Update on an old theme

If you've been reading me for a while, you might remember my long-running diatribe against the various calls from Washington to brand China as a currency manipulator and to impose trade sanctions as punishment. That line of news went quiet for a while, in large part because the Treasury Department delayed its expected announcement on the matter indefinitely.

This past Friday, quietly, the Treasury finally made its long-awaited (long-forgotten?) statement, as Bloomberg notes.

The U.S. declined to brand China a currency manipulator while saying its No. 2 trading partner has made “insufficient” progress on allowing the yuan to rise.

China should follow through on President Hu Jintao’s commitments to allow more exchange-rate flexibility and boost domestic demand, the Treasury Department said in a report to Congress yesterday on foreign-exchange markets.

The yuan “remains substantially undervalued,” according to the report, which was originally due in October and says no major trading partner meets the legal standard of improperly manipulating its currency. “It is in China’s interest to allow the nominal exchange rate to appreciate more rapidly.”

Not surprisingly, some of the windbags in Washington still weren't convinced or satisfied.

Senator Charles Schumer, Democrat from New York, said Congress needs to take bolder action. “It’s as plain as the nose on your face that China manipulates its currency,” he said after the report was released. “It’s just as plain that the only way to address this problem is for Congress to act....

Senator Sherrod Brown, an Ohio Democrat who has been among the lawmakers pushing for a tougher U.S. stance on the yuan, said the currency’s progress is “inadequate.” Senator Max Baucus criticized the “failure” of Treasury to label China a manipulator. Both senators called for Congress to act this year.

Of course, someone should probably remind Sen. Schumer that it's also as plain as the nose on his face that the House and the Senate are not, in fact, their own branches of the federal government--but I digress.

Treasury Secretary Timothy Geithner has certainly had his failings--on this issue and others--and I don't typically approve of much that he has done since taking his current position in January 2009. But on this topic, he certainly understands the dynamics at play much better than our cantankerous friends in the Senate, and he therefore recognizes the need to tread lightly. He has taken a measured approach with regard to China and its currency, which is the only rational course. Acting brashly and pounding our chest will only end in economic pain for our country one way or another, something that our Senators are still devastatingly slow to realize. Hopefully they will come around.

[Bloomberg]

Quote of the Week

Though I already awarded Scott Adams with an honorary (and well-deserved) "Quote of the Week" yesterday, I didn't want to let a Tuesday pass without an official Quote of the Week.

If you've been reading me consistently, you'll remember my rant against the Fed last Thursday. Didn't wanna do it... felt I... owed it to them.

At any rate, it seems like a few people around the world have agreed with my rant, and chimed in as well. The Germans always do a great job of cutting through the B.S., so I thought I'd give them the honor of this week's semi-self-congratulatory Quote of the Week.

This week's QUOTE OF THE WEEK

"With all due respect, U.S. policy is clueless." -German Finance Minister Wolfgang Schäuble

To be fair, some translations of Schäuble's comments ("Bei allem Respekt, mein Eindruck ist, die Vereinigten Staaten von Amerika sind ratlos") are a bit more charitable. The key word, "ratlos", could more directly be construed to mean "helpless", "at a loss", or "stumped".

With my background in German, I'll agree that the popular translation is a little shaky, and definitely more direct and damning than Schäuble's untranslated phrase. But nevertheless, his remarks in combination with China's perturbed response (and this morning's downgrade of U.S. sovereign debt by a prominent Chinese rating agency) makes it clear that the world is not exactly on board with Mr. Bernanke's experimental policies.

Remember, the whole world owns U.S. debt, and they won't stand idly by as we try to inflate our way out of it. What began as mild annoyance among the global community this week could easily morph into something entirely different and much more damaging. I hate to be the bearer of bad news, but this is decidedly bad news.


[CNBC]

Hope you don't like wearing cotton...

I've mentioned inflation (and the threat of more inflation) a lot here lately, but this chart from Finviz does a better job than any of my words could of showing what's really been going on in the markets lately.

Notice that while cotton's been leading the charge higher, food staples like corn, oats, and wheat are right behind. Even if you're invested in stocks and enjoying the dollar-led rally of the past 3 months, you're losing in terms of purchasing power. Increased prices may not have shown up at your grocery store yet, but they will. This is why quantitative easing and other dollar-debasement strategies won't work--these are the results.


[Finviz.com]

Wall Street and Main Street, at odds again...

