Smash! Crash! Crunch! Whack!

Fenders banged up. Radiators steaming. Tires flattened. Whee!

But here’s the most exciting scene in the whole show. Greece and Germany are playing chicken!

Greece presses down the accelerator and heads for Germany. “If you force us out of the euro, all of Europe will go up in flames,” say the Greeks.

“Oh yeah?” say the Germans, turning on the speed in their Mercedes, “ve’ll see about that. Ve haf airbags!”

And we watch. Wonder. Which one will lose his nerve? Or will they crash head-on?

Nobody knows for sure.

But nobody wants to have money in Greek banks…in Europe’s periphery banks…or even in euros…when they find out.

Yesterday, more money leaked out of Greece…and out of the euro. The euro fell to its lowest level in two years as “Europe braced for turmoil…”

One headline said Greece was making plans to withdraw from the euro. The Greeks promptly denied it…which reminded us of what they used to say in Soviet Russia: no rumor is confirmed until it is officially denied…

De La Rue, an English company that prints most of the world’s currencies, would not say whether an order for drachma had come through or not.

Meanwhile, all these wrecks and smash-ups are damaging Europe’s economy. The New York Times is on the story:

Economic reports Thursday showed Europe’s prospects dimming as the long battle to defend the euro zone continued to undermine confidence and raised the prospect of a renewed cycle of demands for austerity.

The relentlessly bleak data, reflecting weakness across the Continent and in Britain, came a day after political leaders again failed to break the deadlock over how to resolve the European debt crisis.

A Markit Economics index that tracks the European services and manufacturing sectors fell in May to 45.9 from 46.7, worse than economists surveyed by Reuters and Bloomberg had expected. An index reading below 50 suggests the economy is contracting. In the first quarter, the euro zone economy grew just 0.1 percent.

Perhaps even more worryingly, German data released Thursday showed signs of a slowdown in an economy that until now had been a bright spot for the Continent. A Markit index based on surveys of purchasing managers of German manufacturing companies fell to 45.0 in May from 46.2 in April.

And Britain’s is worse. New data show the slump is worse than previously thought. The NYT again:

The Office for National Statistics revised the decline in gross domestic product in the first three months of this year to 0.3 percent, up from the 0.2 percent it estimated last month, because of a deeper slump in the construction industry. Construction output dropped 4.8 percent from a year earlier, the agency said, not 3 percent, as it had estimated earlier.

The revised figures were “bad news for UK policy makers as it shows the economy faring even more badly than initially thought,” said Scott Corfe, senior economist at the Center for Economics and Business Research in London. “Indeed, the latest data show the UK economy performing worse than the euro zone economy, which saw zero growth at the start of the year — meaning the UK’s woes cannot even be fully attributable to the debt crisis embroiling the Continent.”

So, stay tuned…let’s see what happens tomorrow…

Bill Bonner
for The Daily Reckoning

Euro Declines as Greece and Germany Play “Chicken” originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

— Neil Sedaka

What’s the Greek word for ‘chutzpah’? We don’t know either.

But the leader of the communists/socialists, Alexis Tsipras, has it. He must have heard that old saying:

“When you owe your bank $100,000, you can’t sleep at night. When you owe your bank $1 million, your banker can’t sleep at night.”

Since the Greeks owe money all over town, he figured he could thumb his nose at his lenders. He told the Germans that they were trapped. They had no choice. They had to keep the money flowing to Greece. Otherwise, the Greeks would default…and cause Hell to all of Europe.

What’s the word for “oh yeah?” in German? We don’t know that either. But surely the Germans have a word for this occasion. A word that means… “We’ll show you what a moron you are…”

In the event, the Bundesbank did the talking. As to the possibility of the Greeks’ departure:

“The challenges this would create for the euro area and for Germany would be considerable but manageable given prudent crisis management.”

Or, in the words Gerald Ford used in responding to New York City’s request for a loan: ‘Drop Dead.’

Yesterday, the Dow was down as much as 170 points as investors wondered what would happen next. The dollar rose to $1.25 to the euro. By the close of trading, the Dow had managed to pull itself up to only a 6-point loss. Everything else was down, down, down…and it keeps going down. Watch out…investors could panic!

In Europe itself, things seem to be coming to a head. It looks like the Greeks might finally leave…or be pushed out of the euro.

Bloomberg continues:

Greece may have only a 46-hour window of opportunity should it need to plot a route out of the euro.

That’s how much time the country’s leaders would probably have to enact any departure from the single currency while global markets are largely closed, from the end of trading in New York on a Friday to Monday’s market opening in Wellington, New Zealand, based on a synthesis of euro-exit scenarios from 21 economists, analysts and academics.

But switching currencies is not an easy thing to do. Bloomberg continues:

It would most likely be necessary to close borders to stop Greeks smuggling out euros to stash in banks elsewhere. But with hundreds of miles to cover, much of it in inaccessible mountain, wood and scrubland, security forces would be stretched thin.

Simultaneously, police would likely have to manage a dramatic spike in unrest and perhaps more political and criminal violence. Already, there have been isolated examples of Germans — or those suspected of being German — being assaulted in apparent anger over EU-enforced austerity.

Greece’s leaders could decide to deploy the army onto the streets in an attempt to reassure the population and bring calm. But that could prove deeply divisive…

The commentariat still insists that it would be against Germany’s interest to push the Greeks out of the euro. One says Germany would be “shooting itself in the foot” or perhaps the head. Another says it would cost a fortune, $1 trillion, according to a report in the Telegraph:

The British government is making urgent preparations to cope with the fallout of a possible Greek exit from the single currency, after the governor of the Bank of England, Sir Mervyn King, warned that Europe was “tearing itself apart”.

Reports from Athens that massive sums of money were being spirited out of the country intensified concern in London about the impact of a splintering of the eurozone on a UK economy that is stuck in double-dip recession. One estimate put the cost to the eurozone of Greece making a disorderly exit from the currency at $1tn, 5% of output.

Yes, breaking up is hard to do. It would be costly. But money isn’t everything. People do bad things for money, it’s true. But they do worse things IN SPITE OF money.

Where was the money in WWI? In starving the Ukrainians? In Hitler’s ‘final solution’? In the extermination of the Armenians?

You might find a money motive…but few mass murderers are bottom-line oriented. They’re usually world-improvers…

There are some things more important than money. National pride is one of them. Here’s our point. At some point, people stop counting the costs…they go ‘off their heads’…and begin doing things that don’t really benefit anyone in a financial way. So, it may not matter whether it “makes sense” to kick the Greeks out of the European monetary system or not.

Greece was still in it as of yesterday. Today, anything could happen. But at this stage, the Germans may prefer to blow off a toe or two in order to get rid of them.

We went to Toronto yesterday to visit an old friend who made a lot of money in the mining business but now works in bio-tech. Why did you get out of mining, we wanted to know?

