In This Issue.

*  Currencies & metals see more whacking
*  A Minsky Moment for China?
*  Rising Treasury yields a reason to buy?
* James Rickards on the dollar collapse

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

Tied To The Tracks.

Good day. And a Marvelous Monday to you! Did you get to enjoy the “super moon” last night? I didn't, because it was pouring rain here in St. Louis, but my beautiful bride sent me a picture from her location, and it looked “super cool”! It was  case of “The Revenge of the Rangers” this past weekend, as my beloved Cardinals got swept by the Rangers, who's last visit to St. Louis ended in watching the Cardinals celebrate a World Series win. It was a day of more bleeding for the currencies and metals on Friday, and it appears that will continue today. So, let's go to the tape and see what's going on.

The newswires are filled with stories about how the dollar is getting all its current strength from the rising Treasury yield. Hmmm. Ok, let me get this straight. The 10-year is at a 22 month high of 2.60%, inflation is around 6-7% (in real terms, not the cooked books of CPI), and investors are getting all lathered up about that?  If yields are rising, folks. that means what you buy now, is less value tomorrow, and then the next day and so on, as long as yields are rising.. So, this mentality is all messed up as far as I'm concerned. Look, I used to be a “bond guy”, and right now, I would be steering clear of rising yields. But then, I knew what was I was doing.

Did you see what the Bank of International Settlements (BIS) had to say this past weekend about the path that Central Banks around the world have been taking with all their bond buying? Oh it was priceless. The BIS issued a statement in their Annual Report, urging Central Banks around the world to change their focus on inflation and warned against further bond purchases. Let's listen in. “Central Banks cannot do more without compounding the risks they have already created.”   Sure. where were these guys in 2009, when the recent love affair with bond buying by central banks began?

Crash and burn. Did you ever have a toddler, or know one that would go full speed until they would “crash and burn”?  Well, that's what this trading in Treasuries reminds me of. And I don't mean to skip over the losses in Gold & currencies, but when the newswires are full of stories of why the dollar is so strong, I must investigate.  And like my long-time TV super hero, Jack Bauer, I get to the bottom of the investigation!

So, last week, leading up to the FOMC meeting on Wednesday, we had nothing but story after story about what the FOMC was going to do. Now, we are beginning to see story after story about how the Fed is going to unwind their QE and ZIRP.  I saw one story this past week, titled: “The honeymoon period is over”.   Here's the thing I want everyone to put in their memory banks, and then one day, pull it out and say, “Geez, I thought that Chuck was crazier than a loon, but look what's happening now..”  

You see, what I'm talking about here is the fact that Japan began all their stimulus, Budget Programs, and bond buying (QE) back in the mid 90's. Do you know how many times they have stopped their current program because they thought their economy was strong enough to live without stimulus? More times than you can shake a stick at, is the answer I was looking for there!  And what is the most recent thing the Japanese have done? The went all-in on bond buying. nearly 20 years after the first rounds of stimulus. I guess the Japanese were wrong all those times they stopped their stimulus, eh?

So. how long have I been saying that “We're turning Japanese, yes, I really think so”?  And here we go again.  Ok. didn't we stop QE1 that began in March 2009? And then didn't we have to go back to another round of QE when the economy faltered? Why, yes, Chuck, we did. and so we implemented QE2, and then we stopped that and thought the economy could stand on its own, only to find out that wasn't true, and we had to do something called Operation Twist.  Trust me, that's just funny words for more bond buying. And then the economy still didn't respond. Now, funny thing here, wouldn't you have thought that the Fed Heads would have said something like, “Hey, we're beginning to look like Japan, we should stop this”. But they didn't. And next we had QE3. And now that appears to be coming to an end, because.. Drum roll please. The Fed Heads believe the economy can stand on its own. sound familiar?

We have become cheap money junkies, and the markets believe that this is going to be good for us to go cold turkey? I don't see how this doesn't end up in tears, or. another round of QE that will have to be pulled out of Bullwinkle's magic hat. So. the dollar may be getting some revenge on the currencies and metals that have taken liberties with the green/peachback for the past 11 years.  And this revenge may be with us for as long as it takes for the economy to show its true colors after QE is stopped.

