China Worried about US Debt - The making of a Powerhouse

Richard Fisher, head of the Federal Reserve Bank in Dallas, Texas – one of the US’s largest states – told a British Newspaper yesterday that the Chinese are incredibly concerned over the US governments handling of the financial crisis, specifically, the printing of money by way of the Federal Reserve buying US government bonds, treasury bills and notes. For those of you that don’t know this, when a government wants to increase its cash position, it “lends: itself money by buying up its own debt. I know most of wish we could do that, but if this were the case we would be bankrupt with houses stripped and cars repossessed and the rights to our firstborn taken as well.

This is yet another example of China showing they are worried. Did they come out and tell Ben Bernanke or Tim Geithner, the US Fed Chairman and Treasury Secretary? No. Did they send a letter to Vice President Biden or talk with Secretary of State Clinton? No, and Clinton was just there. Did they address the congressional delegation who came to visit them this week – a delegation that included the speaker of the US House of representatives Nancy Pelosi, AKA the third most powerful person in the US? No. What they did do was take a round about way to let people know they are unhappy with the status of their investment and the way in which the CEO is handling the company. By Company I mean, The US and by CEO I mean Obama.

The Chinese are in a difficult spot, and I have written along these lines before in my Online Forex Blog, you see if they cause a widespread panic in the markets by making such a fuss over this, the value of their investments go down even further. Widespread panic regarding a rating decrease last week showed what it could do, the Dollar fell hard. What would happen if the Chinese leadership addressed the US leadership on this issue directly – it would take away the air of hearsay that exists now through these drips and drabs of media reports.

The Chinese are able to get their message out this way, but not in a way that would cause so much of a stir. Who reads these little interviews aside fro ma few of us boring people with nothing more to do? Wen Jiao Bing calling Obama on the phone to say “yo, what ARE you doing?” will get front page attention on every major newspaper. This way the Chinese get to have their cake without it collapsing on them. The US gets the message. And, I am sure, the US does not care.

Culturally the US and Chinese mindset are worlds apart. The Chinese are savers and conservative by nature fiscally (they also are superstitious), the Americans are care free, “it’ll all work out” type of thinkers – there is no long term.. Hell, the Chinese emperors buried thousands of ceramic soldiers and preserved aspects of their legacy. In May of 2009 they are thinking of 2030, whereas the Americans in May of 2009 are thinking of June.

In the end the Chinese will emerge stronger – this is certain. It happened the same way for the US in 1914 when it was purchasing all the gold it could. China is now doing the same. And where the US became a global leader in the 40’s because of it, China will dominate later on in this Century. Hold on to your Yuan’s, they might be worth something some day.

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My Forex Online Views: Perspective is Everything

So – We saw yesterday that things are not as rosy in Euro land as people thought, I even wrote about it too, but it gets a bit worse. As it happens the German Economy shrank by again the first quarter of 2009 by 3.8% (6.7% for the year) which is the largest decline since the two Germany’s, East and West, were unified in 1990. What this says is that things are still getting worse. To top off that bad news, a German Finance official made a comment about the stability of German banks. He was quoted as saying “the toxic assets will blow up like a grenade” although later he denied saying that --- one listen to the audio that was played on the radio (BBC, of course) confirms that he did not say that. What he did say was “…the bad assets that the banks have on hand are liable to explode like a grenade if it is not addressed in a more aggressive manner.” Sounds the same to me.

In the US, the stock market rallied after consumer confidence numbers rose reflecting that American consumers are optimistic about the future of their shopping. Who wouldn’t be? Have you seen the sales that are going on in the few stores left in America’s big, huge iconic malls? Traders get so excited over the smallest of things. They pumped up the stocks because of consumer confidence but neglected the more alarming data of housing and unemployment. Yesterday also saw the release of housing data which suggests that the price drop in America’s real estate market has not neared a bottom yet – and the forecast from the real estate community is that it won’t any time soon.

Fact is, with the Federal money given out during the stimulus phase, or as I like to call it, hand-out at the expense of taxpayer phase, builders are incentivized to just build. The numbers released yesterday showed that there is a big discrepancy between demand and available units being built. The market is being supplied with 600,000 plus new units – but the demand barely covers 300,000 of them. This alone does not take into consideration what is already on the market, or what is being foreclosed on. This was a housing start data and it showed that the stimulus is only stimulating the builders while the overflow would serve to further lower prices in the communities they are being built in.

