Notes From Underground: Geithner and Schumer put more dung on the fire to heat up the Chinese currency battle

The news over the weekend was was not market moving. The Center Right coalition in Sweden looks to win re-election, which is a very rare occurrence in the model welfare state of Europe. The Swedes have weathered the recent financial crisis fairly well, since they learned their lesson from the financial pains they endured in the early-to-mid 1990s. In fact, the Swedish crisis has provided some of the best solutions for policy markers in the U.S. and Europe as they seek ways to ameliorate the credit stresses that have been plaguing the developed economies for two-plus years. The biggest problem for the Swedes is the anti-immigration party of Democratic Sweden polled stronger than anticipated, which means they will have seats in Parliament for the first time. The move to the right is something to watch for in the EU as the fiscal austerity programs begin to take hold. If the right can rise in the Swedish Utopia, governments in the rest of Europe have to take note.

The weekend newspapers were full of stories about SARKOZY playing the anti-immigrant card to regain his political strength. There were also stories about the three little PIIGS: Greece, Portugal and Ireland are under such duress that they may have to go directly to the IMF for bigger bailout packages. The spread between the BONDS of the PIIGS and Germany is beginning to widen again so our radar is on and we will be watching for any moves that may signal weakness in the EURO based on NEW FINANCIAL STRESS. The Spanish bond auction seemed to have gone well last week, but the market will be watching the Irish auction on Tuesday. The Greeks announced that they are delaying their bank stress tests as more work needs to be done. The YEN intervention last week caused the EURO to be bought on several crosses as the EUR/YEN cross provided the impetus for momentary EURO strength. Factor in the new rhetoric from the U.S. Congress and the currency markets became rattled.

The political season in the U.S. is in full swing and the Democrats and Republicans are both trying to use the China yuan and its undervalued status as the election bait for MAIN STREET. The reason that the stimulus plan has failed to gain traction is that the Chinese have been keeping the YUAN too low so that we keep sucking in their goods. The polls must indicate that issue plays well in middle America. We would say Peoria but Caterpillar Corp. has been opposed to any type of trade war rhetoric as they are doing great business in China and the emerging markets. Geithner was on the HILL Thursday and he espoused the most strident rhetoric about China moving too slowly on currency adjustment that we have ever heard from him. Schumer, playing the populist even though he is a Wall Street man through and through, ramped up the noise level:

“At a time when the U.S. economy is trying to pick itself up off the ground, China’s currency manipulation is like a boot to the throat of our recovery. The administration fefuses to try and take that boot off our neck.”

Schumer’s quote was directed at Obama and Geithner and it seems they have taken the bait. There are those who want to call the Chinese’s bluff and dare them to begin unloading U.S. assets in the vein of Secretary John Connally’s famous line to the Europeans after the DOLLAR was devalued in 1971:

“Its our currency but its your problem.”

We warn all those who are summoning the ghost of Secretary Connally that the world is a far different place today. Unleashing a potential trade war with capital controls thrown in may not be the best strategy for dealing with the fragile financial environment in which find ourselves. As the rhetoric heats up, the market gyrations are going to increase and the risk-on/risk-off scenario is going to get a new kind of test as the market begins to weigh the effects of a trade battle.

In closing, we wish to direct our readers to an article in Sunday’s New York Times by Glen Hubbard and Chris Mayer, “How Underwater Mortgages Float the Economy.” Hubbard and Mayer lay out the impact of a massive refinance on many mortgages that are able to be refinanced because they are underwater. We have been espousing this idea in NOTES for quite awhile and now noted academics have laid it out for all to weigh. The greatest impact is it will remove many potential foreclosures and put money into the pockets of MAIN STREET. Interesting that well respected Republican academics are doing the work that the democrats should be concentrating on. Now, does anyone have a plan for cutting the tax on dividends?

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One Response to “Notes From Underground: Geithner and Schumer put more dung on the fire to heat up the Chinese currency battle”

  1. Arthur Global Practice Says:

    Great post and thanks for the Glen Hubbard and Chris Mayer´s article. I´d like to call your attention about John P. Hussman´s words: “My view remains that the underlying condition of the U.S. housing market is one of deep insolvency”…

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