International Forecaster Weekly

Cheapening Currency Also Has Risks

Wall St Defies Reality, currency could be cheapened, japanese intervention in currency markets, what is beggar thy neighbour, America on sale, Gold as the final refuge against currency debasement, trade war between China and everybody else.

Bob Chapman | September 29, 2010

It is interesting to watch Wall Street defy reality. This is a scene we’ve observed since the early 1960s, the effect of debt on the economy and the nation and in turn on its currency. The result of the profligacy over all those years is the biggest bull market in history in gold and silver. As we write gold is toying with $1,300 and silver with $21.50. Each day a new high is reached in spite of a pending options expiration and the perpetual market rigging and manipulation by the US government.

One of the things that astound us is that few professionals have seen this coming over the past 10-1/2 years, and even those that do believe do not think this is an earth-shaking event. What we are about to experience is an event that only occurs every 300 to 500 years. All we can imagine is that they have a very limited perspective of history and particularly economic and financial history.

Unbeknownst to most gold and silver shares, coins and bullion have been under accumulation since 2000, by the smart money. Gold alone on a compound basis has been up just under 20% annually. It should also be noted that gold demand rose 36% in the second quarter.

Several events of recent vintage have changed the atmosphere in which gold and silver reside. Six or eight months ago the major NYC banks arranged for a major rally in the dollar, which ran from 74 to 89. It is now back to 79. The problems in Greece were the catalyst, as well as other EU-euro zone member problems. This caused the euro to fall from $1.50 to $1.19. It is now at $1.35. This temporarily boosted the dollar. About 11 weeks ago we predicted a new quantitative easing program in the US and it was put into operation about a month ago. This is the way the Federal Reserve again intends to keep the US economy from collapsing. The result of this move is that again foreign central banks are moving to cheapen their currencies, because the dollar is again falling in value. That is reflected in the increasing foreign exchange dollar reserves of many countries. What they do to cheapen their currencies in US dollar terms is to print their own national currency and purchase dollars. With those dollars they buy US Treasuries or spend them. That process cheapens their currency in dollar terms. This is called intervention.

The prevailing attitude is that if a nation doesn’t cheapen its currency others will and that would leave a nation at a disadvantage in terms of trade and pricing exports. This has been going on for years and US administrations have overlooked the practice. That is because it cheapens exports into the US, holds down inflation and creates buyers for Treasury and Agency bonds and US stocks and investments. Unfortunately for the US other nations have decided US debt is so onerous that they are diversifying into other currencies, purchasing items such as commodities and in some cases buying gold. The argument against gold has been that there is no interest on the investment. They perpetually do not understand that gold has been appreciating in value for the last ten years just shy of 20% annually. Thus their argument for not owning gold is incorrect. It has cost nations dearly and will continue to do so. The real reason that they do not purchase gold is because of pressure from the US government.

The most visible intervention in the currency markets was that of Japan in a desperate attempt to cheapen the value of the yen in violation of agreements with other major nations. Their manipulation into the $4 trillion Forex market was totally unsuccessful. Japan and others are faced with increases in money and credit by the Fed in its efforts to again liquefy the US economy. Any attempt to fight another $2.5 trillion by foreign nations is going to be futile. The currencies of almost every nation will rise and there is little they can do about it. The US dollar has been abandoned in an effort to save an American economy that is in serious trouble. The currency devaluations will come, but will be unsuccessful. Russia is an exception and has thus far failed to use stimulus to weaken its rouble. Every time the IMF tries to suppress gold prices with its gold sales, Russia is right there buying it up, which must infuriate the elitists in Europe and the US. Almost 2/3s of their economy’s growth loss has been due to drought and fires, but with close to $500 billion in foreign exchange, they have no trouble buying gold, which puts those reserves at close to 24 million ounces. It is an easy way to dump dollars.

Over and over again we hear central banks worldwide announcing how they are going to defend their currencies in order to keep their exports inexpensive. We wonder when someone in Washington is going to catch on to what has been perpetually done to injure the US economy? Free trade, globalization, offshoring and outsourcing doesn’t work. It has cost 8 million American jobs over the past 12 years and lowered wages from $30.00 an hour to $14.00 an hour, and caused a depression. British mercantilism has never worked except for those demeaning their currencies. The only answer for America is to impose stiff tariffs on foreign goods and services and junk NAFTA, CAFTA and the WTO. Just look at what China has done as an example. The yuan is undervalued by 40% and they could care less. They keep right on devaluing their currency and then complain about the loss in the value of the dollar and US Treasuries they buy as a result of currency manipulation. If the US is ever to survive economically they have to put an end to criminal devaluations.

