05/27/09 St. Louis, Missouri A very tight trading range day was in place yesterday for the currencies. In yet another sign that maybe, just maybe, the currencies could be breaking their link to stocks, U.S. stocks jumped 196 points yesterday, and the currencies range traded… Hmmm…
Not that this will become a “stock jockey journal”… Stocks jumped on the news that consumer confidence surged this month… Talk about looking at things through rose-colored glasses! Anyway, consumer confidence surged… I guess it’s better to have blips in confidence than to have it be negative all the time! I also guess the stock jockeys took what was behind door number 1 (consumer confidence) and not was what behind door number 2, which was the Case-Shiller House Price Index…
For the first quarter, the S&P/Case-Shiller U.S. National Home Price Index posted a 19.1% drop from a year earlier, the biggest quarterly decline for the reading’s 21-year history. So much for those (insert name to call them) that thought we would see Home Prices level off! Not that there’s anything wrong with “wanting” to see home prices level stop falling, but come on… Where was the proof of that happening? So… Anyway… Obviously, Home Prices continue their multi-year tumble… And, the most important thing about the report is that it gives no signs… Get that? NO SIGNS, of abating Home Price declines…
Alrighty then… We’ve got those two under our belt! Let’s get on with the news! So… Now, I read where N. Korea is threatening a strike against S. Korea… Not that we follow the S. Korean won, but that can’t be a good thing for the S. Korea’s currency… Of course there are a lot worse things that could happen and people wouldn’t be worrying about the currency! But for now, they’re just words…
The good news this morning is that Brazil has posted their first Current Account Surplus in 19 months! $146 million in April was the figure… And any Current Account figure that’s written in black is good for a country and their currency! And the real (BRL) is no exception to this rule. The real is trading this morning at 2.0060, spittin’ distance from losing that “2” handle! (Real is a European Style priced currency, so the lower the price, the more value it returns versus the dollar) The real hasn’t seen the underbelly of a “2” handle since October of last year!
You may recall last fall, I wrote about how the real was holding serve, but eventually it had to give up ground, with the euro (EUR) losing value and commodity prices circling the bowl. But now that the Big Dog, euro, and commodity prices are on the rise, once again… The real is back in the driver’s seat…
Don’t know if you look at these things or not… But Treasury yields continue to inch higher and higher… It’s almost as if they are looking for the pressure point that will cause the U.S./Fed and Treasury too much pain… In the meantime… Holders of Treasuries are losing value. Of course if they hold them to maturity they get their principal back, so no loss of principal there… But how many of the Treasuries that were purchased last year in the “flight to safety” were made with the thought in mind to hold them to maturity? My guess, is very few… And so it goes for those that thought they were making a flight to safety!
And of course, the dollars they bought to make those Treasury purchases have lost quite a bit of ground since March, which means the Treasury holders get a double whammy/hit… Bond price, and currency price… Fun times at the old Treasury ranch, eh?
And while I’m on that subject… Recall that I’ve gone out on the limb, and said that I believe that on the other side of this current deflationary asset price scenario we are in, we’ll see inflation that rivals the inflation we saw in the late ’70s, early ’80s… Inflation like that will absolutely kill the price of bonds.
And to that… We have a quote or two from Dr. Marc Faber. I sat on a panel with Dr. Faber at the New Orleans Investment Conference in 2007. A truly intelligent man with the ability to look ahead and see things that others don’t see… Well… Anyway… What I’m trying to get at is an interview that Dr. Faber gave on Bloomberg TV… Here’s the good Dr.
