Back in June we wondered out loud, “What is a dollar?” That exercise—as well as the recent schizophrenic behavior of the currency market and the lamentations regarding the Fed’s “printing press”—has led us to wax philosophical on this Friday in August, and ask the question that is the title of our post today.
We tend to give the concept of money very little thought. For example, how many transactions does the average person engage in every day, and in how many forms? Our first transaction of the day is handing $1.25 in cash to a guy in a cart on 47th Street for our morning coffee. Throughout the day we buy lunch with a debit card, buy a book online with a credit card, transfer money to pay bills online and write a check to pay ConEd. In this parade of transactions, the relevant questions are “How much money do I have?” and “Do I have enough of it to pay for these things?” At no point during the typical day do we question the unit of exchange for all this activity, the US Dollar, or even wonder if it will be accepted as a form of payment (regardless of the form—cash, check, megabytes over an internet line).
The typical complaint about the dollar is that it is a fiat currency, one that is backed by nothing but the faith in America and its institutions. Some feel more comfortable knowing that their paper money can be exchanged at any time for a set amount of gold; it seems more grounded somehow, less faith-based. But a quick look at gold, despite it having a limited quantity (it can’t be printed at will), reveals that the major drawback of fiat money also applies to gold, meaning it only has value because we have always ascribed it value. Essentially, it is a malleable and ductile metal with a limited range of inherent utility. At the end of the day, you can’t eat it, or live in it (but you can wear it). As Willem Buiter, the chief economist at Citigroup and a gold bear, said, gold has benefitted from “the longest-lasting bubble in human history.”
So, with money, backed by gold or otherwise, what do we really have? Maybe we have something of a modified…
Both came to an end at the same time: the administration’s policy to Extend & Pretend has run out of time as has the patience of the US electorate with the government’s Keynesian economic policy responses. Desperate last gasp attempts are to be fully expected, but any chance of success is rapidly diminishing.
Whether an unimpressed and insufficiently loyal army general, a fleeing cabinet budget chief or G20 peers going the austerity route, all are non-confidence votes for the Obama administration’s present policies. A day after the courts slapped down President Obama’s six month gulf drilling moratorium, the markets were unpatriotically signaling a classic head and shoulders topping pattern. With an employment rebound still a non-starter, President Obama as expected was found to be asking for yet another $50B in unemployment extensions and state budget assistance to avoid teacher layoffs. However, the gig is up: the policy of Extend and Pretend has no time left on the shot clock nor for another round of unemployment benefit extensions. A congress that is now clearly frightened of what it sees looming in the fall midterm elections is running for cover on any further spending initiatives. The US electorate has been sending an unmistakable message in all elections nationwide.
The housing market is rolling over as fully expected and predicted by almost everyone except the White House and its lap-dog press corp. Noted analyst Meredith Whitney says a double dip in housing is a ‘no brainer’ with the government’s HAMP program clearly a bust as one third of participants are now dropping out. The leading economic indicator (ECRI) has abruptly turned lower, signaling the economy is slowing rapidly without the $1T per month stimulus addiction, which has kept the extend and pretend economy on life support.
The gulf oil spill that was initially stated as 1000 barrels per day has been revised upwards faster than the oil can reach the surface. It now appears to be north of 100,000 barrels per day. A 100 percent miss is about in line with the miss on how many jobs the American Recovery and Reinvestment Act of 2009 (ARRA) was going to create. Also, it appears the administration can’t even get its hands around the basics of administration management during any crisis event. Teleprompter politics…
Some deep thoughts from David Rosenberg on the likelihood of a secular bear market and potential new lows:
Well, well, so much for consensus views. Like the one we woke up to on Monday morning recommending that bonds be sold and equities be bought on the news of China’s “peg” decision. As we said on Monday, did the 20%-plus yuan appreciation from 2005 to 2008 really alter the investment landscape all that much? It looks like Mr. Market is coming around to the view that all China managed to really accomplish was to shift the focus away from its rigid FX policy to Germany’s rigid approach towards fiscal stimulus.
What is becoming clearer, especially after the latest reports on housing starts, permits, resales and builder sentiment surveys, is that housing is already double dipping in the U.S. The MBA statistics just came out for the week of June 18 and the new purchase index fell 1.2% – down 36.5% from year-ago levels and that year-ago level itself was down 22% from its year-ago level. Capish, paisan? So far, June is averaging 14.5% below May’s level and May was crushed 18% sequentially, so do not expect what is likely to be an ugly new home sales report for May today to be just a one-month wonder. Meanwhile, the widespread view out of the economics community is that we will see at least 3% growth in the second half of the year: fat chance of that. What is fascinating is how the ECRI, which was celebrated by Wall Street research houses a year ago, is being maligned today for acting as an impostor — not the indicator it is advertised to be because it gets re-jigged to fit the cycle.
