Sept. Housing Data, PPI, Russia and China Talk of Replacing the US$ on energy Trade, UK Real Estate Heats Up

More economic numbers out this morning that suggest a continuation of the status quo.
The Fed can point to the PPI numbers and pretend there is no inflation...
September Core PPI Y/Y +1.8% vs +2.0% consensus, prior +2.3%
September PPI Y/Y -4.8% vs -4.3% consensus

...So rates can remain low to help the listless housing market...
September Housing Starts 590K vs 610K consensus, prior revised to 587K from 598K
September Building Permits 573K vs 595K consensus, prior revised to 580K from 579K

Somehow, all this data results in a U.S.$ rally, T-bond advance (rate decline) and an equity market sell off. I would expect this counter trend move to be short lived. In fact, there have been some developments regarding the U.S.$ that should concern any U.S. $ optimist.

Last week, Russia and China conducted meetings to begin settling trade between the two countries using their own currency. The trade will involve the energy markets. This development brings to mind recent denials we highlighted in the October 5th post out of the middle east that a similar plan is in the works. I believe the appropriate axiom begins, "Where there's smoke...."

BEIJING, October 14 (RIA Novosti) - Russia is ready to consider using the Russian and Chinese national currencies instead of the dollar in bilateral oil and gas dealings, Prime Minister Vladimir Putin said on Wednesday.The premier, currently on a visit to Beijing, said a final decision on the issue can only be made after a thorough expert analysis."Yesterday, energy companies, in particular Gazprom, raised the question of using the national currency. We are ready to examine the possibility of selling energy resources for rubles, but our Chinese partners need rubles for that. We are also ready to sell for yuans," Putin said. MORE...

A possible accelerant about to be poured onto the pile of burning U.S.$s may have a UK label. The real estate market in the UK appears to be heating up. Prices for both residential and commercial properties in London are hitting records. If this recovery turns into a trend that moves across the channel to the rest of Western Europe then Ben and Pinocchio could have a real problem.

The U.S. $ carry trade will gain steam if a European economic recovery/inflation outpaces the U.S. and leads to rate increases much like in Austraila (see Oct. 7th post). A lagging real estate market here in the U.S. will make it difficult for Ben to raise rates. Meanwhile, Pinocchio (Geithner) will continue to express the desire for a strong $ as his nose grows...

London Agents ‘Sold Out’ as Home Asking Prices Jump to Record Oct. 19 (Bloomberg) -- London home sellers raised asking prices to a record high this month and led gains across the U.K. as the shortage of properties for sale intensified, Rightmove Plc said. MORE...

UK property undergoes dramatic recovery - FT
FT reports the UK commercial property market delivered the highest monthly price growth for more than three years in September, capping a remarkable comeback for a sector that looked to have been wiped out only a matter of months ago. Investors are now chasing commercial property and some are complaining that the market has become too hot again. The switch in sentiment has been tangible as investors look to take advantage of a slump that wiped off about 45% from prices from the peak in 2007 by the beginning of the summer. The recovery has been building since, with IPD, the benchmark index, rising 1.1% for September, the highest since June 2006.

Japan Shifting Away From the US Dollar, Option Adjust-rate Mortgages Delinquencies, Russia Threatens to Seize ArcelorMittal's Mines

RCM Comment: I am loath to bore you with the same story over and over but the story's far reaching ramifications demand that we cover this story like the wet blanket it represents. You see, there is a fire raging in the U.S.. Our government is burning paper (US$s) at an alarming clip as it spends aggressively to avoid the inevitable. Let's not debate the simple fact that government spending plans have never in history helped drag an economy out of a recession. Even the oft-praised New Deal of the '30s didn't save the country from the depression; WWII accomplished that feat.

So, paper is burning and the only way to get more paper, short of 'cooking the books', is to issue Gov't debt and hope our trading partners continue to fund our addiction. Enter the wet blanket. The cry to dethrone the US$ as the reserve currency is building and now Japan in an 'et tu Brute' moment adds its voice to the majority....

July 13 (Bloomberg) -- Japan’s opposition party, leading in polls ahead of next month’s election, said the nation should consider shifting its $1 trillion of foreign reserves away from the dollar and buying International Monetary Fund bonds. “In the medium to long term, we need to do what we can to avoid the risk of currency losses or economic turbulence that could result if the dollar were to swing,” Masaharu Nakagawa, the shadow finance minister in the Democratic Party of Japan, said in an interview in Tokyo on July 9. “Many countries are starting to diversify their reserves.” Read more...

RCM Comment: Troubles continue to brew in the real estate arena and by extension the banking sector. The EPS announcements over the next few weeks should be very interesting. Question: Will creative accounting be condemned as it should or will it continue to be ignored as has been the case?
NEW YORK (Dow Jones)--For the third straight month, option adjustable-rate mortgages are generating proportionally more delinquencies and foreclosures than subprime mortgages, the scourge of the housing crisis. A further acceleration of troubles among the loans could mean higher-than-expected losses for Wells Fargo & Co. (WFC) and JPMorgan Chase & Co. (JPM), as well as the Federal Deposit Insurance Corp.'s own insurance fund. "The realization of the issues related to option ARMs is just beginning," says Chris Marinac, director of research at Atlanta-based FIG Partners.

Example of creative accounting: WaMu by Karl Denninger

"In March of 2006, Washington Mutual recorded net income of $985 million dollars. 4Q06 they booked $1,058 mln. This last quarter, they booked $784mln. But in those three quarters they booked $194mln, $333mln and $361 million, respectively, in PayOption ARM "Capitalized Interest." This was booked and recognized as EARNINGS.

Now here's the problem: In 1Q 06, 194 million out of $985 is 19.7%. In December, it was 31%. But this last quarter, it was FORTY SIX PERCENT, more than a DOUBLE over the year ago levels. And what's worse, not one dime of that "income" can be spent! It is entirely phantom. This is the same sort of crap that sunk Lucent and Enron - booking "income" that is not in fact spendable, as it has an impairment associated with it (the LTV is INCREASED by this negative amortization) AND it is not CASH!"

RCM Comment: This story does not bode well for emerging market investments...
MT Russia region threatens to seize ArcelorMittal mines - Reuters (29.87 )
Reuters reports Russia's Kemerovo region has notified ArcelorMittal (MT) that it will seize two of the world's largest steel maker's mines if production levels do not increase, a statement from the Siberian region said. "If your team is not able to stabilize production at these facilities, then we propose that you hand them over without compensation," Kemerovo governor Aman Tuleyev said in a telegram addressed to the multinational's chief executive, Lakshmi Mittal, and cited in the statement on the Kemerovo website. Reuters has been unable to reach ArcelorMittal's Siberian operations for immediate comment on the telegram. ArcelorMittal acquired three Siberian coal mines from Russia's Severstal in 2008, becoming one of the few foreign companies to enter the market.