So. What to do? What to do?  Well. I'm really at my wit's end here folks. We've been to the this fork in the road several times in the past 11 years. One road takes us to splitsville, and we bail on our diversification strategy. And the other road takes us to batten down the hatchesville, and we simply take cover and ride out the dollar strength..  I'm not going to abandon my diversification strategy, but I wouldn't point a finger at you going down the splitsville road.

I was doing some reading and research on Friday, and came across a story that really hit me between the eyes. First of all, anytime I see someone using the term “Minsky Moment” I stop to see 1. If they are using it correctly, and 2. What they are referring to.  In this case, it was China. the researcher believes that China “may be approaching” a Minsky Moment – a sudden fall in asset values bloated by credit.  Minsky's financial instability hypothesis showed how markets create waves of credit expansion and asset inflation, followed by periods of contraction and deflation.

Societe Generale economist, Yao Wei, estimated a debt burden of non-financial companies and local government financing vehicles of about 150% of GDP at the end of 2012. Assuming an average interest rate of 6.3%, Yao estimates a shockingly high debt service ratio of 38.6% of GDP. 

So? Well, the same type of high debt service ratio to GDP was also found in the U.S. , U.K. South Korea, and Finland over the years, as they neared financial and economic crisis.   – Bloomberg  

What does this all mean for our renminbi projections?  Well, it means that we're going to see the renminbi stumble, but not fall to the floor. I still believe that the Chinese have the tools to deal with this stuff, but it doesn't make them immune to the problems. And it doesn't stop them from moving forward on replacing the dollar as the reserve currency of the world.  The real problem that this creates is for the Aussie dollar (A$), for a stumbling of the Chinese economy is the last thing the A$ needs right now.

Last week, I talked about how the Canadian dollar / loonie was looking like it could be a shining light. Well, that light was put out by the markets on Friday. The loonie lost 3-cents since last Monday. And all the while printing some very good data. For instance, Retail Sales from April were up .1%, which doesn't seem to be much, but year on year, they are up 2.3%…   And inflation bumped up less than expected.  But the loonie got caught up in the U.S. dollar whirlwind.

The euro while weaker VS the dollar, is gaining VS the major currencies of yen, & pound sterling, and then a host of other currencies. I know this doesn't help a dollar based investors, as they only care about how the euro is doing VS the dollar, but. it's important that the crosses don't weigh down the euro, and with the euro up on most crosses, it allows the single unit to remain a player against the dollar.

This morning in Euroland. The German Business Climate as measured by the Think Tank IFO, came in bang on the forecasts, with the expectations component of the survey inching up. So, good stuff from the Eurozone's largest economy. The ECOFIN group of Finance Ministers for the region, met this past weekend and failed to come up with anything new, so the IFO gives the euro a lift and the ECOFIN takes the lift away.

The U.S. Data Cupboard will have some very interesting stuff this week, starting tomorrow with Durable Goods Orders, and Capital Goods Orders. Add in the S&P Home Price Index, consumer confidence, and New Home Sales. Two of my faves come later in the week, Personal Income and Spending. So, a busy week with data here.. So, get your data journals out, get those #2 pencils sharpened, so that you're ready to make entries, because, we have to keep track for the Big Ben!

Ok. I mentioned above that Gold got whacked again. I had someone send me a note the other day, and said, “so much for your call on Gold, now that interest rates are going to go up”. I responded. Hmmm. I guess what you're saying is that Gold can't be strong with higher interest rates, right?  Then I have a difficult time explaining how Gold made its initial run to $850 back in the early 80's when interest rates were 18%… Can you do that for me?   I didn't get a response.

But that's the initial knee jerk reaction to the higher interest rates talk, and an end of ZIRP. (for those of you new to class, ZIRP stands for: zero interest rate policy)  And I'm afraid that Gold is going to be tied to the tracks, with Big Ben as Snidely Whiplash.  Gold will need a Dudley Do-Right to rescue it. Where we would love to hear Snidely Whiplash say, “Curses Foiled again”.