“It just got too crowded. You know what they say about the ‘crowded trade.” Get out. Well, I guess it was the big run-up in commodities a couple of years ago that caused it. Suddenly, everyone was starting up a mining company. And they were getting a lot of investment money. Everybody thought he’d get rich in resources.

“But it doesn’t work that way. The mining business is extremely cyclical. Prices go up. It draws in the marginal players. And the good deals disappear. Everything is too expensive. There’s too much production. Too many projects. Too many promoters. And then prices collapse.

“We’ve already had a good pullback. I’m starting to see some good deals again. But I’m waiting a little longer. I think we’ll get some better deals before this is over.”

Our guess, here at The Daily Reckoning, is that Facebook’s IPO represented some kind of high water market for the virtual economy. It was like Blackstone’s IPO in June 2007, which marked the top in the financial economy.

Now, the economy will shift back to the real things…oil, and copper, and precious metals. It could take years.

But heck, we’re not in any hurry either.

Regards,

Bill Bonner
for The Daily Reckoning

Bracing for a Greek Exit originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

The talk about a Grexit softened its tone a bit yesterday. The markets were basically saying that Greece could exit the euro (EUR) this weekend! The US is obviously on holiday this coming Monday, and that fact has factored into the calls for an exit this weekend.

Again, I don’t see this happening, as the cost to Greece — the pain and mess — will be far greater to the Greeks than their austerity measures, should they decide to leave. So I’m on the side of the fence that says Greece stays.

The EU summit was a nonevent. EU leaders left the summit without any meaningful plans. They all agreed that Greece needed to stay in the eurozone, but could not come up with any meaningful action that could be taken.

If you go back in time, when the Greek debt problems first called for a bailout, and the markets all thought that the contagion effect would take over all the southern eurozone countries, I told you then that the only way to deal with this — so that there would be no further contagion — is to issue a eurozone bond, and quit having each country hold their own auctions.

Yes, it takes another chink from each country’s sovereign armor, but when each eurozone country decided to give up their sovereignty of their currency, they opened the Pandora’s box of how to lose one’s sovereignty.

So now skip ahead to the EU summit, in which discussion of a eurozone bond would have nipped the daily flogging of the euro in the bud, the EU leaders decided to push that discussion off to the next summit. What? These guys are really beginning to give me a rash! What the heck are they thinking? Oh, I know, they are thinking that maybe with time, the problem goes away, and they don’t have to have that eurozone bond discussion.

My dad used to tell me all the time that most problems will take care of themselves with time. However, I think the EU leaders have chosen the wrong road to journey down. They needed to address this problem right away! So they decided to see if the problem would take care of itself, with time. I’m sure they will rue the day they decided to journey down this road.

OK, the euro this morning is down just a bit, as it shrugs off the nonevent EU summit, and the news this morning that German business climate, as measured by the think tank IFO, fell by the largest one-month margin (negative three points) since August 2011. The experts had thought it would be a negative number but a soft negative number, not a hard negative number.

German flash PMIs (manufacturing indexes) also are showing some weakening. So even the calm in the eye of the eurozone storm, Germany, is showing that the overall weakness in the eurozone is hurting them, too.

Speaking of PMIs, in China, we always get two sets of PMIs. The government issues their report on the pulse of manufacturing, and HSBC (Hong Kong and Shanghai Banking Corp.) issues theirs, and never do the two match up. For instance, last month, the government issued a report that said that manufacturing as measured by the PMI was a number above 50, and HSBC issued a report that said it was below 50. (Remember, 50 is the line in the sand that denotes whether manufacturing is expanding or contracting.)

I always grow suspicious of government reports that don’t line up with those in the private sector. Take the U.S. economic reports versus ShadowStats. There are HUGE discrepancies between these two, but the sheeple here in the U.S. don’t pay attention to any of this. Whatever the government tells them, they swallow hook, line and sinker.

Anyway, getting back to China, the HSBC PMI report showed a seventh month of below 50 for April. The government report is usually printed on a weekend, so we’ll see what this has in store for us this weekend, as the pools open here in the U.S. (ours has been open for a month!) and the smell of charcoal drifts through each neighborhood and we sit back and reflect on the meaning of Memorial Day.

Did you know that Memorial Day was originally called Decoration Day? And that it originated after the Civil War to commemorate the fallen Union soldiers of the war? Notice, it was only the Union soldiers. Apparently, the South held their own Decoration Days in each region on different days. We joined this all together and called in Memorial Day, to honor the men and women that had died while serving in the U.S. armed forces, and later, we said it would be the last Monday of May.

There you go! A public service education announcement! You get it all here, folks! Why go to any other newsletter? Just kidding. Of course, absolute newsletter reads that I have include: The 5 Min. Forecast, anything David Galland writes, Doug Casey, Bill Bonner, David Rosenberg and I even carve out time for my friend John Mauldin once a week, and of course, the Mogambo Guru!

I wanted to write about this yesterday, but forgot all about it until I had hit “send”! UGH! But did you see the latest existing home sales data here in the U.S.? Very strong, and for the first time in a year of Sundays, the home price increased! WOW! Did we just hit the bottom for home prices? Somehow I can’t get my arms around that thought. I just think about the unemployment situation, and the foreclosures coming down the line, and have to think that this was just a one-month blip. But maybe I’m wrong, and it’s time for me to stop being such a negative Nellie.

I really wanted to send Chris a note on this last week, and then something happened that took my attention away from the story. Then I thought I would talk about it first thing this week, but then something happened to take my attention away from the story, so now on Wednesday afternoon, while I’m thinking about it, I will write it down for Thursday. And it’s Thursday!

Basically, I wanted to talk about sentiment, and focus. While everyone was having a cow over the Greek debt and whether they would form a new government and all that, the eighth-largest economy in the world announced that they had miscalculated their budget deficit and what had previously been forecast to be $9 billion turned into $16 billion in deficits. That eighth-largest economy in the world? Not Greece… not Spain… not Italy… but the great state of California.

The sentiment right now is that the eurozone’s center will not hold together, and the focus is on the eurozone’s problems, not those here in the U.S. with the same thing: debt. Trader sentiment and focus is all that’s needed to either make a currency’s day or send it up the creek without a paddle. And right now, the euro has been sent up the creek without a paddle.

Gold and silver saw another day of selling yesterday, and are down once again. (I have some words on this from Ted Butler later today). And the Australian dollar (AUD) has bounced higher this morning. I have given you two measures that are used to calculate if a currency is oversold in the past week and both showed that the A$ was oversold. But that doesn’t always mean that traders will jump to buying, in this case the A$ immediately. Not with the U.S. dollar strength so prevalent in the markets right now. But they will. Traders can’t break free of their urges to react to charts and index measures.

