US vs. Chinese Stimulus

On Thursday we saw the non-dollar currencies gain more ground versus the dollar during the day, as the euro (EUR) bounced off of 1.47, and went to 1.4755 at one point in the day. Overnight, the dollar rebounded and when I turned on the screens this morning, the euro had just dipped below 1.47 to 1.4688… But again, it looks like 1.47 is a bouncing point, as now the single unit has pushed to 1.4710… I know it sounds pretty ridiculous to talk about such small moves, but I wanted to point out what seems to be resistance in the 1.47 region.

Yesterday, I told you that I was going to do some additional research into the TICs data that showed a Net Total TICs at -$97 billion for July! OUCH! The only thing I could really find was some stuff by a “Mr. Obvious” that said that foreigners sold Treasuries in July…

OK… But that’s important, because… The Fed knowing this happened, long before we did, saw yields climbing and that’s when they stepped in and bought that 7-year auction piece that I told you all about a month or so ago… The Fed Heads bought the piece of Treasuries from the primary dealers to support the market, and accomplish two things… 1. To make the auction look good, and 2. To keep rates artificially low… They made their goals… But at what cost? We all know what the Fed is up to, and it kind of takes the shine off of them, eh?

I was reading some stuff on the Internet last night, and mentioned to my beautiful bride that if I were a first time investor, I would be so confused… I read one story that said “euro ready for correction versus dollar,” and then one story below it that said, “dollar set to slide further”… I mean, that’s confusing, right? And then letting me know that after all these years of “hearing me” but not “listening to me”, she surprised me, and said… “But that’s good right? Not everyone is on the same side of the trade” WOW! I was smiling like a Cheshire Cat!

This morning, there’s not much difference in the stories on the screens versus last night… One says, “Euro may strengthen to Sept 2008 high on Technicals”… And another says, “Euro may be set for correction, per Bank of Tokyo”… Basically, I agree with both! The important thing here is that the second story says, “Euro MAY be set for correction”… It doesn’t say it WILL! And that’s what I’ve been talking about lately… The feeling that risk assets, led by stocks, have gone too far too fast, and a correction could be forthcoming, which would take an adverse affect on the currencies and commodities. But… We’ve seen things go like this before, right? It’s just like everything else in life… Something goes too far one way, it corrects and goes too far the other way! Never, right in the middle, where everyone would be happy.

I did see the text of an interview with Black Rock’s CEO, Fink… He said, “The dollar is a better long-term store of wealth”… Ahem… Hold on a second, I’m choking… Store of wealth? Wait, we’re talking about the dollar, right, not gold? The dollar, which has lost 95% of its purchasing power since the Fed took over in 1913? That dollar? OK… If you say so! But I’m not buying it!

You know, I put the New Zealand dollar (NZD), – or “kiwi” as traders call it – into the “high deficit crowd corner” all the time… I love kiwi, and always have, but kiwi is sort of like that kid that keeps getting into trouble… You love ’em… But they keep trying your love! That’s how kiwi is for me… I’ve always said I can’t bang on the US for having high deficits, and then not bang on New Zealand… But, here we are with kiwi set to complete its longest set of weekly gains since 1999! And it’s the leader of the pack when it comes to currencies in the industrialized countries, with their performance this year.

Here’s my thought on what’s going on here… Right now, investors all over the world are looking for yield, and they are not going to find it in the US, UK, Eurozone, Japan, and so on… They can find it in New Zealand, Australia, Brazil, and South Africa… So… You then look at these and say, “Brazil and South Africa are of the speculative nature”, and then between kiwi and Aussie, kiwi has the better yield… And fundamentals like deficits are thrown out the window… And once again, you’re standing there, and the kiwi bus is heading right for you… What are you going to do, just stand in front of this bus?

British pound sterling (GBP) took a blow to the mid-section after The Wall Street Journal printed a story entitled, “A New Carry-Trade Currency?” And then went on to describe why pound sterling would be a good funding currency for a revival of the carry trade… Hmmmm… Personally, I think the US dollar would be even better, given the fact that there are so many dollars floating around; it wouldn’t be difficult to find dollars to borrow, when you sell them short!

Gold is finding a tough row to hoe, getting past $1,018… We need to keep an eye on this today… The IMF Executive Board is meeting to discuss selling 1/8th of their gold. Doesn’t sound like much, eh? Well, think again… With the IMF holding the third position of official largest holders of gold, 1/8th of their holding would be equal to about 13 million ounces of gold!

Hello, China? Are you ready to buy? Speaking of which, Aaron was telling me yesterday of a story he was reading, that described the Chinese government’s efforts to get the Chinese public to buy gold… One comment to the writer was from a Chinese citizen that said something about how the US keeps telling their people to buy stocks, and my country keeps telling us to buy gold… No question as to who has the best interests of the citizens in mind.

Speaking of China… I keep reading stories about China telling lies about their economic growth… Hmmm… I mean it’s government stimulus growth, but it’s there! I’ve said this before, but as a Communist country, they were able to direct where the stimulus went, and how it was to be used… And the other most important difference between China’s stimulus and ours is the fact that China has a war chest of reserves to spend… The US doesn’t!

So… Anyway… Chinese growth, no matter how they get it, is good for the global economies, so don’t look gift horses in the mouth… I think that’s how it goes!

The Indian rupee (INR) has really been on a positive run in the past month. The rupee has gone from 49 and change to 48.10… In percentage terms it’s not much (just 1.5%), but the trend looks good…

On the data front… Yesterday, we saw housing starts print a modest rise of 1.5% in August… And the Philly Fed Index (manufacturing) hit a high that it hasn’t seen since June of 2007! But before we throw our hats in the air, let’s remember that this is all government stimulus… As witnessed by the 6-month forecast component of the report, which actually fell! The reason the 6-month forecast component would fall, is because that is about the time table for removal of the government stimulus…

And before you get all huffy, and start to pound the keyboard writing a reply to me, asking me how the Chinese stimulus is different from the US stimulus… Go back up a few paragraphs and re-read…

Today’s data cupboard is empty… Which means that the currencies will get their direction from stocks… That’s been the trading pattern for several months now, and one that I don’t agree with, but, as I said above with kiwi… Am I going to stand in front of that bus? NO! Asian stocks were sold overnight, while European stocks are stronger this morning, so there’s no real direction that can be found there. So, we’ll just have to wait-n-see, eh?

OK… It’s Friday, there’s no data to look at, and the currencies are weaker than they were yesterday afternoon, but the euro seems to bounce off 1.47 – at least for now!

The Daily Reckoning