The currency markets continue to be held hostage by the Greeks. As I mentioned in the closing lines of yesterday’s Pfennig, the leaders of Greece’s coalition government reached an agreement on implementing the austerity measures demanded by the EU and the IMF in order to secure a second round of much-needed financing. As predicted, this news caused a rally in the euro (EUR), which reached a high of 1.3320. But eurozone finance ministers said they want to see the measures approved by the full Greek parliament, which is set to vote Sunday. While Greek leaders certainly feel the measures will be passed by the parliament, workers staged a strike in Athens today in order to protest these measures. The EU leaders gave the Greek leaders 15 days to institute the new austerity measures, so they could possibly delay the vote further if they see it has a risk of not passing. But I’m sure they would much rather get this over and done.

The debt holders who have reached preliminary agreements for a debt swap which would cut Greek’s debt load in half are also waiting for the results. The bonds held by the ECB are not subject to this debt agreement, but many of the Greek leaders are assuming the ECB will go ahead and agree to take a haircut on these holdings in line with what the other debt holders have agreed to. The ECB is reluctant to enter into a debt swap agreement as it could open the door to requests from Portugal, Ireland or even Spain and Italy for additional debt concessions.

Irish Prime Minister Enda Kenny made me proud to be 50% Irish when he said his government is not going to be looking for any further debt concessions from the ECB. “It’s very clear that Ireland has not sought and will not seek any write-down,” Kenny said in an interview on Bloomberg yesterday. “We’ll pay our dues in full and on time.” This may look like Irish pride, but it is, in fact, a smart move by Kenny, who will need to refinance about 30 billion euros of debt. By letting bond buyers know they will not be seeking any debt concessions, Kenny is trying to make sure he will be able to refinance the debt at more favorable terms and over a longer period of time. We haven’t heard much from Ireland lately as they go about their business trying to get their economy back on solid ground. But the attitude of their PM certainly leads you to believe they are moving in the right direction and won’t be looking for any additional handouts.

I had a couple of Pfennig readers ask me to not spend so much time on the euro debt situation, and to let them know what was going on with some of the other currencies. I will certainly try to touch on a number of different currencies today, but as I said at the opening, the currency markets are really being held hostage by the events in Greece right now. This is the big news and the euro will continue to move the markets one way or the other, dragging along all of the other currencies behind it. So I’ve got to touch on the euro first, but then I promise to move to some other currencies.

The ECB meeting was a nonevent, with rates remaining where they are and no new announcement of bond purchases. Data released in Germany showed the inflation rate remain unchanged at 2.3% during the month of January, which was in line with forecasts. The ECB has pumped a lot of liquidity into the markets, so they had to be relieved when inflation remained subdued.

ECB President Mario Draghi signaled the economic outlook has improved, as the economic stimulus pumped into the markets back in December seems to have stabilized the credit markets. European banks borrowed nearly 500 billion euros in December, and the ECB will offer another round of lending at the end of this month. It will be interesting to see what the demand is, but I would expect the banks will again eagerly accept the cheap funding from the ECB.

Draghi would not discuss the ECB’s Greek debt and if the central bank would accept losses on these holdings in order to cut Greece’s debt load. “All this talk about the ECB sharing the losses, it’s ungrounded, it’s unfounded.”

The Bank of England is opening up the spigots again on bond purchases, raising their target for bond purchases by 50 billion pounds (GBP), to 325 billion. This equals more than a quarter of current outstanding bonds, and is something investors in the pound should be worried about. Here is why. Bond purchases by the central bank are basically “monetizing the debt” and are the most-inflationary measure a central bank can take. The bank issues bonds, sells them to the markets and buys them back — really no different from throwing buckets of cash from helicopters. Again, this is the most-inflationary measure a central bank can undertake and will likely lead to an eventual devaluation of the pound sterling. But this is sometime down the road, and the BOE obviously feels the present need for more stimulus outweighs the inevitable problems this will bring in the future.

Staying with the European theme, I will move to Hungary, where the forint dropped for a third day and is headed for a weekly loss. Hungary is the EU’s most indebted eastern member and would like to grab the attention of the IMF for some help of its own. But the EU and IMF have been focused on Greece, so Hungary has been left to its own devices. The forint has actually been performing pretty well since the beginning of the year, appreciating 9.1% versus the U.S. dollar.