Hey! I just watched the price of gold go from a negative $5 to a positive $5 in less than five minutes! WOW! Maybe the shiny metal can catch some wind in its sails today.

The 7-year U.S. Treasury auction was interesting. The yield on the 7-year note fell to 1.13%. That’s a record low yield, folks. And just when I thought that yields couldn’t really get much lower! I’m sitting here with the thought of “Yes, Virginia, Treasury yields can go lower.” Hey! For the award of financing U.S. deficit spending, you can get 19 basis points of yield out one year. Of course, by the time the broker takes his pound of flesh for doing the trade, you probably end up with a negative yield. And I hate to break this to all you U.S. Treasury buyers, but unless you go out 30 years, you have negative real interest on your holding (real interest is the yield — inflation).

And then the two anti-dollar investments, oil and gold, which have been butchered lately with the dollar strength, at least didn’t lose any more ground overnight. I’ll have to go read the Mogambo Guru to see what he’s thinking these days about the price of oil and gold.

Then, from Ed Steer’s Daily: “This is Ted Butler speaking… ‘The price action this week has been horrid. It is horrid because the crooked commercials on the Comex have made it horrid. There is no legitimate economic justification for the price decline since Feb. 28 other than the price action was created to permit the commercials every opportunity to scare and induce others into selling Comex contracts so that the commercials could buy. Almost every day, the price of silver and gold seem to be put lower in thin overnight trading. Almost every day, we start out “in the hole,” where it is a struggle to get back to unchanged. This is not accidental; it is a deliberate plan to demoralize and keep silver investors confused. It is shameful that the CFTC has been captured by the crooks and is content to look away.

“‘The good news is that the commercials have succeeded in buying record amounts of silver (and gold) contracts. It’s impossible to pick the timing of the next rally, as we are in a sort of “no man’s land” currently, where technical-type buying won’t come in until the moving averages are penetrated to the upside. There still doesn’t appear to be much speculative selling remaining in silver and gold after the orchestrated takedown of the past couple of months, but neither is there any impetus for technical buying below the moving averages. In this environment, it’s not hard for the commercials and HFT practitioners to put prices sharply lower at will. About the only sane reaction to all this is to accumulate and hold physical silver for the long haul, as the short-term manipulative games won’t last forever.’”

Last week at the Las Vegas Money Show, the booth across from ours was Investment Rarities, which is Ted Butler. One of the guys in their booth came over to me and told me what a fan he was of the Pfennig. And I was like, “When you have Ted Butler? WOW!”

To recap: There was blood in the streets yesterday with the risk assets, as the asset prices dropped all day long. Today, we’re seeing some light — not much, but some, for the risk assets. German IFO and flash PMIs say that even Germany is weakening. The eighth-largest economy in the world announced that their budget deficit was $16 billion, not the $9 billion they originally told everyone it would be. And yes, Virginia, U.S. Treasury yields can go lower.

Chuck Butler
for The Daily Reckoning

Currencies Try to Rebound Today originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

— Reminiscences of a Stock Operator, circa 1923

Poor Zuckerberg. He’s got all those Facebook shares. And they’re dropping in price. The stock closed a bit over $31yesterday…and then kept sinking… It was down to $30 in afterhours trading.

What did you expect? The company has sales of $4 billion. IF…IF…it were able to claw out a 10% profit margin…and IF a fair multiple for its earnings were, say, 10…the company would be worth $4 billion. Not $100 billion. Four billion dollars. And instead of having shares valued at $15 billion, Mr. Zuckerberg would have shares worth about $800 million.

The Dow itself was flat yesterday. Not a very good showing after so many down days. We’ll keep our ‘Crash Alert’ flag up. The bottom could drop out at any time.

The Facebook IPO looks more and more like the end of an era. The end of the pie-in-the-sky social network era. The end of the post-crisis recovery rally. The end of the public’s residual confidence in Wall Street. The end of America’s youthful energy…its era of growth, innocence and hope for the future.

Now, growth rates are low; they’ve been falling for the last 30 years. The baby boomers are neither booming nor babies. Stocks are passé…people want bonds now. And 63% of voters think their children will be worse off than they are.

At least Zuckerberg has it made. He’s got about 500 million shares and options. But every two dollars they fall costs him about $1 billion. So, he’s lost $5 billion since the company went public on Friday.

Still, we’re not going to feel sorry for him. He’s still got $15 billion or so.

Not that we care how much money he’s got. He could have twice as much; he’d still be a putz. We saw the movie!

Seriously, Americans care far too much about money. That’s what people who don’t have it say. They say that too much money is a sign of greed. And that people with too much money can’t relate to everyone else. We lose our sense of community…our public space. People with money live separately from the rest of us. They buy elections and use too much energy…and leave small tips. They’ve got too much power, too much influence, and too much of the pie.

Paul Krugman, Thomas Friedman and Barack Obama want to solve this problem by taking money away from the people who have it. And making it harder for them to earn more.

The guys at J.P. Morgan lost a few billion. You’d think the anti-money crowd would be happy about that. Instead, they want to make a federal case out of it. Practically every pundit is calling for more regulation. “If even good bankers can lose so much,” they say, “we’ve got to get control of them!”

The whole idea that they can regulate risk out of the system is loony. It doesn’t work that way. The more they regulate, the more they distort the market, and the more mistakes investors make.

Investors are buying US treasury bonds, for example, by the boatload. Why? Because the regulators at the Fed have taken the risk out of buying bonds. If interest rates rise, the Fed will buy bonds itself.

Dear Readers and connoisseurs of regulatory FUBARity will appreciate the flexibility of America’s central bank. Its aim is to drive investors into risky assets…by suppressing yields on “safe” treasuries. The unintended consequence is to create depression-like yields…and capital gains for bond buyers. Investors flee stocks…and go into the Treasury bonds the Fed was trying to get them out of. Thus does the Fed manage to bend its right leg far enough to kick its own derriere.

People who don’t like the rich should spend a little time thinking about how the rich got that way. Were they smarter than others? Greedier? Or just luckier?

In our humble observation, we’d say they were a little of all those things. But most of the big increase in wealth the rich enjoyed has come thanks to those same regulators whom the feds want to sic on them.

Yes, dear reader, the rich got richer because of the fixers…not because of the rich themselves. In 1971, Richard Nixon changed America’s money. The old money — backed by gold — flowed to the hardworking producers. It was saved, invested, and put to work. This new money had different ideas. It ran around in different circles. It preferred a different class of friends — bankers, money managers, investors, speculators, venture capitalists, derivative mongers, private equity operators…

You can see this shift illustrated in the difference between Mitt Romney and his father. The ol’ man ran an auto company. He made cars. That’s where the money was back then. He made the Rambler. Remember that? We had one. It was cheap. It was ugly. It ran. What more could you ask for?