Take San Diego County for example; in Oceanside, one of the wealthier, more exclusive areas, there is a house that was built three years ago – beautiful house – 4000 square feet inside – a mini-mansion by many standards which was sold for 1.75 Million Dollars in 2006. The bank took possession of the house and it is now on the market for 600,000 Dollars – almost 1/3rd of the original price.

So, when a consumer sees those prices they get excited and feel optimistic – “I can own that once unreachable house for so much less” – and they tell the pollster who calls them about how they feel and they say, “I feel great, I feel like things are picking up” – but talk to the banks about their toxic assets like the 1.7 million dollar house they are still trying to unload for 600,000 and the picture is completely different.

Those of you reading my Forex Online blogs know better – and if the rest of the trading community could see it – well, perhaps you won’t see these wild swings over nothing.

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Light Trading and Poor Data from Germany Highlights Monday

EUR
On a relatively low volume day, the Euro rose slightly versus the dollar on Monday despite a data release showing German corporate sentiment fell short of market expectations. Traders took the data as a sign that any recovery in the Euro zone's biggest economy would take more time. The German IFO Business Climate Index rose to 84.2, up from 83.7 last month but below the 85 that analysts had predicted. Overall though, the Euro had a decent day.

At 10:15PM GMT, the Euro was up .14% to the USD to 1.4015, up .25% to the British Pound to .8804, up .42% tot he Canadian Dollar to 1.5736, up .17% tot he Australian Dollar to 1.7913 and down .1% to the Swiss Franc to 1.5177.

JPY
The yen returned to the selling pressure that had plagued it for several weeks after news reports confirmed that North Korea had conducted a nuclear test and test-fired three short-range missiles. The occurrence is seen as a negative factor for the currency given the island nation's geographical proximity to Pyongyang, North Korea. Analysts have said though that the downtrend has been exaggerated and that many traders used the North Korean tests as an excuse to unload long positions in the Yen.

At 10:25PM GMT, the Yen was down .3% to the USD to 94.73, down .4% to the Euro to 132.8, down .15% to the British Pound to 150.78, down .21% to the Swiss Franc to 87.5 and down .1% to the Australian Dollar to 74.11.

GBP
British were closed on Monday though the pound did manage to recover slightly after intense selling last week due to Standard & Poor's lowering the outlook for Britain's triple-A credit rating to "negative" from a "stable" rating.

In very light trading the Pound fell .1% to the USD to 1.591, fell .3% to the Swiss Franc to 1.7229 and rose .2% to the Canadian Dollar to 1.7871.

The trading on the Forex was very light Monday, roughly 1/3rd of an average day's trades were conducted. This was due to national holidays in both England and the United States. US and British Banks return to the Forex on today and we should see a return of normal volume.

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The Next Big Thing in the Forex Online Market

The British government was rocked last week, first from the scandal involving the insane spending done by their parliament members and then by the warning from Standard and Poor’s that their credit rating – or should we say debt rating – is in peril of being lowered due to huge budget deficits and a rising national debt not seen since World War 2. Did the Sterling fall though? No, it did not – at least not as much as one would think that a “AAA” rated country would fall after hearing that they will soon be subject to higher interest rates and unfavorable terms that comes with anything less than a “AAA” rating. What did happen was quite fascinating, and it was something that I have been saying here for months. The US Dollar collapsed on the news out of England.

Why? You might ask would the currency of a country across an ocean fall on bad news out of the British Isle’s. The answer is quite simple, Forex traders and investors know that the US is next on the chopping block. Although I firmly believe that they should be first based on their crazy debt to income ratio – they are running at a 12 Trillion Dollar deficit carrying a 1.5 Trillion dollar debt and GDP is expected to fall this year – the Dollar enjoys the privilege of being the Dollar, and thus it gets afforded a little more latitude when it comes to these matters.

But the real reason why the US was not first on this list was political and economic in nature. Lower the sovereign debt of the US and countries holding the bonds suffer. As the US will be faced with higher borrowing rates, and will not be afforded the right to offer so much debt and will be regulated as to the terms (10 year, 20 year 30 year), the value of the currency will fall and thus make the value of the debt already out there worth less. This will have a huge impact on the world economy and is probably one of the reasons why China is pondering accepting the Brazilian Real in trade over the US Dollar.

