Guess Who's Selling Treasuries?

Good day… And here we are on this Thundering Thursday! Thundering here, as storms came through last night! I’ve got some skinny on the negative TICs data that I told you about yesterday… But first… The currencies again traded in a tight range yesterday, with a bias to sell dollars. Overnight, however, it is a different story… The dollar is being taken to the woodshed in the Asian and European sessions… So… Let’s get to the tape!

OK… Here’s the BIG NEWS! Recall yesterday, I told you that the negative TICs data was probably a result of the tumultuous August, but… I thought that in a normal month, the net foreign security purchases would have shown a weakening? Well… Yesterday, it was reported that Japan, China and Taiwan sold U.S. Treasuries at the fastest pace in at least five years in August.

Japan cut its holdings by 4% to $586 billion, China cut its holdings 2.2% to $400 billion, and Taiwan’s holdings slid 8.9% to $52 billion. Japan and Taiwan’s selling were at the fastest pace since 2000, and China’s since 2002.

This sell off was the biggest sell off of Treasuries since Russia defaulted in 1998.

China and South Korea joined Singapore and Norway in setting up so-called sovereign wealth funds to invest excess foreign exchange reserves from export revenue to improve returns.

Now, here’s the bug-a-boo… This is August data! That’s before the Fed cut rates in September! If Asian Central Banks were looking for improved returns before the Fed cut rates, I wonder how bad those numbers are going to look in September, and then for this month!

I don’t think this is the “rush to the exit door” that even thinking about scares the bejeebers out of me… Otherwise we would have heard about it! And the dollar would be circling the bowl right now!

The Master Bubble Blower, Big Al Greenspan, was talking again yesterday. Big Al said that he saw no imminent danger in a weakening dollar, and that odds of a recession for the U.S. remain at 50%.

Let’s talk first about his statement regarding the weakening dollar… Funny isn’t it that it came two days before the G-7 meeting. It’s my opinion, that Big Al was still flexing his global muscles and letting the G-7 members know that the United States wants a weaker dollar!

And then there he went again with the recession odds. While I agree with him… I find it strange, as I’ve never really agreed with anything Big Al said or did!

The Fed Beige Book was printed yesterday, and it sounded quite dovish! The report emphasized a slowing pace of expansion, and this reinforces the consensus view for a weak fourth quarter GDP print. But I don’t think it guarantees a rate cut in two weeks… It just gives the thought of a rate cut some teeth!

CPI did print on the headline number where I thought it would – 2.8% – but the ex-food and energy number showed inflation at 2.1%, unchanged. Oh… How I wish! And you too! You wish that inflation were only running 2.1%!

And finally, housing starts collapsed in September by 10.2% to 1,191 million units… The lowest level since 1993! And then Big Ben Bernanke has the gall to tell us that, “to date, significant spillovers to household and business spending were not yet evident. Our forecast assumes that there will continue to be the case.” Remember… It wasn’t that long ago that Big Ben was telling us that the housing meltdown had hit bottom. That obviously wasn’t even close to being correct – and this statement won’t be correct either!

Oh… And there were 243,000 foreclosures in August, up 36% from July and 115% from August 2006. It’s getting really ugly!

So… Stocks came back, and so did the carry trades.

As I said at the top, the currencies are stronger – actually much stronger – this morning. And why not? Asian Central Banks are selling Treasuries… The housing market continues to fall into a deep dark abyss… And according to Big Ben, we’ve got nothing to worry about, but just in case, he’s got another 25 BPS rate cut arrow in his quiver, and he’s not afraid to use it!

In the United Kingdom this morning, retail sales for September came in stronger than expected, and that news has pound sterling (GBP) looking at the good side of 2.04!

The Indian government is trying to curb foreign inflows to shares, and has announced some restrictions… This news didn’t get the rupee (INR) down though.

I tell you something… Sometimes these government economists that put together the data reports have impeccable timing. Today for instance, The Eurozone announced that their trade deficit with China jumped 25% in the seven months through July… And, what do we have beginning tomorrow? A G-7 meeting! Where, I’ve said over and over again, this dance is gonna be a drag… Well, that too… But what I’ve talked about is the fact that the G-7 ministers are going to take up the fight versus China and Japan regarding their currency weakness… And now the Eurozone minister have this little ditty to shove in China/Japan’s face!

Too bad it won’t matter… China will give them the “it don’t matter to me” look, and Japan will tell them they have a “get out of jail free” card from the United States, and then the G-7 meeting will go down in flames. So much for all that hype a week or so ago about G-7 doing something about the weakness in the dollar! I laugh out loud!

I’ll end today’s Pfennig with a note from “Mr. Yen”… Long time readers – and I mean a long time ago – may recall that in the late 90’s Japan’s Finance Minister, Sakakibara, was known as “Mr. Yen” because of his ability to influence the direction of yen (JPY)… Of course the markets were just playing around with him, but don’t tell him, he still thinks he’s “Mr. Yen”! You have to play along here and say this in your best Rocky the flying squirrel voice… “And now a word from ‘Mr. Yen’!”

Anyway, Mr. Yen, told an audience last night that he believes the dollar may “plunge” in 2008, prompting the European Union, and Japan to intervene in the currency markets. Let’s listen in… “Should growth fall below 1%, we could see a plunge in the dollar. Some form of intervention would be necessary to stop it, and that would require [a] coordinated effort from all three major economies.”

Well… I don’t know about all of that. What I do know is that Mr. Yen was known as a central banker that loved to intervene in the markets. So, he’s either clear on this statement… Or he’s having a fantasy dream, where he conducts the three major economies with their intervention!

Oh… And we’ll see the color of the latest leading indicators, and Philly Fed Survey today. Neither one will lend a hand to the dollar’s plight today.

Currencies Today: A$ .8925, kiwi .7520, C$ 1.0270, euro 1.4260, sterling 2.0455, Swiss .8530, ISK 59.90, rand 6.7930, krone 5.3740, SEK 6.4220, forint 175.73, zloty 2.5980, koruna 19.2670, yen 116.15, baht 31.50, sing 1.46, HKD 7.75, INR 39.64, China 7.51, pesos 10.81, BRL 1.8180, dollar index 77.75, Oil $87.39, Silver $13.80, and Gold… $762.90

That’s it for today… We finally received some rain yesterday and last night. I had forgotten what it looked like! I’m getting more swelling in my leg again… I’ll get with the doctor and see what’s up… Strange stuff! I’m re-reading my friend, Addison Wiggins’s, book… The Demise Of The Dollar… I first read it two years ago… But wanted a refresher on his thoughts, which for the most part play well with mine! For any currency investor, it’s a good read! Time to hit the send button… Hope your Thursday is Thundering too!

Chuck Butler
October 18, 2007

The Daily Reckoning