But the son never made anything…but money itself. He didn’t run productive companies. Instead, at Bain Capital he was a leading member of the new class of people who fiddled with them.

By 2007, this class had gotten far too big for its britches. The whole capital structure began to wobble. Left alone, it would have crashed to the ground…bringing rich people down to earth with it.

Left to its own devices — without the generous support of the feds — the Dow might have fallen to 6,000 in 2008…and kept falling. And it probably would have brought down J.P. Morgan…and Goldman Sachs…the Bank of America and most of the rest of Wall Street. Even GM, which by then had become a finance company, would have gone out of business.

And today…there wouldn’t be nearly as many rich people to complain about. Problem solved.

Instead, the fixers fixed it so the fixees stayed fixed.

Hey…here’s another bubble…getting ready to blow up. Bubble bubble student trouble:

Student Loans With Over $1 Trillion are Likely One of the Next Hindenburg Zeppelin Financial Infernos

Barry James Dyke, author of The Pirates of Manhattan II: Highway to Serfdom predicts that student loans, in excess of $1 trillion, will likely be one of the country’s next financial infernos.

Federal student loans interest rates will rise to 6.8% on July 1st 2012 from their current 3.4% base if Congress does not act. Banking lobbies oppose any reduction in interest rates. If Congress does nothing, the average student’s $23 thousand subsidized loan costs will increase an additional $5,000 over a ten year period.

The author states, “Student loans are a form of indentured servitude as student loans cannot be discharged in bankruptcy. Student loans do not die with death. Collection agencies can call day and night to collect student loan debts. Garnishment to pay student loan debt is common. Students are not getting enough well-paying jobs to pay back these enormous loans, yet The Department of Education through the Department of Treasury can attach tax refunds to pay off student loans. What is more, our Congress drove the getaway car for academia and the banks in 2005 with the Bankruptcy Abuse and Consumer Protection Act of 2005 — which turned student loans into non-dischargeable debt.”

According to the Department of Education, two thirds of students who earn a bachelor degree use some type of loan to finance their education with an average loan of roughly $23 thousand. The New York Times recently reported that as much as 94% of students borrow to get a college degree.

The taxpayer underwrites roughly $105 billion a year in Title IV student loans a year, with $24 billion going to for profit schools owned by Wall Street asset managers. Student loans guaranteed by the taxpayer are a major source of revenue for the US higher educational system and if default rates accelerate, it could bring about a Greece like debt problem to the nation’s colleges.

“Excessive borrowing for an education will be a dark cloud hanging over this generation for decades,” claims Dyke. ”Default rates on student loans for traditional undergraduate and graduate rates are currently as high as 15.8%, and as high as 48% for for-profit colleges. The New York Fed reports that nearly one in four student loan holders are falling behind on their student loan payments.

Regards,

Bill Bonner
for The Daily Reckoning

The Delusion of Regulating Risk originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Grexit — that’s what is being talked about this morning. Grexit is a “Greek Exit,” See how I put the two together? Simply genius, eh? HA! Seriously, this talk of a Grexit has really put the euro against the ropes

This talk of a Grexit is really beginning to get loud, folks. But let me be perfectly clear here: Leaving the euro is NOT the answer to the Greek problems, and I truly believe that a few years from now, the Greeks will regret this Grexit.

Bloomberg had a great article this morning that listed what the Greeks would have to do in a 46-hour period should they decide to leave the euro:

“Over the two days, leaders would have to calm civil unrest while managing a potential sovereign default, planning a new currency, recapitalizing the banks, stemming the outflow of capital and seeking a way to pay bills once the bailout lifeline is cut. The risk is that the task would overwhelm any new government in a country that has had to be rescued twice since 2010 because it couldn’t manage its public finances.”

I was on a call with a couple of other analysts a couple of months ago, and this topic of a Grexit came up, and I was alone in my thought that leaving would be very difficult and messy. I think this will be the case should the Greeks decide to leave the euro.

This Grexit talk has really gotten louder since the caretaker government of Greece made overtures about “renegotiating the terms of its bailout.” Hardliners in the eurozone will NOT go for that, and knowing that, the markets are preparing for a Grexit. That, my friends, is the main reason the euro is taking a ride on the slippery slope.

When I say the “rest of the currencies” are following the euro down the slippery slope, that doesn’t include Japanese yen (JPY), which is a currency on its own course. I’ve said all there is to say about the yen, so I won’t bore you with repeats.

I say don’t go against the trend that’s in place, and that trend is to flock to the so-called safe havens — dollars and yen. Swiss francs (CHF) used to be in that category, but with the “games” the Swiss National Bank (SNB) played with the franc last year, traders don’t want to touch francs with someone else’s 10-foot pole!

And who knows? The SNB could be selling francs into this dollar strength, to further weaken the franc. I wouldn’t put it past them.

One of the anti-dollar investments — oil — has really seen its price plunge, and that’s not surprising to me, given the dollar’s strength right now. You see, it’s all about the petrol-dollar.

But what’s going to happen to the petrol-dollar next month, when Iran opens its Oil Bourse, in which oil can be purchased with any currency, not just dollars? Maybe not right away, but should the Oil Bourse gain traction, it should be a real pain in the side of the dollar and the U.S.

I can tell you right now, folks, that all the saber rattling with Iran is not truly about their nuclear capabilities. The reports I read say Iran is 10 years away from a weapon of mass destruction, but you won’t hear the U.S. leaders say that, because they have to keep the focus on Iran’s nuclear capabilities. The real reason that all this saber rattling is going on is that Iran is going to open this Oil Bourse.

Now, that’s probably something you hadn’t heard or read about. But that’s me — always digging for the stories that fly under the radar. Like the story I saw go across the screens briefly yesterday — The U.S. Commerce Department has imposed tariffs of 31-250% on Chinese solar panels. Back in 2001, when I wrote the white paper called The Decline of the Dollar, I began to write that white paper because President Bush had just affixed tariffs on Japanese steel.

And while being protective of American Industries sounds good, the unintended consequences is that protectionism is one of those things that cause chinks in a country’s currency. So like in 2001, the hit to the dollar didn’t come immediately. I think this hit to the dollar will follow suit, and it will be some time before we see it cause harm to the dollar.

The European Union (EU) summit is going on as my fat fingers type away here this morning. This summit is going to be a real dogfight, and that won’t help the euro any. In the blue corner, we have French President Hollande, who wants to pull off the austerity measures and promote growth with spending (same old dookie, right?), and in the Red corner, we have Germany’s Chancellor Merkel, who will dig her heels in on the austerity measures.

But things can’t be that bad. A German auction of bonds/debt this morning saw great demand, and the issue was oversubscribed, and the yield for 10-year bunds fell to the lowest level in some time. And France also saw good demand at their bond auction this morning. And yes, just here in the U.S., where the Fed buys 61% of Treasury auctions, the European Central Bank (ECB) could very well be doing the same. I don’t think so. But I could be wrong!