But one last thing on this, it is ironic though that while this might hurt the rest of the world, it will help the US get out of the mess quicker. By deflating the currency it means that the US has to pay less in order to repay a debt. For example, if China is holding $10 in bonds from 1999 those bonds are still worth $10 today – plus interest, however the value of the dollar is lower than it was in 1999 and so the payments that the US makes will be worth less than they were only a few months ago. Forex online blogsters are buzzing about this – and all those trading in the dollar should be aware that this is coming. Don’t say you were not warned.

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Uncle Sam can Sing Chicken Little's song now – The Sky has Begun to Fall

The seeds are being planted for the removal of the dollar as a reserve or so it seems this fine Tuesday morning. I woke up to read in the Financial Times that both Brazil and China will seek to use their own currencies in trade rather than the popular US Dollar. What this means is that instead of China buying goods from San Paolo using the greenback, the Brazilians will accept the Renminbi and when purchasing goods from Beijing, the Chinese will accept the Real. This has huge implications and I will explain why.

Although this is a small deal between an economic mammoth and a moderate sized country, it opens the doors for other countries to do the same – it sets the precedent. And while it is not necessarily a Chinese or Brazilian declaration that they are ditching the dollar as a reserve, it allows them to begin scaling down their reserves as it is not needed for trade anymore. The Chinese have figured out a smart way to do this, without sticking a huge middle finger up at the US, and without making tsunami sized waves. This will be slow process, a backdoor to redefining the global monetary system without anyone seeing it happen before it is too late.

The US should have expected this, they are 12 Trillion Dollars in the hole and are only worth 14 trillion annually – a number that is certain to decline this year as a result of the slowdown. Being that there are only 800 Billion actual dollars in circulation (not including the fake ones that North Korea has been printing), this puts the US in a position similar to Rome eighteen hundred years ago – a dominant power in the world that those in need turn to for help yet on the inside, they are collapsing financially and are actually the ones in dire need of help.

We have never seen this before so it is hard to derive a historical reference that could give us insight as to how this will play out. But my Forex Online readers and Traders, I refer you to Zimbabwe as an example of what could happen if the proverbial crap hits the fan in the US.

Trade smart – and watch the Dollar today.

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US Retail Sales Fall Unexpectedly, along with UK's Hope for Speedy Recovery

USD

The Dollar rallied late Wednesday after US retail sales showed a .4% decline against what was widely anticipated to be a flat outcome. The Dollar had been down most of the session after a report in the Financial Times said that the US could lose its AAA credit rating. However, renewed fears about the state of the economy were sparked by the sales data, pushing safe-haven flows back into the dollar and lifting the USD out of a four month low against a basket of currencies and a seven week slide against the Euro.

At 11:00PM GMT, the Dollar was up .4% to the Euro to 1.3592, down 1.2% to the Japanese Yen to 95.25, up .8% to 1.5152 versus the Sterling, up 1.16% against the Canadian Dollar to 1.1762 and up 1.75% to the Australian Dollar to .7515.

GBP

The Bank of England announced that they expect a slower recovery than originally predicted. The BOE revealed that inflation remains below the target level and that suggests that the loose monetary policy of the BOE will remain in effect for now. The figures showed a 4.5% decrease in economic activity for the second quarter and predict an early 2010 recovery. UK interest rates remain at a record low .5% and the British government recently expanded their asset purchasing program to 125 Billion Pounds, however Mervyn King, the BOE Governor said that the recovery will be slow and uncertain, highlighting this by declaring "We may get a recovery that will prove to be sustained and then again we might not."

At 11:20PM GMT, the Pound Sterling was down .4% to the Euro to .897, down .7% to the Swiss Franc to 1.6769, down 2.1% to the Japanese Yen to 144.33, up .2% to the Canadian Dollar to 1.78 and up .9% to the Australian Dollar to 2.0145.

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Pound makes a Rebound after Good Economic News

The news from England was great yesterday and yet I still don’t feel secure that we are through this right now, perhaps which is because anything good out of England is great considering the slide they have taken in recent months. The producer prices are better, but their overall production is down which alone would cause a decrease in prices – think about it, if there are less manufacturers bidding for the same supplies, it means there is less of a demand – less demand equals lower prices. So why is everyone celebrating?

