China Calls for Dollar Displacement, China Begins to Settle Trades in Renminbi, India Questions US$, Increase in Stimulus Spending?

News That Moves Markets

Good morning readers, this is your Monday wake up call. The US$ is under attack and the budget deficit will continue to expand like the blackhole it is regardless of congressional protestations surrounding fiscal discipline.

Instead of wasting time arguing about the inevitable and fearing the fallout let's position the portfolio to benefit: Short US Treasuries (Long TBT) as the spending increases make it impossible to keep rates under control. Short US$ (Long UDN) as the talk of a new settlement currency turns into reality, and long precious metals as currency devaluation drives asset prices higher. Repeat after me: inflation is a currency event not an economic event.

Timing the entry and exit points will continue to be the toughest part of the above investment approach. As always we will be fighting the government and the spinmeisters every step of the way. This manipulation onslaught can cause pain over a short period of time, but doing the right thing is never easy. While most of the investment community was drowning last year we at Rosenthal Capital Management defended principal and made money precisely because we understood these dynamics and were using the correct road map.

Please understand that the long term investment themes described above and illustrated below must be respected if you want your portfolio to survive.

China officials call for displacing dollar, in time - Reuters
Reuters reports the financial crisis has laid bare defects in the dollar-led global economy and the world should look to displace the U.S. currency, even if that will take many years, Chinese officials said in comments published on Monday. The push for fundamental, if gradual, reform of the international financial system comes just before the Group of Eight summit in Italy, where China's willingness to question the dollar's role could fuel debate. The Special Drawing Right, a unit of account used by the International Monetary Fund, presents a viable alternative to the dollar as a global reserve currency, said Li Ruogu, chairman of the Export-Import Bank of China, a major state-run bank. "It is a feasible plan to reform the present SDR and make it into a real settlement currency, a universally accepted 'currency basket' that would replace the dollar at the heart of the monetary system," Li was cited as saying in Financial News, a newspaper published by the central bank.


China begins pilot program to settle trade in Renminbi - NY Times
NY Times reports China has officially opened a pilot program to allow companies to settle imports and exports in renminbi in selected regions, marking a major step toward eventually internationalizing the Chinese currency. Three pairs of Shanghai companies with their Hong Kong and Indonesian counterparts signed contracts on Monday to be the first to settle business deals in the Chinese currency. Executives said the move would save costs and avoid exchange rate risks. Bank of China and Bank of Communications were the first lenders to clear transactions in renminbi, considered a lucrative business given China's expanding economy and huge presence in international trade. Hong Kong also kicked off the long-awaited yuan settlement program on Monday. HSBC said it completed its first renminbi trade settlement with Shanghai and its first cross-border credit transaction.


India open to discussing dollar's status as reserve - Reuters
Reuters reports India is willing to discuss proposals to replace the U.S. dollar as the global reserve currency, Foreign Secretary Shivshankar Menon said on Monday. "This would be one of the ideas which is on the table. There have been ideas expressed and we are ready to discuss all of them," Menon told reporters when asked if India would consider replacing the dollar.


Calls grow to increase stimulus spending - WSJ
WSJ reports Vice President Joe Biden said the Obama administration "misread how bad the economy was" and didn't foresee unemployment levels nearing double digits, in comments likely to intensify calls for the administration to do more to counter job losses... White House economists are discussing whether a second round of stimulus is needed, but a decision isn't expected until at least the fall. "We remain focused on putting thousands of Americans back to work" through implementation of the February stimulus act, an administration official said Sunday. "Any discussion of a second stimulus is premature at this point." That timetable isn't fast enough for some economists, who say quick action is necessary to avoid a protracted period of joblessness. "A second stimulus should be the one they should have done the first time, something that is relatively fast and thoughtful," said Phillip Swagel, a professor at Georgetown University's McDonough School of Business. So far, though, politicians of both parties are showing little eagerness to tackle another stimulus bill. Republicans have attacked the current stimulus package as wasteful and ineffective, labeling it as government bloat at a time of record deficits. As the GOP seeks to reclaim the mantle of fiscal discipline, many are loath to support another round of government spending. Many Democrats, too, said they're disappointed with the recovery program so far but, for now at least, are resisting calls for a second package.