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Wednesday June 3, 2009 - 12:21:46 GMT
Black Swan Capital -

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A bit sick of it all…The dollar will remain the reserve currency. Period!

Key News
• European consumer spending and exports contracted the most in at least 14 years in the first quarter (Bloomberg)
• German Chancellor Angela Merkel, in a rare public rebuke of central banks, suggested the European Central Bank and its counterparts in the U.S. and Britain have gone too far in fighting the financial crisis and may be laying the groundwork for another financial blowup. (WSJ)
• Australia's economy unexpectedly eked out growth of 0.4 percent in the first quarter. (AP)
• South Africa must act now to minimise the impact of the global financial crisis on the poor, but still has to spend wisely, President Jacob Zuma said on Wednesday in his first major speech as the country's leader. (Reuters)

Key Reports Due (WSJ):
7:00 a.m. May 29 Mortgage Refinance Applications: Previous: -18.9%.
8:15 a.m. May ADP Employment Survey: Expected: -550K. Previous: -491K.
10:00 a.m. May ISM Non-Manufacturing Index: Expected: 45.0. Previous: 43.7.
10:00 a.m. Apr Factory Orders: Expected: +1.1%. Previous: -0.9%.
10:30 a.m. May 29 U.S. Energy Dept Oil Inventories


“It ain’t over till it’s over.”

  Yogi Berra

FX Trading – A bit sick of it all…The dollar will remain the reserve currency.  Period!
The Chinese leadership said so yesterday, despite their previous intermittent cat-calls for a new currency.  We suspect the cocky little student know-it-alls at Peking University (a common theme at most universities we might add, not just in China) are likely rolling on the floor in uncontrollable laughter at the thought of the US dollar lasting more than a few more months.  They can’t wait to run out and sell the dollar and buy euro instead…oh wait, I forgot, they aren’t allowed to do that unless their masters in Beijing approve…so sorry. 

Cat calls of a new currency order are coming from Russia now too. It is to laugh to watch President Medvedev blame the US dollar for all of Russia’s ills, loving it when all things commodities were heading north and US-dollar based credit was pumping up all global asset markets.  After all, criticizing the US fits nicely with the Putin Youth Thugs and pumps up the faithful (the crowd still carrying placards of a man named Stalin who murdered 60-80 million during his sick reign of power) who always seem to love a good dose of nationalism when things lurch from bad to worse thanks to cleptocratic leadership.  Unlikely anyone on the “Obama Global US Apology Tour” will be sharing those views with the fawning media entourage.  Is Bruce Springsteen the warm-up band on that tour? 

So we have the two countries that recently set their serfs free, to a degree, leading the charge for a new currency and slamming US “over-consumption.”  It is fresh!  For it was the symbiotic game of Western “overconsumption”, via “overproduction” surplus reserve recycling through the world’s most efficient financial system that nicely led to the enrichment of both the cat-call countries as it stimulated the insatiable demand for final goods.  Even Mr. Geithner alluded to this in China, but few paid any attention.  He said China must work to increase domestic demand because the good old days of the US consumer on a buying binge are over for a while. 

He might have added that despite all the love for China’s forwarding looking infrastructure investment, which granted is a much better use of funds than the waste being generated by the current US Federal Budget, is a very risk bet on a V-shaped recovery even though seemingly all the analysts trotted out on CNBC, and many of the elite bank analysts institutional research heads, use it as justification for a new bull market that will continue as far as the eye can see; haven’t we heard that kind of talk before?  It sounds so eerily familiar.  Call us skeptical.  We have been called much worse, which I am sure comes as no surprise. 

No doubt the United States has abused its world reserve currency status for the last several years—both leading parties must plead guilty as charged.  But what I guess is galling is watching country after country blame the US for all ills.  They seem to forget the US was primarily responsible for setting up the global financial system, with the help of a pretty smart English fellow who knew a bit about monetary history and the like, which has served us very well and achieve the then immediate goal of restoring confidence in the global trading system after WWII and was key for getting worn torn Europe at el back on their feet. 

It was the dollar-based system that helped pull the world from the morass back then, not the gold standard, which is a system that continues to be overrated by those who seemingly know little about it. 

“The dirty little secret of the gold standard is that when the Bank of England raised interest rates, it did not see an net outflow of gold from Germany or France.  Germany and France managed to preserve their stocks of gold by putting pressure on their colonies and/or financial dependencies that would in turn transfer gold to the Reichsbank or the Banque de France.”

“…The gold standard never worked according to theory because the world’ three main trading partners (UK, France, Germany) were transferring monetary pressures to their colonies, foreign possessions and dependencies.

“The status of Serbia, Herzegovina, Morocco, the Ottoman Empire, Egypt, Baghdad, Basra, the Congo, the Cameroons, and the other debtors, suppliers and customers determined the status of gold-standard monetary relations among the main powers at the center, their domestic interest rates, employment levels and political stability.  This, and not Balkan real estate per se, was the reason the First World War began in Sarajevo.

“Because it left the issue of the global financial order unresolved, the First World War led directly to the Great Depression and then to the Second World War—as whose conclusion we saw the Bretton Woods conference that established a dollar world order, with the dollar anchor on a fixed price of gold.  The exchange rates of the dollar against the postwar European and Japanese currencies were set at concessional levels (artificially expensive dollar and artificially cheap German Mark, French Franc, Japanese Yen, etc.) on purpose in order to allow the war ravaged countries to rebuild their economies on the basis of competitively priced exports.

“There was a clause in the Bretton Woods agreements that these exchange rates would be renegotiated to restore dollar competitiveness when the European economies had recovered.  But when the time came, in the late 1960s, Europe (led by President De Gaulle) refused to renegotiate the exchange rates, demanding instead a dollar devaluation with respect to gold. De Gaulle insisted on this as part of his broad ambition to return to the global system back to a full-fledged gold standard of the pre-1014 variety.  President Nixon refused, instead formally delinking the dollar from gold during the summer of 1971.”

“…With the present crisis, however, questions have arisen about the future role and status of both the dollar and the United States itself.  These questions are frivolous.  In a world of fiat currencies, there is no substitute for the dollar.  And if the face of the failure of the gold standard (“the problem of 1914”), there is no substitute for a world of fiat currencies.”

Criton Zoakos, courtesy of our friend Al…both men are wise seers of the global macro world with a depth of experience to compare

Dollar one-way bet sentiment extreme is building on the back of what we perceive is a lot of false rationales.  But then again, what’s new!

Jack Crooks
Black Swan Capital LLC


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