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Also In Today’s Letter…

• The Best Run Central Bank in the World
• More Bubble Proof: Mom and Pop Investors Are Buying Treasuries
• Get Up and Running with Forex in 2-3 Days

By Chuck Butler The BIG NEWS this morning comes to us from down under. The Reserve Bank of Australia (RBA) surprised the markets and left rates unchanged for the first time in seven months.

How dare they? How could they? Where do they get off thinking they don’t have to cut rates when everyone else is? Ahhh, grasshopper… The RBA continues to shine in my eyes as the best run Central Bank in the world.

Here’s why… Yes, they could have followed the rest of the crowd, and cut rates to the bone, but why stoke inflation?

Now, having said all that, that doesn’t mean the RBA will hold rates again in the future. I’m just saying that they’re being prudent (at least for now). They’re taking a step back. They’re taking a good look at what their previous rate cuts have done to the economy, and how the economy would be affected by additional rate cuts. In other words, they took the proverbial “pause for the cause.”

But, I believe this pause is warranted, given the RBA has cut 400 BPS away from their once lofty rate in the past seven rate cuts.

The Economy Down Under Continues to Grow While Everyone Else Contracts

Fundamentally speaking, the Australian dollar represents an economy that has fared better than most of its G10 counterparts. It now has a growth outlook far exceeding that of the G10 nations. Australia’s 2009 GDP growth is expected to reach +1.0%, compared other major G-10 nations around the world. Just take a look at these numbers…

• U.S.: Growth at -2.0%
• Eurozone: -2.20%,
• Japan: -5.0%
• U.K.: -2.7%
• Canada: -2.2%

And we all know that the U.S. growth outlook is a big fat joke! Instead of -2% it should be -4 or -5%! Then, add in the fact that Australia’s current account deficit is seen at 4.4% of GDP in 2009, its lowest level since 2002.

Recall, I kept telling you that Australia’s Current Account Deficit was narrowing? Its Budget SURPLUS is expected to hover at 1.0% of GDP. That’s a far superior display than the deepening deficits of the US, Eurozone, Japan and the U.K.

So, like the spotlight that I shined on Norway last week, here’s another example of a country that could be in the front of the race when this financial turmoil ends…

Indeed, the Aussie dollar is stronger this morning, but I wouldn’t race to the currency kiosk to buy Aussie dollars just yet. This is not what I’d call a reversal in Aussie dollar fortunes…not yet.

Indeed, there’s no end in sight to the financial turmoil that has a grip on the world right now. Knowing that tells me that the risk takers are not participating in the markets right now.

Without the risk takers, any run-up in Aussie dollar or any other currency for that matter is not of the “reversal of trend” kind of run-up. But, there will come a day, when all these fundamentals will matter once again.

Mom and Pop Investors Are Buying Up Treasuries Central Bankers Didn’t Want

I’ve gone on record before, with how I believe U.S. Treasuries are the next bubble. And I read a report from one of my fave economists, Brad Setser, yesterday that tells me I’m really on to something with that belief. Here’s a snippet…

“That implies if the Pandey/Setser estimates for official purchases are right, that private investors snapped up more Treasuries than the world’s central banks. Central bank demand accounted for a far smaller share of total issuance than in the past few years. In 2007, for example, central bank purchases easily exceeded total issuance. The big increase in demand for Treasuries in 2008 came from private investors in the U.S.”

Hmmm…private investors are buying Treasuries. Now that’s something I’ve been telling you for some time now. And the fact that private investors are buying all the Treasuries that Central Banks didn’t want, tells me that a bubble is in the making.

Speaking of Central Bank ownership of Treasuries… I read yesterday that China used to keep 100% of their dollar reserves in U.S. Treasuries. Today they keep only 70% of their reserves in Treasuries. That other 30% now includes gold, euros, and other Asian currencies. Hmmm… What if they decide to diversify more?

Did the Economy Just Show Some Signs of Life?

The devastation the manufacturing sector has experienced in the past 14 months, looks like it might have found a bottom.

The February ISM Index, which measures the pulse of manufacturing, registered a slight increase! The index rose slightly to 35.8 from a previous level of 35.6. However, the employment component of the index continued to slide.

Production was the biggest gainer of the report. So, something is producing a heartbeat for the economy…

My Answer to Your Hate Mail

One of your fellow readers just sent me some “hate mail.” I opened it up, and the guy said he “hated me” because I called for an “Obama bounce” after his inauguration that obviously didn’t come to fruition.

Yes, I was wrong… Frankly, how could anyone know that Obama would opt for a stimulus package that has more spending in it to produce short-term jobs, and start nationalized health care, than shore up financial institutions?

Obama claimed he was going to “fix the problem.” Unfortunately, his idea of a “fix” is to create jobs, when the economists all agree that the banks and financial institutions need to fixed first. Maybe he’ll be right. But right now the markets don’t think so especially stocks.

The Best Investor of All Time Lost Billions in 2008

Speaking of stocks… The DOW lost 300 points yesterday to trade below 7,000 at 6,763. The first time below 7,000 in 12 years! But how can the little guy make money in stocks when the greatest investor of all time lost money in 2008? Here’s the skinny as reported by the Wall Street Journal.

“Berkshire Hathaway, the holding company led by famed investor Warren Buffett, reported its worst year ever in 2008, with its net falling to US$4.99 billion from US$13.21 billion in 2007. Book value per share declined 9.6%, a performance far better than the S&P 500 stock index but only the second negative year suffered by the company since Buffett took over in 1965.

Berkshire predicted the economy, “will be in shambles throughout 2009 — and, for that matter, probably well beyond.”

That’s it for today… My beautiful bride takes off tomorrow morning with her friends, to Florida, leaving me and my little buddy, Alex, to fend for ourselves. No biggie, we’ve done this before. Lots of pizza, eating out, and not doing dishes is in our future! My trip to the radiologist yesterday yielded very little in the way of new information, except that I “might need to be patient a little longer.” Ok, I’m patient…

The time has come for me to hit the send button, so I hope you have a Terrific Tuesday!

Chuck

P.S. In other news, the March issue of my monthly newsletter was released online over the weekend. I hope you enjoyed your free preview I sent you. But if you happened to miss it, you can still find more information out about my monthly newsletter here.

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