“The U.S. economy will enter ‘hyperinflation’ approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates.” He went on to say… “I am 100 percent sure that the U.S. will go into hyperinflation. The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”
Now, I think Dr. Faber mentioned Zimbabwe to illustrate his “hyperinflation” call… Myself? Well, just what I said above, I think inflation will rival that seen in the late ’70s, early ’80s… Dr. Faber has a point, which I’ve tried to make before, so let’s see if I can get it across now… When a central bank raises interest rates, the new Treasury supply they issue has a higher yield, than previous ones issued… That makes the previous ones issued, less valuable. So, what will the Fed do, when the first signs of run-away inflation show up? Do they bite the bullet and raise rates causing all their previous issues to lose value (hello, China, I’ve got bad news for you), or do they do what Dr. Faber suggests they will do… Nothing, absolutely nothing, say it again!
And what’s this all got to with currencies? Ahhhh grasshopper… Everything has to do with currencies! Those dollar denominated Treasuries when reversed and sold, will have the dollar purchases reversed and sold too!
And then throw in what I’ve been talking about lately with China already signing 6 currency swap agreements with countries that allows them to take dollars out of their trade equation with these countries, and put renminbi (CNY) into wider use, and you’ve got the “Perfect Storm” forming for the dollar, folks… I know this is all what I see, and now “fact” per se… But, it’s staring us right in the face! I don’t know why more people aren’t talking about this!
OK… Let’s go somewhere else, all this talk is starting to give me a rash!
How about…. Asia? Yes, let’s see… There were rumors yesterday that Asian countries like Singapore, India, and Japan had to intervene in the markets because of the dollar’s decline. It’s likely that Asian central banks had to sell their currency and buy dollars to keep the fall in the dollar to a minimum. I really, truly don’t like when Central Banks get into the markets… It’s manipulation… And as long as they can do that, and… Print money… There really is no such thing as “free markets,” right? If, Alan Greenspan can manipulate interest rates to allow the stock market to run higher for years, was it the stocks that were the “root” of the rally, or was it the Fed Reserve manipulation? Yes, I’m sure you know the answer.
Well… Gold continues to consolidate after last week’s huge run-up. I think that when you see assets stop to take a breather, it’s a good thing. 1. It allows those that were looking to buy a chance to buy without chasing a rising asset… And 2. Trading trends are not one-way streets, so as long as the asset doesn’t have a HUGE sell off, then the price action is good… It allows the asset to form a new base from which to spring higher!
I see the pound sterling (GBP) trading this morning with a 1.60 handle… That’s the first times since November last year… Only this time the currency is rising instead of sliding down the slippery slope! I really don’t see the value in pound sterling, but apparently others do! This rise does give owners who wanted to get out of the currency an opportunity to do so at higher levels!
I heard one of the salespeople yesterday tell a customer that the South African rand (ZAR) had been the best performing currency this year… But that was before the Brazilian real posted its Current Account Surplus and rallied! Anyway, I was going to talk about the rand… Now, I’ve always said that I wasn’t a huge fan of the rand, because it was volatile, and the corruption in the country just didn’t give me a warm and fuzzy… But, what’s going on right now is simply a case of the rand being 1. A high yielder, and 2. A commodity currency…
The need for higher yields is quickly becoming a growing concern for investors… They are difficult to find, and when you do find them, they’re mostly the property of emerging market countries, or commodity countries… Not your run-of-the mill “major” currency like euro, yen (JPY), or sterling! So… What I’m telling you is simply to be careful out there in high-yield land!
The price of oil spiked up yesterday to over $63!
And finally… The first test of the 2-year auction of Treasuries, passed… But getting investors to go short probably isn’t the real problem… The real test will be the 10-year and out… I told you earlier that yields were rising… Well… How does this sound? 10-year yields are up 129 basis points so far this year and 103 basis points since the March 18th quantitative easing announcement.
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“I don’t know why more people aren’t talking about this!”
Because when you do, you will get laughed out of polite company just as if you were calling an end to the housing run-up two or three years ago.
But I’m not worried. ‘Cuz y’know, Obama has a plan and all.
Why have you stopped listing the daily currency (conversion) rates at the bottom of your daily letters?
and… you’re not listed on the main reckoning page these days… what gives?
(you go tell them to fix it, ok?)
–ikk