Chuck Butler

Well, the mini-rally that the euro (EUR) was putting on yesterday morning, on the news that Italy had put in a successful bond auction, continued throughout the day yesterday and through the overnight sessions. Pretty strong rally, as the euro pushes the envelope to 1.30 again. That 1.30 level has been quite a line of resistance for the euro, but to me, if the euro remains around this level, it shows me that things certainly are quieting down in the Eurozone, and soon the focus will shift to the US.

Yesterday we saw the tale of two countries’ trade balances. The US trade deficit widened to $44.2 billion in August from a revised $42.5 billion deficit in July. The US trade deficit was pushed higher because of a collapse in exports. (Remember what I warned the markets about a couple of months ago, when they were whopping it up about the trade deficit narrowing, and running the dollar up in price? I said, be careful what you do here, as a stronger dollar will hurt exports.) Well… That’s not the only thing hurting exports these days. The global slowdown is dragging down everybody.

Everybody, that is, except Canada! Canada’s trade deficit narrowed to $1.3 billion in August. This was a very sharp narrowing, as July’s trade deficit was $2.5 billion. The experts had forecast a narrowing to $1.9 billion. Here in Canada, it was a sharp decline in imports that brought the trade deficit down to $1.3 billion. Which sounds like chump change compared to the US trade deficit, eh? (Don’t worry… I get it… The size of Canada’s economy versus the US…) The Canadian dollar/loonie (CAD) pushed higher by about ¼-cent on this news. But in reality, the loonie has been stuck in the mud, ranging from $1.02 to $1.03. But, think about this for a minute, folks. If you use the loonie in your mix to diversify out of the US dollar, it’s not bouncing all around like a Mexican jumping bean, and with little volatility, it makes things go smoother, eh?

Today, the US data cupboard has some stupid PPI (wholesale manufacturing index), the U. of Michigan Consumer Confidence for the first two weeks of October, and the Monthly Budget Deficit statement is due to print. The Monthly Budget Deficit data will be from September, the last month of the US’s fiscal year, and is expected to be around $75 billion. If that’s where it comes in, the budget deficit for the fiscal year 2012 will be around $1.240 trillion. And, for those of you new to class, that gets added to our national debt. I shake my head in disgust, for this expanding debt was what I warning people about over 10 years ago. Back then, we were booking $550 billion budget deficits, and back then that made me stop and yell and the walls! Imagine what $1+ trillion budget deficits do to me!

Ok… Onto other things before I get my blood pressure sky rocketing! We received word from the Monetary Authority of Singapore (MAS) that they would not be changing the slope and width of the Singapore dollar’s (SGD) band. That’s good news, as there had been some rumors going around that the MAS would opt to narrow the band. Now, for those of you new to class, what the MAS does is first and foremost, use the strength of the Sing dollar to fight their inflation fights. A novel concept, and one I wish most countries would use, instead of an arbitrary interest rate. But to further the discussion of what the MAS does, is they set a band for the Sing dollar to trade in, and it can float within that band. So, the Sing dollar is somewhat “managed”. But, the MAS has been widening the band for a couple of years now, and that has led to some very nice gains in the Sing dollar… So, having the MAS leave the band unchanged in today’s environment, where most countries are debasing their currencies is a very good thing.

While I’m in Asia… The Chinese renminbi/yuan (CNY) has really been “putting on the Ritz” again, with 10 consecutive weeks of gains (albeit small ones, but gains nonetheless!) Last night, the renminbi was allowed to reach a 19-year high. Investors are pushing the envelope here for larger gains on thoughts that the Chinese government will announce more stimulus for the economy. The Chinese Communist Party will hold a congress starting November 8, and most observers believe that after the congress the stimulus will be announced. China did get some good data news overnight when they printed a 5.5% gain in overseas sales in September, versus the 2.7% increase in August.

Remember, the Chinese official who claimed the second quarter would be the bottom for the Chinese? I get a sneaky feeling that he will be proven correct. But I don’t really expect the Chinese government to let loose of the reins on the renminbi/yuan. The People’s Bank of China (PBOC) Deputy Gov. Yi, said that “CNY was close to its equilibrium based on market supply and demand.” Hmmm. sounds like they were sending that message to the US lawmakers who continue to yap at the heels of the Chinese about allowing the renminbi to gain a larger margin versus the dollar.

