The First Time China Uses The "Liquidate" Word.
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In This Issue.

* A warning from China.

* Steps to removing the dollar standard.

* Gold drops back below $1,800. for how long?

* Getting ready for Operation Twist.

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

The First Time China Uses The "Liquidate" Word.

Good day. And a Tom Terrific Tuesday to you! Cards move a game closer to a wild card spot, and the Rams lay an egg in the red zone last night. It will be a tough start for the Rams, but as long as they keep together the 2nd half of their season should be good. 9 games left and 2 ½ games out. The chances are slim and none, and I think Slim is leaving town, but. it's not over until they say it's over!

Well. things like currencies and metals are looking a bit better this morning, after seeing a take down on Monday. Gold especially saw, yet another, take down. If this was a Roman-Greco wrestling match, Gold would be down for the count by now, after all these take downs. But. like a true champion, Gold keeps getting off the mat, and bouncing back. As I explained to you last week, I personally see the $1,800 level, much like I saw the $1,100 level. The Big Boys all said Gold wouldn't reach $1,200, and that was enough for me to think that a new base at $1,100 was forming. Same with $1,800. of course I could be wrong, as this is just my own opinion.

Well. last week I told you that the markets had priced in a 91% chance of a Greek default. The guys and gals at Barclays have lowered that to 70%... So, that's a good sign for Greece, right? Well. sort of. The chance of a default still runs very high. But, as I've also told you many times, a Greek default is not something to take lightly, no matter where you live in the world, because, we're all connected in some fashion. The U.S. is "all in" on this Eurozone problem. And China has bought so many Eurozone bonds, that when added to all the Treasuries they own, they must be feeling a little like Fred Sanford, of Sanford and Son. lots of junk!

Speaking of the Treasuries that China owns. There was a story that Ty sent me yesterday from By Ambrose Evans-Pritchard, that great writer for the U.K. Telegraph. in the story the writer says that "China intends to start reducing its portfolio of US debt" Uh-Oh! This is something that I've feared for a long time folks. but there have been many false dawns on this. but the writer points to something that we've never heard before. let's listen in. "A key rate setter-for China's central bank let slip - or was it a slip? - that Beijing aims to run down its portfolio of US debt as soon as safely possible.

"The incremental parts of our of our foreign reserve holdings should be invested in physical assets," said Li Daokui at the World Economic Forum in the very rainy city of Dalian - former Port Arthur from Russian colonial days.

"We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way."

"Once the US Treasury market stabilizes we can liquidate more of our holdings of Treasuries," he said.

To my knowledge, this is the first time that a top adviser to China's central bank has uttered the word "liquidate". Until now the policy has been to diversify slowly by investing the fresh $200bn accumulated each quarter into other currencies and assets - chiefly AAA euro debt from Germany, France and the hard core."

Now. let me ask you a question. do you think that owning Treasuries as a safe haven is such a good idea now that you know there's a HUGE seller out there? Ok. maybe China never does get around to actually liquidating. The markets will react to the threat accordingly.

We could see a war on rates. As I told you yesterday, the FOMC will meet this week, and probably announce a new form of stimulus. The markets are already loading up on longer dated Treasuries, in case the Fed announces what is rumored to be their next move, which is called "Operation Twist". Where they sell short dated Treasuries, and buy longer dated ones out on the yield curve, to bring long term rates down.

But what happens to that plan if the Chinese see it as an opportunity to sell? The Fed will have gone through all this, the prime dealers will have gotten fat and profitable as they sell the Fed the long term bonds, and the long end rate doesn't move lower? Well, in the 60's when this Operation Twist was performed all the Fed got out of the long end was 15 Basis Points. I'd say that failed miserably!

I'm shaking my head in disgust here. because. well. reread the last couple of paragraphs if you wonder why!

Ok. That can all be a little confusing to non-market people, but hopefully after reading me for some time, you are up to date on everything, and therefore, should be able to navigate that without any problems. If you have questions, you can always respond to this letter, and I'll eventually see it and get back to you. Sometimes that email box gets backed up, so like I said. "I'll see it eventually".

S&P was back in the news last night, cutting Italy's rating. Isn't that much like making sure the barn door is closed, after the cows are all over the farm? Oh well. they did it, but I doubt it affects Italy that much. I say that because "back in the day" when I was a foreign bond trader, we could always get better yields with Italian bonds than say German bonds, but no one wanted them. Investors all knew back then that Italy was dicey.

Ok. I had a reader ask me what I saw happening to the dollar, if the Fed announces more stimulus this week. Hmmm. Well, if it was going to be QE3, then the dollar would get deep sixed just like it did when the first two rounds of QE were announced. But if it's this so-called "Operation Twist", I don't know what to make of it. For I don't really think it does anything but line the pockets of the Prime Dealers. (you know the financial institutions that are the A list with the Fed)

But, here's my thought going forward. that IF the Fed chooses Operation Twist, they'll soon find out, well maybe they won't find out soon, but later, that the Operation Twist did nothing, and they'll feel as though there's still more they could do, and then QE 3 gets announced.