From our lens, there is nothing wrong in trying to improve the predictive abilities of these leading indicators. Still — it is a comment on how Wall Street researchers are incentivized to be bullish because nobody we know criticized the ECRI as it bounced off the lows (not least of which our debating pal, James Grant). For a truly wonderful critique of the ballyhooed report that was released yesterday basically accusing the ECRI index as fitting the data points to the cycle
Not quite a random walk, more like the one lurch forward, two staggers back, that is how the market has greeted the ‘news’ that China will be taking the yuan to a crawling peg. First, risk markets rallied as we all looked inquisitively at each other and asked ‘isn’t this what we wanted?’. Then with bearish trend reversals prominent in markets across the globe, the real response kicked in.
The weight of money now seems to be gathering behind the notion that the Chinese are serious about slowing their economy – and that the crawling revaluation of the yuan is just another plank in this strategy. The clearest prognostication of the markets reception of these moves to reign in Chinese growth is provided by the Baltic Dry Index:
It’d be fair to say freight rates have collapsed over the last couple of weeks. When we read that capesize freight per tonne rates from Australia to China were down 25% last week (from Cotzias Shipping here), the simplest interpretation is that the demand for bulk commodities has taken a turn for the worse.
To place this in a little context, consider the following chart of world steel production:
The importance of China to global demand for iron ore and coking coal is self evident. But to make the point all the more clearly, consider this excerpt from the World Steel Association’s May report (here)
World crude steel production in May 2010 was 9.8% higher in comparison with May 2007, before the impact of the global economic crisis was felt. However, while China, South Korea and Turkey showed increased crude steel production in May 2010 compared to the same month 2007, the US, Italy, Spain and Japan are not yet back to pre-crisis production levels. The EU is -18%, North America -14% and Latin America -9.8% down on the five months to May total in 2007.
Now the point of this thinking is that the reaction of risk markets to the news about the revaluation is understandable. If we make the broad assumption that the downside risks around Europe have been essentially factored into the markets (for the moment), and that those relating to the US are in abeyance (for the moment), then those around China are to…
The spike in the overnight futures based on the vague assurances from China to revalue the yuan higher, a strictly political move to pre-empt the discussion at the upcoming G20 meeting, was a way to justify a classic ‘wash and rinse’ in the price, and bring in some coin for the needy Wall Street banks.
This is the method by which the moral hazard of bailing out the Too Big Banks has provoked the unintended consequence of strangling the economy and the very markets which the bailouts were intended to save (at least on the storyboard). They are unable to make their expected outsized returns using conventional business means, so they must resort to soft control frauds, generating market inefficiencies to support their unsustainable existance. They ought to have been broken up and liquidated where necessary.
As I suggested last night, the spike higher was utterly artificial, and worth fading to the short side. But while it stays above the trendline now around 1110 I would not lean on it too hard, since the threat of a snapback rally in the last hour is always there on these thin volumes. If it breaks down, we are probably heading down to the 1060 support in a roundabout way.
There is also an FOMC rate decision coming up on the 23rd, Wednesday, so we will see some artificial action around that. It is also the day that GTU closes its shelf offering which should take some of the pressure off the unit price.
As a reminder this is the option expiration week (June 24th) for gold and silver July contracts at the COMEX. Even so, the pullback in the price of gold is well within the range of the handle. Short term it is relatively easy to manipulate the price within a certain range of the primary trend, given the current state of regulatory capture at the CFTC. At some point the primary trend will take a much steeper slope as we head towards a commercial failure to deliver. But no one can accuse the people in New York and Washington of long term thinking when there are short term profits to be made, and campaign contributions to be pocketed.
After months of debate, denial and conflict, China finally announced a new policy on its controversial currency, the yuan (also known as the renminbi, or RMB). For the past two years, the yuan has (unofficially) been pegged to the U.S. dollar, sparking criticism from politicians in Washington, high-profile economists and China’s fellow developing nations that Beijing was pursuing a “beggar-thy-neighbor” agenda to keep Chinese exports artificially cheap to expand their market presence at the expense of competitors. China had stubbornly resisted the pressure to change its exchange rate policy, insisting that the yuan was valued exactly how it should be.