Anyway, the Pound rallied on this news yesterday and the British papers have talks about how things are getting better – well are they? The parliament is at near Mutiny stage over crazy things that MP’s charged to the public in the name of “service to the commonwealth” – the banks are teetering on insolvency and would be without the help of the government, or should I say more public money. The manufacturing sector is down and consumer prices are up – so what is the fanfare about?

Ahh, a distraction. Forex online blogs have taken a vacation from the Euro and USD and shifted focus as of late to the Sterling, primarily because there is nothing else going on. IN a hunt to find something good – writers have manufactured another insignificant piece of information into a big deal – perhaps there is an increase in manufacturing and production going on, just maybe not what we really think it is.

So with that, the Pound was up across the board – the Aussie had a good day as well, the Swiss National Bank said that they are still ready to move aggressively against any downturn in the economy and will do so if it is warranted. Absent in Tuesdays trading was the Euro and the USD which went to sleep after weeks of volatile and intense trading. We hope to see them return soon – before the Forex Traders fall asleep.

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My Forex Online Views: You Don't Paint Over a Broken Wall

Monday saw France and Italy come out with industrial production figures that showed a faster and steeper decline than was expected. This data contradicts the banter that the European Central Bank members have been spewing in the news lately that the Eurozone is recovering. If it had been a slight decrease or a slower pace it would not be so alarming for the believers in a quick economic recovery, however the numbers were a shock as it showed that there is a long way to go and that a bottom has not yet been reached in 2 major economies within Europe. Add the fact that 5 banks in Germany are in major trouble and that Eastern Europe is on the brink of financial collapse and you get a picture that is much darker than those charged with managing the Eurozone economy have been painting. Forex Online traders should keep an eye out for this and make their own decisions after reviewing all the facts themselves. IN recent trading, the Euro has been doing well – almost like a safe-haven currency – yet it is my view that the Euro is far from that status and in fact, they are still in big trouble.

Also, one of the largest global banks, HSBC, announced that their earnings for the first quarter were better that for the same period last year. Great news, huh? Not really, they released their data with a comment that basically said that if they had to report everything they reported to achieve those 2008 numbers, they would have ended up with a loss. But, because of changes in the way they report, chiefly the permission to exclude certain investments which are part of the so called “toxic assets” that have plagued banks for so long, they ended up with a good number. So essentially what the bank released yesterday was a watered down version of their earnings showing their good assets and excluding their liabilities. It is all in the numbers, and Forex online traders should pay attention to the banks whose ultimate fate will determine the fate of the overall economy.

Government intervention into private business has had a negative impact on our perceptions – it has left us with a false sense of security and given us a skewed picture of how things really are. Government regulators telling banks to keep certain investments off the books is not productive – and in the end, these investments that are left off the balance sheets for now will come back to bite everyone in the long run should they ultimately fail.

This is a follow-up entry to yesterdays when I ranted about the way the US reported their unemployment numbers and this reaffirms the fact that we are not getting correct information and we are being smoke screened by technicalities that mask the real story. I know I would prefer to hear the truth – if I have a water leak that is damaging my walls I don’t want a fresh coat of paint over the walls just to make it look pretty again, because the source of the problem will eventually come through again and in fact, might create more damage because I have not addressed it. This is the same thing as my leaky wall and the governments of the world’s major economic powers just keep putting paint on it. One day it will burst and no amount of paint will be able to mask the damage.

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Lets Analyze the Stress Test Results

So we finally got the stress test results, we finally heard the European Central Bank President unveil his stimulus plan and we finally saw the ECB lower their rates to 1. We have been waiting for all these for such a long time it is as if there was nothing else going on. But there was, in the mix of all this we saw on Friday the US release their unemployment figures for April, and not to be shown up – they were less than the 590,000 that analysts thought – which was less than the 600,000 I thought and put down on these pages two weeks ago. But there is a sleight of hand going on here and few people have picked up on it – and in fact, it is in front of all of us in the release of that data. You can find it on the US Department of Labor’s website and boy is it telling.

