Floating the Yuan, The Coup in Kyrgyzstan, Capital Controls and More!

by Addison Wiggin & Ian Mathias

  • Behind the Beijing handshake: A floating yuan in exchange for more Treasury purchases?
  • The coup in Kyrgyzstan: an expensive backwater of the U.S. empire
  • Where’s my recovery? Consumer credit, jobless claims looking ugly
  • More on “capital controls,” and why you should rest easy — for now
  • Reader suggests we slash prices to revive the economy… Our response below

  Politics and money. What else is there? As usual, we’re intrigued by the back story, rather than the headline. Let’s dive in.

  Treasury Secretary Tim Geithner and Chinese Vice Premier Wang Qishan shared dim sum yesterday. The topic of their discussion has been clear for several days. But today, the conclusion is only dribbling out. 

According to a vague report by The New York Times, the Treasury will delay calling China a “currency manipulator,” for whatever that’s worth. In return, China will depeg the people’s currency from the U.S. dollar… sort of. The renminbi will be allowed to float within a fairly tight range, much like the last depeg, which took place 2005-2008.

The 2005 revaluation moved the yuan up 2% against the dollar on the first day. A similar move this time around may even be enough to shut Paul Krugman up. He and the 130 members of Congress have been lobbying to slap a tariff — er, “surcharge,” Krugman calls it — on Chinese imports if they don’t let the yuan float freely against the dollar.

Just hours after Geithner’s surprise visit to Beijing was announced yesterday, the U.S. Treasury auctioned off $21 billion in 10-year notes. It was among the most successful Treasury auctions in history: The bid-to-cover set a record high of 3.72. In our language, nearly four bids came in for every note sold.

Crazy town. Flight to safety, all over again.

“Indirect bidders” (i.e., foreign central banks, i.e., our friends in China) showed up in force at this auction… the first time since last fall. When it was all over, the yield on a 10-year Treasury was back down to 3.9%, but still near a 12-month high.

Support from China, among others, is exactly what the Fed and Treasury needed to ameliorate volatility after they closed the quantitative easing (QE) program a week ago yesterday. And the bizarre dance between the New World and the Middle Kingdom continues…

  The other big handshake grabbing headlines today was between U.S. President Obama and Russian President Dmitry Medvedev. The two post-Cold Warriors signed a successor to the 1991 START treaty. Both countries’ nuclear arsenals will be cut by another 30%, to 1,550 warheads each… leaving either side with plenty of nukes to incinerate most major population centers on Earth. God bless ’em.

Still, even as the two presidents were flying into Prague for the signing ceremony, a coup was underway in a sleepy, but corrupt, backwater where both countries compete for energy resources… and where both maintain military bases.

  The opposition has taken control in Kyrgyzstan, where riots yesterday killed 75 people and the president fled the capital. The trouble started earlier this week with protests over rising utility rates, and quickly took on a life of its own.

Kyrgyzstan, it turns out, has been quite the money sink for the United States in the “war on terror.” A quick recap of our recent history there…

  • 2001: The United States sets up the Manas air base in Kyrgyzstan to support troops in Afghanistan. In an unusual move, the military agrees to pay international civil aviation rates for the rights to the airspace. Much of the money goes straight into the pocket of the president, a Soviet-era apparatchik still loyal to Moscow
  • 2005: The “Tulip Revolution” overthrows the government. Like other revolutions on Russia’s periphery at the time, this was likely funded in part by quasi-government U.S. foundations like the National Endowment for Democracy
  • 2006: The new government, biting the hand that fed it, demands higher payments for the rights to Manas, now the only U.S. base in the region after Uzbekistan kicked Gen. Petraeus and his buddies out. Negotiations continue on and off until…
  • 2009: The government tells Washington it plans to close Manas, days after agreeing to a foreign aid package from Russia. After Washington agrees to triple what it pays for access to Manas, to $60 million annually (plus its own foreign aid package worth $109 million), the Kyrgyz government relents.

The leader of the new government promises Manas will remain open for now, but said something lame like: “We still have some questions on it. Give us time and we will listen to all the sides and solve everything.” In other words, after the new sheriff extracts another round of bribes from your pocket by way of D.C.

You can’t make this stuff up.

And this is just one base out of the 716 that we maintain in 38 countries, according to the Pentagon’s latest “Base Structure Report.” Lord grant us the strength to maintain our empire.

  The Pentagon has confirmed it’s giving some $50 million in aid to Georgia, Croatia, Hungary, Latvia, Lithuania and Estonia. This will keep all six countries committed to sending troops to Afghanistan. Of course, they make up barely 1% of all the troops there, but when you’re in Washington, money is no object. “Pay all that you want, we’ll just print more,” seems to be the order of the day.

Years ago, Osama bin Laden made it clear his ultimate goal was to bankrupt the United States. Executing Sept. 11 cost him the wicked sum of $500,000. The Iraq war alone will cost the U.S. $3 trillion, if Joseph Stiglitz’s estimate is correct. The Afghan war currently costs $1 million per year per soldier on the ground.

Somewhere in a cave on the Afghan-Pakistan border, Osama’s laughing his ass off. And just wait until we invade Iran. That’s going to be fun, too. Check out Byron’s report on $220 oil, here.

  Back in I.O.U.S.A., a host of data are emerging that  undercut the “recovery” theme Wall Street and Washington are pushing so enthusiastically. The long-awaited rebound in consumer credit we got in January? Vaporized in February. In fact, it fell an annualized 5.5%. Revolving credit (credit cards) shrank 13% year over year.

