Friday :: Mar 11, 2005

Take Me Out Of The Ball Game


by pessimist

King George's 'Don't Worry - Me Happy' economic policies are beginning to produce noticeable responses from the world's economic community - responses that even scare a non-economist like me (what COULD this news mean to a self-professed economist like muckdog?).

Hard on the heels of the new bankruptcy law just passed by the Best Senate Corporate Money Can Buy comes the news from the forex front that fiscal people around the world consider the dollar to be an asset of little worth in comparison to other currencies.


Dollar pressured after Koizumi comments on reserves

The dollar came under fresh pressure after markets were spooked by Japanese Prime Minister Junichiro Koizumi's suggestion the country might diversify its foreign exchange reserves. Koizumi's remark to a Japanese parliamentary committee that 'diversification is necessary' sparked a bout of dollar selling.

"While MoF were quick to say Koizumi's comments were misinterpreted, the fact that he mentioned it was enough for the market to think that something is afoot," commented Neil Mackinnon, chief economist at ECU Group. Since the dollar has been supported by central bank purchases, especially from Asia, any move away from the greenback could send shockwaves through the global financial system.

The dollar was already on the back foot for much of last year as concern over the US budget and current account deficits combined with talk that many central banks would shift currency reserves away from the US unit. That and concern over the United States' structural position has weighed on dollar sentiment this week in the run-up to Friday's closely watched trade data for January.

While a market consensus expects the deficit to narrow slightly from December's 56.40 billion dollars (42.06 billion euros) and the record 59.3 billion in November, some players expect the gap to widen. "The dollar is very much on the ropes and the trade figure tomorrow is a serious hurdle," said Mackinnon.

Now I may not know everything about economics, but it seems to me that when one has no tangible assets that anyone will value, and one owes more than one is worth, does this combination not mean

** GASP! **

BANKRUPTCY???

Now factor in these two little tidbits from today.


Trade Deficit at 2nd Highest Level Ever

The monthly trade deficit hit $58.3 billion in January, the second-highest in history, as clothing imports from China surged with the lifting of global quotas.

The U.S. trade gap surged by 24.3 percent in 2004 to set a record for the third straight year at $617.1 billion and private economists said 2005 was likely to post yet another record trade imbalance.

Isn't it ironic that the government which has just screwed the population it pretends to represent is facing the exact same fiscal condition that it wants to deny to these others?

This would be incredibly funny if the consequences weren't so potentially tragic.

Dollar Under Fire from All Sides

The dollar extended its slide against most currencies on Thursday on concerns over global central bank reserve diversification, a widening U.S. trade deficit and this week's dive in bond prices. Having slumped to multi-month lows against its major counterparts on Wednesday, the dollar suffered another blow on Thursday after Japanese Prime Minister Junichiro Koizumi told parliament that, generally speaking, diversity in foreign exchange reserves was a good thing.

The specter of diversification was raised again, putting pressure on the dollar again, much as had happened after South Korea's central bank mentioned the subject in a report last month.

"The 'diversification' word really spooked the market ... but the bond market selloff is weighing on the dollar big time," said Samarjit Shankar, director of global strategy at Mellon Bank in Boston. "The bond market is really adding that extra piece of weight on the dollar right now."

The price of U.S. Treasuries have fallen steeply this week, pushing the yield on the 10-year note up to 4.57 percent overnight, its highest level since July last year. Though now down at around 4.48 percent on Thursday, they have broken convincingly through key technical levels that have been intact for several months.

Bu$hCo To Announce GOING OUT OF BUSINESS Sale?

Maybe. Bond sales don't sound like there is much interest from foreign investors:

Thursday, a new auction attracted average demand with indirect bidders, including investors and foreign central banks, picking up 11 percent of the issue. That compares with 29 percent in the original sale last month but better than the 10 percent seen at the last reopening.

The rise in bond yields is sometimes seen as a supportive factor for a currency, as it offers investors a higher rate of return relative to other fixed income markets.

But not in this instance.

Both the diversification and bond weakness themes aren't constructive for the dollar, say UBS currency analysts. "The markets fear that dollar selling by Asian central banks plus less buying of US Treasuries will cause higher U.S. interest rates and lower capital inflows, to the detriment of the dollar globally," they wrote in a research note on Thursday.

"We also suggest investors need to watch very carefully the sharp sell-off in U.S. bond markets generally," they added.

That doesn't sound like a good thing to me! Could there have been too much of a good thing?

A couple of our biggest trade partners seem to think so!

The massive U.S. current account deficit hasn't been particularly good for the dollar either in recent years, and a reminder of this may come on Friday morning when the Commerce Department releases January's trade data. The figures are expected to show a deficit of $56.5 billion, slightly wider than the previous month and what would be the second widest on record.

Data released on Thursday from two of the U.S.'s biggest trading partners suggest its deficit won't be narrowing significantly any time soon. Germany, the euro zone's largest economy, appears to be coping with a strong currency, as it posted a trade surplus of 12.9 billion euros in January on record exports. China posted a surplus of $11 billion in the first two months of the year.

