Enzio's Clock

Background

1. Down, down down

Yesterday's American data were not exactly led by cheer leaders:

• in May, factory production (a sub set of industrial production) fell by an annual 15% (yes, fifteen per cent): that is the steepest annual drop since 1946;
• May's producer price index slumped by the most since 1946, and
• during the first quarter, inventories were cut by an annual rate of $91.4 bn; this is the largest cut since the Dept. of Commerce began recording data  back in 1947.

Are green shoots really there, or am I turning colour-blind?

2. Treasury and thus reserve currency concerns

This triple stats slump got the Chinese and Japanese worried, so they did not buy as many U.S. Treasury bonds ('bonds") as they used to. According to the U.S.  Treasury, as cited in the South China Morning Post of 16th June, p. 1, this April:

• TOTAL net bond purchases were $11.2 billion (bn); that is  80% lower than the net purchases of $55.4 bn in March;
• INTERNATIONAL net holdings of bonds rose by $41.9 bn - but that is 24% lower than the $55.3 bn gain recorded in March;
• China, which owns 10% of America's publicly-held debt, , pruned her holdings to $763.5 bn, which is one per cent below her holdings in March of $676.9 bn, and
• Japan, the second largest foreign owner of public U.S. Federal debt, trimmed her holdings by 0.2% in April, to $685.9 bn.

Of course, these two powers are concerned about the ballooning of America's federal debt, which will climb to a record $1.84 trillion this fiscal year. But even American officials were concerned. They stated that they "...intend to reduce the deficit as soon as the situation permits." Well, what is that supposed to mean concerning the "situation"?  Either they have to reduce spending rapidemente, thereby curtailing some of the hoped-for stimulus, or they have to raise taxes, thereby killing any of the hoped-for stimulus.

Not that the American Treasury is alone in its budgetary concern. At this week end's  G8 summit in Italy, the Finance Ministers all  began "...pondering how to reverse the emergency steps they took to rescue the global economy as there were 'signs of stabilization'."  Really? Are they now falling for this "green shoots"mirage, too?

In any instance, their Finance Ministers seem to disagree with their colleagues, the Central Bankers. The latter ones of China, Brazil and Russia are wondering how to create a new reserve currency. Not that this will happen soon, but you get the connection: super power currencies always are doomed to fail because the Empire runs out of money, so it prints more, down goes its price and a new reserve currency is sought...

3. How to Make Money Off This Idea

1. Always consult your financial adviser first.
2. Have a look at that Treasury long bond short ETF, TBT:US. The technicals are all right in terms of buying it, and the fundamentals - mistrust of the sustainability of American debt - most definitely are in place. it has risen by 47% since we recommended it on 22nd December 2008.
3. Maybe you want to add gold in for good measure? Korea and Muddle East tensions might be one reason to look at gold.  Our recommendation of 15/11/2007 to buy the ETF, PHAU:LN, is up by 17% since Whilst we disbelieve the omnivores chasing inflation and thus gold, we do believe that Central Banks want to diversify out of the dollar buy buying gold. I know that gold's price  is dollar-denominated, so they really are buying the gold content, assuming that it will rise faster than the price's dollar content will fall.