But over the weekend, in a surprise announcement, the People’s Bank of China signaled the peg would come to an end. Here’s what the central bank said in a statement:
In view of the recent economic situation and financial market developments at home and abroad, and the balance of payments (BOP) situation in China, the People´s Bank of China has decided to proceed further with reform of the RMB exchange rate regime and to enhance the RMB exchange rate flexibility.
What does that mean? Unfortunately, at least in the short run, probably not much.
While announcing the so-called reform, the People’s Bank also made it very clear that any change in the yuan’s value would come gradually at best. Its statement stated plainly that its priorities remained generally unchanged – to “maintain the RMB exchange rate basically stable at an adaptive and equilibrium level, and achieve the macroeconomic and financial stability in China.” The People’s Bank further signaled a return to the currency valuation system that existed before the peg was resumed in 2008 – a managed float in which the yuan traded in a narrow band against an unnamed basket of currencies. That process was put in place in 2005, and though it did result in yuan appreciation – by some 21% versus the dollar over three years – it also allows Chinese policymakers a degree of control over the exchange rate to prevent rapid movements.
In other words, we’re looking at a back-to-the-future scenario, with Beijing returning to an old policy that, though better than its peg, won’t produce the drastic overhaul of China’s currency regime that many critics would like to see. In fact, on Monday morning, the…
The Chinese Central Bank announced Saturday evening that it will proceed with exchange rate reform and allow a more flexible currency, signalling an end to the renminbi’s peg to the U.S. dollar according to an article from The New York Times.
The People’s Bank of China said that the Chinese economy was strengthening after the global financial crisis and that it was “desirable to proceed further with reform” of the currency, known as the renminbi or yuan. The announcement comes a week before world leaders gather in Canada for the Group of 20 and Group of 8 summit meetings. A growing number of countries have been calling for China to let the renminbi appreciate, including not just the United States and European nations, but India, Brazil and Singapore in recent weeks.
Details are vauge in the PBOC’s press release but more information may come this Monday as to the degree of appreciation. The New York Times added the following.
China’s announcement strongly echoed the central bank’s decision in July 2005, to begin allowing the renminbi to rise against the dollar. The renminbi then rose 21 percent over the next three years, until the central bank informally repegged the renminbi at 6.83 to the dollar in July 2008, as the international financial system and the global economy began deteriorating rapidly.
The central bank’s statement on Saturday, like the statement nearly five years earlier, said that the People’s Bank of China would set the value of the renminbi in relation to various currencies, and not just the dollar.
But in contrast with the 2005 announcement, the People’s Bank did not include any immediate appreciation of the renminbi. In 2005, the new currency policy was accompanied by a one-time, 2 percent rise in the currency against the dollar, followed by further, gradual appreciation against the dollar.
President Obama has sought a stronger renminbi as one of his central foreign policy goals. It would tend to make Chinese exports more expensive and less competitive in the American market, encouraging American consumers to buy more American goods instead.
For China, a stronger renminbi will increase the buying power of its consumers and could make gasoline and other imported commodities seem less expensive. Faced with spreading labor unrest, particularly in the auto industry, the Chinese government has
Although all eyes have been focused on the PIIGS in Europe (Portugal, Ireland, Italy, Greece, and Spain), and the CINN group in the US (California, Illinois, New York, New Jersey), tax and spend problems are everywhere you look, including Germany.
Germany’s local governments are slipping into their budget worst crisis since World War II, with total deficits of €15 billion forecast for this year, the German Association of Cities warned Friday.
The association’s president, Frankfurt Mayor Petra Roth, told the Frankfurter Rundschau that the dismal environment for tax revenues in 2009 meant a new record deficit was looming.
It would be €3 billion worse than previously thought, Roth said, and would nearly double the previous record deficits of 2003. Over the past year alone, municipalities had spent at least €7 billion more than they took in, she said.
“Our budgets are completely overstretched,” Roth said, adding that she welcomed Chancellor Angela Merkel’s recent statement ruling out tax cuts for the time being.
She blamed poor federal government policies for the dire situation of the municipalities, saying that about half the shortfall were due not to the economic situation, but to tax policies.
The Finance Ministry’s approach in its efforts to reform the tax system had been “ineffectual,” she said.
Meanwhile Back in the US …
In a crucial budget address on Friday, California Governor Arnold Schwarzenegger blew a golden opportunity to propose radical changes like privatizing the prison system, privatizing work in general, sending illegal aliens home, or getting rid of defined benefit plans.
