I’m not hearing much about this story in the news yet but I suspect the debt-ceiling will become center stage in the weeks ahead. At risk is the fate of the US$ trend. In the unlikely event that congress somehow puts its proverbial foot down and refuses to increase the debt ceiling then no doubt this would stem the slide of the greenback. However, I suspect the third paragraph holds the tastiest morsel of information. In order to avoid looking weak on fiscal responsibility right before an election Congress will pass all that is required now to increase the debt ceiling and in turn add to the US$ weakness. Stay tuned, this could get interesting….

Treasury gets ready for debt-ceiling fight - WSJ
WSJ reports the Obama administration, concerned about the possibility of a big political fight over the national debt, is looking at how it can continue funding the government in the event that Congress hinders its ability to borrow money.

Treasury Department officials are examining tools employed by previous administrations, including disinvesting government retirement funds and suspending interest payments to federal accounts, according to people familiar with the matter. They are also looking at what to do in the unlikely event of a govt shutdown.

At issue is the debt ceiling, a dollar limit controlled by Congress that dictates how much the U.S. can borrow. Treasury Secretary Timothy Geithner told the Senate in a letter last month that the $12.1 trillion ceiling could be hit as early as mid-October, and said it needs to be increased so the U.S. can continue funding operations and making debt payments. Mr. Geithner didn’t indicate the increase he was seeking. With the U.S. borrowing about $30 billion a week, some economists say the Treasury will need an increase of as much as $1.5 trillion if it wants to avoid another request before the 2010 midterm elections. The U.S. could default on its debt if Congress doesn’t raise the debt ceiling, but it is a remote scenario.

…Meanwhile, as the players in the US rearrange the chairs, the rest of the world wants to rewrite the playbook…

UN wants new global currency to replace dollar - Daily Telegraph Daily Telegraph reports the dollar should be replaced with a global currency, the United Nations has said, proposing the biggest overhaul of the world’s monetary system since the Second World War.

In a radical report, the UN Conference on Trade and Development (UNCTAD) has said the system of currencies and capital rules which binds the world economy is not working properly, and was largely responsible for the financial and economic crises. It added that the present system, under which the dollar acts as the world’s reserve currency , should be subject to a wholesale reconsideration. Although a number of countries, including China and Russia, have suggested replacing the dollar as the world’s reserve currency, the UNCTAD report is the first time a major multinational institution has posited such a suggestion.

In essence, the report calls for a new Bretton Woods-style system of managed international exchange rates, meaning central banks would be forced to intervene and either support or push down their currencies depending on how the rest of the world economy is behaving. The proposals would also imply that surplus nations such as China and Germany should stimulate their economies further in order to cut their own imbalances, rather than, as in the present system, deficit nations such as the UK and US having to take the main burden of readjustment

I’d like to take a moment and pose a question before you read the next story.

Now the question: Should you start a trade war with China at a time when your country is most vulnerable? Would that be smart? Would it be diplomatic? Or, in the immortal words of Jaime Lee Curtis, would it be STUPID? (Extra credit to those who can name the movie)

China strikes back on trade - WSJ
The Wall Street Journal reports China indicated Sunday it would restrict U.S. imports of chicken and auto products after Washington’s move to slap punitive sanctions on Chinese tire imports, raising tensions in a trade dispute ahead of two planned meetings between the countries’ leaders.

Citing a jump in Chinese imports, the Obama administration said Friday it would impose stiff tariffs on Chinese-made tires for the next three years, invoking a section of trade law that China agreed to as a condition for its joining the WTO in 2001. The move essentially would cut off the source of nearly 17% of all tires sold in the U.S. last year and hit cost-conscious consumers particularly hard, as retailers will have to find alternative sources for the lower-end tires that make up much of what China sends to the U.S.

Beijing responded quickly. Sunday, its Ministry of Commerce said it was starting antidumping procedures against U.S. exporters into China of chicken and auto products. It said it had received complaints from local producers that the U.S. products were being dumped in China at below-market prices. The ministry denied that the move, which could lead to sanctions, was protectionist. “China has consistently opposed trade protectionism, and the country’s actions since the financial crisis have reflected this stance,” the ministry said on its Web site. “China is willing to continue to act in accordance with countries around the world to push forward the world’s economic recovery.”