One of my trading partners (thanks, Shauna) sent me some research her firm had done on India the other day — and folks, it doesn’t look good. This morning there is an article in The Times of India talking about an Indian default! “Market players are starting to worry that India’s deepening economic crisis and political paralysis could drive Asia’s third-biggest economy into default, according to the International Financing Review.”

Gold is down another $15 this morning. There just doesn’t seem to be anything to stop this slide as another anti-dollar gets whacked by the dollar strength. And we’re coming into the “traditional slow months” for gold and silver… the summer months. Last year was an exception, as gold hit its high during the summer, but you have to go back to last summer. And remember that the debt ceiling debacle was taking place, along with a downgrade for the U.S. Gold should have been going higher with stuff like that going on! And lookie, lookie… what do we have here?

Another round with the debt ceiling, which should come about by late summer. Are you with me that this could get really ugly with this being an election year? That’s why I think — and is my opinion, which could be wrong — that this current dollar strength will last until late summer.

Then from Forbes:

“Add it to the growing list of people going after JPMorgan Chase. Employees are suing the bank over the $2 billion trading loss that they say hurt their retirement plans.

“A lawsuit filed on behalf of JPMorgan employees says their retirement accounts fell in value after news broke about the trading loss, Reuters reports. That’s because the plan holds JPMorgan shares, which have dropped 18% since the loss was announced on May 10.

“The complaint, filed in U.S. District Court, Southern District of New York, names the bank, its CEO and chairman Jamie Dimon as well as former CIO Ina Drew, who resigned soon after the loss was revealed, as defendants. According to the suit, the defendants violated the federal Employee Retirement Income Security Act which gives plan participants the right to sue for breaches of fiduciary duty.”

OMG, what’s next?

To recap: The two-day calm in the currencies ended overnight as fears of a Greek exit from the euro are really strong after an EU official said that there would be no renegotiating of the bailout terms for Greece. The EU summit begins today and should become a real dogfight between the southern countries that want to spend and promote growth and the northern countries that want to continue the austerity measures. Gold and oil — the “anti-dollars” — are getting sold because of the dollar strength.

Chuck Butler
for The Daily Reckoning

Talk of a Greek Exit Gets Louder originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Maybe the currency traders can also find their way back on to the right course, but I doubt it. I told quite a few people last week that I truly believe that this dollar strength that we’re seeing could last for most of the summer. But you know what happens at the end of summer, don’t you?

Ahhh, grasshopper, with the way we’re spending money that we don’t have, the U.S. government will be bumping up against the debt ceiling by the end of summer. And with this being an election year, don’t you think that the raising the debt ceiling negotiations are going to get even uglier than last year? I do, and if you recall last year, the dollar was teetering on the cliff during those negotiations.

For now, the dollar still holds the mighty hammer. Of course, I also told quite a few people last year that while the Australian dollar (AUD) has fallen from the lofty levels above $1, it’s still strong. Yes, that’s right, the A$ is still strong compared with where it was 10 years ago! Fifty-five cents — do you recall that?

Anyway, last week, I sent Chris a note to include in the Pfennig that talked about the A$ falling through oversold levels on the RSI charts, and how it had done that four times since 2010, and each time previously, the A$ bounced higher. Now there’s some more data that lead us to that same conclusion.

The IMM positioning last week showed A$ longs at their lowest level since the crisis. The last two times that the A$ saw positioning like this (oversold) was in July 2010, and in September 2011, the A$ experienced pretty significant moves higher in a relatively short period of time.

Now, after I’ve said all that, the A$ is down about half a cent this morning!

When I came in this morning, the currencies were holding their own, but they have slipped while I was preparing to write the letter. And gold is off $16 this morning. So I’ve got to find out what happened while I was preparing to write — inquiring minds want to know!

Well, the ratings agencies don’t seem to mind being late to the party, and Fitch is the latest to be late to the party in Japan. Fitch downgraded Japan’s credit rating and placed the country on negative outlook. Really? So what you’re saying is that you believe Japan has a problem? HAHAHAHAHAHAHA! I can’t stop laughing!

Japan has had a problem for over two decades! But here’s my serious thought on this: The yen (JPY) might have weakened by 0.5% on the announcement, but I don’t think the selling of the yen has any legs, and it will stop soon enough. There’s just too much going on in the world right now, and as perverse as it might seem, Japanese yen is a safe haven.

Yesterday, I told you about how Chinese Premier Wen Jiabao, announced that China’s economy would receive stimulus. This news helped the emerging markets get their heads above water yesterday, along with the fact that oil gained back a buck on the day, which really helped the Russian ruble (RUB) gain back some lost ground.

The Chinese announcement also helped the Aussie and New Zealand dollars (NZD). I think, though, that today is going to be a tough row to hoe for the currencies, as the European Union summit begins tomorrow, and everyone believes that there is going to be a showdown between Germany and France, and this has got the markets scared right now, which is leading to the selling I’m seeing this morning.

France’s new Socialist leader wants to promote growth with spending. Germany had just about gotten every EU member to sign on to the “austerity is the best program” until France threw a spanner in the works by electing Francois Hollande. And now we’re going to have to be witness to all this drama.

But as I’ve said before, history tells us that, eventually, the German leaders can persuade the French leaders to see things the German way. But Hollande has to grandstand now, as he was just elected, although, in my opinion, it’s better to let your constituents down early in your term, so they have time to forget that you dumped on them! HA!

Yesterday, I told you about how I felt regarding Norway and Sweden getting tarred with the same brush as the euro (EUR), and that one day, traders would get it through their thick skulls that Norway and Sweden are not Greece! Norway tried to pound that thought in traders’ heads this morning by printing a stronger-than-expected GDP for the first quarter — 1.1% first-quarter growth is very good for Norway, given how the rest of the world has slowed. Oh, by the way, the consensus forecast was 0.9%.

I guess the Brazilian government and central bank win. They set out two years ago to weaken the real (BRL), and after multiple rate cuts, taxes and interventions, they have finally gotten what they wanted: a weak real. I told you about a month ago that it appeared to me that the traders had left town, and didn’t want to play this game with the Brazilian central bank any longer. That took away the support for the real, and the free fall has been quick. This is exactly why I always talked about buying the real only with the speculative money that you allocate in your investment portfolio. Crazy wild swings, and now this.

The unintended consequences… they are everywhere and in everything we do. Brazil’s leaders are going to soon find that the unintended consequences of their bashing the real into a weakling that gets sand kicked in its face is soaring inflation. And when the tourists begin to arrive for the World Cup and then the Olympics… oh, my!