Government goes on its merry way because they have a Federal Reserve. There will be no cutback in deficit spending.

All the government has to do is request that the Fed purchase their debt and they do so by creating money and credit out of thin air. This is monetization and it’s inflationary. This is how government pays for mandated services. The taxes for such were already extracted from the public, but unbeknownst to most of the public these funds have already been spent. This is how Social Security, Medicare and all those other bailout services are being funded. Foreigners are buying only 25% of US government debt. The slack is and has been assumed by the Fed, which the people eventually get to pay for. Today we are in a lull, a sort of magical time, when the very superstructure of the system is being destroyed, but it is not particularly noticeable. The economy, we might add, is going sideways, with the assistance of $2.5 trillion a year. That can last for several years but in the end inflation goes rampant and sometimes becomes hyperinflation as we have seen in the Weimar Republic and most recently in Zimbabwe. Inflation, as consumers can attest to, is already climbing and the roar of higher inflation is not far off. One of the events that will kick that off will be bank lending of the funds they hold, some $1.5 trillion, which presently are sterilized, but become monetized once they are lent or spent. We can assure you that day is just over the horizon. This, once raging, will cause political, social and perhaps military conflict. If you look back in history when such problems existed those in power create another war or they subject their own people. Historically this hasn’t been difficult, but today is different, because talk radio and the Internet have allowed people to know and understand what has been and will be forced upon them and by whom.


Richard Russell:

They call it competitive devaluations or more vulgarly "beggar thy neighbor." In the new rough world of 2010, every nation wants to export. The biggest aids in exporting are (1) cheap labor, (2) access to ample raw materials, (3) a "cheap," low-priced, competitive currency. China keeps its yuan on the "cheap" side by forcing it below the purchasing power of the dollar. Treasury Secretary Timmie Geithner and more recently, Barack Obama himself, have been badgering the Chinese to halt their "manipulations" and to allow the yuan to float higher. China's answer is "We can't hear you," and when pressed further the Chinese retort, "We'll allow the yuan to float when it serves China's purposes." In order to compete with the mighty Chinese exporting machine, the rest of the Asian nations force their currencies down. The net result is a series of competitive devaluations. The sum of the story is that every nation wants to export. and no nation wants a strong currency. So what's the US's answer? Our answer is that if China won't allow the yuan to rise, then we'll flood the market with new dollars and allow the dollar to sink. That's the trade-off, China must allow the yuan to rise or the US will set off quantitative easing #2. The US must be competitive, even if we have to sacrifice the almighty dollar. The Chinese complain that to allow their currency to rise too far will mean millions of their factories will be forced into bankruptcy and millions of Chinese will lose their jobs. China's reserves include a staggering $2.5 trillion in dollar-denominated US securities (mostly treasuries). If the dollar sinks, China stands to lose hundreds of billions of dollar in purchasing power. China, it seems to me, is stalling, playing for time, while it gets rid of its dollar liabilities by switching to shorter maturities, by increasing its mix of other currencies while decreasing its dollar position, and by buying gold with its dollars. Meanwhile, the Fed's policy-makers are ready to take the big gamble with the dollar. At last Tuesday's meeting, Fed Chairman Bernanke hinted that the Fed is ready to flood the system with additional dollars in a campaign to push longer-term interest rates lower, and to pressure the dollar to the downside. This announcement served to drive the dollar index down to its lowest level since last March.

Last week the Dow rose 2.4%, S&P 2.1%, Nasdaq 3.5% and the Russell 2000 rose 3%. Cyclicals rose 1.9%; transports 1.8%; consumers 2.1%; utilities 2%; banks 0.2%; broker/dealers were unchanged; high tech rose 2.6%; semis 3.5%; Internets rose 3.9% and biotechs 1.5%. Gold bullion rose $22.00, the HUI rose 2% and the USDX rose 2.6% to 79.28.

Two-year T-bills fell 2 bps to 0.43%; ten-year T-notes fell 14 bps to 2.60% and 10-year German bunds fell 8 bps to 2.34%.

The Freddie Mac 30-year fixed mortgage rates were unchanged at 4.37%, the 15’s were unchanged at 3.82%, one-year ARMs rose 6 bps to 3.44% and 30-year jumbos rose 1 bps to 5.33%.

Fed credit fell $2.8 billion, as Fed foreign holdings of Treasury and Agency debt rose $3.7 billion. Custody holdings for foreign central banks have increased $258 billion YTD, or by 12% annualized and YOY they are up 12.6%.

