The Strong Yen Debate

We’re a week into the Christmas shopping season… I wonder how that’s working out for the retailers? I know that the online shopping has been strong, but other than that, I don’t know. I just continue to hear stories of near empty shopping centers.

OK… Well, we have another “risk on” day today, as the risk assets are cooking with gas this week. This strong run in the risk assets has lasted all week, and whenever it gets on terra firma, the demand for yields becomes quite apparent. And you don’t have to look too hard to find yield… It’s in Australia… It’s in New Zealand… It’s in South Africa… It’s in Brazil… And… Mexico…

Of all of those… Australia is the biggest country – GDP wise – and with the export tracks greased toward China, it has the best prospects for even higher yields as we go through 2010.

The European Central Bank (ECB) is meeting this morning, and while there are no expectations that the ECB will raise interest rates, there is a thought going around that ECB President, Trichet, will announce the ECB’s “exit plan” of stimulus provided to the economy…

You would think that any announcement of an “exit plan” by the ECB would cause some slippage in the euro (EUR)… But that’s not the case, as the euro has climbed back above 1.51 again this morning. Yesterday the euro was 1.51 in the overnight and early morning markets, but got marked down once the US traders came to work. We’ll have to wait-n-see if the US traders mark the euro down again today.

I guess it all depends on how ECB President, Trichet announces the “exit plan”. It’s all in his delivery, folks. Big Al Greenspan was the master at this… He would make an announcement of what the Fed was doing, and no one would be able to figure out what he was referring to… It was called “Green-speak”.

Lots of “talk” going on in Japan these days… You’ve got the Bank of Japan (BOJ) and the Finance Ministry begging for a weaker yen (JPY)… And you’ve got the markets playing hardball and pushing the envelope of yen strength. I was doing some research last night and came across a story about this guy named Wakabayashi, who is a currency strategist. Seems Mr. Wakabayashi, takes claim of being the currency strategist that “called for yen to reach an all-time high back in 1995”… Well, for really long-time readers of the Pfennig (which, by the way, started in 1992), they might recall that yen hit a level of 74 versus the dollar in April of 1995… Well, the same Mr. Wakabayashi is now calling for yen to return to that 74 level by 2011.

So… In other words, he thinks yen is going to gain 16% in 2010, from current levels… Of course, it’s just one man’s opinion… I would like to know just why he believes this, but I have my opinion… And that is he thinks the second leg of the financial meltdown is going to occur in 2010, and it will drive investors to dollars, treasuries, and yen.

Now, on the other side of the coin, I also read this report… Japanese Vice Finance Minister Rintaro Tamaki, who is head of international affairs including currency policy, met with US Treasury officials this week in Washington, spurring speculation that the two nations are discussing the yen’s strength.

“Japan is shifting away from laissez-faire policy on the rising yen,” said Takeshi Minami, chief economist in Tokyo at Norinchukin Research Institute Ltd. “The possibility of actual intervention may strengthen if the yen reaches 83 per dollar.”

Japan should ask the US and Europe to take coordinated action to weaken the yen, Financial Services Minister Shizuka Kamei said in an interview in Tokyo yesterday.

“We need international coordination,” said Kamei, whose People’s New Party is a coalition partner to the Democratic Party of Japan. He has urged Finance Minister Hirohisa Fujii to seek international cooperation to halt the yen’s rally.

The important thing to take away from that story is that Japanese officials believe they will need a “coordinated intervention”… That’s Central Bank parlance for, Central Banks gang up and pool together their reserves and hit the currency markets with both guns blazin’! Otherwise, if the Bank of Japan goes at it alone, they will spend trillions of yen, like they did in 2003 to keep the yen from getting too strong, and find that in the end, it only made a difference for a short period of time!

OK… Enough yen! Under the heading of: I have no idea why that currency is strong… The British pound sterling (GBP) gets the title role! The pound is defying gravity, right now. Britain has the same problems as we do here in the US – on a smaller scale, but still of significant size. The only thing that I thought was holding up the pound was the fact that pounds are one of the components of SDRs, and with all the talk of going to a different reserve currency and using SDRs, pounds were being bought… But, that talk of a different reserve currency has faded for now, and still the pound is stronger. Hmmm… I would look to use this pound strength as an opportunity to exit… But then, the pound just keeps getting stronger… I guess the pull of dollar selling is just too great right now and the pound gets some love on the crosses. There will be an election in the UK soon… I don’t see that as something that would underpin the pound… So, be careful here!

Yesterday in the US, the data cupboard yielded a less-than-stellar ADP Employment Change report that showed job creation was not as strong as forecast. And… The Fed’s Beige Book – prepared with data collected through November 20 – indicated that economic conditions have “generally improved modestly.” They also said that consumer spending “strengthened” since the last report with improvement in both general merchandise and vehicles.

So… The Fed Heads think it’s all seashells and balloons for the US economy right now… Yeah, that’s why gold hit another all-time high yesterday of $1,218! Investors aren’t buying it… Or I should say… The savvy investors aren’t buying it! The others that don’t come under the heading of savvy, are still holding their “safe haven Treasuries”, or buying stocks of corporations that have no earnings!

Speaking of stocks… I did a video yesterday about the stock sell-off that I warned people about months ago. It never materialized in 2009… But I look at this stock market rise and think to myself… It reminds me of the Tech Bubble… Remember? Investors bought tech stocks that had never earned a dime of profit, but their stock values went through the roof! Of course, we all know that came crashing down like the house of cards it proved to be. Well, the price to earnings ratios today are getting out of whack again… So… Like many things that I talk about, I’m so far out in front of the markets, that for a long time, people think I’ve “lost it”… So, just because the stock sell-off didn’t happen in 2009, doesn’t mean it won’t happen in 2010!

There was news last night that Bank of America (BOA) is getting ready to repay $45 billion of its government loans… This news really kick-started the risk assets in the overnight markets… But, I’m from Missouri… I’m going to have to be shown that this gets repaid… Not just talked about!

As I said earlier, gold reached $1,218 yesterday… Kristin mentioned that silver has risen 69% this year, but all everyone ever talks about is gold, and wanted to know why…

Well… Silver is another excellent choice of a store of wealth… But, it’s just not gold! There are a number of reasons for this, but the most compelling one is that gold used to be money, and to many, it is considered to be the only real currency. The practical reason is the fact that if you wanted to carry gold in your pocket, two coins worth $2,400 would be just fine… But if you wanted to put $2,400 worth of Silver in your pocket, you would need a lot of people’s pockets to help you carry it!

And then there was this… According to The Wall Street Journal, Goldman Sachs is meeting privately with major investors to convince them that its compensation levels are reasonable. The meetings, which are expected to last several more weeks, come as the Wall Street firm tries to ward off a shareholder backlash over its pay.

You know my lack of affection for Goldman Sachs and their connection to the US government… Yesterday, a reader made a good point in a response to the Pfennig when I wrote about replacing Big Ben Bernanke… The reader said… “Even if Bernanke is booted out, a replacement will still be drawn from the cesspool of Goldman Sachs.”

To recap… It’s a “risk on” day for the risk assets… Gold hits another record high mark… The “risk assets rally” this week is driving investors to seek yield, which can only be found in a handful of currencies, of which, Australian dollars would lead that pack. One guy says that Japanese yen is going to 74, and another guy says that the Bank of Japan will intervene when yen gets to 83… And, sterling continues to defy gravity.