Speaking of the Olympics, going back to the ’90s. We have always seen the host country get a bump in the currency as the Olympics draw near and during them. Spain was the first we tracked, and so on. So keeping that in mind, could there be a bump in store for the British pound sterling? That’s going to be a tough row to hoe, given all this dollar strength. But it will at least be interesting to watch, eh?

Yesterday, I made fun of the G-8 meeting and their silly attempts to make people think they actually accomplished something. I saw that Russian leader Putin said that the meeting wasn’t worth coming to. Did you know that there was only one truly trained economist among the G-8 leaders? Mario Monti of Italy. Now, that alone should tell you something about the meeting. The leaders were all throwing in uneducated ideas of what would work. Oh, boy, sign me up for the next meeting, eh?

I was asked by quite a few people last week about the Swiss franc (CHF). The franc is still hovering just above the 1.20 floor that the Swiss National Bank (SNB) put on the currency’s cross to the euro last September. It’s currently at 1.2011. The overtures from the SNB continue to ring out a song about how they want that cross’s level to go to 1.35 or 1.40. That would knock the stuffing out of the franc, folks. And with the euro getting weaker by the day, the SNB’s resolve will be tested soon enough.

I had a chance to talk briefly with James Rickards, author of Currency Wars, while in south Florida a couple of weeks ago. Mr. Rickards is convinced that all countries are in a war to reduce the value of their currency below their neighbor’s or trading partner’s currency.

I told him I hoped that wasn’t true, but at this point, how can you argue with him? But here’s what I took from the conversation and the book. That the U.S. dollar is going to lead the currencies down, which means the dollar will always be weaker than the other currencies. Maybe that’s taking a simplistic view of the whole situation.

Then I had a couple of readers send me this story, so it obviously is worthy! Did you know that the U.S. allows China to bid directly in U.S. debt auctions without going through Wall Street banks? Yes, it’s true! And China has the only central bank that’s allowed to do this. Reuters broke the story on this. I say good for both parties! And I would ask why are the other central banks of the world not allowed to do this? Why should Wall Street primary dealers get to make truckloads of markups on debt auctions to central banks? We should be rolling out the red carpet and meeting them with an adult beverage with an umbrella in the glass, when these central banks show up to buy our debt.

To recap: The currencies held their own yesterday and overnight, but the announcement by Fitch that they were downgrading Japan’s credit rating put the currencies on the selling block again early this morning. Gold is off by $16 this morning. The A$ has reached oversold levels on two different measures now. Chuck is looking for a bump here, along with one in pound sterling, should the “Olympic host country bump” for the currency hold true.

Chuck Butler
for The Daily Reckoning

Fitch Downgrades Japan originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

During the last couple of years, anxious Greeks have yanked a net €72 billion from the banking system — or nearly a third of total short-term bank deposits. And according to the scuttlebutt, withdrawals have been accelerating in recent days, as the “unthinkable” possibility that Greece might withdraw from the euro bloc has become increasingly thinkable.

So who could blame the Greeks for grabbing their euros before they turn into zeros…or, at best, drachma? In fact, given the chaotic conditions now unfolding in Europe, who could blame anyone for grabbing their euros before they turn into zeros?

Anxious Spaniards are also queuing up to withdraw their euros from the banking system. And many bond investors are behaving similarly: they are dumping Spanish government bonds and/or buying insurance against a default by the Spanish government.

You all remember Spain, don’t you, Dear Readers? That’s the country that, if it were an American high school senior, would be voted, “Most likely to follow Greece out of the euro zone.” Spain’s fiscal problems are not new news, but thanks to the renewed turmoil in Greece, distress has returned to the Spanish bond market.

As the chart above illustrates, the yield on Spanish government 10-year bonds recently touched a six-month high, while the price of insuring Spanish bonds against a default just hit a new all-time high.

That’s what we would call, no bueno.

Eric Fry
for The Daily Reckoning

Greeks Run on Banks as Euro-Confidence Wanes originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Thanks to Chris and Mike for picking up the conn on the Pfennig while I was gone. The crowds that came to listen to me in Las Vegas were HUGE! And the group of EverBankers at the booth was great! Mike H., Dina, Luis, Mike B, Diane, Lauren and Jason! If you came to our booth, you we had you covered!

The old saying that they had on the desk about when I was gone, that the currencies would rally, came to a screeching halt. And that “perfect storm” for the dollar that I talked about at the end of last year is really flexing its muscles now.

I read this weekend that while the euro (EUR) has been quite resilient through all the bailouts of Greece, Portugal and Ireland, hedge funds don’t believe the euro can withstand the exit of Greece, so these hedge funds are blowing out of the euro at warp speed.

And when the euro is getting sold like funnel cakes at a state fair, the rest of the currencies’ chances of rallying are slim and none. Even the Japanese yen (JPY) can’t seem to find terra firma, although it remains strong.

Old faithful, the Chinese renminbi (CNY), is really wishy-washy these days. But remember what I told you a couple of weeks ago about the renminbi: In 2008-09, during the financial meltdown, when investors flocked to the dollar and Treasuries, the Chinese kept the renminbi steady Eddie versus the dollar, I wouldn’t be surprised to see them take that approach now, again.

A reader sent a note and asked me to explain why the Swedish krona (SEK) was performing worse than the euro. It’s unwinding the gains it made when the Riksbank (Sweden’s central bank) was in a rate-hike mood. As I’ve explained in the past, the euro is the Big Dog on the porch. All the other currencies are the little dogs. The little dogs can out run the Big Dog, (outperform) but not unless the Big Dog gets off the porch to chase the dollar down the street — the same holds true for when the dollar chases the Big Dog back to the porch!

I’ve talked about Norway and Sweden being tarred with the same brush as the euro, and that hopefully, one day — and hopefully soon and not far away — traders will realize that Norway and Sweden are not Greece! But until that day, we have this scenario to deal with.

G-8 world leaders met this past weekend, and they have all decided that the best course of action is to promote growth. Hmmm, sounds great! Global growth all around, eh? Ahem, how did they say they would promote this growth? Oh, they didn’t?

Hmmm. Now, that sounds about right for G-8. But to come out and make all these statements about promoting growth without a plan, unless you count more stimulus — that has been about as helpful long term as a broken crutch.

In China, Premier Wen Jiabao, said that more stimulus for his economy was coming, and when Wen speaks, investors listen. You see, China can dictate where the stimulus goes, and this gives them an advantage. We saw this in 2009, how the Chinese economy quickly reacted to the stimulus measures applied by the government and was the first to gain ground, while the rest of the world’s economies were still stuck in the mud and yuck of the financial meltdown.

Wen said that his government will give “more priority to maintaining growth” while continuing “to implement a proactive fiscal policy and a prudent monetary policy.” Sounds like central bank parlance for get ready for a truckload of stimulus.

At least China has the treasure chest from which they can dig into to get this stimulus. What’s the rest of the world going to do? Go deeper into debt? Spend to get out of debt? That’s been the mantra of the U.S., and they’ve finally gotten their message across to the rest of the world!

