How the US Will React to China's Trade Surplus

What do I see front and center this morning on the currency screens? A nasty sell-off in the currencies and metals that began yesterday afternoon, carried over to the Asian markets…

Gold had lost the $1,400 figure in the profit taking yesterday, but has rallied back $9 this morning to push past $1,400 again. Silver, which yesterday morning looked like it was going to be on a straight line to the moon, also sold off in the late afternoon trading, but like gold, has rebounded in the morning trading.

“This is just monetary policy”… Those aren’t my words… Those are Big Ben Bernanke’s words at the Jekyll Island Jamboree last weekend, when he was being dissed for implementing another round of quantitative easing (QE). Gee, it’s nice to know that he takes this stuff seriously, eh? Memo to Big Ben… QE is printing of money… And money supply is in its base form, inflation… It’s that simple!

The Fed Heads have said over and over again that inflation in the US is too low… I beg to differ with them… (See yesterday’s Pfennig“Gold and Silver Surge Higher” for a discussion on inflation…) But on the thought that the Fed Heads believe inflation is too low, I heard a great line from James Grant (editor of Grant’s Interest Rate Observer) who quipped, “That’s like the New York Police Department complaining about the lack of crimes.”

The news this morning includes a report from China that is sure to get the boys on “the Hill” all lathered up… China posted a larger than forecast trade surplus in October of $27.1 billion, which is a 22.9% gain from a year earlier… Yes, the “boys” are not going to be happy to hear this news, and I think we’ll hear more saber rattling for faster currency appreciation from China, and… Trade sanctions… UGH!

Here’s what I see… China really began putting the pedal to the metal with currency appreciation in October, but even if they keep their foot on the accelerator it’s going to take a very long time to change or rebalance China’s economy, folks… I would caution the “boy” on the “hill” to have patience, and not do something that would hurt trade… Chinese renminbi (CNY) has gained over 2% in the past 3 months, which I believe to be a “fast enough pace” for currency appreciation… If at the end of next September we see that the renminbi is up over 8% in that time period, then I think that’s a good thing… A nice “steady as she goes” pace, without inflicting major harm on the Chinese economy!

China also raised their reserve requirement for banks by 0.5%… this move has scared the bejeebers out of the risk takers, and the selling that began yesterday afternoon, has really picked up overnight. Why would this reserve requirement rate hike in China scare the risk takers? Ahhh grasshopper, come…sit… China is the proxy for global growth, and if they apply the brakes by taking liquidity out of the economy, then that’s going to hurt global growth, which is what the risk takers are all about!

We’re going to have to be patient and let this reserve requirement rate hike work its way through the markets. I just don’t see anything but short-term rallies in the cards for the dollar, as I keep coming back to the thought that the dollar just doesn’t offer investors any yield… And won’t for some time!

The guys over at Market Rates Insight, Inc. sent me this note yesterday…

The national average for all deposit products, the average rate for CDs, including Specials, now dipped below one percent for the first time since rate data has been recorded. The average rate for CDs ranging from 3 months to 5 years, including all Specials, reached 0.99%…

So… US investors/savers have that going for them… NOT! Leads me to talk about something that I’ve been talking about in both my paid subscriber newsletter, and my presentations… And that is… Looking for income… Because you’re not getting it from US dollar bank accounts! (Of course, excluding my bank, EverBank, where yields can still be gotten!)

The thing to think about, folks, is this… You can pick up yield in foreign investments, because of different rate/economic cycles. And when you “lock in” a yield for a time period, you are sure to get it! Of course, the interest will be paid in the foreign currency that the principal is denominated in, and the value of the interest is dependent on how the currency performs… But again, think about this… Most US savers receive their interest, and then roll it into the principal for another time period… You can do the same thing with a currency CD… Any way you look at, you get a pickup in yield, and you have diversified at the same time!

