Currency Wars, Trade Sanctions and its Impact on You

All the major exporting countries are in a race to devalue their currency to ensure their exports stay in demand globally.  If a country can improve exports then GDP and jobs improve, showing growth as a nation.  As reported in an earlier post, the Bank of Japan interceded a few weeks ago in the currency market devaluating their currency in one swift action (which has been totally retraced and then some already).  This action was an attempt to ensure their exports (as Japan is totally dependent on exports as a country) continue to grow or do not slow.  Europe wants to make sure there currency isn't too strong because they want to continue to enjoy abundance in exports.  Meanwhile, China has been purchasing more Yen and Euro strengthening them stating that they are trying to diversify their portfolio.  The U.S. is printing money like it was going out of style in an effort to pump the economy, stock market and the TBTF banks wallets, which is further devaluating the U.S. Currency (see dollar index below).

If you look at the major currencies the dollar has devaluated against every major currency.  Remember the first part of the currency pair (pair like EUR/USD) is the currency that your going long and the 2nd in the pair your going short.  So if you look at the EUR/USD chart below it is going up and to the right, which means that the EUR is gaining strength vs. the USD.  In the USD/JPY below, it is going down and to the right, which means the USD is losing strength vs. the JPY (or Japenese Yen).

The IMF is now getting in the picture warning all nations to stop this currency war as it is doing nothing but hurting an already fragile global economy.  In an article in the Huffington Post entitled "IMF Chief Warns Against 'Currency War' " IMF managing Director Strauss Kahn says:

"We are gathering at a pivotal moment facing a very uncertain future.  Growth is coming back but we all know that it is fragile and uneven."

Strauss-Kahn said he saw a particular threat to the recovery from a breakdown in cooperation among nations, emphasized by growing talk of currency wars.

Canadian Finance Minister James Flaherty told reporters that the global economy would be the loser if nations followed "beggar-thy-neighbor" currency policies where one country tries to get an advantage over another by lowering its currency, making its exports cheaper.

Now the U.S. is looking to sign a bill that would impose a tariff on all imports from China to offset this currency imbalance.  Now, before you go thinking this is a great idea, read on to see how it impacts you.

Impact of import tariffs on you: In a prior article, I said that this was the wrong time to impose import tariffs, as we have no real agricultural and manufacturing base to sustain ourselves as a country.  I suggested that we put stimulus money (if you must spend to stimulate the economy) into building new factories, infrastructure and funding farmers to grow food for human consumption again, so this nation can employ and feed ourselves.  We are at an important juncture in our countries life, in which the US people are the major consumers in the world and we are also the major importers to those countries that are thriving off our imports.  Before we decided to take action, lets make ourselves self-reliant again.  I was listening to a podcast by Jack Spirko (Survival Podcast, about self-reliance not living in a cave) and he points out that if import tariffs are imposed on China ( our main importer of food and cheap stuff i.e. everything in Walmart) that the U.S. consumer will be the ones that pay, not China.  I'll add to that and say that maybe this is the plan anyway.  This could be another method of siphoning off money from the U.S. consumer into the government, giving them more money to spend.  See for China's currency to actually be equal in value to the U.S. it would have appreciate by 40%.  Using an example from Jack Spirko, if you get a product that normally costs $50 and then you add transportation, handling and markup for the stores lets say it is now $100.  Well the tariff would only apply to the $50, so a tariff of $20 would be added now making that product cost $120.  Seems like a great plan to tax the U.S. consumers further without actually calling it a tax.  As you can see this in no way impacts China as they aren't paying it.  Long term China would be effected as U.S. consumers try to  find new ways to get those basic living products (that could be a long and painful process).

Jon Stewart on Foreclosure Crisis

Jon Stewart always has a humorous way of putting spins on things.  This time Jon jests about the handling of the mortgage crisis and how the banks didn't read the documents before signing off on them. Even though this video has a humorous side, he brings up some pretty important issues that we all need to be aware of (especially toward the end of the video).

