Geithner Makes Another Promise to China

The currencies, led by the euro (EUR), ran into a dollar roadblock yesterday, not once, not twice, but three times… The first two times the euro traded over the 1.42 figure, it fell back, but recovered to again try to remain over 1.42… It was a classic case of profit taking at a line of resistance… But the third time, was no charm for the euro, and thus it ended the day and night sessions below 1.42… But hey! Has this run from 1.2578 on March 1st been something, or what?

I see where UBS believes this is it for the euro… Sort of like the thought that a star burns the brightest right before it burns out… Hmmm… I guess they believe that the U.S. deficit problems are going to go away… Apparently, they drank the Kool-Aid from U.S. Treasury Secretary Geithner, who told the Chinese that the U.S. was going to shrink the deficit… He also told them that their assets were “safe”… Ty sent me something on this that he found yesterday…

“Chinese assets are very safe,” Geithner said in response to a question after a speech at Peking University, where he studied Chinese as a student in the 1980s.

His answer drew loud laughter from his student audience, reflecting skepticism in China about the wisdom of a developing country accumulating a vast stockpile of foreign reserves instead of spending the money to raise living standards at home.

I guess I have more in common with a Chinese student than you would have thought, because I would have been laughing out loud, too!

There’s a story running on the news wires this morning that the U.S. recession ended in May… Wait a minute! Did the ISM Manufacturing Index soar back to the expansion number of 50 in May? No… How does 42.8 sound? Now… We have to go back to January of 2008, when I kept writing about how the U.S. had entered a recession, although the government officials (read dolts), and the NBER, the official recession caller, said otherwise… The reason I was so adamant about the recession at that time is that the ISM Manufacturing Index number slipped below 45, for the second consecutive month… My research over the years showed that any time that happened, the NBER would follow it up months later with a call that we had entered a recession!

So… “Is this time going to be different?” I think NOT! And… By the by… That saying really gets my blood boiling, as it reminds of the dolts that kept saying that about eight years ago!

And here’s how I view this manufacturing thing… First of all you have to deal with delays and such, but in a simplistic view… The dollar was strong through February, and the ISM Manufacturing Index was in a free fall… That makes sense, right? The cost of exports was increased, thus it affects manufacturing… But… The dollar began its current decline on March 1st… And by May, the ISM is recovering… Dollar down, manufacturing up… Want to have manufacturing a part of an economic recovery? Guess what needs to happen… Awww… You know the answer!

OK… Back to “other stuff”… My friend, Ian Mathias over at The 5-minute Forecast said two things yesterday that really caught my attention. First was this…

“Your family’s share of the government debt is now over half a million dollars. A record $546,668, to be exact.

“That cheery Monday stat comes courtesy of a USA Today study, which claims that each American family’s share rose 12% in 2008. That’s $55,000 in new government debt last year for every US household – thousands more than the median household annual income.”

And second… He quoted me in The 5 and introduced me as “Chuck Butler, the man, the myth, the legend.”

That Ian… What a guy!

OK, now that you’ve stopped laughing hysterically, I’ll get back to the task at hand! But… Is that debt number not staggering? And just wait, folks… Just wait until the baby boomers begin to retire in huge numbers, and begin drawing on Social Security and Medicare…

U.S. stocks were up 221 points yesterday, and the euro and other currencies backed off… Hmmm, another sign that the link has been broken? I would say yes… But I think today could be a real indicator, in that stock futures are down right now… But the euro is rising; at least it’s higher than it was when I first came in this morning. (Over an hour ago!) In fact, the single unit just touched 1.42 once again, after sitting at 1.4123 when I came in!

Down Under… The Reserve Bank of Australia (RBA) left rates unchanged (good for them!) and there was some good news for the economy too, so… The Aussie dollar (AUD) has been underpinned, and poised for a renewed attack on the green/peachback! (For new readers, when I say green/peachback I’m talking about the U.S. dollar, who has changed its color to peach and you can’t just refer to it as the greenback any longer… At least I can’t! HA!)

Australia’s Current Account Deficit narrowed in April to A$4.6 billion, or 5% of GDP… Still too high for my liking, but, with China pushing the envelope on commodities, investors can look beyond just the deficit in Australia, as long as it keeps narrowing, which it has overall in the past year!

The RBA’s statement following the meeting was a bit cautious, and leads me to believe they’re leaving the door open to a rate cut in the future… I guess they wouldn’t be prudent if they just closed the door! So… When this was first announced the Aussie dollar took a hit… But has recovered from that initial hit, and like I said above, poised for a renewed attack on the green/peachback.

The Canadian dollar/loonie (CAD) continues to bask in the rising crude oil price, which reached $68 yesterday. But there’s more to the loonie than crude oil… For instance, yesterday, the first quarter GDP printed and was pretty bad at -5.4%… However, it was widely expected that the number would be much worse…(-7.3%!!!!) Now, I know this doesn’t sound like a huge endorsement for Canada, saying their GDP was a -5.4% in the first quarter, but… The economy WAS stronger than expected!

Yesterday, I talked about the commodity currencies of Australia, New Zealand (NZD) and Canada, and unfortunately, I left out Brazil (BRL)! UGH! How could I do that? In this month’s Review and Focus newsletter (available to World Markets clients only) I spent about a full page on talking up Brazil… Remember though… Brazil is considered an emerging market, and therefore requires an additional disclosure to buy it… And… Just because I like Brazil, it doesn’t mean it can’t post losses! The markets will do what the markets want, folks…

Speaking of emerging markets… Recall last week I talked about the emerging markets soaring and the amount of money flowing into these markets? Well… Yesterday it was reported that in the past four weeks, over $12 billion has flowed into emerging markets, pushing the MSCI Emerging Markets Index (that tracks emerging markets) to a 19-month high!

Yesterday, the data cupboard produced the ISM Index that we talked about earlier, and one of my faves… Personal Income and Spending… Remember when every month you could count on these two to show that U.S. consumers outspent what they made… But those are days gone past… These days, it’s all about recovery for personal balance sheets… And while income isn’t going higher, spending is going down… Oh, and the rise in personal income in April showed a 0.5% rise (consensus was for a drop of -0.2%)… Turns out to be nothing more than increased payments to unemployed workers… Spending did fall -0.1% in April, and the deflation people are all over that… But deflation is going out the door, folks… Inflation, while probably a little too early to call is now on everyone’s minds.

Today’s data is somewhat secondary with Pending Home Sales for April, and Vehicle Sales for May… Not much to draw from there… So… As they say in Star Wars… Nothing to see here, move along…

Gold lost some ground yesterday… I guess $985 was just too pricy, eh? Well, in my mind, that’s nothing more than yet another opportunity to buy at cheaper levels! But… Remember last week when I told you about how silver had it’s best month (May) in 22 years? Well, silver is still outperforming gold… I saw in here The Daily Reckoning the other day that Byron King said that he believed we would see $20 in silver before we saw $1,200 in gold… Hmmm… Hey! Either one or both is just peachy with me!

And then my friend, the Mogambo Guru, had this to say about owning gold and silver… “Of course, if you have gold, silver and oil, then the ‘we’ in ‘we’re freaking doomed,’ doesn’t actually include ‘you’ – as in ‘if you are the owner of gold, silver and oil, then you are indeed fortunate, as they are the only things upon which you can rely during the coming economic cataclysm which won’t sell you out and stab you in the back, unlike your family and co-workers, which you always suspected, so don’t act surprised.’”

Ahhh, the Mogambo on a Tuesday… Sure makes it terrific!

The Daily Reckoning