The announcement didn’t specify the timing or the exact kinds of goods involved. An official with the U.S. Trade Representative’s office Sunday defended the trade decision and warned that Washington would be “inquiring closely” over the next several days as to the basis for China’s response.

Tags: bretton woods, China, debt-ceiling, new global currency, obama, trade war, treasury department, U.S. Dollar, US Treasury

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The US Federal Reserve’s policy of printing money to buy Treasury debt threatens to set off a serious decline of the dollar and compel China to redesign its foreign reserve policy, according to a top member of the Communist hierarchy.

Cheng Siwei, former vice-chairman of the Standing Committee and now head of China’s green energy drive, said Beijing was dismayed by the Fed’s recourse to “credit easing”. “We hope there will be a change in monetary policy as soon as they have positive growth again,” he said at the Ambrosetti Workshop, a policy gathering on Lake Como. “If they keep printing money to buy bonds it will lead to inflation, and after a year or two the dollar will fall hard. Most of our foreign reserves are in US bonds and this is very difficult to change, so we will diversify incremental reserves into euros, yen, and other currencies,” he said.

China’s reserves are more than — $2 trillion, the world’s largest. “Gold is definitely an alternative, but when we buy, the price goes up. We have to do it carefully so as not to stimulate the markets,” he added. The comments suggest that China has become the driving force in the gold market and can be counted on to buy whenever there is a price dip, putting a floor under any correction.

I devoted Monday’s post to the rise of the inflation trade. Well, I thought I’d throw another log on the proverbial fire with the story below. The Chinese realize they are in possession of a bunch of rapidly depreciating paper and they are in the process of plowing said paper into any hard asset they can find. This process is, of course, the very definition of inflation.

CIC looks to pile cash into U.S. real estate - WSJ
The Wall Street Journal reports China’s $300 bln sovereign-wealth fund is eyeing big investments in distressed U.S. real estate, according to people familiar with the matter. To finance some of the deals, China may rely on the U.S. government.

In addition, CIC is weighing investing through one of the U.S. government’s bailout programs, the Treasury’s Public-Private Investment Program, known as PPIP. The program is designed to rid banks of toxic mortgage securities by enticing investors to buy these assets with financing from the U.S. government. Representatives for CIC, BlackRock, Invesco and Lone Star declined to comment.

Now concerns are mounting that the agency — and the U.S. taxpayer — may have to pay the price. The FHA insures loans secured with down payments as low as 3.5%. But values in many markets in which it has been increasing its activity have fallen far more than that in the past year. The result: A growing number of homeowners with FHA-backed loans owe more than their homes are worth and are more likely to default Officials worry that the resulting losses will help push the FHA’s reserves below the level required by Congress. The value of those reserves will be revealed in the agency’s annual review due Sept. 30. If they have fallen below the minimum, that could prompt a new round of questions about the role government should play in stabilizing the housing market.

David Stevens, the FHA’s new commissioner, said on Friday that the agency will continue to support the housing market and isn’t in danger of needing a taxpayer bailout. But some housing analysts warn that, if home prices decline much further, the agency would require taxpayer assistance for the first time in its 75-year history.

Tags: China, china investment corp., cic, commercial real estate, FHA, gold, taxpayer, us money printing

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This story is a must read and read carefully. The unprecedented actions of the Swedish Riksbank may be the precursor to a whole new phase of the quantitative easing shell game. And make no mistake about it, a true shell game is going on with the worlds fiat money supply.

The picture I have just described is overwhelmingly Gold bullish. I trust you will not dismiss the $25 gold advance today as coincidence.

Bankers watch as Sweden goes negative
By Andrew Ward in Stockholm and David Oakley in London

For a world first, the announcement came with remarkably little fanfare.
But last month, the Swedish Riksbank entered uncharted territory when it became the world’s first central bank to introduce negative interest rates on bank deposits.

Even at the deepest point of Japan’s financial crisis, the country’s central bank shied away from such a measure, which is designed to encourage commercial banks to boost lending. But, as they contemplate their exit strategies after the extraordinary measures of the past two years, central bankers will be monitoring the Swedish experiment closely.

Mervyn King, the Bank of England governor, has hinted he may follow the Swedish example as the danger of a so-called liquidity trap, where cash remains stuck in the banking system and does not filter out to the wider economy, is an increasing concern for the UK.

