Tuesday, April 6, 2010

Playing Chicken With The Chinese

It’s possible the economy is commencing a powerful new upturn, but why should it? One third of the country lives off food stamps, one quarter of the country has negative equity in their homes and one sixth of the country can’t find a job. Each of these statistics is a record – or close to it.
-Eric Fry, The Daily Reckoning

Why Else Would Anyone Lend the Feds Money or Back their Health Care Bill?
by Bill Bonner, The Daily Reckoning
We are expected to believe six impossible things before breakfast, and another half dozen before lunch.

"...the current rebound in the economy is a statistical mirage," writes David Rosenberg. It is "orchestrated by record amounts of monetary and fiscal stimulus that are simply unsustainable and actually risk precipitating a very unstable financial and economic backdrop in coming years."

But investors and voters seem willing to believe anything. Why else would anyone lend the feds money...or back their 2,400-page health care 'reform' bill?

We're expected to believe that the same feds who couldn't see the subprime fastball coming...

..and who struck out completely when they started to get overleveraged curve balls coming their way (they thought derivatives made the system more stable!)...

..have now hit a home run, with the bases loaded.

Yes, we're expected to believe that the bad news bears - Bernanke, Summers, Geithner et al - have now won the World Series...by not only preventing a depression...but putting the economy back on track for growth and prosperity.

And now the feds are going to improve the whole system of health care, too. And we're expected to believe that the $1 trillion program will not cost us a cent...and that the deficit will actually go down...that insurance companies will charge less...that doctors and nurses will work harder...that cripples will walk...that the blind will see...and that even teenagers with acne will suddenly have peachy-perfect skin.

We're also expected to believe the Greek's debt problems have gone away (thanks to a deal cut with the Germans)...and that America's debt problems never even existed.

Why else would so many people lend the US so much money at such low interest rates?

Yes, dear reader, the crisis of '07-'09 gave us a fright. But it's all behind us now. How do we know? We just read the paper!


“Let me get this straight. We’re going to be gifted with a health care plan written by a committee whose chairman says he doesn’t understand it, passed by a Congress that hasn’t read it but exempts themselves from it, to be signed by a president who also hasn’t read it and who smokes, with funding administered by a treasury chief who didn’t pay his taxes, to be overseen by a surgeon general who is obese, and financed by a country that’s broke. What the hell could possibly go wrong?”
-origin unknown

Interest rates rise on further signs of growth
NEW YORK (AP) -- Interest rates rose Monday in the bond market on fresh signs the economy is continuing its slow, steady recovery.

The yield on the 10-year Treasury rose note briefly touched 4 percent for the first time in intraday trading since June. It hasn't ended the day above 4 percent since before the credit crisis erupted in late 2008. The yield is often used as a benchmark for consumer loans.

Monday's yield on the 10-year note was its highest since October 2008 when it hit 4.09 percent. That came just before the credit crisis peaked and investors bought up safe Treasurys, sending yields plummeting. The yield fell as low as 2.06 percent by December 2008 before slowly starting to recover.

Treasury yields have been rising recently because of weak demand at new auctions and continued signs of economic growth. Yields typically rise and prices fall when the economy improves because investors will pull money out of safe, government-backed bonds and opt for riskier investments, like stocks, that have the potential for bigger returns.

Inflation also typically increases when the economy is strong, so Treasury yields and interest rates must move higher to keep pace.

The government auctioned $8 billion of Treasury Inflation-Protected Securities, or TIPS, Monday. The bid-to-cover ratio was 3.43, much stronger than the demand seen for TIPS in January and February. Demand for the notes can climb when inflation is a concern since it protects investments from rising prices.


Treasury appetite seen waning
Allan Robinson
The price of 10-year U.S. Treasuries has fallen sharply during the past five days as investors eye a heavy week of government bond auctions – but the rise in yields can also be viewed as a positive omen.

This was the seventh time in 10 months that the 4-per-cent threshold has been challenged, said David Rosenberg, chief economist and strategist with Gluskin Sheff + Associates Inc.

Some attribute the rise in the yield to recent U.S. government bond auctions, which indicate investors may be becoming fatigued and are losing their appetite for Treasuries. Some are concerned about rising U.S. debt levels, and that's pushing prices down and yields up.

This week should be another good test of that thesis. Today, the U.S. Treasury will auction $40-billion (U.S.) in three-year notes, followed by the sale of $21-billion in 10-year bonds tomorrow and $13-billion in 30-year notes on Thursday. However, there is a bright side.

“The data show that the economic recovery has momentum and the Treasury market is starting to price that in,” said Michael Pond, an interest-rate strategist for Barclays PLC, told Bloomberg News.

“It's a potent combination of an economic recovery and fiscal concerns all at once,” said Eric Lascelles, chief economics and rates strategist with TD Securities Inc. “The 4-per-cent level has come sooner than expected. But our view is that there will be an upward trudge [in yields] over the next year.”


The only thing growing in this economy is the noses on the faces of government officials touting a "recovery". That, and the growing risk of debt default from coast-to-coast. Interest rates are NOT rising because of new "signs" that the recovery is gaining momentum, that is pure financial news media pablum. Interest rates are rising because the supply of US Treasury debt is overwhelming demand. $82 BILLION of new debt comes to market just this week alone.

