China Intervenes

Today’s Pfennigfor your thoughts…

Good day, and a wonderful Wednesday to you!

China stuck by its pledge to allow the markets to have more say in directing the renminbi, and the result was a 1.6% drop in the renminbi, thus marking a 3.5% drop in the past two overnight sessions.

Remember last year, when the Chinese were attempting to introduce volatility to the renminbi, and teach the markets a lesson that the renminbi was not a One-Way Street of appreciation? Well, I guess they finally got their point across now, eh?

I don’t mean to sound cavalier about this, I guess I’m just trying to find something that won’t make people run out in front of a bus, cause this isn’t the end of the world as we know it.

It’s really something that I tried to explain was probably going to happen, due to a couple of things: the slowing down of the economy that hasn’t responded (yet) to the stimulus that China has attempted to apply, and the watching the treasure chest of reserves that had built up to more than $4 trillion dollars, having
chunks of dollars removed, without any results.

So, I really don’t know what to tell you regarding my view on where this goes from here. It could settle down, and we get back to dealing with debts and deficits, or it could be like a snowball rolling downhill, and become a bigger problem for the rest of the globe.

Could this be the black swan event that people have been talking about? Or as James Rickards says, the snowflake that causes the avalanche?

Here in the U.S. we don’t seem to be too concerned with these moves by China, and I find that to be an error in judgment by the U.S. But then we’ll have to wait-n-see, but I’ll tell you one thing that has become very important: gold.

No, it’s not taking off for the races (yet), but it is getting some love each day and the small gains are adding up, with gold now trading $1,118. Just a week ago the shiny metal was trading with red figures just about every day, and there were quite a few Chicken Littles out there squawking about how gold was going to fall below $1,000.

I was beginning to believe them. really, I was. but something kept telling me to not fall for that trap.

Today’s currency action is a complete opposite of yesterday’s when everyone panicked on the Chinese announcement. The only currencies with losses this morning are the renminbi, the Indian rupee, and the Russian ruble.

I’m certain that the Brazilian real will also show losses once it opens for trading this morning. I say that, because the rest of the BRIC currencies are showing losses.  When you add the “S” The BRICS, then have one currency, the S. African rand eking out a gain this morning.

The best performer overnight has been the euro. Boy, it’s been some time since could say that!  But the euro is up more than 1-cent overnight.

Coming in second place is the Norwegian krone. I saw the krone’s performance on the screen and immediately wanted to know what the price of oil was doing. It must be good, I thought. But I was wrong, the price of oil was back below $44.

So, what had the krone all lathered up this morning? I would think that with the price of Oil not responding favorably for the krone, that the krone is just following the euro. Shoot Rudy, it followed it downward, why not follow it back up?

Speaking of the Indian rupee. I read a report last night that quoted the Reserve Bank of India (RBI) Gov. Rajan, and he said that he was going to keep the rupee out of the Currency Wars.

Good Luck with that Mr. Rajan.

You see, the Eurozone was once proud of its position of not joining the currency wars, and so were the Chinese. But, they all eventually raise the white flag and succumb to the pressures. But, I give kudos to Rajan for saying that, and trying to remain the Swiss of the Currency Wars. But like I said, Good Luck with that!

Getting back to the euro. Wow! The euro must be seeing so much flight to something other than dollars and Treasuries, out of China, because Eurozone Industrial Production for June printed this morning and was weaker than expected at -0.4% vs. -0.1%.

Maybe the euro is tearing a page out of the dollar’s book on how to book gains when economic data is weak. HA!

In Australia last night, their August Consumer Confidence report printed, and showed a huge gain to 99.5 from 93.2 in the previous month. I found this to be quite interesting in that just the day before it appeared that the sky was falling on the Asian and Pan Asian currencies.

The Aussie dollar (A$) is up nearly ½-cent on this report, so that’s a good thing.

The Wall Street Journal (WSJ) is reporting right now that China’s central bank intervened to prop up the yuan (renminbi) in the last minutes of trading, and directed the state-owned Chinese banks to sell dollars on its behalf.

Pretty interesting, eh?  That’s the first time I’ve heard of the Chinese Central Bank intervening.

So, there is a ton of talk out there that started yesterday, after the Chinese announcement, that given the state of the Chinese economy, and that it required a devaluation of the currency, that the U.S. Fed might delay their rate hike that’s on most people’s radar for next month.