Courtesy of Michael Panzner over at Financial Armageddon comes this provocative graphic, which displays a growing disconnect between stock prices and the public perception of our economic health. The "Present Situations Index" that the graphic cites is a monthly release compiled by The Conference Board since 1967. One of three major "Consumer Confidence" statistics, it is typically closely watched by market professionals, as it is a fairly reliable indicator of consumer attitudes.

It's tempting to attribute this growing gap to behavioral or psychological factors--"consumers don't trust Wall Street any more", "persistent unemployment is a drag on the consumer's psyche", "the fat cats are getting rich off the little guy", etc.--but I don't think this is all that's going on here.

Since the onset of the financial crisis, the Fed and our government have engaged in a significant and consistent dollar debasement policy. I've written about this here before, and it's again relevant here. Essentially, while nominal stock prices have risen back to pre-crisis levels (creating the widening gap), this is not indicative of more valuable companies or a more robust economy. It is simply a measurement anomaly--we continue to measure the S&P 500 Index in dollars, the dollar is worth less now, so the S&P 500 Index is worth more of those dollars. In real terms, it has barely budged from its lows--just like our confidence.

Rising asset prices do not, by themselves, indicate a healthy economy--it's a game that our Fed is playing that simply isn't working in the consumer's mind. In other words, "Main Street" gets the game this time, and won't play along. While I'd love to say that this is a gap that is bound to close--and no, I don't mean via a market crash, I mean via an increase in consumer confidence-- I don't think it's the case. Unless we reverse the debasement of the dollar, the gap in this chart is almost guaranteed to continue growing.


[Financial Armageddon]

An update on my "bizarro world" post

In my last post on Friday before a weekend of bourbon-filled football-watching escapism, I ranted and raved about what I basically think was a baaaad week-ending rally--that is, a stock rally that masked serious underlying issues (especially with the dollar). A reminder:

Today's rally (and the entire 11% rally from the August lows in the SPX index) has been completely on the back of a rapidly devaluing dollar. In real (dollar-adjusted) terms, the market has barely budged, and by some measures gone down. While the market has rallied 11%, the dollar has lost about 10% against the Euro (nearly 17% since June), as the dollar index has hit an 8-month low, revisiting levels last seen at the height of the financial crisis. Now, the Fed is widely expected to debase the dollar even further. All this, while we accuse China of being a currency manipulator. Hold your laughter.

My bitterness has mellowed a bit (it's a holiday, after all...isn't it?), but if you were looking for a graphical representation of my point, you're in luck, thanks to my friends over at The Daily Reckoning.

Increasingly, investors are coming to prefer the sober, welcoming embrace of physical materials to the unrelenting, drunken currency abuse perpetrated by the world’s central bankers.

In actual fact, there’s not a whole lot that hasn’t been rallying in dollar terms lately…except, of course, the reputation of those responsible for destroying its credibility.

While the dollar index plummeted 12.4% from early June to the end of September – even as headlines persisted about a shaky euro – everything else has benefited.

So no matter what the Fed might be telling you about inflation, the market is telling a different story. Of greatest concern is the CRB commodity index, which has outpaced even equities as the dollar has declined. This index includes all of the basic necessities--from crude oil to corn to wheat to orange juice--meaning that the prices of staple goods are skyrocketing. Anyone whose pay is denominated in dollars has seen their real wealth erode since June, no matter what the stock market may say.

Note also that the current Fed policy (of debasing the dollar) is especially damaging to the poorest of Americans. Not only do they largely not have assets invested in the stock market (meaning that their net worth doesn't benefit when the market rallies on the back of a weak dollar), but they also are less capable of "trading down" in expenses when inflation hits.

While a more affluent person might be able to swap steak for hamburger as cattle prices rise, or organic milk for non-organic milk when dairy prices do the same, the poorest Americans have already traded down. Therefore, any inflation flows directly through to their bottom line--they by definition pay a greater portion of their income for food, while the rich can change the products in their grocery cart and keep their expenses about the same.

Inflation and Fed policy over the last two decades is directly to blame for the ever-widening gap between rich and poor that so many have written about so many times. We'd love to blame the corporations for being evil, and not paying a fair wage, but the reality is that Fed policy is at least as culpable. To borrow a cliche, the barbarians are not only at the gate, they're in your wallet. Literally.

[The Daily Reckoning]