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Five Things You Need to Know: Forex Report, Protectionism, ECB, Bolivia, Beer Deflation


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


Minyanville's five things you need to know to stay ahead of the pack on Wall Street:

1. Treasury Forex Report

In a move that was largely expected, as Minyanville noted yesterday morning in Five Things You Need to Know, the US Treasury Forex Report yesterday afternoon did not name China a "Currency Manipulator. "

  • Here is the text of the release.
  • The spin in many media outlets is that the report continues to pressure China toward a speedier revaluation of the yuan against the dollar.
  • Most are focusing on this single statement: "We are extremely dissatisfied with the slow and disappointing pace of reform of the Chinese exchange rate regime."
  • Minyanville Professor Kevin Depew disagrees:
  • "If you read the report yourself, you will find that lone sentence buried beneath six consecutive paragraphs praising China for taking steps to move toward a more flexible currency," he said yesterday afternoon in Minyanville's Real Time Buzz & Banter commentary. "Although Americans on the one hand don't like the idea of losing jobs overseas, they certainly don't mind paying less for inexpensive Chinese-made goods that are inexpensive as a direct result of the yuan's weakness relative to the dollar. A strengthening currency would ultimately lead to higher prices paid for both companies and consumers," he added.
  • So what is the point? Politics? Economics? "The soft tone of this report (despite the lone sentence talking "tough") tells me all I need to know about who is really holding the strongest cards here, and it's not the Treasury Secretary," Depew said. "It also helps explain why Chinese President Hu Jintao visited Microsoft's Bill Gates, Starbucks and Boeing before meeting with President Bush last month," he noted.
  • The dollar is higher this morning, and technically is poised for a counter-trend bounce.
  • What is worrisome, however, is the continued rise in gold in the face of a rising dollar. Gold for June delivery is higher this morning by $21.3 to $727.

2. Let the Protectionism Begin!

Ok, so the U.S. Treasury doesn't have the cards or the "cajones," which we believe is the Latin word for "Cajun Chutzpa," to go head-to-head with China over currency issues. Congress still has an ace up its sleeve.

  • Senator Charles Schumer, D- NY, was first out of the Congressional gate to criticize the Treasury's decision to play nice with China.
  • "The administration is making a habit of stepping up to the line and never going over the line," said Sen. Charles Schumer, D-N.Y. That's a fairly accurate assessment we believe. But then, Sen. Schumer continued speaking... and ruined everything.
  • "They put geopolitical concerns ahead of economic concerns," Sen. Scuhmer said. Wrong, we say. He got it wrong... and backwards.
  • First, China keeps U.S. interest rates low by buying Treasury bonds to maintain the yuan/dollar relationship.
  • A speedier revaluation is the last thing the Chinese want. And the last thing U.S. politicians want (when they aren't speaking to constituents whose jobs have been displaced to China). Why?
  • Simple. A boost in the yuan would mean China doesn't have to buy nearly as many U.S. Treasury bonds.
  • A lack of Chinese Treasury bond buyers means we'll need to offer bonds with higher rates to finance our debt.
  • Higher rates means consumers and businesses would probably be forced to spend less in the name of debt service.

3. ECB Caught Between a Felsen and a Schwierig Platz

Growth in the 12 Eurozone nations picked up pace in the first quarter... but as expected, Germany was a slacker.

  • Gross domestic product in the 12-country eurozone rose by 0.6 percent in the first quarter, according to data from Eurostat.
  • GDP growth was 0.3 percent in the fourth quarter last year.
  • The GDP growth is an acceleration, but pockets of weakness remain. Notably, Germany, the Eurozone's largest economy, saw GDP growth slow to just 0.4 percent.
  • Forecasts had been for German GDP growth to come in at 0.6%.
  • On Tuesday, Five Things You Need to Know used Kant and Hegel to reach the conclusion that Germany's GDP would need to be revised downward ahead of this morning's Eurozone GDP report.
  • This proves that philosophy really does belong outside the ivory tower.
  • What this all means is that European Central Bank President Jean-Claude Trichet looks increasingly wedged between a rock and a hard place.
  • Many expect the ECB to raise rates in June to quash latent inflation - a near 100% chance of a 25 basis point increase and (at least until this morning) widespread consideration being given to a possible 50 basis point increase.
  • But the underperformance by Europe's largest economy throws a possible wrench in the works, at least for a 50 basis point increase.
  • Watch the euro currency. A stronger euro could further slow growth going forward, raising the probabilities that any tightening move by the ECB in June would be akin to stepping out of bounds in the end zone.

4. Badges? We don't need no stinking badges.

Companies affected by Bolivia's nationalization of the energy sector have no right to compensation President Evo Morales says.

  • Bolivian President Evo Morales said he will extend his nationalization of private property to include agricultural estates and ruled out any compensation for oil companies, according to Bloomberg.
  • Bolivia's army took control May 1 of the country's oil and gas fields and gave foreign energy companies operating in the country 180 days to agree to new contracts with the government.
  • Morales said foreign oil companies were entitled to recover their investment and take returns on them but not have ownership.
  • "What we are looking for are partners not bosses that exploit our oil resources,'' Morales said.
  • Morales also said he had written to the Andean Community (CAN) of South American countries members Peru, Ecuador and Colombia urging them to reconsider their plans for free trade deals with the United States, which caused Venezuela to recently quit the group.

5. Deflation, just where we like it. In the price of beer and wine.

Two recent court rulings could result in lower retail prices for beer and wine, the Wall Street Journal reported.

  • Last month a federal court in Seattle struck down key parts of that state's beer and wine distribution laws, which had resulted in higher prices to customers.
  • The laws on credit purchases of beer and wine were challenged by Costco (COST).
  • That court decision follows a decision last year by the U.S. Supreme Court which allowed some consumers to buy wine directly from winemakers.
  • The way it works these days, thanks to a maze of tangled legislation left over from the repeal of Prohibition, is that a beer producer sells to a distributor, who marks up the price and sells it to a retailer, who marks it up again before you stop by to pick up your nightly 12-pack of Mickey's Big Mouth or Little Kings Cream Ale*.
  • The Costco ruling could eliminate the middleman, thereby making beer and wine cheaper for consumers everywhere. And we think that would be a good thing.

*Minyanville does not endorse or promote the consumption of either Mickey's Big Mouth or Little Kings Cream Ale.


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