When scrutinizing the numbers, I was so happy that I was wrong – that the analysts were wrong, “we are finally coming out of it.” But looking deeper I saw something that struck me. The US government added 66,000 jobs in April. These jobs are not construction, not manufacturing, not industrial, not even office work – they are temporary Census workers – you know the people who come to your house once every ten years at 9:00pm and ask you a whole bunch of personal questions so the government can know how many people live where and what they do and how many kids they have. In the report it clearly showed that 611,000 jobs were lost in the private sector – but thanks to the minimum wage earning, college student Census workers, the US lost less jobs overall than was expected. I think not.

I cannot stress enough how looking into the real story is the most vital thing we can do to gather information. Don’t believe what you read until you have read it all – and by that I mean numbers can be manipulated to make us think whatever those presenting the numbers want us to think – and in the case of US jobs, they are falling faster than expected .

The US unemployment rate is 8.9%, 9.3% if you discount the pimple faced adolescents who gave up flipping McBurgers, pouring McSoda’s and slating McFries to harass the US citizenry in the middle of the night and are now counted as part of America’s workforce for doing so. God bless the American accountants and number crunchers who have second degrees in marketing. Their efforts helped the market rally to year highs – what will you give us for an encore?

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The Waiting is Over – We Hope

The European Union cannot catch a break. You would think that the week long news of this looming rate cut and speculation on stimulus by the European Central Bank would have been traded out already, and perhaps it has. But with Germany coming in with a 2% constriction in economic activity coupled with a Standard & Poor’s rating cut for five of its banks the Euro just has nothing to look forward to right now.

Add into this mix the speculation that England might need to start printing more money and it does not look good on the European side – no matter what the stock markets or flip-flopping analysts say.

Look for the Japanese Central Bank to try and boost interest in the ailing currency, only safe haven flows have sustained the Yen as of late. The only thing that can keep the island nation afloat is their exports and right now there are none.

So today we find out which US banks are in trouble and we find out what great pplans the ECB has for their economy. My bet is that it will pass with disappointment and we will wonder what we were talking about for the past two weeks. The US Banks are in trouble, this is established – and word has it that 9 or 20 large banks need capitalization, the news is out and nothing has happened.

The ECB will lower rated to 1% and announce a passive plan today which they will tout as aggressive. It will make us wonder why they had all the infighting in the newspapers the past few weeks – it will make us wonder what is truly going on in their minds. IT will make us think that all is well – however when you look at the numbers you can see that all is not.

For me, the important date is tomorrow – when more unemployment data in the US is released. This will be telling – and no matter how bad, I guarantee, there will be some rays of hope that some politician or economist sees. 1 out every ten people without a job is not good – watch them make us believe that it is.

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Cheers Turn to Jeers as D-day Nears!

EUR

The Euro gained early in Tuesdays session only to give it back later on as the US markets opened and investors began taking profits and returned to the safe haven Dollar in advance of Thursday’s US stress test release and the European Central Bank’s decision on interest rates and stimulus. The past few sessions saw the Euro benefit from the positive sentiment on the street as traders took advantage of good economic news to come out from hiding behind the stalwart Dollar and Yen. However, as Thursday’s ECB meeting comes close, investors who traded the Euro in recent days are cashing in and taking cover once more. We, forex online traders can expect to see strength in the Euro should there be signs that the ECB will not adopt and aggressive policy – a topic that has been widely debated in recent weeks and seemingly dominated the market news.

At 11:00PM GMT, the Euro was trading down .4% to the Yen to 131.88, down 1.1% to the Sterling to .8831, down .4% to the Canadian Dollar to 1.567, down 1.2% to the Australian Dollar to 1.7926 and flat to the Swiss Franc after an up and down session to 1.5102.

USD

Federal Reserve Chairman Ben Bernanke said that it was his assessment that the economy is “turning the corner” and that the US could see growth in the second half of this year. This testimony in front of the US Congress contradicted his last month’s report when he declared that it could take until mid-2010 before any growth is seen. What should have been good news was muted by jitters over the release of the stress test this coming Thursday and an announcement by President Obama that he intends to raise business taxes by 5% in the short term to help cover the ever growing national debt. It is thought that 10 of the 19 banks that submitted to the US Treasury’s stress test will have to raise additional revenue in order to remain solvent, however to what degree these companies are struggling was the source of much debate on Tuesday.