In all seriousness. I'm not trying to make light of the whacking that Gold has taken (along with Silver of course!) I do believe that this drop in the metals is going to cause a lot of Gold producers to shut down because the price to produce Gold will be greater than the price of Gold.  When the producers begin to shut down, what will that do to supply?  You've got it!  Supply goes to hell in a hand basket and, demand continues to be strong for physical metals. Supply is low, and demand is high. What does that tell you about what could be in store for metals?

For What It's Worth. OK. The number one question on the desk and at conferences over the years, is about will the Gov't confiscate Gold like FDR did in 1933?  I talked about why I didn't think it would happen last week, not like that previous episode though. But then I read something that James Rickards wrote last week, you know, James Rickards the guy that wrote “Currency Wars”.  This man has such an interesting life, and has done some very interesting things over the years, that once you know his history, you stop and listen to what he has to say.

And what he was saying was that when the dollar collapse begins, and it will come, that the President will do anything to save the dollar from complete collapse, and will announce a new plan to return to the gold standard. But this time the confiscation would come in the form of taking control of the Gold that's held in the vaults  here in the U.S. that belongs to other countries, and then revaluing the price higher in order to support the bloated money supply. The countries like Japan and those in Europe that have their Gold taken from them will receive receipts that are mostly likely payable in the “new dollars”.   

So reading these thoughts by James Rickards, got me thinking about other stuff. Like what would happen if all the countries decided ahead of time to remove their Gold from U.S. vaults?  Oh, like Germany tried to do but were turned back?   Can you say IMF? Ahhh, those sneaky IMF people could “help us” create a new dollar, that had SDR's (remember those? Special drawing rights that the IMF issues?) backing them. or maybe SDR's become the new dollars. The list of choices could become endless.  But the thing to think about here is that while all this seems to be evident, it's not imminent.  but I thank James Rickards for his thoughts, and my friends over at Agora for sending them to me!

To recap. The currencies and metals continue to get whacked in the overnight trading, as U.S. Treasury yields continue to rise. The 10-year Treasury is at a 22 month high of 2.63% this morning, and all the markets are filled with stories of dollar strength derived from higher yields. Is China about to experience their own Minsky Moment?  And if they are, that doesn't give the A$ any love. And we're looking for a Dudley Do-Right.

Currencies today: 6/24/13. American Style: A$ .9185, kiwi .7705, C$ .9505, euro 1.3105, sterling 1.5355, Swiss $1.07, . European Style: rand 10.1425, krone 6.0975, SEK 6.7560, forint 228.85, zloty 3.32, koruna 19.7530, RUB 32.91, (the price of Oil has dropped $5 in the past week) yen 98, sing 1.2795, HKD 7.7565, INR 59.70, China 6.1807, pesos 13.39, BRL 2.2415, Dollar Index 82.58, Oil $93.50, 10-year 2.60%, Silver $19.68, and Gold. $1,282.05

That's it for today. I see where Citigroup is going to be the first U.S. bank to open an office Baghdad.  That's when you need to look for a new job, folks. When the boss comes to tell you that you've been transferred to the “new office”. YIKES!  Rain both Saturday and Sunday nights. UGH! Oh well, we got to be outside during the day! Today we say Happy Birthday to our Sheryl Dickerson, who takes care of all kinds of stuff for us here. Got to spend a little time with some of the guys on the desk Friday afternoon, and caught up with Chris Gaffney who has been on vacation the past two weeks. He's back today. Time for me to go on vacation I can tell. I'm starting to get that feeling again. I'm like Christopher Walken in that SNL skit. “I've got a fever, and the only cure is more cowbell”..  But I would substitute, “the only cure is vacation”!  Doucette is playing Mama Let him Play right now. So a good song to send me off to the send button today! I hope you have a Marvelous Monday!

Chuck Butler
EverBank World Markets