China Keeps The Global Growth Hope Alive!
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In This Issue.

* Currencies mount a mini-recovery.

* Chinese Retail Sales & Ind. Prod. soar!

* Who's going to take the Fed's place?

* The Honor of the Nation is at Stake!

And, Now, Today's Pfennig For Your Thoughts!

China Keeps The Global Growth Hope Alive!

Good day. And a Terrific Tuesday to you! Day / night one of my week of "solitary confinement" was pretty much a non-event last night. It sure was quiet, without Alex there playing his guitar or now his piano / keyboard. The Cardinals had a day off, so I don't think I even turned the TV on, instead opting to do some research / reading at the computer until it was time for bed! I can hear you saying. Hey Chuck! Did anyone ever tell you that you are BORING? Yes. and I'll leave it at that!

Well. the currencies tried to mount a mini-recovery from Friday's bloodletting, all day, with some success, but not a whole lot. Then overnight, the risk dial was turned to "ON", as China reported that not only Retail Sales were strong (see more signs of domestic demand), but that Industrial Production was also strong. You know, it seems about every time that the Chicken Littles come out of the woodwork to tell anyone that will listen that Global Growth is going to falter, China prints an economic report that refutes that claim by the Chicken Littles, and the risk meter is turned to "ON" once again.

This time, Chinese Retail Sales grew 16.9% in May! WOW! OK. so remember what I told you a few years ago, about the customer of mine that lived in China for years, and did business there. He said, that you should only believe 1/2 of what the Chinese tell you about their economy. OK. so, if that's the case, their Retail Sales grew 8.5% that still gets a WOW! But I think the 5.5% gain in Industrial Production (or 2.7% using the 1/2 rule) is the better news. That's good for commodities, it's good for Commodity Countries, and all that.

Now. China did take this opportunity to raise their reserve requirement on Chinese Banks by 50 Basis Points (1/2%), which in essence is the same as a rate hike. Which I would be surprised to see in addition to the bump higher of reserve requirements. You see, China has no use for inflation, they don't see it as "transitory", and they've done the right thing for the past two years to combat that inflation. But the rise of domestic demand in China has really put pressure on China's ability to combat that inflation, but they have. so far.

Well. in the Eurozone, the finance ministers, and leaders of the respective countries are getting down to the cheese that binds with regards to ironing out the Greek situation. The Eurozone leaders will meet next week June 23&24, and most observers believe that it will be here, at this Summit, that the Greek "plan" will be announced. Until then there will be lots of sawdust left on the floor, from these blockheads banging heads. I know that a lot of observers are saying that the Eurozone leaders are going to allow Greece to default. But I don't think so, not now.

A good friend (email friend) is a writer that sends me his stuff (and it's good!) and the other day he sent me something that, was written by David Kotok, and really rang a bell with me. Here's the start of his letter. "Stefan Ingves, Sweden's central bank governor, was asked how Sweden found the political resolve to respond to its financial crisis two decades ago. His answer was, "The honor of the nation was at stake." A simple statement carrying profound meaning.

In the end, the honor of Greece, Portugal, Ireland, and countries around the world is at stake. In the United States, a debt-ceiling stalemate that results in a default would be a breach of American honor. The damage would be irreparable. "

Chuck again. and now I'll circle back to my statement above, and apply this thought. I don't believe that Eurozone policy makers are going to just willy nilly allow Greece to default. "The honor of the nation is at stake."

Of course, they could come a time 2-3 years down the road, when we reach the can that was kicked down the road, and nothing else can be done. Debt write down at that time will probably be the last thing anyone wants to do, but that's too bad, so sad, don't get mad. But that's down the road, right? I mean that's all we keep doing in the U.S. as if some magical wand is going to float down from OZ right into the President's hand and he can swish all our debt away. Just like that, it's gone, and we become so prudent in our spending, and never go down the deficit road again. WAKE UP CHUCK! WAKE UP! What? Oh. I must have been dreaming right here at my desk. Sorry.

The U.S. is in worse shape. I've told you this, ever since the first Greek debt debacle. But you don't have to just take my word on this. Here's Bill Gross, the manager of the largest Bond Fund (PIMCO) in the world on this very subject. here's Bill. "When adding in all of the money owed to cover future liabilities in entitlement programs the US is actually in worse financial shape than Greece and other debt-laden European countries. Gross puts the total U.S. Debt at "nearly $100 trillion," that while perhaps a bit on the high side, places the country in a highly unenviable fiscal position that he said won't find a solution overnight.

"To think that we can reduce that within the space of a year or two is not a realistic assumption," Gross said in a live interview. "That's much more than Greece, that's much more than almost any other developed country. We've got a problem and we have to get after it quickly."

Ok. enough of that! So. while the currencies had a mini-rebound yesterday, Gold & Silver go whacked again! I find this selling of Gold & Silver to be very strange. The 10-year Treasury yield was below 3%, and yet the price action in Gold & Treasuries is telling me that people would rather loan money to the Gov't at negative real rates (yield minus inflation), than have a store of wealth like Gold? I know that everyone that walks the earth just don't understand all of this. but come on! Don't these people buying Treasuries realize that there's going to be no one at the Treasury's bond auction in July?

The Fed has been responsible for 70% of the auction buying during this latest round of Quantitative Easing (QE). and that's schedule to end on June 30th. So. who's going to take the Fed's place at the auction table? Once again, I hand the Pfennig over to Bill Gross, who had this to say about this very thing.

