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Five Things You Need to Know for Tuesday


What you need to know (and what it means).


Five things you need to know to stay ahead of the pack on Wall Street.

1. That's All I Have to Say About Debt

China's vice chief of the national parliament said China should trim its holdings of U.S. debt.

  • China holds the world's largest foreign exchange reserves, $853.7 billion excluding gold.
  • It was announced a week ago that China had overtaken Japan as the world's largest holder of foreign currency reserves.
  • The comments come ahead of China President Hu Jintao's visit to Washington this month, during which it is expected the Bush administration will press harder for a speedier revaluation of the yuan.
  • The U.S. would also like to boost exports and ease the record trade gap with China, which last year reached $201.6 billion.
  • Meanwhile, yesterday, the European Commission announced it backs China's policy of a "gradual currency revaluation," which, let's face it, to administration officials means "imperceptible."
  • So what would it mean if China were to "trim" U.S. debt holdings?
  • First and foremost, a move by China to sell massive U.S. debt holdings would increase supply, thereby driving down the price of the holdings and raising U.S. interest rates.
  • But don't fret yet, oh real estate-leveraged personage! An official at China's central bank said Cheng was merely giving a personal opinion.
  • Cheng is one of more than 10 vice chiefs of the parliament, which in the U.S. would sort of be the equivalent of a non-voting Federal Reserve Bank Vice President Emeritus.

2. Diversification Away From the Dollar?

The United Arab Emirates and Qatar, which together hold almost $30 billion of foreign exchange reserves, said they may buy more euros on expectations the currency will appreciate, according to Bloomberg.

  • Gulf Arab states have long favored the U.S. dollar and together own a significant share of the estimated $4.2 trillion in U.S. dollars held by non-U.S. investors.
  • Due to last year's record oil revenue, many Arab states have excess dollars and say they simply want to "diversify" a bit.
  • Of course, selling dollars could exacerbate the dollar's decline against the euro.
  • Moreover, there is increasing talk worldwide about no more need for a single world currency.
  • As recently as last month, Bank of England Governor Mervyn King said, "The whole point of having free capital markets is that you have several currencies co-existing at the same time. The need for a single reserve currency is much less than what it was earlier."
  • In addition to the pressures on the dollar due to the U.S. current account and trade deficits, there is also speculation that an Iranian Oil Bourse pricing crude in euros could be a significant blow to the dollar's ego.

3. The U.S. Dollar (Was: the Pound Sterling)

What is a reserve currency anyway, and why should we care?

  • There has been persistent speculation over the past few years that the U.S. dollar's status as global reserve currency is in jeopardy. What does this even mean?
  • A reserve currency is simply the currency most widely held among central bank and institutions as part of their foreign exchange reserves. Why is it important?
  • The global reserve currency is also the international pricing currency for global trade.
  • So, how do you get to be the global reserve currency? In a word: stability. The global reserve currency is typically the most stable and strongest currency among those countries with the largest, most diverse economies.
  • How did the dollar become the world's reserve currency? Practice.
  • Before the dollar, the British Pound Sterling was the world's global reserve currency.
  • The dollar was able to overtake the Pound Sterling due to Britain's persistent current account and fiscal deficits.
  • Some say these deficits were financed by cheap credit and monetary policy that was simply unsustainable as the British government sought to hold onto its status and global dominance as the world's "colonizer of choice."

4. Iceland: The Butterfly Effect

In 2005, Iceland's ICEX 15 Index was up 65%. This year, in dollar terms - and yes, we feel a bit awkward viewing things in "dollar terms" after the prior two posts - it is the worst performing market among 20 European markets. What went wrong?

  • First, Iceland's economy may be heading for a recession, according to Danske Bank A/S, one of the two largest banks in the country of 300,000 people.
  • On March 30, Sedlabanki Islands, Iceland's central bank, raised its benchmark interest rate by three-quarters of a percent to 11.5 percent in an effort to fight inflation that has exceeded the bank's 2.5 percent target.
  • Last year, Paris-based Organization for Economic Cooperation and Development noted that Icelandic banks and companies were funding their expansion by borrowing from international banks, setting up a potentially dangerous dynamic.
  • Iceland's currency, the krona, climbed almost 40 percent versus the dollar since 2001, but this year since Feb. 21 has fallen 9 percent against the dollar.
  • According to Merrill Lynch, Icelandic banks have a total of $17.8 billion of debt due through 2007, equal to about 1.3 times the country's gross domestic product.
  • Minyanville Professor Scott Reamer has noted that meteorologist Edward Lorentz in 1963 coined the phrase 'butterfly effect' to describe the possibility that entire weather systems could be generated by something as insignificant as a butterfly flapping its wings thousands of miles away.
  • "A hallmark of chaotic systems is that even the smallest imaginable discrepancy between two sets of initial conditions will always result in a massive discrepancy at later times as that initial "aberration" is magnified many times over by the non-linearity inherent in the system," according to Professor Reamer.
  • "Were you aware..." that in the Nordic languages, "Iceland" means, literally, "tiny butterfly"?
  • Actually, we totally made that up to make this item fit together. The compound word "iceland" can best be understood by dividing it into its separate parts: "Icel," and "and."

Iceland, Europe's "coolest" country.

5. Milestones

At 10:35 a.m. yesterday, with the publication of Prof. Kevin Depew's "Point & Go Figure," Minyanville published its 10,000th article!

  • Minyanville first began publishing articles in 2002.
  • In a brief ceremony held early this morning in an undisclosed bunker to commemorate the event , Kevin Depew said he was "extremely ambivalent" about being the author of the 10,000th article on the site. "It was just luck," he said.
  • Meanwhile, in researching information for this item we learned that for some reason there was actually not an article numbered 1 because the first Minyanville article was created as number 2
  • This means Depew's article was really only the 9,999th article on the site.
  • The 10,000th article was actually a Mini-Minyan Mailbag by Professor Laurie McGuirk.


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