Total money market funds fell $10.6 billion to $2.803 trillion. Total commercial paper jumped $27.8 billion to $1.064 trillion.Rumors persist that Bank of America just received $13 billion in emergency funds to keep the bank solvent. The word is HSBC has problems as well.

SIPC has $1.2 billion and can borrow $2.5 billion from the Treasury. This certainly is not much money for the undertaking they are involved in.

The August Chicago Fed National Activity Index fell 0.53 to after being down 0.11 in July.

On Friday regulators seized three corporate credit unions and will have to repackage $50 billion in troubled assets.

We have been warning you on credit unions. This is just the beginning.

Regulators shut two more banks bringing the 2010 total to 127.

Record-low interest rates are stoking the biggest increase in U.S. share buybacks ever.  American companies announced $55.9 billion in repurchases since June, data compiled by Birinyi Associates Inc. show. That adds to $93.5 billion in the second quarter and $108.3 billion during the first three months of the year, compared with $125 billion in all of 2009. Corporations are using debt to pay for buybacks.

Leveraged-loan returns rose to their highest level of the year this week as Brickman Group Holdings Inc. took advantage of investor demand and marketed a loan without financial-maintenance requirements. Investors in search of extra yield have turned to high- risk, high-return loans, driving supply to more than double this year and allowing companies to bring so-called covenant-lite deals to market. Those loans are devoid of restrictions such as a mandate on maximum leverage, or debt to earnings before interest, taxes, depreciation and amortization.

Bank of America has been busted using some seriously outrageous tactics to try to collect debts so small they're barely worth the paper they're written on.

It wasn't until ABC News ambushed BOFA CEO Brian Moynihan Michael-Moore style outside his office that the firm finally responded by firing its debt-collection firm.

Regulators announced a rescue of the nation's so-called wholesale credit

unions…Friday's moves include the seizure of three wholesale credit unions and an unusual plan by government officials to manage $50 billion of troubled assets inherited from failed institutions. To help fund the rescue, the National Credit Union Administration plans to issue $30 billion to $35 billion in government-guaranteed bonds, backed by the shaky mortgage-related assets.

Bernanke and the NY Fed are boosting stocks ahead of the November election. If the GOP takes control of at least one chamber of Congress, Ben’s ways and means of rigging and bailing out will be audited.


The Fed did a $3.89B POMO on Friday. For the week, the NY Fed monetized $11.15B of Treasuries. At 14 to 1 bank leverage, this is sizable juice. Hedge funds can employ even greater leverage.

Heavy dollar inflows into Brazil could pose credit risks for the country's banking system, Brazilian Central Bank chief Henrique Meirelles said Friday, defending his bank's intervention measures in the foreign exchange market.

Ergo, the world is accelerating its beggar they neighbor competitive currency debasement scheme instead of allowing the necessary economic and financial restructuring. Soon, more of the market will become alarmed at increasing central bank and sovereign credit risk. Then this inflate of die party will get very interesting.


A Return to Beggar They Neighbor? Beggar-thy-neighbor currency devaluations proved ruinous for the global economy in the 1930s. Is the world setting off down the same slippery slope again? As in the 1930s, competitive devaluations, whether by fair means or foul, are likely to increase international tensions and risk protectionist responses. Meanwhile, they will do nothing to address the global imbalances that led to the crisis or tackle the chief problem facing the advanced economies today: lack of domestic demand in many countries.

Japan Signals Determination on Yen Japanese Foreign Minister Seiji Maehara said that Japan's government is determined to prevent further appreciation of the country's currency and raised the possibility of further government intervention to curb the yen's rise.

What More Fed Easing Means For Markets: 'America On Sale'

"The Fed is going to do whatever it takes to support this market. They don't care what it is."… "Investors are looking at what the news is and they're reacting to it, and the reaction isn't necessarily a healthy one at all times," says Andre Julian, CFO and senior market strategist at OpVest Wealth Management in Irvine, Calif. "They've lost perspective on the long term: What are we going to do with inflation? What are we going to do when the dollar isn't worth as much?"

A Grand Unified Theory on Market Manipulation [August 2, 2009]

A limiting factor is that the rules of the game have changed quickly, and what we believe is important to the major players now may not necessarily have been important twelve or even six months ago… The theory for which we have the greatest supporting evidence of manipulation surrounds the fact that the Federal Reserve Bank of New York (FRNY) began conducting permanent open market operations (POMO) on March 25, 2009 and has conducted 42 to date.