How many times have we heard U.S. Treasury Secretary Geithner tell the Chinese that they need to be more like the U.S.? Too many is the answer.

How about those U.S. Treasury yields? I bet you didn’t think, like I didn’t think, that they could go lower, but they did! Let’s see how well those low yields hold up this week when the U.S. Treasury has to auction about $99 billion of new bonds/debt this week, starting tomorrow.

And I had quite a few people last week ask me about gold (and silver, of course!). I told them that it was my opinion that gold’s rise from $250 to $1,200 was all about people realizing that gold was a store of wealth, etc. The rise from $1,200 to $1,900 was all about the “anti-dollar trade,” since the dollar has become the darling of investors again. As we saw in 2005, 2008 and 2010, the need for the anti-dollar gets reduced, and thus the price of gold gets reduced.

Sure, a lot of it has been “paper trades.” The price manipulators must be smiling like Cheshire cats. But that’s not all of it, folks. People are hopping off the gold and silver bandwagon as if they just found snakes on it! But I personally will not sell! It’s my personal opinion that these people jumping off the bandwagon are going to be sorry for doing so.

Today we have Fed head Lockhart speaking, and he’s been a proponent of more stimulus for the U.S. economy. Any kind of talk like that should be dollar negative today. But only slightly, as he’s just one voice.

It’s a pretty light week datawise here in the U.S. so the markets will really get to focus on the $99 billion of new Treasuries that will hit the street!

Then last week, Chris was talking about economic reports and how they had all looked a bit better than recent data reports here in the U.S. And I got to thinking: I wonder what John Williams over at Shadowstats.com would say about the economic reports. For years now, I’ve talked about John Williams and Shadowstats.com, but thought that new readers might get a kick out of going to the website and seeing what John Williams says about how the U.S. accounts and reports its data. It’s all lies and videotape!

To recap: The G-8 meeting called for growth… calling all growth, calling all growth! The dollar is in the driver’s seat these days, and that means the currencies and metals are getting sold like funnel cakes at a state fair.

Chuck Butler
for The Daily Reckoning

Hedge Funds Bail On Euro Now originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

Dow down.

Oil down.

Yields down.

Gold down.

What’s going on?

Yesterday, we drove into Washington, DC, to the Argentine embassy. Friends from Salta were hosting a wine-tasting. It seemed strange to see our Argentine friends — who live in a remote corner of the country — in our nation’s capital. But it was a pleasure to see them…and taste their very strong, high altitude malbecs.

Washington has largely escaped the financial crisis. There is plenty of money in the city, but hardly anyone in town knows anything about economics or finance. It is politics they care about. That’s how they get money, in the old fashioned way — by taking it away from someone else. So, it is only natural that they believe the world of economics should be approached in the same way — by brute force. Command, control, and central planning…that is Washington’s method. That’s what politics is all about.

Of course, politics and economics are natural enemies, not natural friends. An economy works best when willing buyers and sellers, investors and entrepreneurs, consumers and producers are able to get together on their own terms. As Adam Smith explained it, they all look out for themselves…and are all guided, as if by an “invisible hand” towards an outcome that is best for the group. Hayek described it in more detail. Willing buyers and sellers set prices freely. Those prices are rich in information. They tell investors where to invest…and shoppers where to shop…and businessmen where to apply themselves.

The more you interfere with this process, the more screwed up things get. Artificial prices — such as the price of credit set by the Fed — send the wrong signal. Investors make mistakes. Resources are misallocated. Bubbles are pumped up…and then, blown up.

But Washington doesn’t care. It’s not really the gross welfare or wealth of the people it worries about, but the relative wealth. “Fairness” they call it. And relative to the rest of the nation, Washingtonians are getting richer. That’s fair, isn’t it?

Washington is a bad place to run over a pedestrian. If he is a white male, he is almost certainly a lawyer. So, if you run over him…our advice is to back up quickly and run over him again. Finish him off. Otherwise he’ll sue you.

The houses in Georgetown and the Northwest section of the city are handsome. They have carefully-tended lawns and gardens…and a Prius or Volvo parked in front. DC residents — at least those in the Northwest of the city and the Virginia suburbs — are conscious of their ‘carbon footprint.’ They recycle. They are well-meaning, earnest and public spirited… Just the sort of people you would like to run over, in other words.

Driving on Massachusetts Avenue…then up Wisconsin Avenue…and then along MacArthur Blvd…we passed many of the places we’ve heard so much about over the years. Fannie Mae’s huge headquarters…Homeland Security…the Brookings Institution…SAIS…the White House…the Capitol…the US Treasury…the Eccles Building, where the Fed is headquartered… It’s all there.

“It’s amazing how much damage has been done from such a little geographic area,” Elizabeth remarked.

The question we have been asking ourselves for the last 5 years.

Which way will America go? To Tokyo or Buenos Aires? To deflation…or to inflation? To a long, cold drawn-out slump…or a fiery blow-up?

Mr. Market is pushing the US towards Japan. No question about that. After 60 years of credit expansion we now have a natural credit contraction. Households and businesses are paying down…and defaulting on…debt. They’re hoarding cash rather than splashing it around.

For example, young people are driving less…and buying fewer ‘starter houses.’ Gasoline use in America is going down. So are housing prices.

Part of the reason young people are buying fewer houses is that they can’t afford them. The Financial Times reports:

“Young put off buying homes under weight of student debt.”

Yes, dear reader, the feds practically force-fed young people student loans. Like shyster subprime lenders, the feds offered students money at low teaser rates. Now, the rates are supposed to double.

Of course, the poor student thought he would be in fat city when he got out of school. He thought he’d have a well-paying job!

Now, he’ll be lucky to have any job at all…

It looked for a while as if the economy really were recovering. At least, that’s what everybody said. But now Mr. Market has asserted himself again.

Yesterday, US stocks fell again. Oil, copper, Treasury bond yields…everything is going down.

Truck buyers were canceling orders at the fastest rate in two years.

As to housing prices, the FT continues:

The number of first-time buyers has plunged — they comprised 37 per cent of home purchases in 2011, down from 51 per cent in 2010 — sapping the struggling housing market of a traditional source of vitality.

High levels of student debt, along with tighter mortgage requirements and stagnant wages, are forcing young people to delay buying their first homes.

Is there any fed policy that hasn’t backfired? Not that we know of. And the biggest fed policy now — aside from world domination — is the attempt to hijack Mr. Market’s plane, en route to Tokyo, and force it to Buenos Aires.

The feds have put their hearts and souls into this effort. Too bad they haven’t put their brains to it too!

Regards,

Bill Bonner
for The Daily Reckoning

Immune to the Financial Crisis originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".