The Daily Show With Jon Stewart	Mon - Thurs 11p / 10c
Foreclosure Crisis
www.thedailyshow.com
Daily Show Full Episodes Political Humor Rally to Restore Sanity

Dylan Ratigan on the Markets and Fed

Dylan Ratigan discusses the movie Inside Job, which outlines corrupt practices in the U.S. financial system that they say Americans are paying for.

Dylan Ratigans discussion on the FED in April 2010.  Dylan talks about what he believes is a con on America by the FED and the TBTF (To Big To Fail) banks.  Dylans guests are Congressman Grayson and Bill Fleckenstein of Fleckenstein Capital.  

Part 1

Part 2

Monthly Non-Farm Payrolls

Septembers Non-Farm Payrolls Unemployment report is the change in the number of employed people during the previous month, excluding the farming industry.  This number is an important economic indicator of consumer spending, which accounts for our overall economic activity.  The number was forecast to come in at 1,000, but the actual headline number disappointed by coming in at -95,000.  The headline number was worse than the revised number of -57,000 from the prior month.

Unemployment Rate

The unemployment rate number was released today, which stated that the unemployment rate stayed the same at 9.6% beating forecasts of 9.7%. This seems like great news, unfortunately this was the reported rate (or U3), the real unemployment rate or U6 actually increased from a prior 18.5% to 19.0%. That is a pretty big hike in unemployment. The markets regained most of its losses from pre-market after the release of the U3 number, but if they really peal back the report and look at U6 (which most don't), they will see this as a much worse problem).

The problem with U3 is that it only takes the reported labor force / unemployed, it does not consider the following; Marginally attached, Discouraged and part time for economic reasons workers. They all have to be included in the unemployment number as that truly reflects our unemployment number. The number of Marginally attached workers increased by 78,000, the number of workers that are part time for economic reasons expanded 612,000 and the number of discouraged workers increased 99,000 from the prior month.  That is huge and is not a victory by any stretch of the imagination.

The graph above represents the changes in Marginally Attached, Discouraged and Part Time for economic reasons month to month.

Fed Funds Rate Decrease

The Fed Funds Rate decreased last night to 0.18% from 0.19%. This change occurs by trading government securities, the NY FED affects the Fed Funds Rate (thus effecting the rate at which we borrow money).  The FEDs target rate is between 0.0 and 0.25.

Professor William Black on Mortgage Fraud

Foreclosure Mess

The foreclosure situation has gotten worse over the past few weeks, with banks not having clear title to mortgages and not even knowing which mortgages they have.  In one case a man was foreclosed on and his property was sold even though he had no mortgage (he paid cash for his house).  Now mortgage foreclosures in a growing number of states (23 so far) are getting frozen until the end of the year, to give the banks the chance to straighten out those records (don't know if they actually will).   This freeze will have rippling effects into other markets, like the $2.8 Trillion MBS (mortgage backed securities) market.  An article by the WSJ makes  a few points:

If a foreclosure is delayed, the servicer must typically keep advancing payments that will go to all bondholders, including the junior debt holders, even though the home loan itself is producing no revenue stream. 

Normally the foreclosure would go through and the holders of the riskiest debt ( junior debt holders) would take the loss.  Now this investment instrument seems toxic, as it pays on an asset that is became a liability, paying to a debt holder that would normally be liquidated from the position and creating a drain on the asset on the Senior debt holders ( less risky debt holders).

The latest events thus set up an odd circumstance where junior bondholders—typically at the bottom of the credit structure—could actually end up better off than they expected. Senior bondholders, typically at the top, could end up worse off.

This impacts whomever made investments in these type of assets, be it pensions, mortgage based mutual funds and etc ( ultimately you and I ).  The sellers of these instruments (investment banks typically) have 90 days to correct the problem or they have to buy back the loan.  The Assoc of Mortgage investors is trying to hold the sellers accountable for these bad practices by demanding an audit and enforcement of the 90 day period.