Another of the former Eastern Bloc currencies that has been performing well this year is the Polish zloty, which is up over 7.7% versus the U.S. dollar this year. And according to a fund manager at the Franklin Templeton Group, Poland’s zloty is still “undervalued.” “Poland demonstrated its economic robustness by being one of only a handful of countries globally to not fall into recession during the global financial crisis,” the Templeton manager wrote in a note to clients. And he is putting his clients’ money where his mouth is, as the Templeton Global Bond Fund is the largest foreign holder of Polish debt.

Moving away from the European continent, the commodity currencies performed well through most of the trading day on Thursday, but are off of their highs this morning. Both the Australian (AUD) and New Zealand dollars (NZD) reached multimonth highs yesterday after the news that Greek leaders had reached an agreement on austerity measures. But the currencies turned sharply as the day progressed and the EU pushed for further confirmation from Greece.

The Australian dollar was negatively impacted by the Reserve Bank’s lowering of its forecasts for growth and inflation during 2012. The RBA said it sees the economy expanding at 3.5% in 2012, down from its earlier estimate of 4%. And “inflation is forecast to remain around the midpoint of the target range for most of the next couple of years,” the central bank said today. Consumer prices are predicted to rise 3% during 2012, less than a previous prediction of 3.25%. The lower growth and inflation estimates would seem to ensure the RBA will remain on an easing bias even after it surprised some in the markets by not moving rates lower at their last meeting.

The South African rand (ZAR) has been the worst-performing currency, dropping 2.33% yesterday and over 3% versus the U.S. dollar over the past week. Commodity prices retreated yesterday after the EU pushed Greek officials on the bailout agreements. There is a general “risk off” mood in the markets this morning, and investors are moving away from the rand and higher-risk currencies into the haven of U.S. Treasuries. We will probably see more of this today, with investors not wanting to take risks with the Greek vote scheduled on Sunday.

Data showed Brazil’s consumer prices are still rising, increasing 0.56% MOM in January. The annual rate of change slowed slightly to 6.22%; a number that is still much higher than what the government would like. Central Bank President Alexandre Tombini said last week that policymakers would work to bring inflation back down to 4.5%. The government has backed itself in a corner with their attempts to control the value of the real (BRL) at the same time they are trying to keep inflation in check. By pushing their currency lower, they have triggered inflation, as commodity prices have remained on an upward track. The government will quickly have to decide which one is more important, a cheap currency or lower inflation. One way to bring down inflation would be to allow their currency to appreciate, in the mode of the Singapore monetary policies.

Indian factory output was less than estimated in December, signaling weaker domestic demand as the global recovery faltered. Output at factories climbed 1.8% from a year earlier, after a 5.9% advance in November. Economists had predicted a 2.6% gain, so the number was a fairly large surprise to the markets. Both India and China have attempted to temper growth, and the tap on the brakes has seemed to work as planned, with growth slowing in both of these emerging markets.

The Chinese renminbi (CNY) increased to an 18-year high yesterday, just ahead of a visit to the U.S. by Chinese Vice President Xi Jinping next week. The unexpected acceleration in Chinese inflation has pushed Chinese leaders to allow faster currency appreciation. As I mentioned above, Chinese growth has slowed, and exports are predicted to have fallen in January, according to the Chinese commerce minister.

Moving back to the U.S., the initial jobless claims posted a 358,000 number, which was less than the expected 370,000 increase. Continuing claims were slightly higher at 3.515 million. Another piece of data showed consumer confidence rose to the highest level in a year. Today, we will see the trade balance (or, more appropriately, the trade deficit), which is predicted to have widened in December to a six-month high.

Both gold and silver prices are down this morning as investors again move into the U.S. dollar and away from what I consider the true “safe havens.” I will dig into the metals a bit more on Monday, as I am quickly running out of time this morning.

To recap, the euro rallied yesterday, but then turned sharply as the EU/IMF demands a positive vote by the Greek parliament, which is scheduled for this weekend. The ECB left rates unchanged and did not announce anything new regarding the Greek debt. The BOE announced an increase of 50 billion pounds to their QE bond-buying program. Commodity currencies were sold off as “risk” became a bad word again. And the Chinese renminbi was pegged at an all-time high overnight.

