Fed's Beige Book Disappoints

Well… We had “Turn Around Tuesday”, and that was fallowed by “Whipsawed Wednesday”! The euphoria of the dollar bears, turned quickly yesterday, with the dollar bouncing back… I’ll tell you this dollar has more lives than a cat! But that’s OK… I certainly don’t want to see a dollar collapse, as some have called for… I just want to see it at a “fair” level, given the fundamentals of exploding deficit spending… That seems fair, eh? Trends… Weak dollar, strong dollar, alternating throughout time… Well, at least since Nixon closed the gold window in August of 1971!

There was plenty to sell dollars on yesterday, but the dollar bulls got some wind in their sails in the afternoon, after the Fed Beige Book was printed… Now, I know, I said yesterday that the Fed’s Beige Book rarely moves a market… But that’s what seemed to happen yesterday… The Fed’s Beige Book reported that all the districts saw that economic conditions remained weak or worsened through May. This news threw cold water over the “the recovery is on its way campers” and pushed Risk Aversion to the front of the class once again.

Overnight though… This news was erased when “upon further review” it was reported that five of the Fed districts saw the downward trend in activity showing some signs of moderation. So… Just like I said a couple of weeks ago… This daily back and forth reminds me of a Wayne and Garth street hockey game… Yesterday it was “game off!” today, it’s “game on!”

The really big news that caught everyone attention yesterday was reported by all the major media outlets, and the title of the story was… “Russia to sell U.S. Treasuries, to buy IMF Bonds”… Now, that title alone should have sent a shot across the dollar bulls’ bow… But, I guess the dollar bulls weren’t paying attention… They were probably still rejoicing the Jobs Jamboree farce from last Friday! HA!

Seriously though… Of Russia’s over $400 billion in reserves, which are held in Treasuries, they plan to allocated $10 billion to the IMF bond program… So… In reality the Title is a bit misleading, eh? I mean they could have said, “Russia to diversify $10 billion of Treasuries to IMF Bonds”… So, this doesn’t sound like a Chicken Little story right? Well, not so fast there Tim!

Didn’t China announce last week that they were going to buy as much as $50 billion of the IMF Bonds? $10 billion here, $50 billion there, and pretty soon we’re talking about a large sum of Treasuries getting sold!

And with that in mind, the 10-year Treasury hit 4%! Later in the afternoon, we saw this 4% yield, which was 3.87% at the start of the day, come back to 3.93%… Hmmm… You don’t think that the Fed bought Treasuries do you? I mean, they have carte blanche to do this whenever they feel it to be necessary! And with yields going to 4%, I guess it was necessary!

And, the assumption that the Fed used Quantitative Easing left the dollar hanging out on a line overnight, and Asian traders first, then European Traders pushed the dollar down… Now… I’m watching the currency movements since I came in, and it’s more of the back-n-forth stuff we’ve seen for a couple of weeks now… (The euro was 1.4005 when I came in, traded to 1.4030, and now back to 1.4005) But, the important thing to notice is, while the dollar makes its comebacks/rebounds, at the end of each week, the dollar is lower overall… This makes for a trend people…

Whenever the Risk Aversion campers take their ball and go home, the high yielders/commodity currencies get the court, and they start slam dunking the ball! In other words… They kick some dollar tail and ask names later! The high yielders/commodity currencies of Australia, New Zealand, Brazil, South Africa all see huge chunks of investments coming their way when “risk” is back on the table. The Canadian dollar/loonie, is a commodity currency, but surely not a high yielder! But with oil prices now touching $72, the loonie is once again on the rally tracks!

Overnight, the Reserve Bank of New Zealand (RBNZ), left rates unchanged and didn’t jawbone about keeping the rate cut door open… RBNZ Governor Alan Bollard said: “The economic outlook remains weak both in New Zealand and in other countries. However, there are signs that international economic activity is stabilizing, and international financial conditions are improving. We expect the New Zealand economy to begin growing again toward the end of this year but the recovery is likely to be slow and fragile.”

Sounds like Bollard has taken on my friend John Mauldin’s line about a “muddle through” economy!

While we’re “down under”… Australia saw employment data last night, and it paved the way for a strong performance overnight for the Aussie dollar… Job losses were negligible in May, falling just -1.7K, when a negative -30K was expected. The thing I think that’s very interesting here is that the Aussie futures are pointing to rate hikes early next year… Of course that’s all based on the rosy outlook the markets seem to have right now…

Now… For Australia that might be all fine and dandy, as their fortunes are tied to China, not the U.S. But here in the U.S. the rosy outlook the markets have right now is to me, like putting the cart before the horse, as we might want to see a “bottom” before we recover!

Well… The trade deficit in the U.S. was as expected widening from a revised upward $28.5 billion in March to $29.2 billion in April… The number that was even more concerning was the budget deficit of $189.7 billion… This puts us on target for $2.3 trillion in a budget deficit, and then you have to add in the $787 billion Stimulus, that’s not accounted for in these numbers… That puts us over what I said we would be this year… Over $3 trillion budget deficit…

Now… How many more Treasuries are going to have to be auctioned off to cover that nut? Can you say… Treasury Bubble, popped? I knew you could! The foreigners we need to buy these Treasuries are going to demand a higher yield… And… I don’t think the Fed has enough money to keep buying Treasuries in an attempt to keep yields lower, no wait! Just like Helicopter Ben, told us before he was Fed Chairman… “The U.S. Government has a technology, called a printing press.” They can print what they don’t have!

Anyway… What I’m getting at here is that yields will rise, but not to the degree the foreigners want to see. So… The clearing mechanism for these Treasury purchases, gets discounted… And class… What’s the clearing mechanism that will be discounted? The dollar! The dollar will be allowed to be debased even further to allow the Treasuries to be bought at a discount.

Oh, there will be the usual shallow statements that “the U.S. believes in a strong dollar”, but then those that say that will have their fingers crossed behind their backs!

OK… The data cupboard has a biggie today in retail sales… The Weekly Initial Jobless Claims will also print as usual on a Thursday. May’s retail sales are expected to rebound from April’s poor showing of -.4%… The BHI (Butler Household Index) also agrees that May will rebound. I think if this report does rebound, the “it’s all clear” campers will come out in force… And… That may cause the dollar to lose more ground, as those that purchased dollars and dollar assets as safe haven trades, will no longer see the need to own their safe haven trade!

And then in the “I still can’t believe we’ve come to this” category… The Treasury Department on Wednesday appointed a well-known Washington lawyer, Kenneth R. Feinberg, to oversee the compensation of employees at the seven companies – the American International Group, Citigroup, Bank of America, General Motors, Chrysler and the financing arms of the two automakers.

He will have broad discretion to set the salaries and bonuses for their five most senior executives and their 20 most highly paid employees.

I know, I know, I shouldn’t swim in these waters, but you know me, I can’t help but get myself into these things… But… This is just the beginning, folks… I told you months ago that this was going to happen when the government began to bail out financial institutions. They’ve got their hooks in this fish now, and have you ever seen the government give something back once they’ve gained it? It will only get worse… And worse… And worse…

And it will all be OK because these are “extraordinary times, which call for extraordinary measures” right? HOGWASH! This is really bad, folks…

The Daily Reckoning