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Pressure Builds On U.S. Dollar

I don’t know about you, but I’m noticing more concern overseas these days about the greenback. From Bloomberg’s Mark Deen today:

Suresh Tendulkar, economic adviser to Indian’s Prime Minister Manmohan Singh, is urging the government to diversify its foreign exchange reserves and hold fewer dollars, he said today.

“The major part of Indian reserves are in dollars — that is something that’s a problem for us,” Tendulkar said in an interview in Aix-en-Provence, France today.

He also said that world currencies need to adjust to reflect trade imbalances.

India’s neighbor, China, also continues to exert pressure on the U.S. currency. From the staff over at the Business Intelligence Middle East website today:

China requested that a new global currency be discussed at next week’s G8 meeting in Italy. The news sent the dollar into a downward spiral and the price of gold rallied, confirming its status as a currency hedge.

Wednesday’s sharp rebound in Gold Prices to US$945 faded overnight after a Beijing official refuted claims that China wanted discuss a new global reserve currency at next week’s G8 meeting of political leaders in L’Aquila, Italy…

Specifically, the People’s Bank of China said the IMF should manage part of members’ foreign-exchange reserves.

“To prevent the deficiencies in the main reserve currency, there’s a need to create a new currency that’s delinked from the economies of the issuers,” the People’s Bank of China (PBOC) said in a review of the economy in 2008 released today. In March, the PBOC had urged the IMF to expand operations of its Special Drawing Rights currency (SDRs) and move toward a “super-sovereign reserve currency.”

The PBOC statement comes after a top Communist Party research chief said that China should buy gold and US real estate rather than Treasurys.

Former Chinese Vice Premier Zeng Peiyan highlighted the nation’s concern at the risks posed by a global financial system dominated by the dollar, urging more oversight of countries issuing reserve currencies.

“There should be a system to maintain the stability of the major reserve currencies,” said Zeng, the head of a research center under the government’s top economic planning agency. Fiscal and current-account deficits must be supervised as “your currency is likely to become my problem,” he said in a speech in Beijing today.

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The Russians haven’t kept quiet on the issue either. Bloomberg’s Mark Deen and Isabelle Mas wrote this afternoon:

Russian President Dmitry Medvedev has repeatedly called for creating a mix of regional reserve currencies as part of the drive to address the global financial crisis, while questioning the dollar’s future as a global reserve currency. Russia’s proposals for the Group of 20 major developed and developing nations summit in London in April included the creation of a supranational currency.

“We will resume” talks on the supranational currency proposal at the G-8 summit in L’Aquila on July 8-10, Medvedev aide Sergei Prikhodko told reporters in Moscow today.

Sources:

“India’s Tendulkar Says Govt Should Diversify Forex Reserves”
Mark Deen
Bloomberg, July 3, 2009

“Gold’s investment credentials boosted by China’s quest for new global currency”
MI-ME Staff
Business Intelligence Middle East, July 3, 2009

“India Joins Russia, China in Questioning U.S. Dollar Dominance”
Mark Deen, Isabelle Mas
Bloomberg, July 3, 2009

World’s Highest-Paid Investment Adviser Suspects Coming Bank Holiday

Yesterday, MarketWatch’s Peter Brimelow talked about the latest from Harry Schultz, the highest paid investment consultant in the world and publisher of the International Harry Schultz Letter.

What Brimelow wrote was, well, quite disturbing.

From the piece:

In its current issue, HSL reports rumors that “Some U.S. embassies worldwide are being advised to purchase massive amounts of local currencies; enough to last them a year. Some embassies are being sent enormous amounts of U.S. cash to purchase currencies from those governments, quietly. But not pound sterling. Inside the State Dept., there is a sense of sadness and foreboding that ’something’ is about to happen … within 180 days, but could be 120-150 days.”

Yes, yes, it’s paranoid. But paranoids have enemies — and the Crash of 2008 really did happen.

HSL’s suspicion: “Another FDR-style ‘bank holiday’ of indefinite length, perhaps soon, to let the insiders sort out the bank mess, which (despite their rosy propaganda campaign) is getting more out of their control every day. Insiders want to impose new bank rules. Widespread nationalization could result, already underway. It could also lead to a formal U.S. dollar devaluation, as FDR did by revaluing gold (and then confiscating it).”

Gulp.

Brimelow noted that Schultz’s investment letter was up 81.7% year-to-date through May, compared to 4.1% for the dividend-reinvested Wilshire 5000 Total Stock Market Index.

