Some housekeeping notes to deal with first.

Vincenzo: please look into why some comments are showing in the admin edit mode of a post and not on the display.  Something ate Fly’s comment on yesterday’s post - I can see it and it is approved (of course) but not displayed. Thanks.

Boca: Think James O’Barr but Edgar Allan will do.

On to Business

If I enjoyed bad news I would be giddy right about now. Denninger over at Market-Ticker posted twice yesterday and one was on point and the other - not so much.

In reference to the “paying down of the household debt” - he’s probably right, it wasn’t payed down, it was probably defaulted on.

In reference to the UAW killing the bailout deal? I would think that it was the Republicans playing “hardball” in an attempt to keep some kind of representation of their constituency by trying to downplay the “$73/hr” figure that’s been floating around in relation to the union wages by auto manufacturing employees.

The New York Times has a great piece on how that number was calculated and the reality is closer to $43 than $73.

Yuan depreciation

There were rumours that the Yuan was going to be reset in the short time frame about 30% last week. That turned out to be a rumour however it appears that the Chinese government is going to allow the Yuan to depreciate around 6% in an attempt to make the over $2 trillion USD they have hold some value.

Analysts said currency stability was understood by the market to mean limited movement against the dollar and other leading currencies on a weekly basis. Bigger moves, they say, could spark an exodus of investment capital, copy-cat devaluation among regional neighbors, and protectionist sentiments with leading trading partners.

To borrow a turn of phrase from Mish, this is just the USD holders slowly moving towards the exit.

The Globe and Mail has an article about expecting China to save the world:

China, however, does not have the power to rescue us all from our economic fate.

To begin with, China relies far more on the rest of the world than the rest of the world relies on China. Yes, China, is booming (or has been). But it still accounts for only about 6 per cent of global economic output, substantially more than a decade or two ago but still just a slice of a very big pie. And yes, it is sitting on a huge pile of cash. Soaring export growth has endowed it with an amazing $2-trillion (U.S.) in foreign exchange reserves. But that money, parked in U.S. Treasury bills and likely to stay there, is not much good to the rest of us. The idea that it is going to refinance the International Monetary Fund or bail out the U.S. financial system is fanciful.

….

Put in the context of China’s steadily falling growth forecasts, that may not even save China, much less the whole world. Growth has already tumbled from 11.9 per cent last year to 9 per cent in the third quarter of this year. Loren Brandt, a University of Toronto economist, just returned from a month in China. He says that at the start of his stay, companies were talking about seeing the growth rate fall to 8 per cent – the level which the government says is needed to keep employing all the people in China seeking jobs. By the time he left, they were talking about 5 per cent. After decades of double-digit growth, that would be a staggering comedown.

….

None of this is to say that China is doomed. In some respects, it is in better shape than many other economies. Its strong fiscal position means it can spend lavishly to spark a rebound. Its banks, so far, seem to be in relatively decent shape. The global financial crisis is making it think hard about changing its economic structure by shifting the focus to consumption – Chinese are mad savers – from investment. It is also taking some steps (though not enough) to improve its health and pension systems, a crucial move if the Chinese are to be persuaded to spend more rather than save for a rainy day.

From Reddit (of all places)

Someone asked why an investor would want 0% return or less:

The current debt load, $20 trillion USD and counting, $10 Trillion of which is being used just to finance all the variations of the bailout plan(s) will eventual catch-up with the Treasury bills everyone is currently enamored with. You might be asking yourself how is the bailout debt load up to $10 Trillion already when Congress only authorized $1 trillion in total Bailout aid? The answer is that Fractional reserve banking will allow that $1 Trillion to quickly balloon to $10 Trillion even without Congress’s approval. All this liquidity is looking for someplace to go. Everyone seems to be running to the T-Bill market. You can see this in both Gold and Oil. All this “flight to Quality” is creating an artificial bubble in the T-Bill market that will eventually reset itself and the U.S. Dollar will plummet. Severely. The “Flight to Quality” has artificially deflated commodities such as Gold and Oil. The artificially strong US Dollar is suppressing both the price of Gold and Oil. The US will be forced to default on its debt obligation and once that happens the T-Bills will be worthless and the US Dollar will reset, so watch Gold and Oil shoot back up again. Even the term “flight to quality” has become an oxymoron in itself, monies flooding into the T-bill market is nothing more then a fundamental misjudgment of the underlying problem. Much like the recent commodities bubble, investors and major money market managers are panicking and looking for anywhere to store what’s left of there funds. If this “crisis” were to take place in any other country the US would be calling for foreign intervention to shore up the market. At $40/barrel Oil is historically way too cheap and at $800/oz gold is half it’s true spot price. Somehow the US market has become an untouchable sacred cow.

….

Once both foreign markets and central banks, around the world, notice that the days of the American Consumer driven market are coming to an end there will be a paradigm shift in market practices which are already slowly taking place. Once the US Dollar is no longer seen as a reserve currency and/or an oil sustained currency then the Dollar will plunge. The fact that the dollar is still the de facto reserve currency and still used in most Oil market transactions is the only reason the US dollar is still floating. The US Dollar is the only currency backed by both Central Bank and Oil market transactions. If one Central Bank form one country wants to pay another Central Bank from another country the transaction is done in US Dollars. If two parties want to buy Oil then that transaction is also done in US Dollars. So the Dollar is a fiat currency backed by billions of dollars made buy millions of transactions. Those two reasons allowed Americans to spend beyond their means for the last years. This and the $1.5 trillion in Federal assets are about the only reason nobody has completely decoupled from the US market. Yet. The US is now in a 20 to 1 Debt ratio. Lehman Brothers was at a 34 to 1 debt ratio when it imploded.

The Takeaway

Shiny metals are doing splendid. With futures down 300+ points and the dollar about to implode. I stand by my perspective on the market.

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