No Love for the BRIC Meeting

Remember last week, when I said that we had a “Turn Around Tuesday?” I came in this morning to find a story that Chris Gaffney had printed off the Bloomie for me… The writer refers to the price action yesterday as “Turn Around Tuesday!” OK… I for one don’t even begin to believe that I was the originator of a saying like that for the currencies… I just find it interesting, that a week after I make a big deal out of Turn Around Tuesday that it is used in a story with much wider distribution than my little old Pfennig!

Cool Beans, eh? OK… Well… If yesterday was Turn Around Tuesday as the writer said, I sure didn’t see it! We had a “stop the dollar at the 1.38 border” Tuesday… But a complete turn around from Monday’s sell off, after Russian Finance Minister, Kudrin, threw a cat among the pigeons? Not that I saw!

We do seem to be stuck in a trading range of 1.37 to 1.40… With probes below 1.37 and above 1.40 short-lived. That’s OK with me, at this point, but it had better not last too long, or traders will grow tired of the boring range… And, I will be yelling at the walls for some price action!

Well… The BRIC (Brazil, Russia, India and China) meeting didn’t really bring about the Thunder and lightening as I thought it would… The leaders of these countries did discuss the need for a “more diversified monetary system to reduce dependency on the world’s reserve currency.” (Read the dollar!) They also discussed selling bonds and swapping currency among the group.  Now if we rewind back to Monday, I said that I thought this could be what they would do… The crystal ball was bang on that day! HA!

I can’t believe the markets have allowed this to be swept under the rug… This could be colossal if it’s carried through… And this way, all of them can smile and say they believe in the dollar and U.S. Treasuries while not dealing with them! Personally, I think the reason the markets aren’t paying attention to these goings on, is that the media isn’t covering it… The grip that the administration has on the media is really beginning to show just how tight it is.

One other thing from the meeting… The BRIC nations announced that they wanted to take a more active role in the world’s financing system… And with $2.8 trillion in currency reserves among the four of them… That would be more than a “kind gesture.”

Speaking of the media… I have to wonder what the media is thinking on this one… Here’s the skinny… First of all, this story came to me a week ago… But at first, I thought, I had better make certain this is not a hoax before talking about it… What am I talking about? I’m talking about the report that two Japanese men were caught at the Swiss-Italian border with $130 billion in U.S. Treasuries!!!!!!! Now, Chris and I were talking about this yesterday, and Chris said, “But I thought all Treasuries were book entry for some time now”… Yes, since 1982 (a great year, with the Cardinals winning the World Series!) Treasuries have been book entry only. So… The question I had from the beginning is “are they real or fake?” Because I didn’t want to waste your time and mine if they were fake bonds… But apparently someone believes them to be real.

Hmmm… $130 billion in bearer bonds… Does this intrigue anyone? It sure does for yours truly. Does this mean that the U.S. Treasury has been printing bearer bonds and selling them under the cover of a dark night? That’s the only explanation I can come up, IF THEY ARE FOR SURE REAL!

I don’t know what to make of this except it has my attention, and I can’t believe I don’t see one story on cable news… But it’s all over the news in Europe and Asia… More later, as additional news comes to light on this.

OK… Yesterday, I talked about the current account deficit, which is expected to be $85 billion for the first quarter… What I didn’t talk about is that this would be the lowest level for the current account in a decade! And would represent just 1.5% of GDP. Now… I used to go out and talk about how the dollar entered the weak dollar trend in February of 2002, after the current account deficit reached 4% of GDP, which historically had been the line in the sand for currency issues…

But let’s put this in perspective, eh? Back in 2001 and 2002, our GDP was running at 4-5%… It’s now negative… So, maybe this won’t be the harbinger to reversing the weak dollar trend, that it looks like on the outside… Besides, as I’ve said over and over again lately, the whole deficit talk used to center on the trade deficit (which accounts for the majority of the current account), and with the global recession going on, the trade deficit, while still having issues, is no longer the focal point… Instead, the budget deficit (the second of the twin deficits) has taken the reins of the focal point… If it’s not one thing it’s another, my mother used to tell me! (The “you know what” disturber in me just has to make this comment… “No wonder the current account is lower, we don’t report debts or the bonds that represent the debts!”… That’s in reaction to the $130 billion in bearer bonds!)