Hoarding is exactly what happened in Japan earlier this decade when the Bank of Japan implemented quantitative easing between 2001 and 2006. Japanese banks refused to lend, in spite of central bank stimulus, because of fears over the dire state of the economy.

If this continues to happen in other economies, central bankers may be left with little choice but to follow the Swedish example. John Wraith, head of sterling rates product development at RBC Capital Markets, says: “The success of the UK’s quantitative easing experiment hinges a lot on whether the banks will use the extra money they are getting for lending to individuals and businesses. “If there is no sign of this over the next few months, then the Bank of England might consider a negative interest rate. In essence, it is a fine on banks that refuse to lend.”

READ MORE…

Tags: bank of england, central bankers, China, FOMC, gold, precious metals, Riksbank, Swedish

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The American people are receiving a true education from our president regarding the various uses of the baffling word that is ‘Change‘.

And that brings me to the next use of the word ‘change‘. If anyone actually believed that Obama was going to change Washington then I respectfully request you review the phrase, ‘A leopard can’t change its spots.”

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Tags: ben bernanke, central bankers, China, Not Categorized, obama, tax increases, UK

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Emerging markets have seen explosive growth over the past decade, but with the recent contraction in the global economy, investors have a chance to look at real growth in individual markets. There is no doubt in my mind that the boom over the past couple of years in some countries were due to insatiable

investors overbuying in whatever country the talking heads mentioned. However, as the global economy worsened over 2008 and the first part of 2009, investors switched from the greed mentality and into a fearful and defensive position. Investors began pulling capital out of the emerging markets around the world, and what is left in these economies is real growth in GDP.

Investors now have a chance to analyze the fundamentals of the emerging markets and look for real potential value. Some of the markets stood up, while others folded to the economic pressure. MSCI Barra provides country specific indices based on equities listed by a specific country. The MSCI China Standard Core and the MSCI Brazil Standard Core have already doubled from their lows in October and November respectively. China is up almost 10 percent for the past year, but Brazil is down 13 percent over the same period. The MSCI India Standard Core is up almost 100 percent since its low in March of this year but is down almost 10 percent since August of last year. India has made it difficult for individual foreign investors to invest in Indian equity. Russia is struggling to recover as the MSCI Russia Standard Core is down almost 50 percent from this time last year.

As the market has started recovering over the past couple of months, many of these emerging markets are recovering quickly. Most of the emerging markets listed by MSCI are up 30 to 60 percent year to date, but hopefully investors will be weary of overbuying into emerging market funds just because it’s trendy. Hopefully, as a global society, we can stop to get our breath and think about building the economy back based on innovation, ingenuity, and real growth.

Tags: Brazil, China, Emerging Market, etf, hedge fund, Index, india, Not Categorized, Russia

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- If you don’t read the newspaper you are uninformed, if you do read the newspaper you are misinformed. –Mark Twain

I’m sorry did I just write something? I must have been dreaming. Tax breaks would help everyone equally and this would never do for those controlling Washington. Government handouts, in the form of “stimulus”, can be directed at special interest groups and those who donate to political campaigns. Did you really believe Obama’s campaign promise to rid Washington of lobbyists and special interests? If, so then you must go directly to jail without passing go or collecting $200. Your punishment for naivete: stay in jail until the Community Chest gets around to authorizing a “get out of jail free” card. This authorization should take about as long as it takes for the stimulus package to actually stimulate. My advice: bring a good book. Something written by Thomas Sowell perhaps such as “The Housing Boom and Bust”.

Stalled stimulus programs deter investments in renewable energy - WSJ
WSJ reports the U.S. government stimulus package passed in February promised to reinvigorate the renewable-energy industry with new capital and programs, but the prospect of large flows of government money to the industry is holding up private-sector investment. New incentive programs haven’t yet been defined, and uncertainty about program rules has deterred investors from backing companies that also may get government money. At the same time, companies are holding off from accepting private capital because of the possibility of getting it more cheaply from the government. “It artificially slowed the recovery,” Matt Cheney, chief executive of Renewable Ventures, the U.S. subsidiary of Fotowatio SL, a Spanish developer of renewable-energy projects, said of the stimulus plan.