Source:

“Latest Schultz Shock: a ‘bank holiday’”
Peter Brimelow
MarketWatch, June 24, 2009

Related Post

From our sister blog Investorazzi.com this morning:

“Warren Buffett Warns Of Problems With Inflation, Dollar”

“What we’re doing raises the profitability significantly of very significant inflation down the road. Not this year, next year, maybe the year after, but we have taken actions, and they were appropriate actions, to fight the war we were in that started with a vengeance last September. In taking those actions, we’ve applied medicine dosages to a patient that’s never been done before except in wartime. And it will have consequences. And nobody knows exactly what they will be and nobody knows how effective we will be draining a system that we’ve been flooding. But the probability of significant inflation has really gone up.”

Quote For The Week

From Jim Puplava, an investment analyst and host of the popular Financial Sense Newshour, in the third hour of his June 13 broadcast:

The President doesn’t understand economics. Look at the people in his administration. From Larry Summers to Bernanke to Christine Romer. None of these people have a job or have had a job in the real world. We have college professors running the Fed, the economy, with no idea how the economy actually works. In the end, they will have no choice but to debase the currency. It’s what we did in the thirties, it’s what we’ve done ever since 1971. That is what the world leaders, are largest creditors, and our trading partners, have come to realize…

Russia Plans To Cut Back Its U.S. Treasury Holdings

Russia and China have repeatedly criticized the dominance of the U.S. dollar in the global economy for some time now. Each has called for a new supranational currency in the interests of stability. And today, Russia fired a shot at the world’s reserve currency when it announced it was going to reduce its holdings of U.S. government bonds. From Agence France-Presse (AFP) reporters:

Russia announced plans Wednesday to cut the US Treasury bond holdings in its 400-billion-dollar sovereign wealth fund, the central bank’s first deputy chairman, Alexei Ulyukayev, said.

“We plan to reduce the portion of US Treasuries since the window of opportunity has arisen to work with other (financial) instruments,” he was quoted by Russian news agencies as saying.

Ulyukayev said Russia would shift its reserves into International Monetary Fund (IMF) bonds and commercial bank deposits.

He added, however, that the move would be gradual and Russia would sell off its Treasuries as they reached maturity.

US Treasury bonds now make up 30 percent of Russia’s 400-billion-dollar reserves after the central bank reduced its holdings of high-risk assets, such as US mortgage-backed securities, Ulyukayev said.

The AFP article suggests Russia’s plan to cut Treasury holdings is part of a larger scheme to challenge the greenback. From the piece:

The central bank’s announcement came ahead of a planned meeting of leaders of four key emerging economies in Moscow on June 16, where the dollar’s role as the world’s global reserve currency will be discussed.

Russia has been aiming to challenge the dollar and raise the status of this group of emerging economies, dubbed the BRIC states — Brazil, Russia, Indian and China.

Ulyukayev also said Russia was ready to diversify its large reserves — accumulated over months of record-high oil prices as the world’s second-largest exporter — to include China’s yuan if it became a new global reserve currency.

“The more we diversify our portfolio, the better,” he said.

Source:

“Russia to cut its US treasury holdings: central bank”
Agence France-Presse, June 10, 2009

Chinese Students Laugh At Treasury Secretary’s Remarks

“Geithner: China Confident in U.S. Policy Steps”

-Washington Post, June 2

“Treasurys up as Geithner, China inspire confidence”

-MarketWatch, June 2

“Geithner’s China Visit Seen Adding Fuel to ‘Great Comeback’ of U.S. Economy”

-Supply & Demand Chain Executive Magazine website, June 2

From the looks of these headlines this morning, it appears that U.S. Treasury Secretary Timothy Geithner is having a lot of success in bolstering Chinese confidence in U.S. assets during his visit to the People’s Republic of China.

Yet, I wonder if this is not just one more instance where “the devil is in the details.”

From the Washington Post’s Ariana Eunjung Cha this morning:

Geithner’s remarks stand in sharp contrast to the commentary in China’s official propaganda papers.

An editorial in the English-language China Daily said it will be “regrettable if [Geithner] underestimates and shuts his ears to voices from China’s civil society,” noting that there are worries that “Washington’s mushrooming deficit, generated by massive government borrowing to fuel its economic recovery plan . . . will undermine both the dollar and U.S. bonds.”

The Global Times, which is affiliated with the Communist Party, said an online poll found that 87 percent of respondents believe China’s dollar-assets are unsafe. The paper concluded, “Ordinary Chinese people are discontent with the declining value of China’s huge foreign exchange reserves denominated in U.S. dollars.”

And the Economic Information Daily, which is part of the official New China News Agency and affiliated with the State Council, in a headline demanded to know of Geithner: “How do you propose implementing fiscal discipline? How will you maintain the stability of the dollar after the crisis?”

