Editor said the markets were wrong to believe the Reserve Bank of Australia (RBA) were finished with their rate cuts. Well, that story was followed up by one that shook the confidence of the commodity currencies… This one was about China, and how analysts had gotten the stimulus all wrong in China, and that the Chinese had NOT put the money toward infrastructure and capital improvements but instead into investments, thus making the Chinese disguising the stimulus in China as a recovery… Hmmm… I don’t live in China, so I can’t really pass judgment here, but I will say that most people that comment on China in the past six years have been mostly wrong…. And more wrong than right for sure!

But… As they say on the farm, it’s too late, the cow’s out of the barn! That Chinese stimulus story, hit a nerve with the commodity currencies, and before you knew it, the high flying currencies of Aussie, kiwi (NZD), Brazil (BRL), and South Africa (ZAR) were all looking at figures that thought for sure were in their rear view mirror! The sell off was damaging for sure…

This looks like a classic case of “getting cold feet”… Traders were all lathered up to take these currencies higher last week, but read a story and “got cold feet”… They would say they are being prudent… I would say that they are being wimps! Because in the end, folks… This has nothing to do with whether or not the RBA cuts rates again or not! In the end, this is all about what the U.S. is going to do about all their debt! I’ve harped on this for years, and the thing that really gets me is that IT HAS GOTTEN WORSE! The National Debt, is now over $11 trillion, and will probably reach $14 trillion this year, after all the deficit spending by the administration… This is just awful folks, just awful… Because… And here I go again getting up on my soapbox, but come on, this is important! And Yes, I know, you’ve heard this at least 100 times if not more before!

But, the only way the U.S. is going to be able to pay down their debts, and the $11 trillion is just the tip of the iceberg with the baby boomers starting to retire, is to pay it back with cheaper dollars… But… Hey! Don’t take my word alone for this… Let’s listen in to the IMF’s Chief Economist, Olivier Blanchflower, who was speaking at a conference in Paris yesterday…

“A U.S. economic recovery will only be sustainable if there is a ‘large increase’ in net exports, which may  require a dollar adjustment. It may not be very easy. It may require ‘an adjustment in the dollar, but it is needed.’”

Did you hear that? The IMF Chief Economist is saying out loud, and not under his breath, like most economists that see this but don’t want to go out on a limb, that the U.S. needs to devalue the dollar!

Now… That might be a shock to you, folks… But it’s not to me! And if you’ve read the Pfennig for a long time, and heard me harp and harp about the deficits and not being able to pay them back unless we do so with a cheaper dollar, then now it might just all come back to you… Like what the blind man said when he spit into the wind, Ahhhh, it’s all coming back to me now!

But again… It’s not just me that thinks these things, although I will say that sometimes it sure feels like I’m the only one saying them out loud every day of the work week!

Today, I have a special treat… And once again, I’m as proud as a peacock this morning, because, I have a quote to share with you, from the one and only Richard Russell… This comment plays well with what I’ve just been talking about… Check this out:

“It’s clear (at least to me) that Obama is following the path Roosevelt took during the Great Depression.

“In 1933, the government devalued the dollar by 41% by raising the official price of gold from $20.67 to $35 an ounce. Devaluation makes debt easier to handle. In a devaluation, the dollar value of debt remains the same, but all other assets would be worth more (in nominal terms) whether it was a house, a stock, a car or an ounce of gold.

“How our creditors who own trillions of dollar in their reserves will react to a dollar devaluation I really don’t know, but a devalued dollar is a lot better than nothing. The Bernanke Fed is trying desperately to bring back inflation, and devaluing the dollar is the surest and quickest way to inflate.”

WOW! It’s not every day that I get to use a quote by Richard Russell! But now… Think about this stuff that’s in the Pfennig this morning… And then think about what I told you last week, about how all this going back and forth in the currencies and precious metals, is just “noise”… Ahhh, now I want to hear you say… “I get it, I get it!”

Oh… And to follow up the Blanchflower, Butler, and Russell comments… Ty sent me a quote my Mark Twain that sums it all up… “History doesn’t repeat itself, but it does rhyme.”

U.S. stocks sold off 200 points yesterday, making it a tough row to hoe for the commodities, and commodity currencies… The Brazilian real posted the worst performance on the day, with the real moving back above the “2” level for the first time in about a month… Recall, that the Central Bank Gov. said in the middle of May that he would everything he could to keep the currency above “2”, only to watch it move below and then well below “2” in the next weeks. The Central Bank Gov. did try, by cutting interest rates about 10 days ago, but in reality, he has little at his control if the markets / traders / investors decide to buy the currency… He does not have a treasure chest of reserves like the Bank of Japan and Bank of China… No, in reality, the only way the real was going to move back above “2”, was to have the sentiment toward commodity currencies change…

And again, I can’t believe that the one story in the Australian newspaper, has caused a sea-change of sentiment like this! Maybe, the story’s writer will be proven to have been bang on… That’s not what I’m saying… I’m saying, his opinion, caused a sea-change of sentiment, and that surprises me!

I had someone write me yesterday and say, I might add, once again, that Europe is in worse shape than the U.S. that they didn’t even have stress tests there because they fear what they might show… Hmmm… I wonder what they’ll think when they read this… ECB member, and President of the Bank of France, wrote in his annual letter to French President Sarkozy, that the “worst has passed for the economy and that he was favorable to releasing the results of the banks’ stress tests.”  Hmmm… Guess we’re back to the “ugly car” comparison, eh?

Recall last week when I told you about the Chinese announcing a “buy China” protectionist program? I said then that these things usually spread and other countries announce their own versions of protectionism measures… Of course, we all know who started this round of protectionist talking… The current administration and their “buy American” plan… The Chinese measures were placed to offset the U.S. measures… But now, Germany is feeling pinched… Germany’s economy minister, Guttenberg, is voicing concerns about the Chinese announcement last week, and that he would bring this up at the next G-8 meeting in July…

Well… The problem with that is that China isn’t a member of G-8, so this could just be a “you-know-what session” of finance ministers, getting them all wound up to write protectionist measures of their own! Watch for these protectionist policies to spread like Bermuda grass! And, if that happens, the global recession will get even worse, folks! Thanks to the “buy American” move… Geez Louise, when will they ever learn? When, will, they, ever… Learn?

Looks like more and more people are jumping on my bandwagon, that the stimulus would not work… Two months ago, 59% of Americans thought the $787 billion stimulus would restore the economy, but since then, the number has slid to 52%. And… As unemployment heads to 10%, even with the adjustments and ghost jobs the BLS adds each month, that number of those that thought the stimulus would restore the economy, will continue to slide.