"We've always wondered who will buy Treasuries" after the Federal Reserve purchases the last of its $600 billion to end the second leg of its quantitative easing program later this month, Gross said. "It's certainly not PIMCO and it's probably not the bond funds of the world."

Ok. so, we've talked about this before, but it's worth going through again, especially for all the new readers. First of all. the U.S. uses Treasury bond (Treasuries) issuance as a means to finance their deficit spending. So, when a country experiences a problem with finding buyers of their Treasuries (or debt in real terms), they have two choices. They can aggressively raise interest rates, so that the yields on the new issues are more attractive to buyers (like they had to in Greece), or they can allow a general debasement / depreciation of the currency, which acts as the clearing mechanism for the trade. In other words, when foreigners buy a Treasury, they have to convert their currency to dollars to make the trade. So, if that conversion is in their favor (if the dollar is weak against their base currency), then they get to buy the Treasury at a discount. thus making it attractive.

OK. we can't aggressively raise interest rates, or the depression we're in will worsen. So, we're left with a depreciating dollar. So. when the first auction of July comes around, we'll see what happens. Personally, I believe it's going to be a real financial calamity, but that remains to be seen at this point, so I won't go there except to ask the question. "Who's going to take the Fed's place at the auction table?"

Well. when you get down to the currency round-up you'll see that the price of Oil has really moved backward in the past week, which is pretty strange, considering that we are now in the Summer driving period. But, the $5 downward move in the past week, is simply a short-term blip. I just don't see Oil falling to $65 once again. That sure would be nice on my wallet (actually I don't use a wallet, can't stand that in my pocket) when going to the gas station, and other things of course!

You know, we don't offer Russian rubles as a standalone currency at EverBank World Markets, but it's a component of our BRIC MarketSafe CD that we issued 2 years ago. So, I now record the ruble's price in the currency round-up each day. I noticed some time ago, that even more than the Canadian dollar / loonie, the Russian ruble's performance is closely tied to the price of Oil. Which, puts a Cheshire Cat-like smile on my face, because I remember telling people at the Agora Vancouver Symposium 2 years ago, to view Russia as "an oil play". There were a lot of people that would not invest in the BRIC, even though it has 100% principal protection, because Russia was a component. I guess, the cold war, was still going in the minds of some people, eh?

Well. the U.S. data cupboard has been re-stocked and is ready to yield some data prints for us, starting today with May Retail Sales. Yes, U.S. May Retail Sales will dominate the markets today. The forecasts are all over the place for this data. But like I told you yesterday, the BHI (Butler Household Index) is indicating to me that the number will be soft and disappointing. So. in the "old days" good times I remember, Fun days, filled with simple pleasures. No wait! I wasn't talking about the song by Chicago, I was talking about how in the Old days of data reports, a disappointing Retail Sales figure, would be bad for the dollar. And although, recently we've begun to return to those "old days", every now and then we get a rogue reaction to a report. So. I'll tentatively say that the dollar could see some selling today, IF the markets go "old school" on the disappointing report.

Then there was this. from the Wall Street Journal this morning. "The divergences between the economies of individual euro-zone member states are no greater than those between states in the U.S., European Central Bank President Jean-Claude Trichet said Monday.

"Those who question the viability of the euro area as a single currency area on the grounds of economic heterogeneity are misguided," Mr. Trichet said in a lecture at the London School of Economics.

He cited a number of academic studies arguing that the degree of variance is no greater than among U.S. states. Mr. Trichet acknowledged that the financial crisis had exposed the weaknesses of the euro zone's institutional framework, which he said "need to be addressed urgently," as well as the need for individual countries to restore their economies' competitiveness."

Chuck again. sorry to beat this drum so often, but it just gives me a rash every time I see someone making such a big deal out of Greece's problems, but just push the U.S.'s debt problems to the side.

To recap. The risk meter dial was turned to "on" overnight, when China printed to very strong pieces of data (Retail Sales +16%, and Industrial Production +5.5%) which brought the thoughts of Global Growth not dying just yet back into the markets. The currencies tried to stage a mini-rebound from Friday's selloff, but have met some resistance, as the problems of Greece continue to be a real drag on the currencies. And Retail Sales here in the U.S. will dominate the markets today. I expect the report to be disappointing.

Currencies today 6/14/11. American Style: A$ $1.0635, kiwi .8180, C$ $1.0255, euro 1.4430, sterling 1.64, Swiss $1.1920, . European Style: rand 6.7670, krone 5.4160, SEK 6.3215, forint 183.40, Zloty 2.2735, koruna 16.6970, RUB 27.88, yen 80.20, sing 1.2325, HKD 7.7840, INR 44.74, China 6.4796, pesos 11.85, BRL 1.5825, dollar index 74.43, Oil $97.51, 10-year 3.01%, Silver $34.59, and Gold. $1,517.10

That's it for today. Well. Happy Flag Day! Fly those Flags! I got in a good mood, and was singing out loud this morning, when my I-Pod played a great song from the early 70's, I Believe in Music, by Gallery. A simple song, but one of those songs that get you singing and in a good mood! Well. I'm out of words to type. (not really, I could go on for hours on this stuff, but don't have the time, or the space to do so!) So. thanks for reading the Pfennig, and I hope you have a Terrific Tuesday that just happens to be Flag Day 2011!

Chuck Butler


EverBank World Markets



Posted 06-14-2011 7:18 AM by Chuck Butler