Why do you suppose the Post reporter pointed out The Global Times was affiliated with the Communists? To discredit their statement?

Think this might be a case of “the pot calling the kettle black,” considering America’s socialist, and some would argue increasingly fascist, leanings these days?

Other publications also expressed doubts over Geithner’s success. From Peter Ford of The Christian Science Monitor this morning:

US Treasury Secretary Timothy Geithner said Tuesday he had found “a lot of confidence” in the US economy among Chinese leaders he met on his two-day visit here. In other circles, however, skepticism was widespread.

When Mr. Geithner told a student audience Monday that Chinese assets invested in Treasury bonds were “very safe,” his intended reassurance drew loud and dubious laughter.

A survey of 23 top Chinese economists, published in the daily Global Times on the eve of his arrival, found that 17 feared that Beijing’s huge dollar holdings put China in “a very dangerous position.”

More Communist propaganda, I suppose.

Ford added such views also existed outside the political and academic sphere. From the piece:

Ordinary citizens, however, appear to have little sympathy for such arguments, to judge by comments on Internet chat rooms.

“It’s a big joke that China’s money will disappear with nothing to be gained, and the beneficiary still says that the money is safe,” wrote one Internaut from Hebei Province on Sina.com, a popular Internet portal.

“Don’t trust Uncle Sam,” warned another. “Why do they enjoy the pleasures and we pay the bill?”

I suspect this situation might not continue for much longer.

Sources:

“Geithner: China Confident in U.S. Policy Steps”
Ariana Eunjung Cha
Washington Post, June 2, 2009

“Treasurys up as Geithner, China inspire confidence”
Deborah Levine
MarketWatch, June 2, 2009

“Geithner’s China Visit Seen Adding Fuel to ‘Great Comeback’ of U.S. Economy”
Supply & Demand Chain Executive Magazine, June 2, 2009

“Geithner visit: Chinese economists skeptical of US strength”
Peter Ford
The Christian Science Monitor, June 2, 2009

Hedge Funds Increase Gold Investments

“Don’t you invest in that just because you think it’s a good idea. I’m warning you.

It’s gold — that so-called safe haven for your assets — and if you’re considering it today, let me explain why you need to bypass it and move on. Although gold may well be one of your favorite items in the vault, as a long-term investment, it is just plain lousy.”

-Nick Kapur, The Motley Fool, May 11, 2009

A growing number of hedge fund managers might disagree with Mr. Kapur’s assessment of the yellow metal. The Dow Jones Newswires’ Joseph Checkler wrote the following on the SmartMoney website last night:

Hedge fund firms Paulson & Co. and Lone Pine Capital made big bets on gold during the first quarter, becoming the No. 1 and No. 2 shareholders, respectively, in the SPDR Gold Trust (GLD) exchange-traded fund, according to regulatory filings.

Paulson & Co. – run by John Paulson, who had already been beefing up his exposure to gold companies – bought 31.5 million shares of the ETF during the first quarter, according to its mandatory end-of-first-quarter holdings report with the Securities and Exchange Commission. That stake would be worth more than $2.8 billion if Paulson still holds all those shares at present.

Stephen Mandel’s Lone Pine bought 26.5 million shares of the ETF, which would be worth $2.4 billion if it still holds those shares. Lone Pine didn’t immediately return a message seeking comment.

Many hedge fund managers have been increasing their gold investments lately. More than 28% of the SPDR Gold Trust ETF’s outstanding stock was owned by hedge funds as of the end of the first quarter, according to Factset Research Systems.

The increased bets on gold come as the price of the yellow metal have remained high, above $900 an ounce. Funds also see hard assets as insurance against further turmoil in the financial system, including a decline in the value of paper currency.

Source:

“Hedge Funds Making Big Bets on Gold”
Joseph Checkler
SmartMoney, May 18, 2009

U.S. Risks Losing Triple A Credit Rating

When the former chief accountant of the United States warns that the nation’s credit rating is at risk, Americans might want to listen to what he has to say. David Walker, chief executive of the Peter G. Peterson Foundation and former Comptroller General of the United States, wrote in the Financial Times (UK) this past Tuesday:

Long before the current financial crisis, nearly two years ago, a little-noticed cloud darkened the horizon for the US government. It was ignored. But now that shadow, in the form of a warning from a top credit rating agency that the nation risked losing its triple A rating if it did not start putting its finances in order, is coming back to haunt us.

That warning from Moody’s focused on the exploding healthcare and Social Security costs that threaten to engulf the federal government in debt over coming decades. The facts show we’re in even worse shape now, and there are signs that confidence in America’s ability to control its finances is eroding.

