Markets

Exchange Rate Determination Rules

If no one objects to this, then a tacit approval of this policy is being given. If this is the case, then you can be sure that other major nations will follow suit. What of price stability and exchange rates that accurately reflect the Balance of Payments of a nation. To understand the importance of these issues we take you back to the last time you heard the U.S. complain about the undervaluation of the Chinese Yuan. It is perceived by many in government and in both parties that the Chinese are manipulating their currency to gain advantage in international trade and this is making many people angry.

It's has been a while since I have checked in on foreign purchases of US financial assets. It's time now for a number of reasons. There are a few primary "messages" of importance as we listen to what the current data has to say. The International Capital Flow stats for June were released by the US Treasury recently. Only the highlights, we promise. First, over the last twelve months the foreign community has purchased $940 billion of US financial assets. Close to 82% of this number was directly driven by US Treasury purchases. The chart below chronicles the twelve month moving average of foreign purchases of US Treasuries over the last few decades. Of course we've never seen anything like the trajectory of these purchases over the last year that has clearly been vertical in nature. You know how vertical charts end, and it's usually not a pretty sight. Of course the unknown is timing, so that’s a story for tomorrow. So although many in the press highlighted the sale by China of roughly $100 billion in Treasuries over the last year or so, we suggest that contextually that number for now is a rounding error in the greater scheme of ongoing foreign capital flows up to this point.

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Should be a busy week.  What's on  Deck?  Brought to you from the fine folks at CNNMoney.com.  Keep in mind, if the numbers are indeed bad (as we expect them to be) watch the Fed, PPT or a guy flying around in a "black helicopter" to be buying futures through a secret hedge fund in the Cayman's.  If the numbers are good (and why anyone would believe them, good or bad, is beyond us), you know that they have been massaged.

The UK Telegraph is reporting that investors should embrace themselves for a "blood bath" according to Albert Edwards a strategist with Societe General.

Roubini says 40% chance of recession?  We think it's about 100%.  He does bring up a few points.  The Fed has run out of bullets.  It's done.  Nada.  All they can do is print money. Other than that, he is quite funny.  He recommends MORE quantitative easing.