Reality vs. “Green Shoot” Redux…Combine this story with the commercial real estate story from the 7/8 post and you get a good idea of the real headwinds facing economic recovery.

Subprime resurfaces as housing-market woe – WSJ
WSJ reports the U.S. housing market is facing new downward pressure as holders of subprime-mortgage bonds flood the market with foreclosed homes at prices that are much lower than where many banks are willing to sell. While nationwide figures are scarce, a review of thousands of foreclosures in the Atlanta area shows that trusts managing pools of securitized mortgages sold six times as many properties as banks during the six months ended March 31. And homes dumped by subprime bondholders sold for thousands of dollars less on average than bank-owned properties, the data show.

Experts say this is a bad omen for residential real-estate prices and homeowners trying to sell or refinance, because the fire sales, many to cover soured subprime loans, put downward pressure on the value of nearby homes. All of this undermines federal efforts to stabilize the housing market and revive the broader economy. “While the banks are trying frantically to get loans off their books, they face the problem of large shadow inventories of housing being dumped on the market, which would depress prices further,” said Anthony Sanders, real-estate finance professor at George Mason University in Fairfax, Va.

RCM Comment: I continue to run these stories about the US$ because you must appreciate that change is coming and protect your assets accordingly. Should you need help devising a plan may I suggest you visit our website. I will also entertain any and all questions as promptly as possible whether they are received via blog comments, email or phone.

China attacks dollar’s dominance - Financial Times
Financial Times reports China has launched its highest-profile criticism of the dominant role of the US dollar as a global reserve currency at a meeting of the world’s biggest economies. Dai Bingguo, Chinese state counselor, raised the issue on Thursday when he joined the leaders of four other emerging economies for talks with the leaders of the Group of Eight industrialized nations — including US President Barack Obama — in L’Aquila. The remarks, in front of Mr Obama, caused concern among western leaders, some of whom fear that even discussion of long-term currency issues could unsettle markets and undercut economic recovery.

Gordon Brown, Britain’s prime minister, said he did not remember Mr Dai making the remarks. But he said the focus should be on moving the world out of recession. “We don’t want to give the impression that big change is around the corner and the present arrangements will be destabilized,” said Mr Brown. (In other words, Gordon would rather lie about the situation than give an honest impression.)

“We should have a better system for reserve currency issuance and regulation, so that we can maintain relative stability of major reserve currencies exchange rates and promote a diversified and rational international reserve currency system,” said Mr Dai, according to the Chinese foreign ministry. While he did not name the dollar, Mr Dai was unequivocal in calling for the world to diversify the reserve currency system and aim at relatively stable exchange rates among leading currencies.

Tags: ACORN, China, dollar dominance, housing boom and bust, housing market, mark twain, renewable energy, Stimulus spending, subprime, thomas sowell

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Instead of wasting time arguing about the inevitable and fearing the fallout let’s position the portfolio to benefit: Short US Treasuries (Long TBT) as the spending increases make it impossible to keep rates under control. Short US$ (Long UDN) as the talk of a new settlement currency turns into reality, and long precious metals as currency devaluation drives asset prices higher. Repeat after me: inflation is a currency event not an economic event.

China officials call for displacing dollar, in time – Reuters
Reuters reports the financial crisis has laid bare defects in the dollar-led global economy and the world should look to displace the U.S. currency, even if that will take many years, Chinese officials said in comments published on Monday. The push for fundamental, if gradual, reform of the international financial system comes just before the Group of Eight summit in Italy, where China’s willingness to question the dollar’s role could fuel debate. The Special Drawing Right, a unit of account used by the International Monetary Fund, presents a viable alternative to the dollar as a global reserve currency, said Li Ruogu, chairman of the Export-Import Bank of China, a major state-run bank. “It is a feasible plan to reform the present SDR and make it into a real settlement currency, a universally accepted ‘currency basket’ that would replace the dollar at the heart of the monetary system,” Li was cited as saying in Financial News, a newspaper published by the central bank.