April 15 is not only Tax Day, it was supposed to be the day the US Treasury released its report on global exchange-rate policies. That report has been postponed. Suspicions abound as to why it has been "delayed". My suspicion is that it DOES name China a currency manipulator, but the US Government is hopeful that China will decide "on their own" to allow their currency to rise.

I suspect that the "failed" bond auctions two weeks ago were a "coded message" by the Chinese inferring that if the US Government names China a currency manipulator it could have serious implications for the US Treasury Bond market going forward. Interest rates over the past ten days have risen to a tipping point with the 10-year bond again flirting with the 4% yield line. China has pushed Washington's back to the wall, and now we wait to see who will blink first. A currency war is already ongoing, and threatening to escalate. The USA owns a printing press, but the Chinese own the nukes in this war.

Summers Says ‘Dialogue’ Reason for Exchange-Rate Report Delay
April 4 (Bloomberg) -- White House economic adviser Lawrence Summers said delaying a report to Congress that would include determining whether China manipulates its currency will allow the U.S. to better gauge the Asian nation’s progress in pursuing more balanced trade and global growth.

Treasury Secretary Timothy F. Geithner yesterday said the U.S. will postpone a scheduled April 15 report on global exchange-rate policies. The Obama administration is facing demands from Congress to label China as a currency manipulator for keeping the value of the yuan little changed from about 6.83 to the dollar for almost two years.

“It’s being delayed because that’s part of our international economic dialogue directed at supporting the crucial issue for job creation, doubling our level of exports and that depends on what other countries do,” Summers, director of President Barack Obama’s National Economic Council, said today in an interview on ABC’s “This Week” program.

Summers, 55, said today on CNN that three upcoming international meetings, including economic discussions with China, are “where we’re going to be pursuing these issues with a great deal of vigor over the next several months.”

Geithner said April 2 that Chinese President Hu Jintao’s visit April 12-13, along with a meeting of Group of 20 finance ministers and central bank governors this month and a U.S.-China Strategic and Economic Dialogue scheduled for May, will offer “the best avenue for addressing U.S. interests at this time.”

“No one can be satisfied with where we are,” Summers said about the overall U.S. trade gap. “This is going to be a continued focus for us going forward. We’re focusing on increasing our exports.”

Senator Arlen Specter, a Democrat from Pennsylvania, said he was disappointed by Geithner’s decision.

“I’m not too happy about the delay,” Specter said on Fox News Sunday. “We have a real problem with the Chinese. They are very shrewd and customarily, they outmaneuver us. They take our jobs. They take our money and then they lend it back to us and own a big part of America.”

The Treasury secretary is betting that China will take steps in coming months to strengthen its currency, making Chinese-made goods more expensive and allowing U.S. companies to become more competitive.

“These issues of China and other countries of treating the U.S. as the ultimate importer and not taking our products are issues we are totally committed to addressing,” Summers said on CNN.


White House: Iran not why currency report delayed
WASHINGTON — The White House denies any connection between delaying a report on China's currency policies and seeking China's cooperation on new penalties against Iran for its nuclear program.

The report to Congress was due April 15 — just as China's president comes to Washington for a nuclear security summit.

Treasury Secretary Timothy Geithner said Saturday he was delaying publication because several high-level international meetings in the coming months would be a better way to advance the U.S. position.

White House economic adviser Lawrence Summers tells ABC's "This Week" that the Iran matter isn't causing the delay and that those meetings are a good way to have a direct dialogue with the Chinese.


Yuan revaluation "China's choice": Geithner
NEW DELHI/BEIJING (Reuters) - U.S. Treasury Secretary Timothy Geithner said he was confident that China would see that it is in its own interest to make the yuan more flexible, while Beijing stoutly defended its currency policy.

Geithner, who said global economic recovery "looks quite strong now," also said on Tuesday it was "China's choice" whether or not it revalues the yuan.

"As I said before and I'll say it again, but I want to make sure I am repeating myself, I am confident that China will decide it's in their interest to resume the move to a more flexible exchange rate that they began some years ago and suspended in the midst of the crisis," he told India's NDTV.

In Beijing, a Foreign Ministry spokeswoman and two government economists held out the prospect of the yuan being allowed to resume its rise after a 20-month pause but said at separate briefings that China would proceed with caution and on its own terms.

"We don't want to see our exchange rate kept unchanged," said Zhang Yansheng, director-general of the Institute for International Economic Research, a think-tank under the National Development and Reform Commission, a powerful planning agency.

Making the yuan more flexible was a challenging task, not least because of a lack of hedging instruments in China and domestic companies' lack of experience in handling a fluctuating exchange rate, the economist said.

With U.S. unemployment near 10 percent, President Barack Obama is under pressure from Congress to persuade Beijing to allow the yuan to appreciate.

Geithner over the weekend decided to delay a report on whether China manipulates its currency, pledging to work instead through the Group of 20 economies and other multilateral meetings to press for more currency flexibility.

Earlier on Tuesday, a Chinese Foreign Ministry spokeswoman said China never manipulates the yuan and rejected the argument that a firmer yuan would reduce the U.S. trade deficit with China -- indicating that Geithner's decision may not have eased tensions over the issue.


Its a dangerous game of currency chicken now. If the US wins, China revalues the yuan, and the Dollar falls. If China wins, the Chinese continue selling US Treasury Debt, and the Dollar falls. The big winner in this currency war ultimately will be Gold.

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