These days are highly correlated with strong paint-the-tape closes, with the theory being that the large institutions that receive the capital injections are able to leverage this money by 100 to 500 times and

Ambrose Evans-Pritchard: Gold is the final refuge against universal currency debasement States accounting for two-thirds of the global economy are either holding down their exchange rates by direct intervention or steering currencies lower in an attempt to shift problems on to somebody else, each with their own plausible justification. Nothing like this has been seen since the 1930s.

The managers of all four reserve currencies are playing fast and loose: the Fed is clipping the dollar; the Bank of England is clipping sterling; the European Central Bank is buying the bonds of EMU debtors to stave off insolvency, something it vowed never to do just months ago; and the Bank of Japan has just carried out two trillion yen of “unsterilized” intervention…

Policy makers must do more than print money and hope for the best Quantitative easing might seem the easiest option but it is storing up major problems for the future.

The regulatory failure that brought the Western world to this impasse and the gross irresponsibility shown by the investment banks and ratings agencies is shocking. Central bankers lowered rates in the aftermath of 9/11 and the dot-com crash, then kept them low for far too long so pumping up the biggest

credit bubble in history.

Now, the Western world's policy response amounts to printing money and heaping debts upon debts, while shoving the banking sector's losses on to the general public – and, particularly, their children and grandchildren. This is perhaps the most systematic act of inter-generational theft the world has ever seen.

But that's not the point at least for now. The point for now is that QE and the related fiscal boosts simply are not working.

As Simon Johnson has written: "The finance industry has effectively captured our government and recovery will fail unless we break the financial oligarchy that is blocking essential reform." Strong words from a former chief economist of the International Monetary Fund but no less true for that.

An intriguing pick-up in Treasury settlement fails First, there’s been a relatively strong burst of settlement failures in the US Treasury repo market in the last week.

According to data compiled the New York Fed, ‘failures to receive’ shot up to 87,173 versus 14,356 the previous week, while ‘failures to deliver’ hit 85,827 versus 9,377 the highest since January 6, 2010 on both counts. Meanwhile something else that’s curious in the market. If you’re interested in trading the 30-year spot-future basis, there’s a potentially interesting arbitrage opportunity that’s opened up since about August. [US 30-year bonds are out of whack with USZs.]

The explanation for both of the above noted conditions is: the system is running out of deliverable product because it is still too levered, with the Fed’s NZIRP and QE as a driving dynamic.

The use of derivatives has “far exceeded any pressing need for hedging in real markets or financial markets and has become a kind of speculative instrument,” the 83-year-old former central banker said…“It’s going to take a long time to repair the basic disequilibrium in the economy,” Volcker said.

The substantial drop in credit card debt in the United States since early 2009 has been widely attributed to newly frugal consumers. But analysts say that a significant portion of the decline is actually the result of financial institutions writing off billions of dollars in credit card debt as losses…

A study released last week by Evolution Finance’s, calculated that financial institutions charged off about $20 billion each quarter from early 2009 through early 2010, about equal to the amount of the decline in outstanding credit card debt…

President Barack Obama's $30 billion small community business lending program faces one big challenge: many of the community banks and businesses it's supposed to help don't want it…

Bank executives say their customers don't want loans, even at low interest rates, because the sluggish economy has chilled expansion plans. Some say the federal money isn't worth it because they fear it will come with too much regulatory oversight. "We have taken a strategic decision not to have our primary regulator, the government, also be a partner in our bank," said William Chase Jr., CEO of Triumph Bank in Memphis.

Tens of thousands of people will lose their jobs within weeks unless Congress extends one of the more effective job-creating programs in the $787 billion stimulus act: a $1 billion New Deal-style program that directly paid the salaries of unemployed people so they could get jobs in government, at nonprofit organizations and at many small businesses.

The Federal Deposit Insurance Corporation postponed its decision on approving a rule that would study failures of mega-banks so that its bankruptcy doesn't affect the markets.

The rule based on the Dodd-Frank Act was expected to be adopted, but instead the agency decided to discuss a proposal on the subject. The proposal is expected to be discussed with the Financial Stability Oversight Council before its approval.

A second proposal on the subject will also be introduced by the agency in Q1 of 2011. This may include methods to examine how funds are deployed in the recovery process and how taxpayer funds will be recovered from the industry.

The United States on Monday set final duties ranging up to 61 percent on hundreds of millions of dollars of copper pipe from China in one of several disputes causing friction between the two countries.

The U.S. Commerce Department announcement came one day after Beijing slapped final duties ranging from 50.3 percent to 105.4 percent on chicken parts from the United States.