China begins pilot program to settle trade in Renminbi - NY Times
NY Times reports China has officially opened a pilot program to allow companies to settle imports and exports in renminbi in selected regions, marking a major step toward eventually internationalizing the Chinese currency. Three pairs of Shanghai companies with their Hong Kong and Indonesian counterparts signed contracts on Monday to be the first to settle business deals in the Chinese currency. Executives said the move would save costs and avoid exchange rate risks. Bank of China and Bank of Communications were the first lenders to clear transactions in renminbi, considered a lucrative business given China’s expanding economy and huge presence in international trade. Hong Kong also kicked off the long-awaited yuan settlement program on Monday. HSBC said it completed its first renminbi trade settlement with Shanghai and its first cross-border credit transaction.

India open to discussing dollar’s status as reserve - Reuters
Reuters reports India is willing to discuss proposals to replace the U.S. dollar as the global reserve currency, Foreign Secretary Shivshankar Menon said on Monday. “This would be one of the ideas which is on the table. There have been ideas expressed and we are ready to discuss all of them,” Menon told reporters when asked if India would consider replacing the dollar.

Calls grow to increase stimulus spending - WSJ
WSJ reports Vice President Joe Biden said the Obama administration “misread how bad the economy was” and didn’t foresee unemployment levels nearing double digits, in comments likely to intensify calls for the administration to do more to counter job losses… White House economists are discussing whether a second round of stimulus is needed, but a decision isn’t expected until at least the fall. “We remain focused on putting thousands of Americans back to work” through implementation of the February stimulus act, an administration official said Sunday. “Any discussion of a second stimulus is premature at this point.” That timetable isn’t fast enough for some economists, who say quick action is necessary to avoid a protracted period of joblessness. “A second stimulus should be the one they should have done the first time, something that is relatively fast and thoughtful,” said Phillip Swagel, a professor at Georgetown University’s McDonough School of Business. So far, though, politicians of both parties are showing little eagerness to tackle another stimulus bill. Republicans have attacked the current stimulus package as wasteful and ineffective, labeling it as government bloat at a time of record deficits. As the GOP seeks to reclaim the mantle of fiscal discipline, many are loath to support another round of government spending. Many Democrats, too, said they’re disappointed with the recovery program so far but, for now at least, are resisting calls for a second package.

Tags: China, india, renminbi, Special drawing rights, Stimulus spending

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RCM Comments: With all the noise about bailouts and payouts and market rallies, I’m afraid you may be distracted from perhaps the most important story brewing. We have highlighted in these pages more than once over the last few months the importance of the movement coming from China to impose its will on the world financial community. Please read these two stories closely. A move away from the US$ as the reserve currency will be destructive for the value of the US$ and US treasury bonds prices as well as bullish for gold prices.

China takes aim at dollar – WSJ
The Wall Street Journal reports China called for the creation of a new currency to eventually replace the dollar as the world’s standard, proposing a sweeping overhaul of global finance that reflects developing nations’ growing unhappiness with the U.S. role in the world economy. The unusual proposal, made by central bank governor Zhou Xiaochuan in an essay released Monday in Beijing, is part of China’s increasingly assertive approach to shaping the global response to the financial crisis. Mr. Zhou’s proposal comes amid preparations for a summit of the world’s industrial and developing nations, the Group of 20, in London next week. At past such meetings, developed nations have criticized China’s economic and currency policies. This time, China is on the offensive, backed by other emerging economies such as Russia in making clear they want a global economic order less dominated by the U.S. and other wealthy nations. However, the technical and political hurdles to implementing China’s recommendation are enormous, so even if backed by other nations, the proposal is unlikely to change the dollar’s role in the short term. Central banks around the world hold more U.S. dollars and dollar securities than they do assets denominated in any other individual foreign currency. Such reserves can be used to stabilize the value of the central banks’ domestic currencies. John Lipsky, the IMF’s deputy managing director, said the Chinese proposal should be treated seriously. “It reflects officials’ concerns about improving the stability of the financial system,” he said. “It’s interesting because of China’s unique position, and because the governor put it in a measured and considered way.”

Official says China to continue buying U.S. debt : AP reports China will continue buying U.S. government debt while paying close attention to possible fluctuations in the value of those assets, a vice governor of Beijing’s central bank said Monday. Investing in U.S. Treasury bills is ”an important component part of China’s foreign currency reserve investments,” People’s Bank of China Vice Governor Hu Xiaolian said at a news conference on Monday. ”So as an important component we are naturally relatively concerned with the safety and profitability of U.S. government bonds,” Hu said — a statement apparently aimed at concerns that rising debt to fund Washington’s stimulus package could spur inflation and weaken the dollar.

