G-7 Squashes Currency Rally

The currencies are much weaker this morning, after digesting the G-7 decision on Saturday, and all the saber rattling with China… But in the real scheme of things, I would suggest to you that this weakness is nothing more than correcting a “too far, too fast” move by all the currencies following the FOMC meeting on Sept 21st.

Speaking of Sept. 21st, the minutes of that FOMC meeting will be on display for all to see this afternoon. Remember on Friday, I told you that there is some slippage in the thought that quantitative easing (QE) is a done deal for the November 2nd meeting of the FOMC… Well, those thoughts are getting more air play, which is also causing some slippage in the currencies… The FOMC meeting minutes should put those thoughts to bed, but there’s uncertainty this morning, and with uncertainty you get currency weakness, that’s just the way it is, some things will never change…

Well… The G-7 meeting last Friday and Saturday, had a BIG surprise for everyone, that is, everyone except the conspiracy theorists that believe we are headed for a “one rule-one global currency”… Now, I love a good conspiracy story as much as the next guy, but I’ve stayed away from pinning my colors to that conspiracy mast… But the actions of G-7 last weekend really push me toward the conspiracy corner… Here’s the skinny…

Financial officials worldwide said at a meeting in Washington that The International Monetary Fund (IMF) should take the lead in preventing competitive devaluation from triggering a destructive round of protectionism. US Treasury Secretary Timothy Geithner strongly backed the move, saying the IMF has a crucial role to play in rebalancing the world economy. “It is ultimately the responsibility of countries to act, but the IMF must speak out effectively about challenges and marshal support for action,” he said.

Hmmm… I don’t know, you tell me… Does that look like a baby step in the direction of a one-rule, global currency to you?

So… The currencies have uncertainty dripping off of them this morning, even the Chinese renminbi (CNY), which had reached a record high of 6.6639 yesterday, is weaker this morning. I would have to think that given how fast all these currencies gained on the dollar, along with gold and silver, that we’re going to see some consolidation for the next week or so… We could see the euro (EUR) slip back to the mid-1.30’s but remain much stronger than it was back in June.

There’s one currency though that’s rocking the dollar strength boat, and that is the Japanese yen (JPY), which is ready to slip below 82 and trade with an 81 handle… WOW! Remember a few years ago, when I kept saying over and over again that Japanese yen was undervalued when it was 110? I said then that yen could trade below 100, and everyone laughed hysterically at me… But that was then, and this is now… And to me, Japanese yen at 81 is preposterous! The cry that yen is a destination for the “flight to safety” investors is just outright weird to me… The yen is now in uncharted waters, and I don’t know about you, but I wouldn’t want my boat in uncharted waters…

At the top, I mentioned that there was saber rattling with China going on… Well, now the Europeans are shouting a bit louder that they are dissatisfied with China’s currency policy… So, now the US and Europeans are ganging up on China. It just so happens that this Friday, the US president could take the next step and actually call out China, and name them a “currency manipulator”… Hmmm… I wonder if the president will put his money where is mouth is with regards to China… For being named a currency manipulator is a bad thing for a country, as penalties, tariffs, and other dastardly things could be bestowed on them.

Again… The Chinese aren’t telling us or the Europeans how to run our respective countries… It wasn’t the Chinese that pushed the US or Eurozone GIIPS to spend like drunken sailors… I only use that line to bring up a great line by Ronald Reagan who said that, “We could say [pick your party] spend money like drunken sailors, but that would be unfair to drunken sailors. It would be unfair, because the sailors are spending their own money.”

No… They didn’t… And so now, we point the blame finger at China, even though our problems and the Europeans’ problems were self-inflicted! If I see Schumer on TV one more time blaming China, I think I’ll get physically ill!

OK… Enough of that! Well… Remember how I’ve harped and harped for years about how the birth/death model used here in the US to adjust the employment numbers, doesn’t work? Well.. Get a load of this story that I saw Friday morning… “The Labor Department on Friday will give an initial estimate of how far off its count of employment may have been in the 12 months through March. The government admitted earlier this year that its count through March 2009 had overstated employment by 902,000 jobs.

“The department blamed its 902,000 miss on faulty estimates of how many companies were created or destroyed, and it has not yet made any changes to the so-called birth-death model that produces this projection.”

Speaking of Jobs… The Jobs Jamboree was quite disappointing on Friday, losing 95,000 jobs in September… The unemployment rate remained at 9.6%… But, you and I know that this is a “trumped up” rate, for if “all the unemployed” were counted this rate would be 22%… For new readers new to class, the government drops individuals from the unemployment rate once their unemployment benefits run out… Makes no sense, but that’s the government for you! So… When you count up the unemployed like they should be counted the unemployment rate goes to 22% or maybe even 23% with today’s report.

And I told you on Friday morning that the currencies would rebound should the Jobs data disappoint, and that’s what happened, for most of the day on Friday… But Sunday night, the Asians got in on the profit taking, and their reaction to the G-7 news, and that currency rally from Friday is in the rear view mirror now.

And before I go on, I want to tell you about a rumor that I keep hearing over and over again recently… And that is that China and the Arab States, and even Russia, are teaming together to remove the dollar from their trade settlements. You may recall that a year or so ago, China signed currency swap agreements with almost all of Asia, and then went into South America, with Argentina and Brazil… All that was done to remove the dollar from their trade settlements, and soon, China became Brazil’s top trading partner… Is China attempting to remove the dollar from oil contracts now? Well, if this rumor is true, then that would be the case… Hmmm… This won’t be good for the dollar or the US should the rumor become fact.

Gold and silver are off a bit this morning, after enjoying a day in the sun after the G-7 meeting… Currency disputes drive investors to gold, and so does any thought of the conspiracy I talked about earlier… But…That was yesterday; today life goes on. No more hiding in yesterday. ’Cause yesterday’s gone… Gold has given back $9, and silver 25-cents this morning.

Then there was this… From The Washington Post

Report warns of coming wave of municipal pension shortfalls

The nation’s largest municipal pension plans are carrying a total unfunded liability of $574 billion, which comes on top of as much as $3 trillion in unfunded pension promises made by the states, according to a report released Tuesday.

The report calls the unfunded pension obligations “off-the-balance-sheet debt” that threatens to starve services such as police protection, recreation centers, parks and libraries.

“The ability of local governments, particularly cities, to provide the levels of service they do now is threatened by this liability,” said Joshua Rauh, a Northwestern University business professor who co-authored the report with Robert Novy-Marx, a University of Rochester professor.

To recap… The G-7 meeting turned the currency disputes over to the IMF… Does that wrinkle anyone else’s forehead? The currencies are seeing some selling this morning, as the uncertainty of things leads to a “flight to safety” once again, with Japanese yen trading close to an 81-handle! The FOMC meeting minutes print this afternoon, and should put all those nonsensical thoughts about no QE to bed. And the president could call out China as a currency manipulator this week…

Chuck Butler
for The Daily Reckoning