Risk Returns -- Slowly

Currencies rebound… G-8 has no fireworks… Aussie / China and coal…                          and a look at entitlements… You’ll find those things and more, in this edition of A Pfennig For Your Thoughts, Thursday, July 9, 2009. And now, here’s our host…

Good day…and a Tub Thumpin’ Thursday to you! I’m late, I’m late! I don’t believe I ever heard the alarm go off this morning! I overslept by more than an hour, and will still be here more than an hour before any sign of someone else! But! That puts me behind by more than an hour today…I’ve got to play catch-up! So, let’s get this Tub Thumpin’ Thursday going!

G-8 never had the opportunity to shoot fireworks because China’s leader had to return home to deal with the street riots going on in his country. So, the call for a replacement for the dollar as the reserve currency will have to wait for another day! And, with that news, the dollar got to remain in the sunlight, and bask in the glory of being the reserve currency and so-called “safe haven” another day…

There was added risk aversion yesterday when it was reported that an Australian shipment of coal to China was cancelled. This sent bad vibes through the markets for the currencies and commodities with the thought that China was putting the brakes on their buying of raw materials, and that their recovery had not taken hold like many had believed…

However, overnight, calmer heads have prevailed. It was my opinion when I heard that news yesterday, that it was simply one bad shipment to a customer that was having difficulties…not ALL OF CHINA! And then overnight the data came out…this was one shipment, maybe 150,000 tons of coal. Australian coal shipments to China on a monthly basis run about 3 million tons! I truly believe that Australia’s trade with China is on terra firma, and this was a one-off deal that went bad. I also believe that the sell-off of the Aussie dollar (A$) was completely overdone.

I don’t know this to be a fact, but given the relationship of the Asian investors and the A$, I would think the Asian investors to be licking their chops to have the opportunity to buy the A$ at these lower levels! Buy on the dips, right? Don’t I always say that to be a prudent investment strategy?

Of course it didn’t hurt that U.S. stocks rebounded yesterday a bit on the news that Alcoa’s losses weren’t “as bad as expected”. Talk about setting the bar low! It’s not like ALCOA didn’t still have a LOSS! But, don’t get me started on this mental giant thought process that has a grip on stocks these days, “Oh, don’t worry, you only burned down 1/2 of the house, I would have expected it to all burn down!”

I’ve got to leave that alone before I really burst! Let’s see, what can get my mind off of that subject…OH! The Bank of England (BOE) just announced that they would keep rates unchanged. Well, my goodness, what else would we expect them to do? Their base rate is .50!

Here in the United States, the Obama administration is trying desperately to nip in the bud, the whispering campaign for another stimulus package. “No one in the administration is talking about a second stimulus at this point,” said Robert Nabors, deputy director of the Office of Management and Budget. However he also mumbled something about how the president is not “ruling anything out”…

I don’t care what they say. I’ll believe it when I see it…and I still believe that the government will believe that another stimulus is needed…

One of the discussions that I had with my fave economist the other day was about “delaying the inevitable”. I’ve talked about this before, but for new readers, I thought I would give them a dose of “Chuck’s Thoughts” this morning. (HA! As if they don’t get that every day!)

This “delaying the inevitable” is all about the TARP (Troubled Asset Relief Program) and how it all did was allow bad banks to continue to be bad banks longer, with toxic waste in their portfolio. This, even in the face of a suspension of the mark-to-market rules! Bad banks should have been sent packing, then. And now, all we’ve done is let them hang on to cause even more collateral damage!

OK…back to the daily discussion…

It looks as though the auction of $35 Billion in 3-year Treasuries went smoothly, which is another reason the dollar was strong yesterday. Every time one of these auctions go smoothly, the “deficits don’t matter” crowd all point and say, “See, we told you, that foreigners will always come to the auction to buy Treasuries, so it doesn’t matter what we run the deficit up to.”

Right! You just keep thinking that, and see where it eventually gets you! Ty sent me a note yesterday from an article he was reading, that plays nicely with this discussion… So…let’s see what’s going on!

“For now, the Treasury continues to find takers for government savings bonds at low interest rates. But somewhere between here and infinity lies a point at which American debt reaches unsustainable proportions, at which investors will balk at continuing to finance the American expenditures absent a higher return on their investments. Then, everything could change quickly, with interest rates soaring and the value of the dollar plummeting, as foreign investors lose faith in its fundamental value.

