The US Treasury Moves the Goal Posts

OK… Welcome to July! The last day of June was quite the volatile one to say the least! There we were waiting for the S&P/CaseShiller Home Price Index to print, and show that home prices were still down by quite a bit, when it did, it did, it printed at -18.12%… But! The media was all over that like a cheap suit, clamoring that the spiral down in Home Prices had come to and end! Which may be true… But wouldn’t you want to wait to see if next month’s report confirms it? And… By the way… Since when does -18.12% fall in home prices beckon a rally? Yesterday, would be that answer!

So… The currency rally that was going on for a fourth day, was quickly wiped out. The euro (EUR) sunk like the Titanic from a level of 1.4130 to 1.40… The iceberg that caused this mess was simply the fact that traders, etc. believe the U.S. is on its way out of this mess. Of course, they must not be Pfennig readers, because… They would have read yesterday how I detailed the monthly numbers and showed how even with the spiral down in Home Prices ending, it would take until 2011 before the Home Prices got back to zero!

OK… Well… After the thrill is gone, and the dust settled on all that yesterday, the euro is leading the other currencies higher once again… Here are a few things that have caused a sell-off of the dollar overnight once again.

Alice Rivlin, of former Budget Director, and former Fed Reserve member, fame, had a few things to say to the House Budget Committee… Good stuff, but you have to wonder if anyone was paying attention! Here’s Alice!

“The long term budget outlook: impending catastrophe

“No one needs to remind this Committee that the outlook for the federal budget is worrisome indeed, scary. Long before the financial crisis and the current deep recession, this Committee was anxiously pointing out that current federal spending and revenue policies are on a risky, unsustainable course. Promises made under the major entitlement programs (especially Medicare and Medicaid) will increase federal spending rapidly over the next couple of decades, as the population ages and medical spending continues to rise faster than other spending. Federal expenditures are projected to grow substantially faster than revenues, opening widening deficit gaps that cannot not be financed.”

Hmmm… Sounds like what I always tell you!

In other data yesterday, consumer confidence took a step backward, and fell in June to 49.3 from May’s figure of 54.8… Maybe those that were surveyed had just read Alive Rivlin’s talk to the House Budget Committee! Seriously though, this was a surprise, given the fact that the DOW gained 838 points in the second quarter! At least, that’s what The Wall Street Journal said!

Today, we get a truckload of data starting with Challenger Job Cuts, and the ADP Employment Change. Those are followed by the ISM Manufacturing Index, Construction Spending, Pending Home Sales and Vehicle Sales… Not a lot of “major” data prints, but still stuff to check the pulse of the economy.

I was talking to my good friend, and an economics professor at a prestigious university, yesterday, and she mentioned that “this piece of data is questionable as to the inputs.” I said to her… “What piece of data isn’t questionable these days?”

OK… The “demand for high yield” was put on hold yesterday… But it will return, or at least I should say I think it will return… I don’t know for sure, so I had better make the legal beagles happy… That’s funny! To say that they would be “happy” with me… They cringe, and get very uncomfortable every day when they read the Pfennig! HA!

But you know me… I’m just trying to provide market commentary, and other things that I think are important… Well… Important to me that is!

A long time reader sent me a note yesterday, and said, “Hey Chuck, did you see the story in The Wall Street Journal (WSJ) on Foreign Demand for Treasuries?” Well, I hadn’t and went immediately to the WSJ, and there it was… Tucked away in a corner so that no one would see it, if they weren’t looking for it… A story, by Min Zeng, titled, “Is Foreign Demand As Solid As It Looks?”

These are the things that really tick me off, folks, so stay with me on this… Basically, as we all know the U.S. Treasury Auctions have been getting “covered” easily recently, and foreign demand was listed as the reason… Which would have been the exact opposite of what I was saying about foreigners shying away from Treasuries.

Here’s the skinny… But I’ll let Min Zeng tell it, since he did the research and brought this to the public, even though it was tucked away so no one would notice!

“But in a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners.

“The new definitions are deep in the arcane world of Treasury auctions. The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before. Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher.”

Ahhh, so that’s what’s going on… The Treasury “moved the goal posts on us”… As Sylvester would say… That’s despicable! Why isn’t someone in Washington DC shouting from the rooftops about this? Oh, that’s right… They’re all in cahoots!

This is HUGE, folks… So… When the markets were thinking that foreign demand was increasing, it was actually, as I had said, shying away from Treasuries! Which, if the market participants are thinking that as long as foreigners are “buying into our deficit spending” then the dollar will be on terra firma, but instead are getting “duped” by the US Treasury, you would think that someone would have some splainin’ to do… Right, Lucy?

And here’s another thing that just ticked me off when I read it this morning… Recall, last week I told you about how someone in China was dissing the talk that China’s stimulus was working, and that China would not be recovering, which sent the Aussie dollar (AUD) to the woodshed until this news had passed? Well… Talk about egg on their face! Here’s the skinny…

China’s manufacturing expanded for a fourth month in June… The official Purchasing Managers’ Index rose to a seasonally adjusted 53.2 in June from 53.1 in May… And just like here in the US, any reading above 50 is thought to show manufacturing is expanding… The manufacturing index in the US is around 44, so… We DO have the tale of two economies.

In one corner, we have the Chinese who have spent about $585 billion worth of renminbi (CNY) in stimulus, and are seeing the results… Whereas in the other corner we have the US who have spent more money than you can shake a stick at, and are not seeing green shoots like they “think they are”; instead they see dandelions, and weeds!

And the currencies of Australia and New Zealand (NZD) have responded positively to this news from China.

And since I’m talking about China, might as well check on the other members of the BRIC’s (Brazil, Russia, India and China) Brazil’s real (BRL) just posted its best quarterly performance on record, and India (INR) was Asia’s third best performing currency, and if you throw out the two currencies above India that are illiquid, South Korea, and Indonesia, India was the best performing currency in Asia in the second quarter.

And the people over at the Royal Bank of Scotland (RBS) believe that the rupee won’t stop here… RBS issued a research report calling for a record 11% gain by the rupee in the third quarter. I bet this news is music to the ears of my colleague on the “other” newsletter that I write, The Currency Capitalist. My colleague, Ashish Advani, at the Sovereign Society, has been saying the rupee would be a strong performer for months now!

Here’s something you might want to be aware of, regarding the New Zealand dollar/kiwi… About $4.5 billion in kiwi Uridashi and euro kiwi bonds denominated in kiwi will expire next month… I’m told that this is more than four times the size of a usual monthly expiration of bonds. This could very well be the hoola hoop the Reserve Bank of New Zealand (RBNZ) is looking for, given their wish that kiwi would weaken.

Royal Bank of Canada’s Currency guru, Sue Trinh, says that kiwi weakness could be beneficial to Aussie dollars, as the Japanese are leaning toward Aussie over kiwi these days.

Sounds about right to me!

And then there was this… OK, you all saw that Bernie Madoff was given 150 years in prison… Did you see that his wife, Ruth, reached an agreement with the authorities to return all of her wealth except $2.5 million that she got to keep? The thing that I still don’t get is how there aren’t more people going down with the ship on this one… I’ve been in the back office of brokerage firms, ran a margin department, etc. and know this wasn’t just Bernie and his accountant. There was a lot of wool pulled over many eyes… And this will be the next step in the investigation by the US officials… To see, who else knew what… If a whole stable full of people aren’t found to have known, then I’ll be surprised.

The Daily Reckoning