Be Careful What You Wish For
Research for Online Investors

by John Dalt

6/21/10

On Saturday, China announced they would let their currency, the Renminbi Yuan, appreciate against the dollar.  This ends two-years of currency policy that kept the Yuan tied to the value of the dollar.  The U.S. Congress called on the Treasury Department to label China a currency manipulator in March.  To this we say, “Be careful what you wish for.”

Common sense would tell us the Yuan would appreciate against the dollar. China’s economy is growing, on June 9 in A Break in the Clouds we reported China’s exports grew at 50% for May year-over-year.

The U.S. dollar has been on a run higher since the middle of April when the eurozone credit problems became more evident.  We could look at the Yuan as supporting the value of the dollar as long as the two currencies are tied together.

China has established trading targets for the Yuan; they don’t want it to move too much in a short period of time.  As the Yuan appreciates does that mean the dollar goes down?

As the world’s reserve currency, the U.S. dollar enjoys benefits we will surely miss if the Yuan rising value means the dollar declines.  The most important benefit is low interest rates.  The U.S. Treasury currently borrows at 3.3% for ten years.  Investors accept this low interest rate because of perceived stability or even appreciation in the dollar.

The Yuan peg was at 6.8277 per dollar, making each Yuan worth 14.65 cents in U.S. currency.  A rising Yuan will have the effect of lower interest rates in China, and possibly higher rates in the U.S. if the dollar declines against other currencies.

The other concern we should have, because it is possible, is the Yuan actually trading lower.  A lower Yuan means cheaper imports to the U.S. and Europe, and widening trade deficits.  Our exports become more expensive to China, and can lead to higher U.S. unemployment.

Currency fluctuations can lead to unintended consequences, and must be watched very carefully.  Our investment idea for today is the TBT etf.  This ETF seeks to replicate double the inverse interest rate movements on 20-year treasuries.  This ETF gains value as interest rates increase on 20-year Treasury Bonds.

In other (unrelated?) news, Russia called for a “united world reserve currency” on Friday.  Russia, China and India have all questioned the dollar’s future as the global reserve currency over the past year.

Can't We All Just Get Along?

The United Nations published a report earlier this year, which called for the replacement of the U.S. Dollar with a new world currency.  The report suggests this action is to protect emerging markets from the “confidence game” of financial speculation.

The U.S. Treasury department reported on June 15 that Russia sold U.S. Treasuries for the fifth consecutive month in April. Bloomberg reports that Russian President Dmitry Medvedev said that discussions with China are continuing on broadening global options. Medvedev said, “Now we are seriously discussing it.”

The chart below shows the long-term trading channels in the gold market. Gold has been in a strong bull market since 2001. The pace of that upward trend increased beginning in mid-2005. Following the financial crisis of late 2008, gold surged once again. While gold made another record high Friday, it still trades significantly below resistance (red line) of its upward sloping trend channel that can see it going over $1400. In the end, with gold currently trading near $1,250 per ounce, gold has more than quadrupled in price during its nine-year bull market.  The lower support line currently limits our pullback to $1000 per ounce.

To the mailbag:
All I have to say is "Amen," to your response to the White House “Shake Down” of B.P.  Has common sense disappeared in our great nation?

John’s reply:  I fear common sense has been lost in the present "populism" that Obama is stroking so hard.  BP has committed a grave error in judgment, and perhaps a crime if found negligent in the accident.  That does not give the government the right to threaten them and take money (property) without legal proceedings.  That is against the law.  I believe the Fifth Amendment (takings clause) would apply.

Mob mentality is dangerous, and the present government is doing all they can to encourage it.  We should be afraid.  Very afraid.  The scary thing is everyone that subscribes to our services is an investor.  They have assets that are in danger if the government can take property (money) without legal proceedings.  I heard discussion today concerning raiding 401k and IRA accounts in the U.S.  "After all, people with private retirement savings are wealthy."  This is a reincarnation of Hillary & Bill Clinton's proposal floated in the late nineties.  I am reminded of the old saying about the Nazis, and not protesting when they came for the other guy; when they came for me, there was not one left to protest.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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