Mover Mike

From the WSJ,

China said it will no longer peg its currency to the U.S. dollar but instead will let the yuan float in a tight band against a basket of foreign currencies. The yuan has been strengthened, effective immediately, to a rate of 8.11 yuan to the U.S. dollar -- compared to the 8.28 yuan it has been set at for more than a decade. (emphasis added)

At 8:45AM PDT, DJIA is down 63 and interest rates are up 10 ticks to 4.25% on the 10 Year Treasury.

I suspect this is the typical reaction to today's news that China is floating the Yuan higher.

Furniture importers had mixed reaction to news the Chinese government no longer will link the value of its currency, the yuan, to the U.S. dollar.

Ultimately, the change could mean price increases on furniture and other goods imported from China. But industry experts don’t expect any immediate price hikes.

The National Association of Manufacturers', President John Engler said

"China's new currency system offers the possibility for continued upward movement of the yuan in the coming weeks and months, and that is what we will be looking for."

...snip...

"But for now, we are pleased that the fixed peg is gone and that a new system has been created. We hope everyone will join us in urging China to use it in a manner that truly reflects market pressures.(all emphasis added)"

These are not stupid people! However, we have just started down a road that initially feels good, but will turn rocky. We still need to import $2 Billion a day to buy our treasuries. If the world won't do it at this interest rate, there will be a higher interest rate that will attract capital.

The Chinese have just started to float their currency, so far just 2%, and you can hear in the pink cloud speech, "that this will barely hurt. If we manage our end well, you won't feel anything." How is this going to work if most experts agree that the Yuan was undervalued by 27% to 40%.

Jim Sinclair of Mineset said in a special email bulletin,

This is an undeniable move away from the US dollar and will impact the thinking of those central banks who have already or are preparing to diversify out of complete reliance on the US dollar as a reserve currency. This is what gave the markets the smell of a bottom in gold and a top in the dollar yesterday.

In a special evening update the Wall street Journal said,

But market forces should eventually push China to revalue more; as hot money pours into China, the yuan will need to rise in order to avoid inflation. "Speculators have their foot in the door now, and they're going to push it open as far as they can," (Alan) Ruskin, (research director at market research firm 4CAST Inc) said. U.S. politicians will also not be satisfied with a mere 2% increase. David Gilmore, partner at Foreign Exchange Analytics, said China might let the currency appreciate another 3% by mid-October, to keep the Treasury Department from officially labeling it a currency manipulator and slapping it with penalties. And China's move could have echo effects. Malaysia immediately cut its dollar peg, and other Asian nations could follow suit. The worst-case scenario is that U.S. Treasury bond prices would fall as Asian economies unloaded their holdings, pushing interest rates higher and hurting the U.S. economy. "Far from being the panacea that American politicians proclaim, China's decision to alter its peg could be the pin that finally pricks America's bubble economy," Peter Schiff, president of Euro Pacific Capital, said in a note. That's not the most likely scenario — but it highlights the long-term risks.(emphasis added)

God deliver us from politicians and fools!

Update:

You know that the Chinese floated the Yuan, and from now on, the Yuan will float against a basket of currencies. The odd thing is that our major financial institutions think they know what's in the bag, but judging by their answers, they don't!

In Why is "BASKET" of currency for Chinese a mystery? at CONTRARIAN ADVISOR MARKET COMMENTARY, here are some of the possible answers courtesy of Reuters:

DRESDNER KLEINWORT WASSERSTEIN - 70 percent dollar share and 15 percent each for euro and Japanese yen

UBS - 70 percent share, the Japanese yen a 20 percent share and the euro a 10 percent share

BANK OF NEW YORK - the euro, yen and the dollar would be given an equal weighting of 20 percent each and the Korean won and Taiwan dollar would have 10 percent each.

There are many more estimates, but you get the drift.

The question again is why the mystery?

Sen. Salmon Portland Chase, born in 1808, ran for President against Sen. Rep. Abraham Lincoln (R-IL) and lost. After his defeat, the Ohio legislature decided to return Chase to the U. S. Senate in 1861, where he served but two days before resigning to become Lincoln’s Secretary of the Treasury.

During the Civil War, he faced the daunting task of financing the Union war effort and maintaining the nation’s solvency.

Chase brought to the office his fear of monopolies, distrust of bankers, a preference for revenue tariffs and a belief in hard money. His principles would be tested by an empty treasury coffer and a long civil war that would cost the nation more than twenty billion dollars.

...Lincoln placed the entire problem of financing the Civil War to Salmon Chase. Against his beliefs, and believing that issuing greenbacks to be unconstitutional, but with the debts from the war mounting and not being paid, Chase lobbied the congress to pass the Legal Tender Acts of 1862 and 1863. This enabled the printing of paper money as a legal substitute for gold and silver for pre-existing debts including taxes, internal duties, personal debts, and excise taxes. debts.