In general, over the last couple decades, the US has been becoming more like Greece, taking form productive members of society and giving it to the union parasites and others in social distribution schemes.
“We will not pass a budget that eliminates CalWorks,” state Senate President Darrell Steinberg told reporters after the governor’s speech. “We will not be party to devastating families. That’s not what any of us came to Sacramento to do.”
Who wants to cut taxes and spending?
Not Frankfurt Mayor Petra Roth, not Schwarzenegger, not Illinois Governor Pay Quinn, and certainly not…
For some time now, the U.S. government, business leaders, and top economists have been trying to pressure China into allowing its own currency, the renminbi or yuan, to gain value versus the dollar. The thinking is that a higher yuan would make American products more competitive.
Meanwhile, China has been cautioning the U.S. that a free-floating yuan could result in a lose-lose situation in which both economies would be damaged.
We think our government should be careful what it wishes for. In particular, the U.S. should consider that China may be much more right about the U.S. economy than its own economy.
Let’s assume for the moment that the Chinese want the yuan to rise but know that a higher yuan will create havoc in the developed world.
Being highly intelligent, the Chinese know that they shouldn’t unilaterally let the yuan rise. If it did, China would be blamed for the fallout. Just like the hustler who wants the mark to feel like a victim of his own greed, China wants the revaluation of the yuan to look like an act of reluctant self-sacrifice which it does to appease U.S. demands.
It will look like self-sacrifice, thanks to people like noted short seller Jim
The World Bank indicated that China, the world’s third biggest economy, should raise interest rates to help contain the risk of a property bubble and allow a stronger yuan to help damp inflation expectations.
The nation’s “massive monetary stimulus” risks triggering large asset-price increases, a housing bubble, and bad debts from the financing of local-government projects, the Washington- based World Bank said in a quarterly report on China released in Beijing today. The group raised its economic growth forecast for this year to 9.5 percent from 9 percent in January.
The World Bank’s call echoes the assessment of private economists — analysts at Morgan Stanley this week said higher reserve requirements for banks may be “imminent” and interest rates could start to climb as early as next month. China’s economic rebound has also sparked increasing calls for an end to its exchange-rate peg to the dollar, adopted in mid-2008 to help shelter exporters amid the global recession.
Five senators including Charles Schumer of New York and Lindsey Graham of South Carolina introduced legislation yesterday to make it easier for the U.S. to declare currency misalignments and take corrective action. Even if the bill stalls, it may have “ripple effects” that lead the Treasury Department to declare China a currency manipulator, William Reinsch, president of the National Foreign Trade Council, said.
Obama’s goal of doubling U.S. exports in five years depends on his ability to get China to raise the value of its currency, said Sherrod Brown, an Ohio Democrat and co-author of the legislation. China’s intervention in currency markets to keep the value of the yuan, or renminbi, at a set value acts as a subsidy to exports and tax on imports, Brown said at a news conference yesterday.
Senator Debbie Stabenow, a Michigan Democrat, and Sam Brownback, a Kansas Republican, are also supporting the legislation. Graham is a Republican and Schumer is a Democrat.
So many shoes are dropping out there that reality is starting to look and sound like the tap-line in a Busby Berkeley production number. The meme-scape, too, is humming with viral transmissions of dire doings. Is JP Morgan unwinding like a 1911 knitted woolen Yale varsity sweater? Did it booby-trap the credit default swap universe in the process, and is that getting ready to blow? The whole world is hanging by its fingernails, refusing to be dragged into the future.
That future is all about contraction. We could navigate our way into it but we don't want to. We want to stay right where we are with all our stuff and no need to make new arrangements and we are trying every las...
Here’s the REAL DEAL NO BS Situation with Europe (Warning What Follows is EXTREMELY BAD).
The media is rife with misrepresentations and analysis of the EU. Here’s the real deal.
The ECB is tapped out. Having provided over €1 trillion in funding via LTRO 1 and LTRO 2, taking on over €700 billion in PIIGS debt putting its own solvency at risk, it simply cannot launch another LTRO scheme for th...
The S&P 500 got off to weak start and, after retracing a modest morning rally, spent most of the day in the shallow red with an intraday low of 0.63%. But in the last seven minutes of trading, the index recovered enough to a make a small gain of 0.14%. This is the fourth advance, the first was Monday's 1.60 surge, but the last three have ranged from 0.05% to 0.17% with today's close near the high of the miserly three-day series.