When a government gets itself in over its financial head, it has the option of raising taxes on the citizens to cover its debts, which were run up in serving these very people. Consider this next fact, and then ask yourself if this is looking like a viable option now:

Elsewhere, U.S. weekly jobless claims, which rose an unexpectedly high 17,000 last week, kept the dollar under pressure too, analysts said. Economists had expected no change.

Tell me if I'm incorrect, but aren't economists supposed to know about these things????

Based on what our chief economics wizard just stated, maybe they don't have a clue!


US Treasuries slip as Greenspan adds salt to wounds

U.S. Treasury prices slipped in Asia on Friday after Federal Reserve Chairman Alan Greenspan said it was unusual for long-term rates to move lower at this stage of the tightening cycle.

Historically, long-term yields tend to rise when the Fed is in a tightening cycle. But the 10-year yield peaked near 4.9 percent in mid-June, just weeks before the Fed started the current tightening campaign. The market has also been sensitive to speculation that Asian central banks may shift a part of their forex reserves out of U.S. Treasuries after a South Korean central bank report referred to reserve diversification. The market saw a ripple on Thursday when Japanese Prime Minister Junichiro Koizumi said that, generally speaking, reserves should be diverse. He was responding to a question from an opposition lawmaker in parliament.

Most Tokyo traders took Koizumi's comments as a Japanese way of politely saying "no", given that Japanese authorities are unlikely to sell dollars because such action would run counter to years of efforts by Tokyo to keep the yen's strength in check.

Fed Governor Ben Bernanke also weighed in, saying there would be some impact on long-term U.S. interest rates if foreign holdings of U.S. securities were to decline even though he saw no such imminent shift. "Much of what they said was hardly new," said Etsuko Yamashita, chief economist at Sumitomo Mitsui Banking Corp. "But these comments come at a time when market sentiment is really bad."

The latest rise in Treasury yields was set off by comments from Greenspan in mid-February that low yields on long-term bonds constitute a 'conundrum'. "First he said it was a conundrum. Today he sounded as if he were still not satisfied with the level of long-term yields," said a fund manager at a Japanese asset management firm. "I think the market will be very susceptible to bear factors for the time being."

Greenspan also repeated that foreign investors may cut holdings of dollar assets at some point, exacerbating weak market sentiment already hurt by this week's sell-off to seven-month lows amid recent stirrings of inflation.

Then, to rub in that salt he just added to the open economic sores, he added this:


Greenspan warns smaller banks' weakness

U.S. Federal Reserve Chairman Alan Greenspan warned Friday smaller banks may be forced to close when new global rules are introduced.

Gosh! Could it be time to dust off Franklin D. Roosevelt's First Fireside Chat?

I want to talk for a few minutes with the people of the United States about banking — with the comparatively few who understand the mechanics of banking [like muckdog insists he is? - ed], but more particularly with the overwhelming majority who use banks for the making of deposits and the drawing of checks.

The success of our whole great national program depends, of course, upon the cooperation of the public — on its intelligent support and use of a reliable system. There is an element in the readjustment of our financial system more important than currency, more important than gold, and that is the confidence of the people. Confidence and courage are the essentials of success in carrying out our plan.

Because of undermined confidence on the part of the public, there was a general rush by a large portion of our population to turn bank deposits into currency or gold—a rush so great that the soundest banks could not get enough currency to meet the demand. The reason for this was that on the spur of the moment it was, of course, impossible to sell perfectly sound assets of a bank and convert them into cash except at panic prices far below their real value.

Substitute 'foreign central bank' for 'public', and that is the situation the United States faces thanks to the ignorance and predjudices of the Red Staters and running dog DINOs. This is all they need to know if they are really paying attention:


Dollar tumbles as Japan's Premier hints at sell-off

With currency markets sensitive to any suggestions that Asian nations might switch reserves out of dollars and into the euro or other alternative holdings, the Prime Minister’s remarks sparked an immediate response. The dollar was sent tumbling to two-month lows against the euro, which was pushed back to levels above $1.34 for the first time since early this year.

Now that I have their attention:


Asian Central Banks Play Chicken With the Dollar

Asian central banks are poised on the edge a cliff. Who will be the first to jump?

Late last month, traders pummeled the dollar when they learned South Korea's central bank was looking to boost returns on its foreign-exchange reserves with non-U.S. government bonds. Within hours of the revelation, courtesy of an annual report to the legislature that was hyped by the media, the Bank of Korea was forced to issue a press release saying it had no plan to sell dollars.

Fast forward two weeks, and China's central bank governor made noises about dropping the yuan's peg to the dollar in favor of a basket of currencies. China's finance ministry countered with an opaque statement -- something about keeping the currency stable.