Chuck Butler
for The Daily Reckoning

Ireland Says It Won’t Need Additional Bailouts 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.

We’ll get back to that in a second. First, our regular beat…

Markets went precisely nowhere yesterday. It was as if everyone agreed to stay home…or go fishing…or to become reacquainted with that strange person living in their house and sleeping in their bed. Among other things, investors are waiting to see what happens with Greece. We’ll save them some time. Nothing will happen. Nothing different, anyway. Here’s Bloomberg, with more news on the same old story:

Greek political leaders struck a deal on a package of austerity measures, clearing the way for a swap to cut the nation’s debt and win its second rescue in two years.

Greek Prime Minister Lucas Papademos called European Central Bank President Mario Draghi to tell him “an agreement has been reached,” Draghi said at a press conference today in Frankfurt. An announcement from Papademos’s office is expected shortly, a Greek government official who declined to be identified said today by telephone.

The accord came less than four hours before euro-region finance ministers hold an emergency meeting in Brussels to discuss the 130 billion-euro ($172 billion) lifeline and the swap that will impose a loss of about 70 percent for investors.

Oh, Papademos and Draghi said all’s well. An agreement has been reached. A deal was struck. Phew! We thought that…

…Wait, we’re trusting politicians now? Ex-Goldman Sachs politicians (in Draghi’s case), no less? When did that happen? These are people who couldn’t lie straight in bed. Everybody knows it. Notice, for instance, how these and various other furry-knuckled folk are no longer referred to as “politicians”? That word has been sullied. People have trouble even using it without nailing a “damned” or “thievin’” to the front of it. Now the papers, with embarrassing deference, refer to them as “political leaders.”

Let’s recap what we know about Greece and the euro-situation in general. For brevity’s sake, we’ll stick to its most recent — i.e. current — collapse only.

Back in May of 2010, five short months after receiving its first official credit downgrade, Greece was awarded a €110 billion 3-year “loan.” (We put that word in inverted commas just in case it mistakenly implies repayment.) And what happened? Did the government clean its act up? Did it cut expenses, as promised? Did the economy roar back to life? Of course not. Protesters had barely left their post in Syntagma square when it was time to return for more banner waving and foot stomping. By December that year, the yield on 10-year bonds had spiked to near then record highs over 11%.

Not to worry, said the Feds, who swept in with another €110 billion bailout plan…again negotiated under the strict condition that they rein in spending. But the horse had already bolted. Greece’s outstanding debt is now equal to roughly 160% of GDP. The gears have stalled. Official unemployment has reached over 20%. It’s worse for the youth. Much worse. Half of the nation’s under-24 population is without work. Growth has collapsed. Industrial output in December fell 11.3% from the year-earlier month.

Would you lend these people money? Would you lend these people your money? Only a fool would answer yes to the second question. Only a politician would answer yes to the first.

The Spartans are broke. They have been for a long time. And, as such, they will default. One way or another. All the handshaking, backslapping, hallway dealing, last minute brokering, politicking and brinkmanshipping won’t stop that. It’s just noise, playing like the soundtrack to a movie that’s already been written.

Not that the Greeks area lone sinners. The whole developed world is caught up in a debt funk. The collapse, when it arrives, is going to be truly epic. Which brings us back to our original thought: If you had the choice, would you live your life at any other time?

Take a look back through history. Most of it was a complete bore, save for the workaday melodramas played out in small, social soap operas. In fact, most of history existed before actual soap operas…and before soap…and before operas.

Sure, there were wars and plagues and the miserable collapse of empires. Currencies were debased and their masters beheaded. New lands were found and old cities forgotten. There were events that reshaped the course of history itself, delivering us the present day in which we live.

But mostly these things took many years, centuries even, to fully express themselves. Trends were slow…probably because there was nobody around to drive them. Mankind couldn’t even manage to gather a group of 1 billion people until 1811. How can you expect to get anything done when you’re still counting the global population in “millions?”