At 11:20PM GMT, at broker trading boards, the US Dollar was down .7% to the Euro to 1.3315, up .22% to the Yen to 98.68, down .45% to the British Pound, down .2% to the Canadian Dollar to 1.1746, up .6% to the Swiss Franc to 1.1325, and down .8% to the New Zealand Dollar to .581.

AUD

The Reserve Bank of Australia held interest rates today at 3% after the members said that signs that the recession has grown in Australia are not present and in fact, there are positives that can be interpreted as strength. The Australian Dollar has benefitted lately as investors tested their risk appetite and moved to the higher yielding Aussie Dollar in order to lock in some larger profits.

At 11:40PM GMT, in addition to being up to the Euro, the Australian Dollar rose .45% to the US Dollar to .7421, up .65% to the Yen to 73.52, down .06% to the Pound to 2.034 and down .3% to the New Zealand Dollar to 1.2791.

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The Bulls are Back for Now, Dollar Pays the Price

USD: Risk Appetite Returned with a Loud Bang

As investors bought up European and American stocks the US Dollar suffered on Monday as risk appetite returned with a loud bang. Part of the reason for the lack of demand for the safe haven Dollar was a report out of China that showed a 9 month high in manufacturing activity and a 3.2% rise in US home sales. The theme of Monday seemed to be a fundamental shift in investor attitude as fears of a deepening recession retreated and the bulls came back – if only for a short while. Thursday the US government will release the results of the bank stress tests and already there is speculation that the results will not be received well. Wells Fargo and Citigroup, it is rumored, will require additional funding and Bank of America is denying that they will. In all, of the 18 banks surveyed, it is thought that nearly half of the banks will require more capitalization. Forex online experts says if this turns out to be accurate, it is a sign that things might not be as rosy as investors feel they are today.

At 9:00PM GMT, the Dollar was down .93% to the Euro to 1.3392, down .3% to the Japanese Yen to 99 even, down .42% to the British Pound to 1.4982 down .75% to the Canadian Dollar to 1.1763, down 1.14% to the Australian Dollar to .7387, down .84% to the New Zealand Dollar to .5741 and down .75% to the Swiss Franc to 1.1271.

EUR: Investors Cautious on the Euro Ahead of the ECB’s Policy Meeting

The Euro fell early on Monday as Axel Weber; a European Central Bank member said that Germany will not start to see economic growth until the second half of 2010. However after the news out of China and the US, the Euro recouped some of its losses. Investors still seem to be cautious on the Euro ahead of the ECB’s policy meeting. The ECB is expected to lower their core interest rate by 25 basis points to 1% and announce a quantative easing plan that includes the purchase of securities to stimulate growth and lending in the 16 country Euro zone. Until now, ECB members have been holding a public debate about how far to go with the stimulus plan and investors will find out who won.

At 9:30PM GMT in the broker trading boards, the Euro was up .83% to the Japanese Yen to 132.61, up .52% to the Pound to .8938, up .22% to the Canadian Dollar to 1.5762, up .16% to the Swiss Franc to 1.5096 and down .24% to the Australian Dollar to 1.8125.

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China has already Canceled America's Credit Card

The Chinese are making moves to dismantle the Dollars standing, in an article in the Wall Street Journal this weekend, it was revealed that “China has already canceled America's credit card” as a US senator put it.

As China is the leader in US debt holdings, 800 Billion Dollars worth of bonds and another 2 Trillion in Treasury Notes and Bills, it seems as if China’s concern over rampant US spending has taken its toll on the way China conducts business. Last month I told you in Forex Online land that China was beginning to amass large reserves of Copper and Aluminum. With a building sector down to near zero production right now, I am sure they are not stockpiling these metals for the future. They are converting their cold hard American debt to tangible assets.

The problem has gotten so bad that the US Federal Reserve has been compensating for the lack of interest in Treasury Bonds, Bills and Notes, by buying it themselves. It’s not even paying your MasterCard with your Visa, its paying one MasterCard with another MasterCard and it is going to get the US in trouble.

Anyway, for the week ahead my Forex trading friends, look for the European Central Bank meeting – nothing exciting will come of it as nothing ever does, but it has been hyped for some time. Also, look for Thursday when the US Treasury releases the results of the over talked about stress tests on banks . Tomorrow I will talk about why the US messed up by having them in the first place. Also, watch the markets flip flop as President Obama announces his new plan for Wall Street – I guarantee you they won’t like it.

Trade well people.

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