Last week, Chris told you about a guy that was making a HUGE bet that the Chinese would remove the dollar-peg from the Hong Kong dollar. Well, apparently this "guy" isn't the only person that sees it this way, as expectations for Hong Kong dollar moving strongly against the U.S. dollar, tripled in the past year!

Now. long time readers, and I mean long time. might recall me saying that I believed the Chinese would allow the Honker (Hong Kong dollar) to float before they allowed the renminbi to float, as the honker was the more established, mature currency, and would be on smaller scale than the renminbi. This way, the Chinese would get the "hang of a floating currency" , and then allow the renminbi to float, and finally merge the two currencies.

I still believe this to be the roundabout way, although the new CNH deliverable currency that China is issuing could replace the renminbi first.

The Last Nail. I'm listening to that great Dan Fogelberg song, and I'm thinking that making the Chinese currency a floating currency could very well be the last nail for the dollar as the reserve currency of the world. And one thing I never want to forget to mention about China. They are hording Gold. buying it by the truck load.. and they are doing this for two reasons. 1. They want the dollar removed as the reserve currency of the world, so, they buy the "anti-dollar" to lessen the dollar's value. and 2. They plan to back their currency with Gold. now, maybe not 100% backing, but even if it has a 50% backing, it would make the Chinese currency the most attractive currency on earth.

Boy, Chuck, you sure can make a mountain out of a molehill! You take a song title, and write an epistle! HA!

I see where Brazil isn't happy with just throwing real investors under the bus. They now want the World Trade Organization (WTO) to adopt measures that would allow members of the organization to protect their industries from trade imbalances prompted by currency fluctuations. Hey. the Brazilian Gov't has made it perfectly clear that they believe that "some countries" are keeping their currencies undervalued for trade purposes. Hey, if the Brazilian Gov't had the intestinal fortitude they would just name names. and say. China!

I don't see this getting Brazil anywhere. The WTO has heard all this before, and has turned a deaf ear. The Brazilian Gov't will have to find new ways to make investors suffer on their own.

And the Reserve Bank of Australia (RBA) met last night, and the minutes showed that the guys that were calling for a rate cut in Australia are way off base. the minutes contained this note: "Technical factors might make rate cut bets inaccurate." The A$ rallied after the minutes printed. since these "rat cut campers" had really weighed heavily on the A$ recently. But, as Pfennig readers, you know that I said that there would be no rate at this time.

Then there was this. from the WSJ this morning. "Securities regulators have sent subpoenas to hedge funds, specialized trading shops and other firms as they probe possible insider trading before the U.S. government's long-term credit rating was cut last month.

Securities and Exchange Commission officials demanded more information about specific trades made shortly before Standard & Poor's downgraded the U.S. to double-A-plus from triple-A on Aug. 5. SEC officials are zeroing in on firms that bet the stock market would tumble."

Chuck again. this doesn't make sense to me. there were calls for a downgrade to the U.S. credit rating for years. no wait, that was just you, Chuck. Ok. but still. the question wasn't "should the U.S. credit rating be cut", it was "do any of the credit rating agencies have the cajones to cut the U.S. rating".

To recap. The currencies and metals are rebounding a bit this morning, after seeing weakness all day yesterday. Gold fell below $1,800 again, but for how long this time? Ambrose Evans-Pritchard drops a bomb on Treasuries with some info on a possible Chinese liquidation of Treasuries. And the RBA throws cold water on the rate cut campers in Australia.

Currencies today 9/20/11. American Style: A$ $1.0280, kiwi .8235, C$ $1.0085, euro 1.3690, sterling 1.57, Swiss $1.1350, . European Style: rand 7.6650, krone 5.6820, SEK 6.6775, forint 212.65, zloty 3.1960, koruna 18, RUB 31.40, yen 76.50, sing 1.2590, HKD 7.7940, INR 48.03, China 6.3837, pesos 13.10, BRL 1.7970, dollar index 77.06, Oil $86.91, 10-year 1.98%, Silver $39.33, and Gold. $1,788.80

That's it for today. Well. serious stuff folks. I won't keep this from you any longer. The "infection" that I had in my gums and jaw turned out to be another bout of Cancer. Cancer is eating away my jawbone. I knew there was something wrong, when the antibiotics I took didn't clear the so-called "infection". The good news is that there are no other signs of new cancer. So, this "spot" in my jawbone will begin receiving radiation next week. I'm Ok. no worries. I'm just dealing with swollen gums, and some pain for now. I know that a lot of you keep me in your thoughts and prayers, and I thank you from the bottom of my heart. and I'll carry on. There, I feel better, telling you all, as I had kept that among a few people for a couple of weeks until we knew that we just needed to deal with the spot in my jaw. And with that, I'll get this out the door. Thanks for reading the Pfennig, and now go have that Tom Terrific Tuesday!

Chuck Butler


EverBank World Markets



Posted 09-20-2011 10:39 AM by Chuck Butler
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