I was talking to Mike last night, preparing for this morning’s Pfennig, and we agreed that all of this dollar buying is starting to look a bit overdone. At some point, the markets will figure they have “priced in” the Greek exit and will again start to trade on fundamentals.

Speaking of economic fundamentals, we got a ton of data released in the U.S. yesterday, and most of the numbers surprised on the upside. Housing starts and industrial production exceeded forecasts in April. Starts rose 717,000 versus an adjusted 699,000 in March. With the adjustment to last month’s numbers, the percentage gain in housing starts was 2.6% versus an expected 4.7% increase, but the numbers were still positive, which is all the markets focused on.

Building permits, a number that is a bit more forward-looking, were a bit mixed. Last month’s permit number was increased to 769,000, making April’s number of 715,000 look worse. April’s permit number was 7% lower than the March number versus expectations of a 4.5% drop. All in all, the housing numbers show a bit of an improvement in this very important sector of the U.S. economy.

My mortgage guy (I have my mortgage with EverBank, of course!) contacted me yesterday to let me know rates had dropped enough to make refinancing a good option for me. As I mentioned in the opening paragraph, much of the “safe haven” flows back into the U.S. dollar have been funneled into the U.S. Treasury markets.

This fresh round of bond buying has pushed interest rates down, which is obviously helping to support the housing market. The average rate on a 30-year fixed mortgage fell to an all-time low of 3.83% last week, and the average 15-year rate dropped to an all-time low also, according to Freddie Mac.

Another report released yesterday showed industrial production climbed 1.1%, the most since December 2010. The industrial production number was propelled by gains in auto sales, which were the strongest in four years. Half of the gain in factory output in April was due to a 3.9% surge in vehicle sales, according to today’s data. Utility use also increased during April, climbing the most in two years.

In addition, we got the capacity utilization numbers for April, which increased to 79.2%, the highest since April 2008. Chuck always watches this number closely, as it is a very good indication of whether businesses are using all of their production facilities. A rise of this number above 80 is typically an indication that the economy is “running on all cylinders.” We are not quite there, but certainly getting closer!

The combination of an uptick in housing and auto sales was great news for the U.S. economy, and would typically have led to a surge in the equity markets, as these are two of the most important pillars of the U.S. economy. But the stock markets were down here in the U.S., as investors continued to worry about the eurozone crisis.

Data released in Europe yesterday showed inflation slowed last month, and exports dropped in March as the region’s fiscal crisis undermined the economy. The eurozone crisis was also on the minds of the Fed policymakers during their last meeting.

Minutes from the FOMC meeting at the end of April showed members were worried about a loss of momentum in global growth caused by the European crisis. The members of the FOMC “indicated that additional monetary policy accommodation could be necessary if the economic recovery lost momentum or the downside risks to the forecast became great enough.” The minutes also pointed out the “fiscal cliff” that the U.S. economy is approaching at year-end, as U.S. lawmakers have to agree on a budget before automatic spending cuts kick in.

We will get a few more pieces of data released this morning, including the weekly jobs numbers and leading indicators. The jobs data are expected to show another 365,000 increase in weekly claims, a bit lower than last week’s 367,000 increase. The numbers of jobless claims have been steadily drifting lower since peaking in March 2009.

I spent a lot of ink this morning on the data releases here in the U.S., so I better move back to the currency markets, which have been dominated by events in Europe. The big news yesterday was an announcement by the ECB that they would temporarily stop lending to some Greek banks in order to limit its risk. ECB President Mario Draghi signaled the ECB would not compromise on key principles in order to keep Greece in the euro (EUR). The ECB said it will push the responsibility for keeping the Greek banks liquid back onto the Greek central bank until they have sufficiently boosted their capital. The announcement was meant as a warning shot for the other peripheral eurozone banks, but lending will probably resume shortly. “Once the recapitalization process is finalized, and we expect this to be finalized soon, the banks will regain access to standard Eurosystem refinancing operations,” the ECB said in an emailed statement.

Draghi fired another shot at Greek leaders with his first acknowledgment that Greece could leave the monetary union. He said while the bank’s “strong preference” is that Greece stays in the 17-nation euro area, the ECB will continue to preserve “the integrity of our balance sheet.” As I mentioned yesterday, the Greeks will go back to the polls on June 17 in what many are now seeing as a vote to exit or remain in the euro.

Chancellor Angela Merkel hosted the new French President Francois Hollande on the day of his inauguration. That just amazes me that the new French president would travel to Berlin on his first day in office. It definitely shows you exactly where the seat of power in Europe is located. I also think it is a sign that Hollande will be much more inclined to cooperate with his German neighbors than some of his election rhetoric indicated. And it wasn’t an easy trip for Hollande to make, as his plane was struck by lightning, forcing a return to Paris to board a second flight to the German capitol.

During the press conference at the end of their meeting, Merkel and Hollande sounded as if they would get along and work together to solve the Greek crisis. Hollande definitely looks like a better partner for Merkel than the last French president, and the two look like they have already started down the path of compromise concerning Greece. The European leaders said they would consider measures to spur economic growth in Greece as long as voters there committed to the austerity demanded to stay in the euro. Hollande affirmed at the closing of his visit that “we have a common task” to accomplish. “Greece can stay in the euro area,” and “Greek citizens will be voting on exactly that.”

Chuck sent me a note yesterday morning suggesting the Australian dollar (AUD) may be oversold: “A charts friend of mine sent me a note indicating the Aussie dollar is showing oversold on the RSI readings. RSI stands for relative strength index, and my research shows that the A$ has reached current RSI levels four times since 2010 and each time, A$ has bounced off these levels. So… maybe the sun will begin to shine in the A$ again soon.”

I watched the Aussie dollar continue to slide after reading Chuck’s email and thought his chartist friend had probably misread something. But as I turned on the screens this morning, I saw both the AUD and NZD have turned around and begun to move higher. These two currencies were helped by Asian stock markets, which headed for their first advance in seven days. A feeling that the U.S. Fed could introduce another round of stimulus also helped buoy these commodity-based currencies.

To recap: The U.S. data released yesterday indicated the economy is still in a “recovery” mode. An increase in housing starts and industrial production showed two of the most important pillars of the U.S. economy, housing and the automobile industry, had stabilized. Another release showed capacity utilization increased to get close to 80. The crisis in Europe continues, as some Greek banks were “cut off” by the ECB. The new French president traveled to Germany, and from the look of things, the leaders are going to show a united front in their battle to save the euro. And finally, the AUD and NZD look like they are oversold, according to the charts.

Chris Gaffney
for The Daily Reckoning

Data Show US Economy is Improving originally appeared in the Daily Reckoning. The Daily Reckoning, published by Agora Financial provides over 400,000 global readers economic news, market analysis, and contrarian investment ideas. Recently Agora Financial released a video titled "What Causes Gas Price to Increase?".