Wednesday, June 30, 2010

Economic Recovery Knocking At Death's Door

With the 10-year Treasury yield now below 3%, and the 30-year below 4%, the bond market is making a statement: this economy is getting bad.

But I thought we were in the midst of a recovery? The President said so. The Fed chairman said so. The Treasury secretary said so. CNBC says so every morning.

Only in The Land Of Oz grasshopper.

Treasuries Have Best First Half in 15 Years on Risk Aversion
By Lukanyo Mnyanda and Wes Goodman
June 30 (Bloomberg) -- Treasuries headed for their best first half in 15 years, with two-year yields near a record low, as tumbling stocks drove demand for the safest securities amid concern the economic recovery is stalling.

Two-year securities were little changed today after rising in each of the previous three days. A U.S. report today will probably show business activity expanded at a slower pace, according to a Bloomberg survey of economists, while an employment report in two days is forecast to show more than 100,000 job losses. Treasuries returned 5.8 percent in the first six months of 2010, Bank of America Merrill Lynch indexes show, while the MSCI World Index of shares plunged 10.4 percent.

“The market is starting to become more pessimistic about the growth outlook next year, probably not yet playing double- dip, but at least quite a weak economic scenario,” said Kornelius Purps, a fixed-income strategist at UniCredit SpA in Munich. “It will depend very much on the labor market report whether we will keep these low yield levels.”

Risk aversion? How is buying the debt of a completely bankrupt nation considered an aversion to risk? Buying US debt might just be the riskiest investment available to investors today.

ADP Employment Report Disappoints
Private sector jobs increased less than expected in June signaling that there is little hope for a turnaround in employment in the near future for the millions of American out of work following the recession.

According to the ADP National Employment Report, nonfarm private employment increased 13,000 this month, after a revised increase of 57,000 in May, which was previously reported up 55,000.

Economists were looking for a much brighter increase of 60,000 this month.

The rise in June was the fifth consecutive month of gains for the report, but the increase have average a minimal 34,000 over that time, as the ADP suggests that private employment may have decelerated heading into the summer months.

The ADP report includes only private sector jobs, while the Bureau of Labor Statistics will release its payroll data on Friday, which includes government workers.

The BLS report is expected to show a drop of 110,000 jobs, as the government lays off the hundreds of thousands of workers hired to conduct the census. The June unemployment rate is expected to inch up to 9.8 percent from 9.7 percent in May.

Fed officials see high unemployment for years
CHICAGO (Reuters) - Unemployment is likely to stay high for a long time, two Federal Reserve officials said on Wednesday, suggesting the U.S. central bank is in no rush to raise its ultra-low interest-rate policy.

I guess interest rates will remain low if these jobs prognostications prove accurate. Hmmm...low interest rates bad for US Dollar...good for Gold. Or so one would think. Perhaps barring the Gold Cartel's persistent manipulation of the price of Gold. Oh, what am I thinking, Gold actually be allowed to perform in a free market based purely on fundamentals?

Dollar Faces Perfect Storm
By: Rick Ackerman, Rick's Picks
China Makes Good on Flexibility Vow – Yuan Falls”. As if any of the central banks actually support flexible markets. If it had been Hitler’s invasion of Poland that was being reported, the headline might have read, “Hitler Makes Good on Vow to Seek More Room for Germany”.

Recall that U.S. stocks got barely any lift from the news. Abetted by short sellers caught on the ropes last Sunday night, DaBoyz and their pigeons were able to pretend for only a few hours that China’s decision to let the yuan rise was good news. Stocks all around the world rallied sharply if fleetingly, but by Monday morning most traders seem to have figured out that a pricier yen would subject global financial markets, particularly the U.S. dollar, to killing stress. The Dow Industrials fell steadily for the rest of the week, failing to attract even one decent short-squeeze rally the whole way down. Ominous.

And here’s why: Imagine everything the U.S. and the rest of the world buys from China costing more. Then imagine China’s exports falling as a consequence, leaving the country with far fewer dollars to buy U.S. Treasury debt. Well, it is no longer something that needs to be imagined, for that is exactly what China intends. With the nation’s foreign currency reserves edging toward $3 trillion, most of that in U.S. dollars, it was time for China put an end to a greenback-support operation that had long since grown beyond the bounds of sanity. That is not to say, however, that Chinese support for the dollar has outgrown its usefulness, for the arrangement has given the U.S. Treasury the appearance of solvency, freeing up easy credit for U.S. consumers with an insatiable hunger for Chinese goods.

All of that is about to change, though, and with it the status of the dollar as the world’s reserve currency. We find it remarkable under the circumstances that, a week after China’s decision, the dollar has yet to implode — nor Gold to erupt, presumably with sufficient force to leave the $1300 threshold behind in a cloud of dust. It is difficult to think that both of these things will not occur, although it may take a shift in the sheep-like behavior of money managers, since they are deeply conditioned to believe that the dollar and Treasury paper are “safe havens” even though a U.S. without recourse to printing-press money would look far worse than that supposed financial basket case, Greece.

With both Europe and Japan abandoning deficit spending as means of spurring their moribund economies, the U.S. dollar can only fall, and gold rise, as the former confronts a perfect storm of tough comparisons and bad tidings. This will happen even with the support of a dying coterie of money managers who may pretend for yet a little while longer that black is white and that 1 + 1 = 3. It is predictable that they will all have their epiphany at once. When that day arrives, investors who are hedged with gold will be able to ponder the consequences with serene detachment.