Alrighty then! Well… The New Zealand dollar/kiwi (NZD), is still getting sold because of the news coming from the kiwi-fruit fields that at least 18 orchards are suspected as being infected and possibly diseased. Take that news and mix it with some dovish remarks by Reserve Bank of New Zealand (RBNZ) Gov. Bollard, and kiwi-currency weakness is the result…

The top Fed Head in Dallas, Richard Fisher, was talking yesterday, and said something that just didn’t rhyme for me… Fisher said, “All of us are believers in a strong dollar policy. We want to make sure that the dollar has its purchasing power, and we want to make sure it is of great international standing.” Hmmm…. That all sounds good, but it just doesn’t rhyme with the actions of the Fed Heads… Two rounds of quantitative easing, cutting and leaving interest rates at near zero for far too long, ballooning the balance sheet, secret deals on Treasury auctions… These just don’t add up to what Fisher is saying his fellow Fed Heads believe… But you can make that call yourself… I’m sure you’ll agree with me that they don’t add up…

On a side bar… I have to wonder now with the latest round of QE if the Fed/Cartel’s independence is going to be taken away… A reader sent me the following story that plays well with that thought of mine regarding the Cartel’s independence…

Ron Paul, the Republican Congressman from Texas, is the ranking member of the monetary policy subcommittee, and when the next Congress takes over he’ll likely be the chairman of the subcommittee. And Congressman Paul has some big plans.

“I will approach that committee like no one has ever approached it because we’re living in times like no one has ever seen,” Paul said in an interview with NetNet Thursday.

Paul said his first priority will be to open up the books of the Federal Reserve to the American people.

“We need to create transparency there. To see what it is they are buy buying and lending, and who it is they are dealing with,” Paul said.

I’ve always liked Ron Paul’s economic thoughts… He’s one of the few followers of Austrian economics in Washington…

My friend, and writer extraordinaire, David Galland, had some great thoughts on the US debt situation in his letter yesterday. Here’s a snippet of David talking about the dire situation regarding US debt and money printing…

Unfortunately, the scale of the problems now facing the US have reached the point where…

  • The nation’s debt and mandatory spending obligations are intractable. Simply, there is no conceivable way that the debt can be paid and the obligations met, at least not through any “normal” government operations.
  • Evidence that this is true can be seen in [what] it is now accepted as a fait accompli by Democrats and Republicans alike that annual US budget deficits approaching $1.5 trillion will be the norm for years into the future.
  • A lot of people are paying attention. In fact, pretty much everyone is watching the desperate follies of the US government. The watchers may hope for the best, but if the prices of gold and silver are any indication, they are beginning to suspect the worst.
  • Desperate to avoid the debt death spiral that will be triggered by rising interest rates, the Fed has announced that even if no one else shows up at the almost daily auctions of Treasury debt, the Fed will. By doing so, Bernanke & Friends hope to lull the watchers back to a less vigilant posture. So far, it is “sort of” working… The watchers are buying the argument that as long as the Fed keeps buying Treasuries, rates should remain dampened.

It is, however, our contention that this charade cannot last. A sentiment shared, it is clear, by the number of big money players recently piling into sound money.

There are a number of big questions yet to be answered, but the core issue surrounding the ability of the US government to meet its obligations using normal operations is not one of them. It can’t. Therefore, by definition, it must either default or attempt to debase the dollar to the point where fixed-amount obligations erode back into a range where they can be paid.

Thank you, David… You always say it 10 times better than I would!

And one more thing before I head to the Big Finish… US Treasury yields are moving higher once again… The 10-year jumped 20 Basis Points yesterday to 2.72%! WOW! OK… Before I go out and make statements that the Treasury Bubble is popping, let me remind you that the Fed is going to be buying $600 billion in the coming months… But this Treasury yield bump higher could provide the dollar some strength…

Then there was this… Remember about a year ago, I told you about the Chinese organization that downgraded the US’s credit rating? Well, they’re at it again… “The Federal Reserve’s plan to buy $600 billion in government debt prompted Dagong Global Credit Rating to lower its credit rating for the US. The Chinese credit rating agency cited the country’s deteriorating intent and ability to repay debt as it downgraded the US from AA to A+. ‘The serious defects in the US economy will lead to long-term recession and fundamentally lower the national solvency,’ according to a report from Dagong.”

To recap… The dollar rallied yesterday afternoon and in the overnight markets pushing the currencies and precious metals down. Gold and silver rebounded some this morning, but not the currencies. China’s raising of their reserve requirement, really took the wind out of the sails of the risk takers, and it’s definitely a “risk off” day in the markets. New Zealand’s kiwi-fruit industry is under deep pressure after at least 18 orchards were found with diseased vines, and then RBNZ Governor Bollard had some dovish things to say. Both of these items have kiwi-currency beaten and battered.

Chuck Butler
for The Daily Reckoning