“We’re running this $10 trillion gamble that interest rates aren’t going to rise,” said Kenneth S. Rogoff, a former chief economist at the International Monetary Fund and now a professor at Harvard. “If they do, we could end up in a very difficult situation.”

Hey, you think so, Kenneth? My goodness, we have a new “Mr. Obvious!” I would think that we are already in a very difficult situation, given the fact that when the you know what hit the fan the U.S. had no war chest to use, like China did… Why? Because we didn’t think “deficits mattered”. Dealing with problems from a position of strength, it would have made a HUGE difference from the get-go!

However, having said that… I believe that a larger problem is still on the horizon for the U.S. and the “deficits don’t matter” flag wavers. It’s not going to happen overnight…it’s going to be a slow, dragged out, problem that goes on for years, and then finally snaps! I’m talking about the entitlements and the retiring baby boomers… And more specifically when I’m talking about entitlements, I’m talking about Medicare!

The Big Boss, Frank Trotter, showed me a graph that he came across from the Concord Coalition the other day that illustrated this. While I wasn’t shocked, having seen this all in the movie I.O.U.S.A. and in the book of the same name, there it was again staring me in the face…

The reason I tell you all this, is that the current administration has no other choice but to allow the dollar to weaken considerably over the years so that these deficits that “didn’t matter” can be paid off with cheaper dollars… And it won’t be this administration that has to deal with it. That’s why this one and the previous one aren’t concerned about the size of the national debt…

Ok, enough of all that. I didn’t mean for this to be gloom and doom! Let’s move on…

The data cupboard has the Initial Weekly Jobless Claims for us to view today… I expect for the weekly number to remain above 600,000, and the Continuing Claims to have risen. Though this all sounds bad, the markets have become comfortably numb with this unemployment data… It will take something really BIG to slap the markets in the face and say WAKE UP!

And then, finally: The Japanese yen has really been on a tear this week as the risk aversion crowd dominated the markets. I find it very strange that Japan is considered a “safe haven” currency, given their national debt problems. And their once “Ace in the hole” the Trade Surplus, is taking on water. But, this is what the markets do, and they are never wrong! However, there’s a roadblock ahead for the yen, as it trades with a 92 handle this morning… And the roadblock is in the form of the Bank of Japan. (BOJ). It was reported that last night the Bank of Japan issued a statement to the markets that “they were checking FX levels.”

That’s Central Bank parlance especially coming from the BOJ, for… We don’t want the currency to get any stronger, and we’re just letting you know that we’re ready to intervene if you don’t settle down.  Sort of like when grandma would tell you that if you didn’t settle down she would send you to the woods to find your switch… Believe me you only didn’t settle down once!

And when the Risk Traders come back and push the Risk Aversion crowd to the back of the room… Again, we’ll see yen sell off again… So be careful here!

Currencies today 7/9/09: A$ .7845, kiwi .6305, C$ .8650, euro 1.3980, sterling 1.6260, Swiss .9250, rand 8.11, krone 6.4925, SEK 7.8590, forint 196.70, zloty 3.1150, koruna 18.55, yen 92.90, sing 1.4580, HKD 7.75, INR 48.71, China 6.8317, pesos 13.47, BRL 2.00, dollar index 80.21, Oil $61.29, 10-year 3.39%, Silver $12.95, and Gold… $915

That’s it for today. I got the news from the eye specialist yesterday regarding my left eye. The tumor and the fluid on the eye is gone, they successfully shrunk it and removed it. Unfortunately it left a ring of “stuff” on my eye, and my eyesight from that eye will never get any better. Of course, I still have my right eye, so I’m not completely bummed. My cutie little granddaughter, Delaney Grace came by to see me yesterday, she wanted me to come “sit by her.” She’s almost 2 now, and saying her ABC’s, and singing songs, and she showed me how she knew her right from left now. Such a little joy to be around…I’ll get to spend a whole week with her in about 10 days when we all go on vacation together. Can’t wait! Well, my lateness has put me way behind this morning, I had better get going. Don’t forget…today is going to be a Tub Thumpin’ Thursday no matter what!

The Daily Reckoning