Print This Article

The Treasury Just Pulled a Fast One…

Chuck Butler (July 1, 2009)

Wednesday, July 1, 2009

Here’s How It Affects You and Your Portfolio…

Also In Today’s Letter…

By Chuck Butler So, welcome to July! The last day of June was quite the volatile one to say the least!

There we were, all waiting for the S&P/CaseShiller Home Price Index to show that home prices were still down by quite a bit. But the number was actually even better than expected at -18.12%.

Naturally, the media was all over that like a cheap suit. They kept clamoring that the spiral down in home prices had come to an end! Which may be true. But wouldn’t you want to wait to see if next month’s report confirms it? And by the way since when does a -18.12% fall in home prices beckon a rally?

Yesterday, would be that answer!

So the currency rally that was going on for a 4th day, was quickly wiped out. The euro sunk like the Titanic from a level of 1.4130 to 1.40. The iceberg that caused this mess was simply the fact that traders, etc. believe the U.S. is on its way out of this mess.

Of course, they must not be my readers, because…

You heard me say yesterday that even with the spiral down in Home Prices ending, it would take until 2011 before the Home Prices got back to zero!

After the thrill is gone, and the dust settled on all that yesterday, the euro is leading the other currencies higher once again today.

Can We Really Count On Foreigners to Pay Our Debts?

A long time reader sent me a note yesterday, and said, “Hey Chuck, did you see the story in the Wall Street Journal (WSJ) on Foreign Demand for Treasuries?”

Well, I hadn’t and went immediately to the Wall Street Journal, and there it was. Tucked away in a corner so that no one would see it…A story, by Min Zeng, titled, “Is Foreign Demand As Solid As It Looks?”

Okay, things like this really tick me off folks. So stay with me on this… Basically, as we all know, the U.S. Treasury Auctions have been “covered” easily recently. Foreign demand was listed as the reason that bonds were selling.

For those of you keeping track at home, that’s the exact opposite of what I’ve been saying about foreigners shying away from Treasuries for the last couple months. But I may have been even more on target than even I knew…

The Treasury Department Pulled a Fast One!

Here’s the skinny… But I’ll let Min Zeng tell it, as he did the research and brought this to the public…

“In a little-noticed switch on June 1, the Treasury changed the way it accounts for indirect bids, putting more buyers under that umbrella and boosting the portion of recent Treasury sales that the market perceived were being bought by foreigners.

“The new definitions are deep in the arcane world of Treasury auctions. The change involves buyers who place orders through primary dealers. Those had been counted as direct buyers, but as of June 1 they were classified as indirect buyers, making that group larger than before. Because investors view that group as being dominated by foreign buyers, they assumed foreign demand was higher.”

So that’s what’s going on. The Treasury “moved the goal posts on us” so it looked like more foreigners were buying. That’s despicable! Why isn’t someone in Washington D.C. shouting from the roof tops about this? Oh, that’s right, they’re all in cahoots!

This is HUGE folks… When the markets believed that foreign demand was increasing, foreigners were actually shying away from Treasuries (just as I said)! Which, if the market participants are thinking that as long as foreigners are “buying into our deficit spending” then the dollar will be on terra firma.

But instead the U.S. Treasury is duping everyone in the markets. You would think that someone would have some ‘xplainin to do…Right Lucy?

U.S. vs. China: The Battle Continues
…and These 2 Currencies Are Winning

And here’s another thing that just ticked me off when I read it this morning.

Recently, several experts have been dissing China and dismissing the idea that China’s stimulus has been working. Last week, their words alone sent the Aussie dollar to the woodshed until this news had passed?

Well, talk about egg on their face! Here’s the skinny…

China’s manufacturing expanded for a fourth month in June. The official Purchasing Managers’ Index rose to a seasonally adjusted 53.2 in June from 53.1 in May. And just like here in the U.S. any reading above 50 is thought to show manufacturing is expanding. The manufacturing index in the U.S. is around 44, so we do have the tale of two economies.

In one corner, we have the Chinese who have spent about $585 billion worth of renminbi in stimulus, and are seeing the results. In the other corner, we have the U.S. who have spent more money than you can shake a stick at, and are not seeing green shoots like they “think they are,” instead they see dandelions, and weeds!

The currencies of Australia and New Zealand have responded positively to this news from China…

The Strange BRIC Story Continues…As the Rupee Flies!

And since I’m talking about China, might as well check on the other members of the BRIC’s (Brazil, Russia, India and China).

Brazil’s real just posted its best quarterly performance on record, and India was Asia’s 3rd best performing currency, and if you throw out the two currencies above India that are illiquid, South Korea, and Indonesia, India was the best performing currency in Asia in the second QTR…

And the people over at the Royal Bank of Scotland (RBS) believe that the rupee won’t stop here. RBS issued a research report calling for a record 11% gain by the rupee in the third quarter.

I bet this news is music to Ashish Advani’s ears – he’s my colleague and my co-pilot on my monthly newsletter, The Currency Capitalist. Ashish has been saying the rupee would be a strong performer for months now! In fact, he recommended the easiest way to buy the rupee almost two months ago! Members can see the full story in the May issue.

That’s it for today… I see that my little buddy, Alex, got second and third in backstroke and freestyle respectively at his latest swim meet. Really long time readers might recall when Alex’s older brother, Andrew was a highly decorated swimmer, and I would write about his swimming records. And their sister Dawn, also was a medal winner as a young girl! So it’s now up to our granddaughter, Delaney Grace to carry on the swimming tradition! HA! Cards lose again… Ugh!

Okay, let’s get on with this Wonderful Wednesday…shall we? Have a great one!
Chuck Butler

More From The Author