The Chinese Yuan revaluation story is being ignored by the financial news media. Probably because they misunderstand the implications of it. A revaluation higher in the Yuan is very bad for the US Dollar...AND VERY GOOD FOR GOLD. The markets initial positive reaction to the "news" that China would allow it's currency to rise was Euphoria. This Euphoria quickly turned into a Bronx Cheer as the realization that this Chinese currency move is not the financial panacea that US politicians proclaim it will be.

China Yuan Up Late At Modern-Era High On Banks' Demand
SHANGHAI (Dow Jones)--China's yuan rose to another modern-era high against the U.S. dollar late Wednesday afternoon because of strong demand from banks for their corporate clients, while month-end dollar demand waned.

The yuan rose despite the People's Bank of China setting a slightly higher dollar-yuan central parity rate for the third consecutive session. The dollar-yuan fixing is the daily mid-point around which the spot rate is allowed to trade up or down by as much as 0.5%. Traders said lingering hopes for yuan appreciation against the dollar in the near term and a small rebound in the euro against the dollar partly drove demand for the local currency.

On the over-the-counter market, the dollar was at CNY6.7814 around 0930 GMT, representing the yuan's strongest settlement level in the onshore spot market against the dollar since the 1980s, before the currency was allowed to be traded as part of China's market-oriented reforms. The dollar settled at CNY6.7977 Tuesday. It traded between CNY6.7801, a modern-era intraday low, and CNY6.7981.

The central bank set the dollar-yuan central parity rate at 6.7909, up from 6.7901 Tuesday and 6.7890 Monday, after the dollar rose against the euro overnight.

The euro fell to $1.2196 in late New York trade Tuesday, down from $1.2276 Monday. But the currency had risen to $1.2264 around 0930 GMT.

"The dollar selling was quite heavy," said a Shenzhen-based trader at a local bank. "People anticipate a certain degree of yuan appreciation in the medium term, and they feel that it's a good level to sell dollars against the yuan today because the dollar-yuan central parity rate is well above 6.7900."

Yuan demand intensified late in the afternoon, when state-run banks were seen bidding for the yuan in heavy volume, said a Guangzhou-based trader at a local bank. But traders said unlike last week, there weren't obvious signs of central bank-guided flows in the market.

"We saw mostly large state-owned banks selling dollars," a trader said, "but they could have been selling on behalf of their clients."

It is important to point out the proven implications to the Gold market in lieu of a Chinese Yuan revaluation. In June of 2005, China announced a revaluation higher in the Yuan. Gold's reaction was not only positive, but astonishing.

In June of 2005, Gold was trading at $435. The Gold price had been capped at $450 since February of 2004. Upon announcement of the Chinese Yuan revaluation in June 2005, Gold responded with a surge through $450 in August of 2005...and NEVER looked back.

Gold's rise did not pause until it's Spring 2006 correction at $650. Gold continued to rise until peaking in January 2008 at $975. China repegged the Yuan to the Dollar in June of 2008, whereupon Gold corrected by $225. The recent runup in Gold from the $681 low in the Fall of 2008, to $1265, has occured with the Yuan pegged to the Dollar. Gold bulls should be licking their chops at Chinese easing of the Yuan's Dollar peg.

Financial Markets React to G20 Confusing Conclusion
By: PhilStockWorld
We’re going to cut those deficits… As soon as we’re done spending more money!

That’s the conclusion of the G20 summit this weekend as
the official statement says:

While growth is returning, the recovery is uneven and fragile, unemployment in many countries remains at unacceptable levels and the social impact of the crisis is still widely felt. Strengthening the recovery is key. To sustain recovery, we need to follow through on delivering existing stimulus plans, while working to create the conditions for robust private demand. At the same time, recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances.

Those countries with serious fiscal challenges need to accelerate the pace of consolidation. This should be combined with efforts to rebalance global demand to help ensure global growth continues on a sustainable path. Further progress is also required on financial repair and reform to increase the transparency and strengthen the balance sheets of our financial institutions, and support credit availability and rapid growth, including in the real economy. We took new steps to build a better regulated and more resilient financial system that serves the needs of our citizens. There is also a pressing need to complete the reforms of the international financial institutions.

There’s 26 pages of this nonsense but the gist of it is: We promise to keep bailing out the economies but as soon as that’s done then we are right on top of this deficit thing. Of course, the underlying assumption there is that the bailouts are working in the first place - something that is difficult to convince the World’s 500M unemployed workers, who would rather have jobs than a robust banking system. From a global perspective, our short-term outlook is less than robust so far:

Could these buffoons have come up with a more POSITVE Gold statement? Unlikely. Gold's response to this nonsense was precise Sunday night in Asia and Europe. The Gold Cartel felt otherwise, and quickly shut the door on the price of Gold as it hit an ALL-TIME high in the London PM Gold Fix Monday. Gold fell hard through the CRIMEX trading day Monday and into the CRIMEX open on Tuesday

The CRIMEX Gold bulls wouldn't have any of the Gold Cartel's rebuke, and promptly bid Gold off it's Tuesday morning lows in what may be another major reversal of another attempted takedown by the Gold Cartel.

After rising overnight from Tuesday into Wednesday, the Gold Cartel felt it necessary to try and chop Gold once again. But the Gold bulls stuffed them with vigor. The CRIMEX goons are out of sinks to toss at the market, and the Gold bulls appear to be herding for a stampede. If you are short this Gold market, in this environment, step aside or prepare to become part of the pavement.

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