US and Chinese Presidents Trade "Ideas"

The goings-on this past weekend were something. Every time I would pull up the news, I would find more quotes and statements that would potentially move the markets come Monday morning… One of the big ones was our president telling the Chinese: “Enough is enough”… Oooohhhh… I bet the Chinese are shaking in their boots… Look, I’ve talked about this before… You know the “biting the hand that feeds you” thing… Does the administration (and lawmakers) truly believe that China will not get ticked off, and choose not to attend the next Treasury auction? What happens if they do? Well, we all know what happens, as I’ve been through all that before; but let’s just pretend that will never happen, that’s best you know, stick our heads in the sand, and forgetaboutit! NOT! That’s not going to happen as long as I have a laptop and an Internet connection!

And then there was Chinese President Hu Jintao, trying to get this message through to the US administration and lawmakers… “The US Trade Deficit and Unemployment are not caused by the yuan exchange rate, and a ‘large’ appreciation in the currency won’t solve US problems.”

So… The markets have something to talk about this morning, other than the Eurozone problems… Italian PM Berlusconi finally stepped down this weekend, and that has allowed the Italians to form a new government, which will be led by an economist named Mario Monti… The markets liked the resignation of Berlusconi, and the euro (EUR) was allowed to rebound a bit on the news.

There was an article in the NY Times that a reader sent me this weekend, that doesn’t really have anything kind to say about the euro, and basically spells out that the euro’s time may be short… Well… That might be true… But, there certainly isn’t any indication of that in the euro’s price-to-dollars… But as I’ve said a few times as we’ve gone through the PIIGS or GIIPS or peripheral countries, or “Club Med Countries”, or whatever you want to call them… The euro deserves to be weaker, much weaker; but because of its position as the offset currency to the dollar, it is allowed to remain 1/3 of a cent stronger than a dollar…

Oh, our president had some other things to say this past weekend, that ought to make a few business people a little unhappy… The president called business leaders “lazy”… Sure, he’s just trying to get them to hire people, because we’re almost into an election year… We can’t go around getting re-elected with 23% unemployment! Oh, by the way, I saw that old friend, Mark Skousen (über-respected analyst and writer) joined me in reporting the true unemployment numbers last week…

So… As the day begins today for us… The euro is around 1.3660 — a little weaker than it was right after Berlusconi stepped down… And that means the other currencies that look to the euro to provide direction are basically drifting this morning. The Aussie dollar (AUD) is $1.0240, and the Swiss franc (CHF) hangs on to $1.10…

Gold is off by about $12, so there’s nothing really moving strongly against the dollar this morning… In fact there’s nothing moving weakly against the dollar this morning, either… The Chinese renminbi (CNY) saw its value versus the dollar lose a large chunk this morning… Which I find amusing, since the US president is visiting Asia, and calling out the Chinese, and they simply say… “Here, deal with this”, and mark down their currency!

But that won’t become a trend… Since we’ve been following the renminbi in 2003, we’ve seen this happen over and over again… The Chinese allow the renminbi to weaken just to prove a point, and then get back to allowing the appreciation versus the dollar a few days later. So, look for that to happen again this week.

The Japanese yen (JPY) continues to defy gravity, and in fact has traded below 77 overnight, barely… The news from Japan over the weekend was interesting… Japan’s economy grew for the first time in a year! Yeah, that’s right… In fact, it was not a measly little number either! Japan’s third quarter GDP grew at an annualized rate of 6%! WOW!

So… Apparently Japan is recovering from the devastating earthquake and Tsunami that hit the country last spring. Exports are up, and economic output was back to levels seen before the country was hit by Mother Nature last spring. But don’t go out and dance in the streets here, folks… The rest of the world is slowing down, so, once the reconstruction demand is over, where will the growth come from?

And in Switzerland, the other land of intervention, the Swiss National Bank’s (SNB) move to anchor the franc to the euro at 1.20 has seemed to work… I was quite pessimistic about this move at first because I thought the markets were too much into the franc and its so-called safe haven status… But SNB Governor Hildebrand has put the fear of God in the markets… And the franc has lost 11% against the dollar, and 13% against a basket of other currencies, that Hildebrand bought versus the franc to make his point… So, should I dare say that this form of intervention worked? Nah… Trust me, if the markets, which have far deeper pockets than the SNB wanted to push the envelope here they could do so very easily, and cause The SNB to book losses just like they did when they tried conventional intervention. The markets’ focus right now is on the Eurozone…

What the markets should also be focused on is what’s going on here… OK… Remember about three weeks ago, I told you all about the Super Debt Committee (SDC), that had a deadline of Thanksgiving to bring forth $1.2 trillion in spending cuts… I said then that I doubted the SDC would come through, for there is no real political will to do this… You don’t get reelected if you take free stuff away from people! Well… Thanksgiving is next week! And what happens then? Well… According to the deal that was struck last summer, if the SDC fails to bring forth the cuts, then $1.2 trillion in discretionary spending cuts automatically take place…

I’ve also gone on record saying that I doubted those $1.2 trillion in automatic spending cuts take place… Which means… Moody’s and Fitch will join S&P in downgrading the US debt rating. And then, we’ll have to see how the foreign markets like knowing that they are buying debt from us that is no longer AAA-rated!

I’ve gone through this scenario too… But I had better go through it again, for those new to class, or those who skipped class that day! If Treasuries are downgraded by all the ratings agencies (and basically, they should already be downgraded) we could see yields begin to rise at break-neck speeds, as foreigners demand higher yields to buy this downgraded debt. That’s what’s happened in Greece, Portugal, and now Italy… And I’ll debate anyone who tells me it can’t happen here!

Then there was this: From Barron’s

The US trade deficit unexpectedly improved in September, but a significant part of it appears to have been related to flight to safety to gold during September’s weak financial markets. The September trade gap shrank to $43.1 billion from $44.9 billion in August. The latest shortfall was narrower than analysts’ expectations for a $46.3 billion deficit. Exports gained 1.4 percent after edging up 0.1 percent in August. Imports rose 0.3 percent in September, following a 0.2 percent decline the prior month.

About half of the unexpected improvement in the deficit came from gold exports. Still, exports were moderately strong otherwise and imports were mixed. Given weakness in Europe, the report is encouraging even after discounting gold movement.

Well, based on an average price of $1,750 an ounce…and ‘about half’ of the ‘unexpected improvement’, it works out to about 25 tonnes of gold that was exported in September. One has to wonder who got it all…and from whence it came.

Strange thing, eh? But there it is…

To recap… The currencies are drifting this morning after bumping higher on Friday with the news of Berlusconi’s resignation. Gold is off again this morning by $12. The Super Debt Committee has one week to come up with $1.2 trillion in cuts, or else Pandora’s Box of ugly things could get opened, and the US and Chinese presidents traded “ideas” this past weekend… I shake my head in disbelief that we still want to bite the hand that feeds us.

Chuck Butler
for The Daily Reckoning