Prices have risen on credit default insurance on US government bonds, meaning it costs investors more to protect their investment in Treasury bonds against default than before the crisis hit. It even, briefly, cost more to buy protection on US government debt than on debt issued by McDonald’s. Another warning sign has come from across the Pacific, where the Chinese premier and the head of the People’s Bank of China have expressed concern about America’s longer-term credit worthiness and the value of the dollar.

Walker warned that the nation’s credit rating could be downgraded with the help of two developments. He wrote:

The US government has had a triple A credit rating since 1917, but it is unclear how long this will continue to be the case. In my view, either one of two developments could be enough to cause us to lose our top rating.

First, while comprehensive healthcare reform is needed, it must not further harm our nation’s financial condition. Doing so would send a signal that fiscal prudence is being ignored in the drive to meet societal wants, further mortgaging the country’s future.

Second, failure by the federal government to create a process that would enable tough spending, tax and budget control choices to be made after we turn the corner on the economy would send a signal that our political system is not up to the task of addressing the large, known and growing structural imbalances confronting us.

On the topic of health care reform, Walker noted:

There is no question that this nation needs to pursue comprehensive healthcare reform that should address the important dimensions of coverage, cost, quality and personal responsibility. But while comprehensive reform is called for and some basic level of universal coverage is appropriate, it is critically important that we not shoot ourselves again. Comprehensive healthcare reform should significantly reduce the huge unfunded healthcare promises we already have (over $36,000bn for Medicare alone as of last September), as well as the large and growing structural deficits that threaten our future.

Walker concluded that a new government commission is needed to help get the nation’s finances back on track— or else. From the piece:

One way out of these problems is for the president and Congress to create a “fiscal future commission” where everything is on the table, including budget controls, entitlement programme reforms and tax increases. This commission should venture beyond Washington’s Beltway to engage the American people, using digital technologies in an unparalleled manner. If it can achieve a predetermined super-majority vote on a package of recommendations, they should be guaranteed a vote in Congress.

Recent research conducted for the Peterson Foundation shows that 90 per cent of Americans want the federal government to put its own financial house in order. It also shows that the public supports the creation of a fiscal commission by a two-to-one margin. Yet Washington still sleeps, and it is clear that we cannot count on politicians to make tough transformational changes on multiple fronts using the regular legislative process. We have to act before we face a much larger economic crisis. Let’s not wait until a credit rating downgrade. The time for Washington to wake up is now.

Source:

“America’s triple A rating is at risk”
David L. Walker
Financial Times (UK), May 12, 2009

That Which Didn’t Kill Could’ve Made US Stronger

Earlier today, I was doing research for Boom2Bust.com’s sister blog, Investorazzi.com, when I noticed Jeremy Grantham, the chairman of global investment firm GMO and advisor to such notable individuals as former U.S. Vice President Dick Cheney and U.S. Senator John Kerry, had just released his latest quarterly letter. The British-born investor set aside the last part of his May publication to lay into those responsible for the financial mess we find ourselves in today, as well as those who have traded in America’s long-term economic health to preserve the cancerous financial status-quo. From the piece:

It is ironic, by the way, that the U.S. would be less hurt than most given that Pied Piper Greenspan led all of us global rats off the cliff. And, yes, in this case the Maestro (well named) had an orchestra pit filled with Treasury and Fed officials (especially the NY Fed), and such a large supporting cast of dancing CEOs of financial firms and their reckless board chums that even Cecil B. DeMille would have found them sufficient. So we in the U.S. developed almost single-handedly the tech bubble of the late 1990s, and then engineered a U.S. housing bubble and a flood of excess dollars that almost guaranteed that global assets would follow suit. Yet, unfairly or not, the U.S. has some considerable advantages in this mess we created. First, we have an unusually low percentage of our labor force in manufacturing and export-oriented companies that will be the most immediately affected by the global downturn, unlike Germany and China, to name two. Second, the dollar plays an important role that may cushion U.S. pain by allowing U.S. authorities the flexibility to make their own rules where other countries such as Spain and Ireland have most decisions heavily constrained. More profoundly, the U.S. is in a position where necessary sacrifices will simply be less painful. We in the U.S. will have to buy two fewer teddy bears for our already spoiled four-year-olds. The third television set will be postponed as will the second or third car. We will have to settle for a slimmed down financial industry and fewer deal-oriented lawyers. Woe is us…

It may indeed be a better long-term solution to accept a more punishing decline and let foolish overleveraged banks go under together with weak players in other industries. Surely assets would flow to stronger hands with beneficial long-term effects. Indeed, the quick 1922 recovery from the precipitous decline of 1919-21 was so profound that the “Roaring Twenties” suppressed the memory of that earlier depression…

Current stimulus seems to be more about timing. We are unwilling to take a very sharp economic downturn even if such a downturn makes a quick, healthy recovery more likely. Rather, we seem to be making a desperate attempt to make the setback shallower, perhaps at the expense of a longer recovery period. What is likely to happen in the near term always has far more political influence than what may happen in the longer term. So we have been more decisively selecting the Japanese route rather than the 1921 or the S&L approach of a more rapid liquidation. Month by month we are voting for desperate life support systems – at the tax payers’ expense – for zombie banks and industrial companies that have been technically bankrupted by years of excess and almost criminally bad management.

