Moody's Downgrades Japan's Debt. Yen Still Rallies.

On Saturday, I read quite a few stories that would have made a great Pfennig! Stories with headlines like: “IMF chief reiterates a need for EU to resolve debt crisis” and, “State, local and federal debt in US is highest since WWII” and, “Bernanke refutes criticism that Fed policy causes issues abroad”…

I found all these stories and more to read about… I don’t think there’s much explanation that needs to go along with the story titles, for the titles basically say it all! Yes! The European Union (EU) does need to resolve their debt crisis… If they don’t, they can say goodbye to the advantage the euro (EUR) has held over the dollar for over nine years! And the state and local and federal debt levels? Geez, I’ve beaten that horse to death over the years (no animals were hurt!)! But, I guess it’s important that we remain on top of these things just so we can sleep at night, knowing we did the right thing by diversifying a portion of our investment portfolio outside of the dollar! And Bernanke? Well… I wish I could tell you what I really think, but unless you want to hire me, and pay me at the same scale as now, I have to keep my thoughts to myself!

So… Here we are on a Terrific Tuesday, the G-20 met this weekend, and basically said nothing… G-20, Schmee 20! A few weeks ago, people were saying that gold’s run was over… And then looky here… Gold is within spittin’ distance of $1,400 once again, and actually traded over $1,400 yesterday, but has sold off by $10 overnight and this morning. And silver? It continues to outperform gold! WOW! The stories I’m tracking this morning, are: 1. The earthquake in New Zealand, and 2. The Moody’s downgrade of Japan’s debt rating outlook to negative, and 3. The Middle-East violence that has taken risk out of the markets…

Australia and New Zealand just can’t catch a break from mother nature! There was a very strong earthquake in New Zealand overnight, that has been the cause of death for at least 65 people. The earthquake was in Christchurch – New Zealand’s second largest city. My thoughts go out to the people of that region… I know how a tornado devastated an area close to my home recently; I don’t think I can imagine a city being brought to its knees, as has been reported…

As you can imagine, the New Zealand dollar/kiwi (NZD), is getting sold, and kiwi’s kissin’ cousin across the Tasman, Aussie dollar (AUD) is being sold, too. Historically, you see this between these two… One may outperform the other, but if something rocks one, the other gets rocked too… For the Aussie dollar, though, I would have to think it’s a knee-jerk reaction, and presents an opportunity to buy cheaper than yesterday.

The second story I was looking at was about Japan’s debt rating outlook being downgraded by Moody’s… Once again, where have these ratings guys been? It’s not like Japan just crossed some mythical debt number that brought about this downgrade for the outlook to negative… (An outlook downgrade usually means that the next actual rating will be lowered)… Nooooooooo! Japan’s debt has been a balloon being inflated for some time… In fact, just last month S&P lowered Japan’s debt rating to -AA from AA… But even S&P was late to the party.

The thing that makes me scratch my balding head is that the violence in the Middle East has taken risk out of the markets, and caused the old guard (the so-called “safe havens” – dollars, francs (CHF), and yen (JPY)) to rebound… So, even with another possible downgrade on the horizon for the yen, it rallies… Go figure.

Remember, “Mr. Yen”? Long time readers (and I mean long time readers – from my days at Mark Twain Bank, where the Pfennig originated) will recall that Japan’s Top Currency Official, Sakakibara, A.K.A. “Mr. Yen”, was always in the news for his ability to “guide the direction of yen”… Well, that was a long, long time ago, in a galaxy far away… But, looky here! Mr. Yen, Sakakibara is back in the news, saying that he believes that with the “US facing a balance-sheet problem, and businesses still saddled with bad loans and households with excess debts, the sustainability of a recovery is still doubtful, that he dollar’s downward trend will continue over the medium to long term, and that yen will rise to its postwar higher 79.75.”

Hmmm… Well, most of what Mr. Yen just said I agree with. As you can guess, it’s the part about the US problems… But to think that yen is going to go to 80 or less, is a pipedream at this point, in my opinion… For… as I’ve said a couple of times already in the past couple of weeks… I think the carry trade is coming back, and yen will take its rightful place in line as the “funding currencies” of the carry trade.

Chris sent me a note about something he was tracking this past weekend regarding China, so let’s switch gears and see what Chris has to say…

A report last week showed that China’s leading economic indicators fell for the first time in almost three years. The index slid 0.5% in December from November according to the New York based Conference Board. China’s government has raised rates and increased reserve requirements for Chinese banks in an attempt to contain asset bubbles and growing inflation. The official numbers show that Chinese inflation is running at 4.9% during the month of January which is above the government’s 2011 target.

The renminbi (CNY) jumped as speculators moved back into the market thinking the government will have to let the currency appreciate in order to stay on top of rising prices. The Chinese currency traded at a 17-year high on Friday, just in time for the G20 meeting. This has become a familiar pattern, with China letting their currency appreciate just before a major economic summit. While the currency is trading at the highest level in recent memory, the Chinese government has not indicated it is ready to let the currency float. It sure looks to me like they will continue to take a “slow and steady” approach to the currency’s appreciation.

Thanks, Chris!