In Australia, the Aussie dollar (AUD) looks to be trapped in a tight range above $1.02. The earlier gains the Aussie dollar made on the rise in iron ore prices seems to have faded, as if the markets are saying “what have you done for me lately?” The risk sentiment has improved a bit, and some that comes from the Weekly Jobless Claims report from the US that showed a large drop of 30,000 to 339,000 last week. With the risk sentiment improving a bit, that gives the Aussie dollar an underpinning. But just when you think it’s ok to get back into the water, along comes Reserve Bank of Australia (RBA) Gov. Stevens, who reminded the markets (out of the blue, mind you) that he still has ways to slow the economy. What a dolt! Why would you do or say something like that? Central Bank Governors are strange birds, folks. There have only been a few since I’ve followed this stuff that made providing price stability their main job, and they did it well! Don Brash is at the top of the list. Wim Duisenberg. Hans Tietmeyer. And some others that are slipping my mind right now. Those were central bankers.

Australia’s kissin’ cousin across the Tasman, New Zealand, has had their fill of a central banker, Bollard (now retired), that didn’t fill the bill as far as I’m concerned. And now they have a wacky party leader that called for the RBA to print more money in a bid to devalue the New Zealand dollar (NZD). What a whack-job! Good thing the N.Z. Prime Minister put it all in perspective. And something our leaders should listen to. This statement by PM Key is classic, so it gets a paragraph to itself! Mr. Key said this in response to the call to print more money:

“If printing money made you rich, Zimbabwe would be the richest county on the planet, and it’s not.” — NZ PM John Key. Classic… Just classic!

And in the land of quantitative easing and stimulus packages… (Sorry, I’m not talking about the US, but I very easily could be!) Japan cut their economic assessment last night, and Japan’s Economy Minister, Maehara, said he has a “sense of crisis”. Really? Where was this “sense of crisis” back in the ’90s? Or the 2000s? Of course, Maehara only sees the strong yen (JPY) as the problem. I have to say that, they are correct in their assessment that the yen is too strong, but as I outlined earlier this week or late last week, the Japanese are out of arrows. A massive coordinated intervention to sell the yen is all they have left. And right now, they are the kid in the playground without any friends.

Then There Was This. The winners of the “Forecaster of the Month Award” from MarketWatch, Toronto-based Capital Economics had this to say in MarketWatch about the US Economy. “The US economy is missing that vital spark that could lead to a virtuous cycle of faster growth and more jobs. Capital Economics are forecasting another year of the same, weak economy, with 2% growth and 8% unemployment through 2013. They don’t see much movement in stock prices or interest rates, or inflation rates between now and the end of next year. And that’s IF nothing horrible happens in Europe, and IF Congress doesn’t drive the economy off the fiscal cliff.”

Chuck again. Good insight from some economists that don’t have the Sword of Damocles held over them like the economists do here in the US. Say something like that here, and you’ll get blasted in the NY Times. And just goes to show you how “underground” the Pfennig is! I’ll tell you that I think that one of the major things holding back the economy is the debt. It’s that simple. Debt burdens, worries, and confusion, keep the lid on the economy.

The other thing I see is the unemployment problem, but even more is the feeling by people that do have jobs, and income streams that spending right now is the right thing to do. The savings rate in the US is rising, and debt levels of consumers are falling. When this gets more in line then the economy could make a comeback. But that could take years. UGH!

To recap. The successful Italian bond auction carried a lot of weight yesterday and throughout the overnight sessions, as the euro pushes toward 1.30 again. US Weekly Jobless Claims fell 30,000 last week, giving risk sentiment a little boost. The Singapore Monetary Authority is leaving the bandwidth and slope for the Singapore dollar unchanged, which Chuck sees as a good thing given the propensity for central banks to debase their currencies these days. And N.Z. Prime Minister, John Key, gives us a classic quote on money printing!

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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