Of course, if you ask us, the consumer deleveraging, whether by paying down his debt or by defaulting, is a good thing. But it doesn’t square with the notion of consumer recovery.

The stock market reacted to this report by taking a dive in the final hour of trading yesterday. The major indexes were down as much as 0.3%.

  First-time jobless claims “unexpectedly” increased last week. Worse, the four-week moving average is now heading in the wrong direction, too. On this news, the S&P 500 dropped another 0.5% in the opening minutes of trading this morning.

  Nor is it helping that Greek bonds are starting to show signs of meltdown again. 10-year Greek debt now trades at a premium of 436 basis points over German debt. Traders are getting nervous that Greece might not be able to solve its fiscal problems alone and will turn to the IMF for a bailout.

Shocking.

  The European Central Bank is holding its benchmark interest rate at a record-low 1%, it announced this morning. The euro is little changed, trading a shade over $1.33.

  The Bank of England is also holding steady, keeping rates at 0.5% for the 13th consecutive month. This is the last rate decision before U.K. elections next month. The pound is down slightly, at $1.52.

  “Just read over that ‘jobs bill’ and the part about ‘capital controls,’” reads an e-mail from our resident dividend hound Jim Nelson. He agrees with our attorney, darn him, in that the bill “won’t actually affect many investors.”

 

“Even if it otherwise would apply to some,” says Jim, “it looks as if there are many exceptions to the withholding portions of dividends, like:

  • If you are less than a 10% owner in a foreign company, you have nothing to worry about
  • If you are an owner of ADRs of a foreign company, you typically don’t have to worry — unless they are really seedy certificates traded completely under the table
  • If the company you are receiving those dividends from is traded on a major exchange, you don’t have to worry.

 

“Meaning,” says Jim, “if you are investing in a ‘normal’ fashion, this bill can’t really touch you. Of course, I’m not saying there won’t be subtle additions to this section later. But currently, it looks fairly clean… except if you’re an extremely rich investor — and you’re buying an enormous chunk of a foreign company’s stock — you might have your information filed in some U.S. government file cabinet for future reference.

“Otherwise, foreign investors — especially the ones worried about their retirement income being eaten away by withholding taxes — are OK… for now.”

Jim has just published two new picks “normal” income investors will want to add to their holdings, with proven stability during the crash of 2008-09. For access to Lifetime Income Report, go here.

  “The easiest way for politicians to put off the day of reckoning is by continuing to expand the government payrolls,” writes a reader, responding to our items yesterday about underfunded government pensions. “The more employees they have contributing into the pension system, the longer they can continue this Ponzi scheme”

The 5: Ahh, good point. The thousands of new six-figure salaries at the Department of Transportation are starting to make sense…

  “If you guys have all this wealth of knowledge as publishers,” writes a reader who did not take us up on the Agora Financial Equity Reserve, “it is beyond me that you guys wouldn’t help spur the revitalization of our economy by significantly reducing the overall cost of your hyped publications.

“The only reason you don’t is greed. I, as only a mere subscriber and reader and absorber of your published information, cannot determine if your price structure is truly based on actual value of information provided your readership or if it is just determined by consensus while sitting around a large, well-polished conference table during business hours before you retire to the oak-paneled library to do more ‘research.’

“It sure seems that there are many in this land who could benefit from solid wealth-generating information without having to forego a mortgage payment to pay for one of your highly touted stock and bond advisory services. I don’t advocate giving information away, as publishing deserves every bit its due, as it is with other business pursuits in our capitalistic society.

“All I am pondering is what many folks ponder… and that is… ‘Why can’t published information from all these wealth-making publishers such as yourselves be made more affordable?’ That’s all I (along with many others who would otherwise purchase your publications, if in fact, they were within reach of the common guy) am asking. Try this formula: Lower cost for your published product equals a larger subscriber base. Duh.”

The 5: How about this? We take a census of readers. Charge those who make $250,000 or more a year $2,000 for every service we publish. Give the services away free for everyone in the $100,000-250,000 range. And pay readers who make less than $100,000 a year something like $20 a year to take each one. How’s that sound? Fair?

Oy,

Addison Wiggin

The 5 Min. Forecast

P.S. If you’re not a knucklehead, you’ll find this interesting. We just firmed up the speaker list for this year’s Agora Financial Investment Symposium in Vancouver. We’ve dropped a name here and there in recent weeks, but now we’ve posted the full lineup in one place for your perusal.

Check it out, because once you see it, we think you’ll agree it’s our strongest lineup yet. We hope to see you in Vancouver in July. If you’re a Reserve member, you received your invitation this morning by e-mail. Your cost to enter the symposium is $0.

P.P.S. Let’s just take one recommendation from one recent newsletter that makes up the Equity Reserve. In the March issue of Breakthrough Technology Alert, Patrick Cox recommended a $21 million market cap company. It trades for just over 2 cents a share.

Imagine what would happen if Patrick had a "larger subscription base”? We’d blow up the recommendation for everyone.

In the past year, Patrick has recommended five other stocks that originally traded for less than $1 a share. These stocks are up 18%, 21%, 107%, 138% and 155%.

So yes, we charge a good amount for some of our publications. And there’s a good reason behind it. We know that the more we charge, the smaller the subscription base. And that’s exactly what we want in the case of the microcap plays.

But… just $500 invested in the play that’s up 155% would have already paid for your annual subscription to Breakthrough Technology Alert. And you’d have money left over to renew. And that’s just one play.

We think that’s a pretty good deal. And we’re still offering discounted access to Breakthrough Technology Alert… but only through midnight tonight. Check it out for yourself here

 

rspertzel

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