I came across a news story yesterday morning that caught my attention… It seems that the government of Australia has decided to put government backing on state issued bonds like the QTC’s (Queensland Treasury). This is HUGE for these issues, especially since the states in Australia were seeing downgrades in ratings! Now, the country of Australia has a higher rating, and these bonds will carry that rating, since they are now backed by the government! The one thing it will do, though, is tighten up the yield on these bonds… Probably by about 10-15 basis points.

Why am I talking about this? Because… If the QTC bonds now have a higher rating, more institutions will be able to buy them, and the more investment in Australia, the more flows into Aussie dollars (AUD)! The news brought the Aussie dollar back to 80-cents yesterday briefly… But this is going to take some time to work through. The thing here is that in the long run, this is good for the Aussie dollar!

In China overnight, we had an announcement that could really become a problem with protectionism… China has introduced an explicit “Buy Chinese” policy as part of its economic stimulus program in a move that will amplify tensions with trade partners and increase the likelihood of protectionism around the world.

Now, long time readers know that I’ve always banged on… 1. The Bush administration when they placed tariffs on Japanese steel about eight years ago, and 2. Schumer and Graham for introducing a bill to place tariffs on Chinese exports to the United States – because both represent protectionism… And a currency will normally get taken to the woodshed for being associated with a country that takes protectionism measures.

So… Will this hurt the Chinese renminbi (CNY)? Ahhh grasshopper, remember… The Chinese renminbi is a “manipulated currency.” The Chinese government decides what value the renminbi will be. So… In a regular floating currency scenario, yes, this would hurt the currency… But in China’s situation, it’s all different.

However, the reason I make a big deal out of this is that this announcement could lead to other countries putting their own protectionism measures in place to offset China… One protectionism measure, begets another, and another, and another… Oh boy! NOT!

Talk about smashing a bug! This would be just like doing that to the promises of a global recovery… Somebody stop them for they know not what they are doing! Or maybe the Chinese do.

Yesterday, Housing Starts in the United States surprised on the upside, and so did building permits. I don’t like this for the simple reason that we already have an “inventory” issue with houses that have been built and not bought or occupied. But, the media was all over this new, because… It’s the opposite from what I told you the day before that economists, Shiller, Roubini and Whitney had to say about housing! And the Housing Starts and Building Permits data flies opposite of the report this morning that mortgage applications fell 15.8% this month!

We also saw that Industrial Production fell -1.1% in May… So output was off sharply at factories, utilities and mines, in May, which is completely opposite of those that are saying the recession is over.

Today, in addition to the current account data, we’ll also see the stupid CPI data for May. You never know what that data has in store for us, because the government doesn’t know what they want it to show for us yet! HAHAHAHAHAHAHA! Of course that’s my feeling toward CPI, and I’ve explained it all many times over the years… But, in a nutshell, CPI is kept artificially low by the government by re-weighting things that get too expensive, or substituting things that get too expensive… We all know why CPI is kept artificially low too, don’t we? Yes… We do…

Now… I spent more time on CPI this month than I care to! It’s just a dumb report that the media will be all over like a cheap suit!

I heard a great old song on the radio this morning that pretty much puts my feelings toward the direction of the country into words… “But you tell me over and over and over again my friend, ah, you don’t believe we’re on the eve of destruction.” – Barry McGuire

And then, I see where the President is going to announce his sweeping regulatory changes today… Hmmm… Do you see what I see? This is a shift from markets driven regulation to political regulation… Markets to politics… Somebody stop the madness! Serenity now!

The Daily Reckoning