Sounds like a convenient excuse to me, for in my opinion, the Fed wasn’t going to hike rates next month any way, but now they can say that the unforeseen problems in the global economy require them to take a step back.

Yes, they will do that, but in reality they never really intended to hike rates, so it’s all a convenient excuse.

And again, I want to come back to something that I mentioned on Monday: while the Chinese have attempted to diversify their economy, they still depend heavily on exports to fuel their economy, and exports dropped -8.3% last month.

What does that tell you about the strength of the major economies around the world?

I think that China is going to find out that devaluing their currency to make exports less expensive isn’t going to be the medicine to cure all that ails them.

Look around the world…  everyone is doing it, (debasing their currencies to promote exports) and no one is having a good time…

The U.S. Data Cupboard is still lacking any depth today, with only the monthly budget statement for July to print. No one, except me I think, pays attention to this any longer.

But for those rare individuals that do pay attention and maybe even keep score at home, look for the Budget Deficit to increase in July to $138 Billion from $95 Billion in June.

I told you Monday that the “real data” was back loaded to the end of the week, and so tomorrow we finally see something to talk about. I might have said earlier this week that Retail Sales would print on Wednesday, but that was incorrect, it will print tomorrow.

I was doing some reading regarding gold. And the one piece talked about how stocks are bubble here in the U.S. (old news) but they are beginning to show signs of popping, and when they do, investors will be panicking and that will lead to the price of gold rising.

Amazing how some people can twist and turn everything back to “the price of gold rising.”

Maybe he’ll be correct, but what about Treasuries? It sure appears that the direction of money these days is going into Treasuries. The yield on the 10-year fell again last night. We started Monday morning with a 10-year yield of 2.27%, and this morning it’s 2.09%.

That means that investors are buying 10-year Treasuries (and probably other tenures but I only focus on the 10-year) thus driving the price of the bond higher, and I’ve long told you that the pricing of bonds has the bond price and the yield in an inverse relationship. So when the price goes up, the yield goes down, and vice versa.

Before I head to the big finish, I wanted to bring you up-to-date on Puerto Rico. Remember when I told you that they were nearing a default? Well, I guess you can say that they defaulted on August 3rd.

That’s when, of the $58 million in bonds that needed to be paid, investors only received a total of $628,000.

That sure flew under the radar didn’t it? I guess $58 million isn’t enough to get lathered up about. How about $1.4 billion? Because that’s what’s coming due in December and January. Maybe then someone will take notice…

Well, I pulled this from Ed Steer’s letter this morning, and he pulled it from a website: www.firstpost.com . I have this snippet for you, and there are some very important thoughts in here that I’ll try to pick out below:

In November 2009, the Reserve Bank of India (RBI), which has always been preaching the virtues of not holding physical gold, bought 200 tonnes of gold for around $6.7 billion – or roughly $33.5 million a tonne – from the International Monetary Fund (IMF).

At current prices of around $1,106-1,107 per ounce, the value of the RBI’s gold purchase is more or less what it had bought the metal for in 2009.

If the RBI wants to tell people why gold is not such a good investment, it can tell its own story and prove its point.

But it won’t do that, for a simple and logical reason: the purpose of holding gold as a reserve asset is to diversify risks, not to make capital gains by speculating in gold prices.

This is the exact reason why most Indians buy gold when they can. So, despite all the bad press the RBI manages to give gold, they are on the same page.

This brings us to the second question: given that gold prices have fallen, and could fall further, what should the RBI do now? There are four reasons why the RBI should tank up on gold.

I believe Raghuram Rajan, the RBI’s thoughtful Governor, should buy gold – in dribs and drabs – from the market at current prices.

Some 200 tonnes of it can’t cost more than $7 billion, a drop in our current foreign exchange reserves of $353 billion, the bulk of it held in foreign currency assets worth $330 billion.

Gold reserves are worth a mere $18 billion right now.

Chuck again. I loved this comment, “the purpose of holding gold as a reserve asset is to diversify risks, not to make capital gains by speculating in gold prices.”

I think that is the whole purpose of owning not only gold, but currencies other than the dollar in one’s investment portfolio. It’s all about reducing the risk.

And these asset classes of metals and currencies might go down in price, but that simply means something else in your portfolio is going up, and when these asset classes go down in price, it simply means to me that you now can increase your diversification by buying more of the assets at cheaper prices.

But then, you dear longtime readers already knew I was a diversification geek. Always was, always is, and always will be.

That’s it for today. I hope you have a wonderful Wednesday!

Regards,

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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