I do think I know one thing, however. If a government invests directly, drawing employment from a large pool of the unemployed, and only invests in projects with a high societal return on investment such as hiring workers with well-stocked tool belts to install insulation, or repair bridges and transmission lines, or lay track to accommodate a respectably fast train from Boston to Washington (Yes!), it seems nearly certain that such a government will never have to regret it. Keeping banks, bankers, or even extra auto workers in business seems, in comparison, far more questionable. So questionable in fact that it must be justified by politics, not economics. We should particularly not allow ourselves to be intimidated by the financial mafia into believing that all of the failing financial companies – or very nearly all – had to be defended at all costs. To take the equivalent dough that was spent on propping up, say, Goldman or related entities like AIG (that were necessary to Goldman’s well being), as well as the many other incompetent banks and spending it instead on really useful, high return infrastructure and energy conservation and oil and coal replacement projects would seem like a real bargain for society. Yes, we would certainly have had a very painful temporary economic hit from financial and other bankruptcies if we had decided to let them go, but given the proven resilience of economies, it would still have seemed a better long-term bet. But, as I said, this is all just speculative theory and I don’t have to deal with Congress.

Let me end this section by emphasizing once again the difference between real wealth and the real economy on one hand, and illusionary wealth and debt on the other. If we had let all the reckless bankers go out of business, we would not have blown up our houses or our factories, or carted off our machine tools to Russia, nor would we have machine gunned any of our educated workforce, even our bankers! When the smoke had cleared, those with money would have bought up the bankrupt assets at cents on the dollar and we would have had a sharp recovery in the economy. Moral hazard would have been crushed, lessons learned for a generation or two, and assets would be in stronger, more efficient hands. Debt is accounting, not reality. Real economies are much more resilient than they are given credit for. We allow ourselves to be terrified by the “financial-industrial complex” as Eisenhower might have said, much to their advantage.

You can read the entire quarterly letter (in .pdf format) here.

Source:

“The Last Hurrah and Seven Lean Years”
Jeremy Grantham
Quarterly Letter
GMO, May 2009

China Critical Of Dollar, Global Currency System

Chinese officials continue their assault on the U.S. currency and “flawed” international monetary system. From the Agence France-Presse yesterday:

China called Sunday for reform of the global currency system, dominated by the dollar, which it said is the root cause of the global financial crisis.

“We should attach great importance to reform of the international monetary system,” Chinese Vice Finance Minister Li Yong told the spring IMF/World Bank Development Committee meeting in Washington.

A “flawed international monetary system is the institutional root cause of the crisis and a major defect in the current international economic governance structure,” Li said, according to a statement.

“Accordingly, we should improve the regulatory mechanism for reserve currency issuance, maintain the relative stability of exchange rates of major reserve currencies and promote a diverse and sound international currency system.”

As the world’s main reserve currency, US dollars account for most governments’ foreign exchange reserves and are used to set international market prices for oil, gold and other currencies.

As the issuer of the key reserve currency, the United States also pays less for products and can borrow more easily.

Li did not name the dollar but in late March the People’s Bank of China Governor Zhou Xiaochuan said he wanted to replace the US unit which has served as the world’s reserve currency since World War II.

“The outbreak of the crisis and its spillover to the entire world reflected the inherent vulnerabilities and systemic risks in the existing international monetary system,” Zhou said, suggesting the International Monetary Fund could play a greater role.

Zhou’s remarks sparked uproar and concern since China has the world’s largest forex reserves at 1.9 trillion dollars. China became the world’s top holder of US Treasury bonds last September, and currently holds around 800 billion dollars, according to official US data.

Beijing has voiced increasing concern over its massive exposure to the US dollar as the global crisis has steadily deepened but after some tense exchanges, the issue appears to have eased in recent weeks.

Then again, maybe not.

Settle it over ping pong?

And what’s China been doing with all those foreign-exchange reserves? Buying hard assets, including gold, of course. From MarketWatch’s Chris Oliver last Friday:

China has boosted its gold reserves to 1,054 metric tons, according to a Friday report by Xinhua News Agency, which cited Hu Xiaolian, head of the State Administration of Foreign Exchange.