The index is now up 5.02% for 2012, which is 6.93% off the interim closing high.
From an intermediate perspective, the S&P 500 is 95.2% above the March 2009 closing low and 15.6% below the nominal all-time high of October 2007.
Below are two charts of the index, with and without the 50 and 200-day moving averages.
TIF - Tiffany & Co., Inc. – A surprise earnings miss and a reduced full-year profit and sales forecast from luxury jewelry retailer, Tiffany & Co., took some of the luster out of its shares today, with the stock trading down 8.5% at $56.55 as of 11:50 a.m. in New York. Options activity on Tiffany this morning suggests mixed sentiment on the st...
RealNetworks, Inc. (NASDAQ: RNWK) today announced that it has reached an agreement with the Washington State Attorney General over discontinued e-commerce practices. In accordance with the settlement agreement, RealNetworks has committed to:
Discontinuing the use of pre-checked boxes for purchases of RealNetworks subscription products; Spelling out more clearly the material terms of RealNetworks product offerings; Offering online cancellation of subscription offerings; Enhancing RealNetworks customer support guidelines regarding cancellation. Statement from Thomas Nielsen, President & CEO of RealNetworks:
"About two years ago, the Washington State Attorney General's Office contacted us regarding concerns they had with some of our e-commerce practices.
To learn more, sign up for David's free newsletter and receive the free report from All About Trends - "How To Outperform 90% Of Wall Street With Just $500 A Week." Tell David PSW sent you. - Ilene...
First we'll go to the technicals. Back in mid April I had opined a 'bear flag' formation was being created. [Apr 17, 2012: Potential Bear Flag Forming] But the market being the difficult beast it is, head faked everyone and rather than a break down from said flag it first went UP and nearly touched yearly highs. This caused everyone to think the bear flag had failed…. only to lead to a horrid May in the market. Generally a bear flag will resolve relatively quickly but the longer...
Despite the fact that U.S. equities are well-positioned and well-supported to go up, once again it is the headlines out of Europe—especially Greece—that are scaring off investors. Some are saying that it is now likely (and even desirable) that Greece will default on all its sovereign debt, withdraw from the euro, and severely devalue its domestic currency (Drachma?). This will allow them to operate a balanced budget while pumping cash into growth initiatives, rather than suffer the ravages of Germany-mandated austerity.
Some say, so what? Greece makes up only about 2% of the Eurozone’s overall economy. Nevertheless, you might say that t...
Markets died and then rallied to flat again as European leaders “prepared contingencies” for a possible Grexit
Markets died hard and fast earlier today as major indexes registered as much as 1.5% of losses after news that Euro zone officials were unofficially “preparing contingencies” for a Greek exit from the Euro. Unofficial statements were not enough to keep markets down however, as major indexes rallied back to flat levels by the end of the day.
So the world continues to wait on Europe, as the SPDR S&P 500 ETF (NYSEACA:SPY) gained .05%, the SPDR Dow Jones Industrial Average ETF (NYSEARCA:...
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This post is for all our live virtual trade ideas and daily comments. Please click on "comments" below to follow our live discussion. All of our current trades are listed in the spreadsheet below, with entry price (1/2 in and All in), and exit prices (1/3 out, 2/3 out, and All out).
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In this article, please revisit an article written two years ago titled, "The Calm Before the Storm." This article focused on the patent cliff that was looming in the pharmaceutical industry, that was later picked up by the New York Times and several other bloggers! Subsequent articles were written about big pharma company's revenue streams, and the pros and cons of of their later stage pipelines. Other articles have also attempted to identify smaller biotechs with the potential to reap big reward...
My last weekend update is dated from January 30 so after a long hiatus, here is an update of our virtual portfolio. Since the last update, we have closed the AA Money portfolio due to a lack of enthusiasm (and activity) and I have stopped tracking the FAS strangle as the low VIX makes it hard to get rewarded for the risk! But we have added a small $5KP virtual portfolio which does not use any margin.
FAS Money
We have had to recover from a big move up by FAS and a low VIX which keeps option prices low. But the portfolio has gaine about 10% since the last update.
Last update P&L - $5499.00
IWM Money
Not a lot of activity in this portfolio where the main focus is on the large IWM BCS. But the portfolio has grown over 20% since the last update.
Last update P&L - $1998.00
$5KP Portfolio
This is the virtual portfolio that replaced the AA Money portfolio. It does not use margin and we will keep holdings under $5K.
AAPL $50K P...
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