OK… Here’s something that you didn’t see on your cable news last week… First, let me set this up for you… When I took off for Miami last Thursday, the 10-year Treasury’s yield was 3.63%… While in Miami, I heard, from a very good source, that the Fed had bought $8 billion of 10-year Treasuries through the old “back door” once again… Which explains why the yield of the 10-year has fallen to 3.52%… In case you are new to class, you might not know what I’m talking about here with the “old back door.”

Well… The Treasury auctions Treasury bonds through their normal auctions to buyers… When there aren’t enough buyers, the Primary Dealers, (very large banks!) step in and buy what is not sold in the auction… But in a back door trade, the Primary Dealers hold the bonds for about 10 days or less, and then see the Fed/CABAL at the back door, and the Fed/CABAL buys the bonds from the Primary Dealer… Thus brining down the yield, and raising the price of the bond.

Now… You as a US citizen should be grabbing your pitchfork or rake, and heading to Washington DC, because this action costs you money! First of all, you don’t think for one minute that the CABAL gets a “discount” for buying those bonds, do you? No way! And second, just where did the CABAL get the money to pay the Primary Dealer for those bonds that they paid over the auction price for, so the Primary Dealer could make “a shekel or two” (more like cutting into a fat hog!)? That’s right, folks… YOU! Remember what I always tell you, the government doesn’t have any money that it hasn’t stolen/taken from you!

OK… I had better stop, I can feel my blood pressure rising, and… I don’t want to say something about this whole operation, and those running the operation, that will get me called on the carpet!

Well… The Middle-East violence has the price of oil on the rise again… I’ve watched it gain $1 to $93.50 just while I’ve been here banging away on the keyboard with my fat fingers… But, no worries, you don’t have to pay a higher price at the gas pump, because Big Ben Bernanke says there is no inflation! HAHAHAHAHAHA!

Did you see that Mexico’s economy expanded at the fastest pace in a decade last year at 5.5%? I have all kinds of thoughts about this news… But, again, those aren’t compliant… So, I’ll keep them to myself…

Looks like interest rates in Brazil aren’t at a top yet… Seems that Consumer Inflation (CPI) in Brazil, is still rising, even in the face of over two years of rate hikes. Brazilian economists raised their inflation forecasts this past weekend, thus fueling the rate hike talk… The real (BRL) is bound to pick up steam once the “risk aversion” has been taken out of the markets again…

Did you see the comments by ECB member Yves Mersch? In an interview in Luxembourg yesterday, Mersch said that the ECB may toughen its inflation language next week and that he would not be surprised if colleagues “conclude that we have upside risks to price stability.” This news caught the market short euros on Monday, and with the US out, the volume was muted, which caused a very strong 75-point move up in the euro yesterday, only to see it taken back out overnight with the removal of risk.

I was wondering when someone in the ECB was going to step forward and recognize the risks to price stability… So I was happy to see the comments from Mersch… But you have to keep in mind that Mersch has always been considered a strong hawk, so he might be “talking out of school” and then again he might not be! I guess we’ll have to wait-n-see when the ECB meets next to see what the rest of the “boys” say.

So… The currencies and metals don’t look too good this morning, except dollars, francs, and yen… But who wants to own them? They don’t have any yield, and their balance sheets (especially dollars and yen) are absolutely awful! Ask Moody’s and S&P about Japan’s balance sheet! Neither one of those agencies have the intestinal fortitude to downgrade the US…

We start the week with the S&P/CaseShiller Home Price Index for December this morning, and go right to Existing Home Sales tomorrow…

Then there was this… My friend and former colleague, David Galland, always has his way of telling his readers something, and so it is with this piece from his letter on Friday. Here’s David…

In order to be happy, you need energy. But you also need to have a job and a reliable source of income – otherwise finding the leisure time to pursue dreams and passions becomes very limited. And of course, without money it becomes more challenging to secure the basic foodstuffs and shelter needed to keep the tool of your body in reasonably good shape.

Viewing the collision between jobs and machines that now seems inevitable, much of the other nonsense now going on seems almost trivial. Just today, Bernanke blamed the world’s economic ills on the failure of emerging market economies (cough, cough, China) to let their currencies rise.

But this is just so much rearranging the deck chairs on a sinking ship. As the truth of persistent high levels of unemployment, here, there, and everywhere becomes apparent – and the realization that government’s many promises were nothing but debt disguised in a fog of hot air – the public will come to the correct conclusion: no magic solution is in the works. At that point the unemployed will begin to look for happiness in mobs demanding change.

To recap… The currencies and metals are getting sold this morning, in a reversal of their recent trading. Risk aversion is prevalent in the markets this morning, as the violence in the Middle-East continues to cause concern. New Zealand suffered an earthquake near its second largest city, causing many deaths. Kiwi is getting sold on the news, and the sympathy trading is going on in Australia, as the Aussie dollar sells too. And Moody’s is getting ready to downgrade Japan’s debt rating, as they put Japan on a negative outlook… But it hasn’t hurt the yen yet, as the flight to the so-called “safe havens” that happens when risk aversion sets in, is back on the table this morning.

Chuck Butler
for The Daily Reckoning