The same day, the Japanese government found itself in a similar predicament of having to appease foreign-exchange markets by contradicting itself. Prime Minister Junichiro Koizumi told the budget committee of the upper house of parliament that Japan needed to diversify its foreign-exchange reserves, which at $840.6 billion are the world's largest and are held mostly in U.S. dollars. This time, it took less than an hour for a no-name Ministry of Finance official to issue a we-didn't-mean-it statement. The Prime Minister was speaking generically, the nameless official said.

Dollar Dilemma

All across Asia, central banks that peg or manage their currencies to the dollar are facing the same predicament: whether to shoot themselves in the foot by reducing their dollar holdings, thereby depressing the value of the dollar even further; or to dig themselves into a deeper hole, buying more dollars to prevent their currencies from appreciating and plowing the money into U.S. Treasuries.

Currently foreigners own 53 percent of privately held marketable U.S. Treasuries. More than half of that is held by foreign central banks. The choices the banks face aren't great.

They're less clear on the solution.

Hobson's Choice

The perceived arrogance of the US - the idea that the dollar is our currency but someone else's problem - doesn't sit well overseas. There's a sense that the US needs to clean up its act, put its house in order, address the large twin deficits (budget and current account).

If these rumblings from Asian central banks on diversifying their foreign-exchange reserves and rebalancing their portfolios are indeed shots across the bow, they might want to rethink their strategy in favor of less talk, more action.

Cross Purposes

It would be much smarter for these banks to quietly sell dollars, if that's what they want to do, without calling attention to it. They also might want to get their priorities straight. Asian central banks can't sell dollars and expect their currencies to weaken against the dollar. They can't diversify their foreign- exchange reserves away from dollars and, at the same time, prevent their currencies from rising and diluting their export advantage. It just doesn't add up.

Beg To Differ

Implicit in their game of chicken with the dollar is the notion that the U.S. should do something so the burden doesn't fall on the rest of the world. Once you realize that Asian exports to the U.S. were 19 percent of Asia's gross domestic product last year, you start to understand that slowing U.S. growth may do more harm than good. A strong U.S. economy, it seems, is in Asia's best interest.

Head$ In The $and

Fed Chairman Alan Greenspan has become more sanguine about the current-account deficit recently, even as he's raised the level of concern about the budget deficit. In a speech to the Council of Foreign Relations in New York last night, Greenspan said the resolution of the current-account deficit, which is approaching 6 percent of GDP, and the household debt burden, which remains at near an historic high of 13.26 percent, were not 'overly worrisome'.
This is one area where Greenspan's counterparts in Asia just don't agree.

Mr. Greenspan just might want to pay attention to the Giant Dragon which is the foundation for the economic activity that keeps his boss, King George, from being burned in effigy. The Chinese do understand that the dollar isn't in good shape, and are taking steps to see to it that the dollar has a limited effect upon Chinese economic health:


China's forex chief warns against "hot money"

China's foreign exchange chief Guo Shuqing has issued a rare warning against "hot money" flowing into China, telling local governments not to attract foreign investment "haphazardly". Regulators have been playing down the amount and impact of speculative money inflows, but Guo warned of "no end of trouble for the future" unless local governments were made aware of the risks of soaking up foreign funds. He stressed that every locality and foreign-funded enterprise in the country was obliged to abide by China's foreign exchange administration rules. "Capital inflow is an important part of China's overseas economy. We hope relevant (parties) join hands with us to restrain speculative capital," he said.

Practicing Safe F'rex

"China pays great attention to speculative funds," the director of the State Administration of Foreign Exchange (SAFE) told the official Xinhua news agency. "Foreign exchange administration departments and other macro-economic departments are investigating the issue and will punish illegal activities severely."
China's foreign reserves in 2004 soared to a record 609.9 billion dollars from 403.3 billion dollars in 2003, with China now second only to Japan in the amount held.
Observers believe that part of the inflow could be speculative money betting that China will have to raise the value of its currency, the yuan. These theories were boosted last month when China published balance of payments statistics for 2004, showing a net errors and omissions entry worth a positive 20 billion dollars. No explanation for the errors and omissions figure was given but in the past some analysts have said they may indicate irregular capital flows, which up until recently had been largely negative.

Guo insisted the overall inflow of capital was "normal and legal" and reflected the "market scenario" but noted there were also some 'worrisome' problems. 'Fake foreign investment' was being used to purchase yuan-denominated assets and commercial housing for speculative purposes, he said. As an example, he said SAFE had found some foreigners have bought dozens, and in some cases more than 100, apartments in China's coastal cities. This has driven up housing prices to levels which Guo said posed risks to local financial institutions, enterprises and individuals. "When the real estate bubble bursts, they will suffer huge losses," he said.

Let's play my substitution word game again, this time switching 'real estate bubble' with 'foreign exchange bubble' and 'declining dollar value'. Scary, isn't it?

Now - stop chanting "It's only a movie!" It's as real as driving up to a checkpoint in Iraq - and could potentially be just as deadly.


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pessimist :: 3:20 PM :: Comments (9) :: Digg It!