The banks actions on foreclosures has wider reaching implications, like impacts to our rights (whether your foreclosed on or not, as some that are not in default are mistakenly being foreclosed on as well).  How do we ensure houses aren't broken into by the banks foreclosure arm without proper notice (maybe a sign should be posted in the yard for 2 or 3 weeks, so that person knows they are being foreclosed on)?  Here is a video on the Dylan Ratigan show of one persons experience.

Monthly Consumer Credit

The consumer credit m/m (does not include real estate) is a measurement of change in the total value of outstanding consumer credit that requires installment payments.  It's considered to be correlated with consumer spending and confidence.  A rising debt levels are a sign that lenders feel comfortable issuing loans and consumers are comfortable spending money. The forecast was for a -2.9 Billion reduction in consumer credit, but actually decreased by -3.3 Billion which was down less than the previous month of a revised -4.1 Billion.  This was interpreted as negative to the economy, as consumer credit reduced more than expected.  This means that consumers are not spending as much as they were, a problem for a spend more economy.  Revolving credit reduced by 0.6% and non-revolving credit increased 0.1%.

Congress Inaction in Tax Policy

Where'd the Money Go?

Fed Funds Rate Update

Last night the Feds funds rate was reduced from a 0.20% to a 0.19%.  This change occurs by trading government securities, the NY FED affects the Fed Funds Rate (thus effecting the rate at which we borrow money).  The FEDs target rate is between 0.0 and 0.25.

Weekly Initial Unemployment Claims

The weekly Initial Unemployment Claims were released today.  Initial claims are the number of people filing for unemployment insurance for the first time during the past week.  The forecasted number called for 545k and the actual headline number was 445k, beating the previous weeks revised number of 456k.  This means the number of people filing for unemployment insurance dropped by 11k.  This is the 2nd week in a row that initial claims has dropped from the revised number.

The delta in revisions decreased slightly which is good but still to high.  We need to continue tracking revisions to see what the real trend in Unemployment is.

Kyle Bass on the Economy and QE2

Kyle Bass talks about the out of control spending and QE2 which is coming in November.  QE2 was rumored to be 1 - 2 Trillion dollars, now Kyle brings up that 7 trillion has been floated.  Kyle also discusses ZIRP (Zero Interest Rate Policy) and how this tool is really effective anymore which means the FED can only print and monetize (hence QE2), thus debasing the currency further.

Part 1

In the second video Alan Fournier joins Kyle to talk about global growth and sovereign debt.  Alan also talks about the debt markets (or bonds) and how people are getting exuberant.  Alan differs with Kyle on his views of equities, but not a lot behind why.  Kyle continues about debt and the amount of interest that will mount if we move into inflation.

Part 2

In the final video Alan discusses housing and how important it is to our economy.  Kyle discusses how household debt has dropped considerably, but most of that is due to foreclosures.  Kyle says we need to dramatically cut Government spending to start our economy moving in a better direction over time.

Part 3

Weekly Fund Flows

Another bad week for domestic funds as an additional $4.15 billion was removed.  Foreign funds saw an increase in activity as $1.127 billion flowed into foreign funds.  The bond market bubble continues to blow up with an additional $5.421 billion invested this past week.

A total of $35.739 billion has been removed from the stock market since July 28th 2010.  That is a lot of money coming out of the equity markets, no wonder the Fed had to start up POMO purchases again to get the markets moving again.  The FED has, through its Primary Dealers (AKA Plunge Protection Team) pumped $43.7 billion into the markets since August 17th 2010, to keep the market gears a movin.  Wow that is a lot of money holding up our markets.

As you can see above, another week of funds flowing to foreign stock with a grand total of $1.944 billion flowing into foreign stocks since July 28th 2010 (that is the sum of inflows+outflows in foreign stocks).  The money flowing out of domestic stocks year to date is approx. $57.673 billion, with a majority of that coming out since May 2010.  

Bonds continue higher with a grand total of $68.151 billion flowing into bonds (Taxable + Municipal) since July 28th 2010.  The money flowing into bonds year to date is approx. $241.941 billion.