Protectionism Wars Here We Come

On Friday morning I told the early arrivers that the currencies and gold were both strong, that it was all good, and that we needed to close up shop and go home, because it wasn’t going to get an better than that, and that the rest of the day had nothing but disappointment risk! Boy did I nail that one on the head! Let’s get to the goings on.

The currencies added to their gains during the Friday morning, only to see them give the gains back later in the day, as the “boys” in NY all closed shop and headed to the Hamptons. I checked the markets last night before going to bed, and they were trading very close to Friday’s close, as they are still this morning.

The one currency to buck the trend, and remain hot as a firecracker, is the Japanese yen (JPY)… Not that it had any fundamental reason to do so… But that didn’t matter, as yen bulls looked around and found something to hang their hats on.

The news that pushed yen higher came from the US, where the administration announced a tariff on Chinese tires. Passenger and light truck tires to be exact… This really heats up the trade protectionism between the US and China, folks… And if China and the US are going to be battling it out on the trade protectionism front, the Japanese yen would look to be the “better bet” in Asia.

If you all recall, a couple of months ago I told you that protectionism was going to become the “thing to do”. At that time, I really thought that countries would use their currencies as bargaining tools, in trade… But leave it to the US to pull a rabbit out of the protectionism hat.

You know… Back in 2001, the then President Bush slapped a tariff on Chinese steel… And I remember telling everyone that would listen to me that this would be the Big Shift in the strong dollar trend that existed then. I was credited with calling the secular shift of the dollar to a weak dollar trend. Now, we have this tariff… What do you think this will do to US/China relations? YIKES!

You know… If the US Trade Commission was really concerned about the shipments of tires to the US and what they felt to be a displacing of thousands of jobs, why then didn’t the Trade Commission work with the US tire companies and work out a price adjustment? Ahhh, grasshopper… That would be too difficult to do! It’s far easier to slap tariffs on the one country that has bought your debt year after year, without batting an eye.

OK… So, could this new tariff be the juice that moves the dollar to the next big leg down? It very well could, but it won’t happen overnight, folks… These things need to work themselves through. Just like in 2001, it took several months before the dollar really began a strong downward trend… But, keep this in the memory bank.

Oh… And China, feeling that they had to retaliate… Announced a probe of US auto, and chicken imports. See how this works, folks? If you get this going really heated, it could spread throughout the globe, and push all the hard work to get out of the global recession into the dumpster! This is plain stupid! And our government should have known better!

Well… We had our first bank casualty from the commercial real estate meltdown… Corus Bank in Chicago, is the second largest bank to fail this year, and will cost the government between $1.5 billion and $2.4 billion in losses, depending on the performance of the bank’s outstanding loans.

Speaking of government losses… I saw some math on the Cash for Clunkers program… Don’t believe it when the government tells you it was a success… Unless of course they are talking about successfully spending billions!

OK… Lets get off this government stuff; they give me a big rash anyway!

At this time every year, economists meet in Davos, Switzerland, and normally you can get a few thoughts that remind everyone about “what’s really going on in the world”… And this year was no exception. The Big Boss, Frank Trotter, was kind enough to send a few of those thoughts to me this weekend.

First off, one of my fave economists, Stephen Roach, had this to say… “The American consumer is dead and this is a wake up call for the Chinese & Asian export industry.”

Then we had a guy from China that’s a “think tank” guy… His name is Yu Yongding, and he had this to say… “I have tremendous doubts about US households to finance the budget deficit.” And… “Why are people still so confident in the strength of the dollar? It’s a myth!”

And then there was this… Remember the talks I’ve had with you regarding the IMF wanting to issue their own “global currency”? Well… Zhu Min Bank of China had this to say… “IMF should provide stable reserve currency regardless of format. Very volatile reserve currency is difficult for Asia.”

The Wall Street Journal had a good story regarding the weak dollar, this weekend… Let’s check it out…

“The dollar could continue its weeklong decline this week, especially if data on US retail sales show improvement. The dollar hit a nine-month low last week against the euro and a seven-month low against the yen. Investors are moving into higher-yielding currencies such as the yen as the global economic picture brightens.”

Sounds as if the WSJ writer is a Pfennig reader, eh?

Since the WSJ brought up retail sales, we might as well go to the data cupboard to see what’s up this week… The cupboard is empty today… But tomorrow it will yield the stupid PPI report, along with retail sales for August, which are expected to be stronger, based on the Cash for Clunkers program, which ended in August. We would have normally seen the August retail sales report be stronger anyway, given the “back to school” purchases… The Butler Household Index (BHI) tells me that besides Cash for Clunkers, we would see a jump.

On Friday last week, we saw the U. of Michigan Consumer Confidence report jump five figures to 70.2, and the Monthly Budget Deficit print at $111.4 billion… Not as bad as forecast, but still, not good in any stretch of the imagination, folks!

The Bank of International Settlements (BIS) issued a report yesterday that said it expects longer-term bond yields to increase on the swelling budget concern.

OK… Let me explain what they are talking about… As the budget deficit grows, we have to issue more bonds (our debt) to finance the deficit… The BIS believes, like I have said for some time now that eventually, the buyers of these bonds are going to require the yields to be more attractive… And as yields grow higher, the losses in these bonds grow wider for the holders.

Commodities have sold off since Friday morning, and that hurts the commodity currencies… Oil, which was up to $72, is back to $68 this morning, as it was reported that “demand was slowing”… Hmmm, not when it comes to filling my gas tank! HA!

OK, to recap… The currencies gave back some ground Friday afternoon, but remain at those levels this morning. Japanese yen is stronger on the news of a protectionism war between the US and China, as the US administration slapped a tariff of Chinese tires. The annual meeting in Davos is going on, and retail sales tomorrow is important data for this week.

The Daily Reckoning