×

Farrell: Timmy And Guo Are Playing Nicely

I do like to kid Treasury Secretary Geithner, but in reality I think he has done a credible job under very difficult circumstances. If he could figure out how to tie a neck tie it might help. But, hey, I have three grown sons who are equally challenged. But in their defense they never wear ties!

Timmy is in Chinaand the trip is going very well. Guo Shuqing, head of the China Construction Bank and former Chinese foreign exchange administrator, said "I don't think we can find another currency to replace the dollar..the dollar is the main currency because (the American economy) is number one in terms of competitiveness, in terms of innovation." Geithner for his part said "I've actually found a lot of confidence here in China in the strength of the American economy." It's nice to see the boys playing so well in the sandbox. It's a good thing too since China has 70% of its $2 trillion in foreign reserves dollar assets. But they are no fools and reports are they might have been net buyers of U.S. government issued debt so far this year, but they are selling longer dated assets and moving decidedly to the short end of the yield curve fearing a resurgence of inflation and/or a decline in the value of the dollar.

    • Watch CNBC's Steve Liesman's Reports From China

On the latter point, one can hardly blame them. Short dated Treasuries- one to three years in maturity- have returned 18% the last three years in dollar terms. But they have only returned .3% when translated into the Chinese yuan. The dollar will, actually is, the battleground where the confidence in Ben and the Fed's ability to keep inflation expectations under control will be fought.

Wednesday is the June deadline for TALF - term asset backed lending facility - submissions. At least $13 billion in car and credit card backed paper has been placed that will be applying for loans (that's how it works. You do the deal and then get the cheap government financing.) While that total is better than it has been, hopes had been higher. What I find very interesting, and it's not been focused on, is that JP Morgan placed a $1.15 billion credit card deal that is NOT eligible for TALF funding. The market is healing itself! Likewise, Business Week reports that at the start of the subprime debacle there was $3.7 trillion of the toxic stuff around and that is down to $1.7 trillion. The market for paper written in the 2005-20007 time frame has risen from $.55 on the dollar to a recent $.80. Soon there will be no need for the PPIP (public/private investment partnership) which is probably just as well since most are very cautious about partnering with the government.

April pending home sales were up a surprising 6.7%, but I wouldn't get too excited. While housing looks like it has found a floor, mortgage rates have moved higher along with the 10 year Treasury. It's been figured that every .1% move in mortgage rates effects the average home price by 1%. The beginnings of the better housing market could be short circuited if rates move up.

And much has been made of the fact that the market has moved above its 200 day moving average. That often is a good sign but the market moved above that mark three other times since September of 2007 and those moves subsequently gave up the ghost.

_______________________________________