The increase makes China the world’s fifth-largest holder of gold, just ahead of Switzerland, and among the six nations plus the International Monetary Fund that have reserves of more than 1,000 metric tons.

Hu said that China’s gold reserves had risen by 454 metric tons since 2003 and that the total was being reported to the IMF per the organization’s rules.

The comments are China’s first public acknowledgement in more than five years that its gold reserves had increased.

The new figure is 76% higher than the 600 metric tons reported at the end of March, a level that had been unchanged since December 2002.

It is thought the latest gold acquisitions came from domestic sources. From the piece:

Analysts said China’s bullion buying reflects efforts to diversify its nearly $2 trillion stockpile of foreign-exchange reserves.

“Chinese officials have been increasingly vocal about their concern on the U.S. dollar and the U.S. bailout policies of late, and have actively been seeking to diversify into other assets, especially commodities,” said Martin Hennecke, an associate director with Tyche Group in Hong Kong.

Traders in Hong Kong said that some of the additional reserves were likely acquired on the Shanghai gold market during January and February. The physical market remained well-bid by an unknown buyer despite bullion prices spiking to levels that normally cooled demand, they said.

Purchases were made in Shanghai, traders said, in an effort to absorb domestic production and lessen the impact of bullion prices on global markets…

Traders also say the gold was accumulated systematically over a number of years.

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$230m client holdings
Secure storage in New York, London or Zurich
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Sources:

“China calls for reform of global monetary system”
Agence France-Presse, April 26, 2009

Suspicion Grows Over China Dumping U.S. Assets

On Tuesday, a Federal Reserve official downplayed talk of China dumping its U.S. assets. Reuters’ Kevin Plumberg wrote yesterday:

Dallas Federal Reserve President Richard Fisher said on Tuesday China would not do anything to harm U.S. interests such as dumping Treasuries, adding that solid capital returns support the dollar’s attractiveness.

Fisher, who was headed to Beijing, soundly rejected the view that China can decouple economically from developed countries such as the United States and described the relationship between the two powerhouses as “symbiotic.”

“China cannot succeed if the U.S. does not succeed,” he said after a speech sponsored by the Asia Society, noting that while China owns a lot of U.S. Treasuries its economy is still dependent on U.S. consumer spending.

Recent comments from Chinese public officials have suggested Beijing is uncomfortable with the Fed’s rapid expansion of its balance sheet. Last month, Premier Wen Jiabao said he was worried about the country’s holdings of some 70 percent of the $2 trillion in foreign reserves and asked for a guarantee of safety for Chinese assets.

While the Fed might be unconcerned about China’s intentions, the U.S. military doesn’t appear to be so sure. FOX Business’ Rebecca Diamond reported Monday that for the first time ever, the Pentagon played a war game that focused on economic warfare. And, one of their key findings involved China selling off American dollars and Treasuries…

FOX Business Video Link

Source:

“Fed’s Fisher says China won’t harm U.S. interests”
Kevin Plumberg
Reuters, April 14, 2009

What Next For Gold?

“Gold is just a piece of metal.”

-Recent comment on a Wall Street Journal blog

Gold has been in the news a lot more lately— but not because of rising prices. From MarketWatch’s Morning Zhou this afternoon:

Gold futures fell Thursday ahead of the three-day holiday weekend, marking a third weekly loss as upbeat results from Wells Fargo & Co. boosted investor interest in stocks, reducing gold’s appeal as a safe asset…

Gold for April delivery fell $2.60, or 0.3%, to end at $882.20 an ounce on the New York Mercantile Exchange. The front-month contract lost 1.5% this week. The more active June contract also fell Thursday, down 0.3% to $883.30 an ounce.

Should gold investors be worried this might be the beginning of some longer down-trend in the price of the precious metal? Maybe not, according to some long-time gold observers that MarketWatch’s Peter Brimelow spoke to. He wrote this morning:

Gold gives ground, but the bugs respond with calm.

Yesterday, Harry Schultz’s Gold Charts R Us service offered technical reasons for a rebound. Looking at the weekly gold chart, it said it saw:

“A one-year reverse Head and Shoulders development, with $879.40 left shoulder support (being tested as we write) — that also coincides with a 50% retracement of the October rally-leg. If bullion manages to hold around this level, the odds for shorter, higher highs will remain intact via the formation of a possible right shoulder and a fourth attempt to breach the psychological $1,000 resistance.”

GCRU added that, if this doesn’t work out, it expects “July 2005 uptrend line support, currently around $750.”

GCRU concluded cheerfully: “Don’t let this gold dip dishearten you. Our patience and discipline will soon be rewarded by a new golden sunrise.”