'In God We Trust' was printed on every piece of U.S. currency for the first time in 1864 by order of the Secretary of the Treasury. The face of the Treasury Secretary graced the one dollar dominations. The most common of the bills, it was the one the public was most like to possess. Thereby keeping Mr. Chase's image in the mind of the potential voters in the next presidential elections. He was nick named 'Old Mr. Greenbacks.' Chase was a constant critic of Lincoln’s policies, inundating the President with unsolicited advice and proffering his resignation four times in fits of pique. In October 1864, Lincoln finally accepted the Secretary’s resignation, but in December appointed him as the new Chief Justice of the Supreme Court, a position he held until his death in 1873.

Five days after the Legal Tender Act was passed Susan P. Hepburn tried to settle a debt she owed to Henry Griswold of over $11,000 with governmental notes, notes which had depreciated more than fifty percent against gold and silver. She was sued by Griswold for payment in Gold and the suit made its way to the Supreme court. In 1870, Hepburn v. Griswold was decided in a 5-3 decision. Now Chief Justice Chase would disown his own offspring and declare the Legal Tender Acts unconstitutional. The Court until this time had rarely found an act of Congress unconstitutional. Chase wrote:

that such laws were inconsistent with the spirit of the Constitution, which prohibited the states from passing "any ... law impairing the obligation of contracts." Further, an act compelling holders of contracts that called for payment in gold or silver to accept as legal tender "mere promises to pay dollars" was unconstitutional because it deprived "such persons of property without due process of law" under the Fifth Amendment

In 1871, the Court, with two new justices on the bench, reversed itself with the legal tender cases, Knox v. Lee and Parker v. Davis, and declared the Legal Tender Acts constitutional. It said Congress had the power "to coin money and regulate its value" with the objects of self-preservation and the achievement of a more perfect union. As to the argument that the acts indirectly impaired the obligation of contracts, the Court said that "no obligation of a contract can extend to the defeat of legitimate government authority." Since the acts were within the spirit of the Constitution, Congress had not exceeded its authority.

The two cases decided by the Supreme Court in 1871 upheld the constitutionality of paper money issued by the U.S. Treasury. The Legal Tender Acts of 1862 and 1863 made paper money a legal substitute for gold and silver, including for the payment of preexisting debts.

Stephen J. Field, was the most eloquent of the new dissenters:

... The power to commit violence, perpetrate injustice, take private property by force without compensation to the owner, and compel the receipt of promises to pay in place of money, may be exercised, as it often has been, by irresponsible authority, but it cannot be considered as belonging to a government founded upon law.... From the decision of the Court I see only evil likely to follow."

It is amazing to me that Salmon P Chase would go against his principles and urge passing of the Legal Tender Act by Congress. The ends justify the means! Then have the courage to find the same law unconstitutional. It is amazing to me that the Fifth Amendment has been eroded even further in Kelo V New London.

I don't blame Susan P. Hepburn for taking advantage of the depreciating currency, we all do it today. We go into debt and pay the lender off in cheaper dollars. Since 1973, when Nixon severed the last Gold connection, our currency has depreciated 95%! I don't blame the Chinese for floating the Yuan. The dollar has fallen from 122 to 80 before this last small rally. In 1913, Congress passed a law establishing the Federal Resrve System, essentially our money system is now run by a cartel of banks. By passing the Federal Reserve Act, Congress gave up its power "to coin money and regulate its value"!

Update:

Update:

It gets tougher to hold the market together when the USD breaks recent lows (below 88.5), the CRB is within 3.5 points of it most recent high, Oil goes over $62 a barrel and Gold ($435)looks like it wants to challenge its most recent highs in the low $440's.

Do you suppose it's connected to CNOOC pulling its bid for Unocal? After all, if I'm China and I take in all these USD's, which are depreciating, what good are they if I can't buy what I want with them? Maybe, I should hurry my diversification. And what is the lesson for other countries who hold dollars?

It is possible that the Chinese are just poor buyers (Forbes). They have failed at quite a few of their recent forays: Maytag, Noranda, etc. I suspect Wall Street will figure out a way to help them rid themselves of all those USD's.

Update:

From Brad Setser, Can China add close to $300 b to its reserves a year and have no impact on the bond market?, an analysis of money flows into Chinese reserves. In 2003, China had $448 Billion in reserves, 65% were in USD's. It now has over $771 Billion and Setser expects the year end total of $930 Billion, 60% in USD's; meaning that the US total will have gone from $291 Billion to $558 Billion in two years. We don't where all the money is going, Setser writes:

...the implied non-dollar flows are enormous, particularly in relation to overall capital inflows to other markets. Big enough to drive down yields in other markets to the point where dollar yields become more attractive to private investors.

Greenspan has been frustrated that long interest rates have stayed low in spite of a series of short rate increases. The WSJ carries this chart to show what has happened to interest rates since the raises began:

Is Setser implying that our rates are low because of the competition with other Euro rates? Euro rates have been driven down because of the flow of funds, leaving our rates attractive by comparison, thus making them attractive to investors. That would argue for continued low rates in this country, frustrating Greenspan even more. I don't know the answer, but we have come a long way from the $10 Billion per year inflow to China from 1998 to 2002.