Tags: China, debt, US Reserve, US$

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A quick update to the post on Friday the 13th:

I wrote last Friday that this week’s action would hold some of the keys to unlock the true direction of the markets going forward. Dead cat bounce or a real change in direction? That is the question that needs answering.

Allow me to begin by writing that real changes don’t happen in a week and time is needed to prove out any new trend. This is why we at Rosenthal Capital Management have a discipline of leaning in the direction we believe the markets are taking as opposed to plunging. Then we watch closely for signposts along our path that validate our thinking and act accordingly. If we don’t receive the correct feedback we reassess and live to fight another day. Make no mistake, it is this discipline, among others, that allowed us to not only survive the bear market mauling of 2008 but even prosper.

Today, we are officially leaning towards a more bullish stance. Last week I mentioned the G20 meeting and options expiration as reasons for volatility this week. Both have had their impact, but perhaps the biggest game changer was revealed by the Fed. The announcement by Helicopter Ben and the Fed to buy US debt had the effect of pushing the US equity indices (DOW, S&P500, NASD Comp.) above key areas of resistance. These markets have now broken downtrends on volume and notice must be taken. Furthermore, the group with the highest ranking out of 197 William O’Neil groups exploded higher. If the markets are going to trend higher leadership must develop and this is a good first step. Shame on you if you need to inquire as to what group I am referring. I invite all avid readers of this blog, owners of any of the Fortune’s Favor Family of Funds and all others working with Rosenthal Capital Management to join me and say, THE NUMBER ONE GROUP IS PRECIOUS METALS.

On the 13th I wrote: “a solid long position in gold…a short of the US$ and US Treasury Bonds…”

Due to the events of this week we bore witness to a dramatic move higher in gold prices and a serious plunge down in the value of the greenback. However, when the Fed announced its intent to “buy $300 billion of long-term US treasuries” the knee-jerk reaction was to put a serious bid in Treasury prices. I want to be very clear: this does not change our opinion on the direction Treasuries will inevitably take. We believe that this move up in price/down in yield, for US debt will give way when the realization that a devaluing of the US$ makes this debt less attractive. Higher yields must be demanded when the underlying currency is losing value. Furthermore, I’d like to call to your attention once again to the issues China has been raising about US debt obligations. We would not be surprised at all to see stories written in the coming months that the Fed has been the bidder on US debt the Chinese have been selling.

I will end by writing that if a bottom of sorts has been reached there is no need to be the first to take the plunge. Be careful, market bottoms take time to develop and often require retests of lows, which can be painful. Continue to focus on leadership and accumulate opportunistically.

Tags: bullish, China, Fed, market bottom, market reversal, precious metals, U.S. Debt

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RCM Comment: So, the debate continues to rage: Is this a dead cat bounce or the beginning of the next bull market? Next week’s action will be very telling due to a confluence of events sure to impact traders. The G20 meeting this weekend (bound to focus on currency manipulation), supposed start of the TALF program, and options expiration on Friday all have the potential to create volatility. The following stories shed some light on the issues.

LONDON, March 12 (Reuters) -

Gold jumped more than 2 percent on Thursday, boosted after the Swiss National Bank sold francs against the euro and raised the spectre of a race to devalue major currencies. Analysts said the SNB intervention means one of the world’s safest currencies is being deliberately undermined to help boost growth and that other countries could follow. “If all currencies are being devalued against each other then gold is a currency which is going to profit from it,” Commerzbank analyst Eugen Weinberg said. “So we have bad currencies, worse currencies and the worst currencies, and gold could be an alternative stable currency in this case.” Spot gold rallied to a high of $930.45 and was quoted at $923.45/924.95 an ounce at 1444 GMT from $906.65 late in New York on Wednesday. U.S. gold futures for April delivery on the COMEX division of the New York Mercantile Exchange rose $14.20 to $924.90 an ounce. The Swiss franc had its biggest ever one-day drop against the euro after the SNB said it had sold francs as part of a drive to boost the economy, which also includes an interest rate cut and planned bond buy. “The SNB have now fired the first formal shot in the forthcoming currency war,” ING Bank said in a note.

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Tags: China, Privateer, TALF

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