By the way, Schultz happens to be the world’s highest paid investment consultant, in case you didn’t know. Brimelow continued:

The underlying reason for this cheerfulness is not technical but fundamental. There is disturbingly universal expectation among gold-watchers that Federal Reserve monetary expansion must blow off into inflation.

The Pamela and Mary Anne Aden’s Aden Forecast is typical, commenting recently:

“Gold is the ultimate inflation hedge, and there’s no telling where it’ll end up, at least well into the thousands of dollars in the years ahead, and maybe sooner. … Remember, gold’s peak in 1980 at $850 is now the equivalent of about $2,200 in today’s dollars. Gold has not even approached that level yet. Once the dollar declines again and inflation kicks in, it’ll be another story.”

And how many thousands of dollars? The Aden sisters write: “Using the gains in the 1970s as an example to forecast where gold could end up … $5,800 would be the equivalent upside target.”

Brimelow pointed out that non-gold bugs are also bullish about the prospects for the yellow metal. He added:

This optimism is no longer confined to the investment letter fringe. John Reade, the respected non-gold bug London-based chief metals strategist for UBS, wrote:

“Based on the conversations we continue to have across our client base, gold remains something that investors are looking at with unprecedented interest, although participation levels remain lower than the interest would suggest.”

“But the reasons why investors bought gold — fears of longer-term inflation and currency debasement — remain intact, and we see no reason why investors will not buy gold in very good quantities at some point. … once the correction has run its course and gold has stabilized, we expect bottom-fishers to begin the next cycle of investment.”

Some piece of metal…

(Note: The author disclaims any personal liability, loss, or risk incurred as a consequence of the use and application, either directly or indirectly, of any information presented herein.)

Sources:

“Gold falls to mark third weekly loss amid optimism”
Morning Zhou
MarketWatch.com, April 9, 2009

“Gold bugs calm short-term, buoyant long-term”
Peter Brimelow
MarketWatch, April 9, 2009

Friday Freebie: The “A-Letter”

I love free stuff. And I bet a lot of you do as well. Which is why I’m starting a new series called “Friday Freebie,” where every so often I’ll introduce you to some free, yet possibly useful, finds of mine related to topics covered in this blog, starting with this post.

One of my favorite free newsletters that I like to read on a regular basis is the “A-Letter” that’s published by The Sovereign Society. The “A-Letter” is their “free offshore financial e-newsletter containing late breaking news, commentary and ground breaking advice about everything effecting the ‘offshore world’ delivered straight to your email inbox, six times per week.” Anyway, I thought the April 1 edition of the “A-Letter” was a real keeper— and thought-provoking. Here’s an excerpt from that issue:

2009 seems to be working out to be the “year of the fool” judging from headlines like…

 The Social Security Surplus is already gone…fini…no more. “Expected” to last through 2017, thanks to rosy estimates from the bean-counters in Washington, the surplus was annihilated in last year’s stock market crash…meaning the U.S. government will likely need to raise hundreds of billions more in Treasury sales in the coming years…aside from the trillions already scheduled, of course.

 Apparently dissatisfied with only causing the biggest bankruptcy in recorded history, a former Lehman Exec decided to gamble with 44 million American pensions. Former Lehman Managing Director Charles Millard – acting as head of the Pension Benefit Guarantee Corp. (PBGC, the federal government’s safety net for pensions) – boldly moved a substantial portion of the PBGC’s funds out of “boring” bonds and into promising stocks…all in hopes of avoiding a future government bailout. Unfortunately, he started this plan mid last-year, and his picks were already down by 23% at the end of September ‘08. Oh yeah, and he was almost a trillion in deficit when he started.

 Obama says Detroit Bankruptcy Restructuring is “inevitable,” after the latest round of media back-and-forth that pushed Waggoner out the door with a US$20 Million+ retirement package. I can’t tell you how glad I am that we gave these yahoos US$17 Billion last year just to stall the bankruptcy process for a few months. What a great investment that was.

 And on a similar note (wink wink) “The administration of President Obama is suffering very, very strong pressure from sectors affected by the U.S. economic recession,” (ed.: *cough* UAW *cough*) “and that is preventing it from acting correctly,” said Mexican President Felipe Calderon in a recent interview. A look at the list of Obama’s biggest campaign contributors suggests that Felipe was right on. Change? Well, I suppose changing from a neo-conservative puppet of an oil-man to a “bought and & paid for” cog in the Chicago machine does count as “change.”