From the PrudentBear, there is a discussion of the Global Credit Bubble. This bubble has been primarily a US/Asian phenomenom with huge money flows between the US and China/Japan. As I have posted about recently, China's reserves are to top $900 Billion by the end of 2005. Now with the Middle-East stock markets flying, first we read about Saudi Arabia repatriating $360 Billion. Now, Wednesday from the Financial Times (Javier Blas):

Arab Gulf oil producing countries will embark this year and next on a “massive accumulation of foreign assets as they cash in on record oil prices and soaring worldwide petroleum demand… The region will buy about $360bn of foreign assets, from bonds to property in 2005 and 2006 – 50 per cent more than their total purchases of the past five years, according to a study by the Institute for International Finance, the leading association of private banks.

Economists in the US argue that greater growth outside the US will solve our trade balance problem, but greater growth will also put further pressure on oil prices. For now that huge float of billions of USD's seems destined for Europe and Japan.

Speaking of oil, last week there was an interview at Financial Sense Online with Matthew R. Simmons, President Simmons & Company International who wrote the book Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy. The transcript of that interview is here.

Simmons conducted a survey of the worlds oil wells.

What I came up with was finding that there are about 120 oil fields in the world that still produced over 100,000 bpd, and that they collectively were 49% of the world’s oil supply. What I also found is that the top 14 fields that still produce over 500,000 bpd each, were 20% of the world’s oil supply, and on average they were 53 years old. The next thing I found was that in the Middle East you had basically, somewhere between 3-5 oil fields in each of the major Middle East oil producers that made up about 90% of their supply – and until I did that I had just assumed the Middle East had hundreds of oil fields – and all these oil fields were old.

His Conclusion: “you know I really wonder whether in fact we’re sitting on an illusion that Saudia Arabia has all this vast amount of producible oil.”

Several interesting things came out in the interview:

* Oil at $60 per barrel translates into 36 cents per quart. Compared to milk at $1.30 a quart, oil is awfully cheap.
* We have almost created a domestic embargo for ourselves.

In 1990 the United States was still producing 7.3 million bpd of crude oil, today it’s 5.1; our refineries only needed to run at 13 ½ million bpd; and we only needed to import 5.8 million bpd of crude oil imports to balance our system. Today we have to run our refineries at 100% or we have major product shocks; today, we have to import 10-11 million bpd, or we lose crude oil stocks; we have to basically create almost 3 million bpd of finished product imports; we have to run the system on a 24-7, all Summer long. And we still liquidate stocks.

...snip...

By this Winter of 2005 and 2006, because oil demand globally could easily go to 86-88 million bpd during the Winter, and that could easily exceed supply by 2-5 million bpd.

Simmons says "Oil prices could easily go up 5-10 times."

Last weekend in Dawson City in the Yukon, Goldrush 21 occurred. The overall purpose of this conference was to disclose to the financial world that the precious metals industry has been manipulated and suppressed for years by the Central Banks and the Bullion Banks. Organized by GATA (Gold Anti-Trust Action Committee), the rationale for the suppression of gold and silver was discussed.

While "joined at the hip," central banks and bullion banks both have a vested interest in keeping gold as low as possible. To the government-controlled central banks, gold is a barometer, a lightning rod, or as one top international money manager describes it, "gold is the canary in a coal mine." If or when gold takes off to the upside, the fear is that investors will begin to worry about the general health of the financial system. Since there has been such enormous liquidity created in our system, asset bubbles have developed in stocks, bonds, real estate, and credit. A rise in gold may cause investors to worry and retrench, whereby these assets may deflate like the tech bubble did in 2000. This could do enormous damage to the U.S. and global economies. The bullion banks, on the other hand, are interested in maintaining a low gold price for other reasons. Collectively, they are massively short millions of ounces of gold, going back to the early 1990’s. While prospering enormously for many years from the carry-trade in which they shorted gold and invested the proceeds in higher interest-bearing instruments, today their massive short positions are extremely vulnerable to large losses should gold rise much higher. In addition, since gold competes with traditional asset classes like stocks and bonds, bullion banks stand to lose a lot of revenue should investors become concerned and reduce their exposure to those assets.

This story has not been covered by the MSM and the public is barely aware or interested in suppression of prices of precious metals, why it has been done or what it means to them.

Update:

From Chuck Muth's News Letter: NIMBY SYNDROME "Not a single (oil) refinery has been built (in the United States) in the last 30 years. Why is that? Because the radical environmentalists have made it so hard along with the government to pull the proper permits, that's why. The oil companies figure it's just not worth it. There's also a little bit of the NIMBY syndrome....not in my back yard. People want to drive their gas-guzzling SUV's, but would be jumping up and down screaming if somebody dared to build a new refinery within sniffing distance of their house." - Talk show host Neal Boortz

From Kitco, Gold/Oil Ratio Extremes 3 by Adam Hamilton, an excellent article analyzing the relationship between the price of Gold and the price of Oil (GOR)

Five times since 1975, the GOR has been below 10 since 1975. Each time the GOR went back to at least 15.2, it's average. Now for the sixth time we are below 10, currently at 6.6. With Oil at $65, a GOR of 15.2 puts gold at $988. If I were selling oil for USDs, I would take the USDs and buy Gold. If things work out for the sixth time, it would be like selling Oil for $130. It may be the best trade in the last 35 years!