 And just when you thought hypocrisy couldn’t possibly raise itself to new heights in Washington, President Obama nominated yet another tax dodger to his cabinet in Kathleen Sebelius, his nominee to Health and & Human Services. She owes US$7,000 in total due to some “unintentional mistakes.” Funny thing is, when I make an “unintentional mistake” on my returns, I tend to get whacked with fees, calls and threats from the IRS. Good thing she’s a member of the “Washington Club.”

 Housing Prices are Falling Faster than any other time on record, at least according to Case Shiller’s highly reliable statistics. The 20-city average decline hit 19% in January, muffling any speculation of a bottom forming in the housing market.

 Banks are Refusing to Take Ownership of Properties at the End of the Foreclosure Process in cities all across America, because the cost of the process is higher than the rapidly-declining value of the underlying real estate. But homeowners aren’t off the hook…they’re still obligated to take care of their mortgage and handle any maintenance and repairs that occur in the months after they vacate due to foreclosure.

 Commercial Real Estate Lenders are hesitating to push borrowers into bankruptcy for reasons ranging from misguided optimism to the harsh reality of having to write those debts off. As evidenced by companies like General Growth Properties and Centro, CRE borrowers are staving off bankruptcy for much longer than they would in any other situation. Apparently wishful thinking still qualifies as a business plan in some circles.

 And now the OECD is pleading the EU to begin Quantitative Easing, aka “printing money and throwing it at the problem.” Germany’s so far been vehemently against the idea, for reasons including the problems Eric highlighted with QE in the EU.

So…Which One was the Joke?

Could you figure it out? Which one of the above was a joke?

Well…you’re right. None of them were; they’re all real. I suppose that’s the joke…albeit a very morbid and existentialist joke. But hey, I work with what I’ve got.

And what’s worse; following this crisis as it unfolds on a daily basis, watching every blip of news and trying to decipher what it means for you and I – I’m starting to feel like the joke’s on us.

Us the taxpayers…us the voters. Even us the dollar holders, because the “inflation tax” that will surely follow Washington’s blundering bailouts will bushwhack the value of everyone’s dollars…no matter whether you’re American, Mexican, pink, purple, green or some lily-livered presidentially-appointed tax-cheat.

Hey, who said there was no such thing as a free lunch?

Source:

“In 2009, Every Day is April Fool’s Day!”
“A-Letter” Newsletter
Matt Collins
Sovereign Society, April 1, 2009

One Recession, Two Recession…

Good news. A non-profit global business organization is predicting that the current recession will end later this year. Bad news is, it’s also saying there’s the potential for another one to emerge in 2010. From Reuters tonight:

Although the U.S. economy is expected return to growth later this year, there is a danger of a second recession if monetary easing and a weak dollar leads to increased inflation expectations, a report said on Wednesday.

Massive stimulus spending and moves by the Federal Reserve to fuel economic activity is expected to jump-start the anemic U.S. economy in the last quarter of this year after it contracted 6.3 percent in fourth quarter of 2008.

But the Fed’s moves to boost the economy by slashing interest rates and buying up billions in government debt could have undesired consequences, The Conference Board, a private research group, said in the report.

“If the United States experiences a too-rapid recovery, there may be a risk of another recession in 2010,” said Bart van Ark, vice president and chief economist of The Conference Board.

“It may fuel expectations for a return to inflation, adding to the uncertainty concerning the pattern and path of economic recovery,” he said.

The U.S. economy has the potential for a “double-dip” recession, van Ark noted, similar to 1980 and 1982, as commodity prices rise on the back of a falling dollar and monetary easing.

He added, however, that the likelihood of this scenario taking place is small as deflation risks are great, while government stimulus spending should stem further economic decline and ease the flow of job losses.

Others would disagree with the assumption the U.S. economy will grow later in the year. Just last week, National Bureau of Economic Research President Emeritus and Harvard economist Martin Feldstein predicted the recession will last into 2010. From Reuters’ Jason Subler and Shengnan Zhang on March 24:

The recession in the United States will stretch well into next year, probably raising the need for another fiscal stimulus package at least as large as the first one, prominent economist Martin Feldstein said on Tuesday.

Feldstein, a Harvard University professor who is a member of President Barack Obama’s Economic Recovery Advisory Board, told Reuters that the stimulus would offset only a relatively small piece of the likely fall in spending, exports and construction.

“I’m afraid that the economy will continue to slide down well into next year,” Feldstein, a former head of the National Bureau of Economic Research, said in an interview in Beijing where he was attending a conference.

“I don’t know when it will end, but the forecasts that it’ll end later this year I think are too optimistic,” he said of the recession.

Sources:

“U.S. seen facing danger of 2nd recession next year”
Reuters, April 1, 2009

“U.S. recession to last into 2010: Feldstein”
Jason Subler, Shengnan Zhang
Reuters, March 24, 2009