These days, contrary to the relative snoozefest of yesteryear, things happen. And when they do, they are fast…and loud…and on a scale that dwarfs any other in history.

Take economic output, for example. According to data compiled by The Economist, more than half (55%) of all the economic output generated over the past 2,000 years was generated in the 20th century. In other words, the last 100 years of the millennium produced more than the preceding 1,900. And this trend — along with the mushrooming population supporting it — is quickening. The first 10 years of this millennium account for roughly one-fifth of the total economic output achieved since BC ticked over to AD.

All this is just a fancy way of saying that big things are happening. Big booms. Big busts. Greece-, Europe-, US- and entire developed-word sized busts. And, lest we fail to mention it, a spectacle like no other in history.

Who would want to miss that?

Joel Bowman
for The Daily Reckoning

Watching the Greek Debt Episode of the Global Soap Opera 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.

The ECB meets today to set monetary policy, and ECB President Mario Draghi will hold a press conference following the meeting, so we could see some additional euro volatility throughout the trading day. Draghi will definitely be questioned on the ECB’s possible role in securing a second round of funding for Greece. The ECB reluctantly entered the debt markets, purchasing bonds in order to keep rates from rising too dramatically. They have accumulated a substantial position in Greek debt, and the IMF wants them to agree to take a write-down on this debt in order to reduce Greek debt levels. The bonds purchased by the ECB were already at a discount, but Greece wants them to take an even larger discount on these holdings. The bonds bought by the ECB in its Securities Market Program are exempt from the current debt-swap deal, but Greece needs additional debt reductions, and the IMF is pressuring the ECB to write down this debt.

It will be interesting to see what Draghi decides to do, as many of his cohorts in the ECB aren’t interested in booking big losses on this debt. And if the ECB is forced to participate in the Greek debt write-downs, what will that mean for the other distressed debt that the ECB has purchased? It would certainly seem to set a precedent that the ECB would have to follow in dealing with other debt purchased through their QE efforts of the past year.

The data released this morning in Europe will give the ECB a bit of good news to start their meeting. Economic confidence in the euro area rose in the first quarter after posting losses in the previous two. The positive move was led by an improvement of expectations for the euro region over the next six months, according to the Ifo research institute, with the indicator measuring future expectations rising from 57.4 to 70.5. This is still under its long-term average, but a good move in the right direction. ECB President Draghi has said 2012 will be a “much better” year and, these data indicate many of the business leaders seem to agree.

The Bank of England will be meeting also, and many expect BOE Gov. Mervyn King to announce additional stimulus measures. Economists predict King will announce an increase of 50 billion pounds to their target for bond purchases, and some expect an even larger 75 billion pound increase. Growth in the U.K. has resumed (albeit very slowly) following a contraction in the last quarter of 2011. But King has indicated he would like to see stronger numbers, and doesn’t seem to be worried about any inflationary impact of pumping additional funds into the U.K. economy. The risk of slipping back into a second recession seems to far outweigh any future negative impacts of additional stimulus measures in the mind of the current BOE leader. With rates near zero, additional bond purchases is the preferred policy tool of the BOE, and an increase is being priced in by the markets.

At least one Federal Reserve president here in the U.S. would also like to see additional bond purchases. John Williams, the Fed president of San Francisco, said he thinks there is room for additional purchases of mortgage-backed securities by the Fed. “There’s only so much headroom to do further Treasury securities of a medium- or long-term duration. But there is more room out there in the mortgage-backed securities space,” Williams told reporters in California. Fed chairman Ben Bernanke said yesterday that he sees a “long way to go” before the job market returns to normal, and additional bond buying is one option that is still on the table. It makes me a bit nervous to be following in the footsteps of the BOE and BOJ in what seems like another round of QE.

No data releases in the U.S. yesterday, but today is Thursday, which means we will get the weekly jobs numbers. Initial jobless claims are expected to have increased to 370,000 from 367,000 last week, and continuing claims are expected to have risen to 3.5 million. This data may seem counter to last week’s unexpected drop in the jobless rate to a three-year low, but the reason for this drop in the big number is that workers are simply giving up looking for work. So while last week’s announcement of a drop in the unemployment rate to 8.3% sent stocks soaring, the rate doesn’t give the true picture of the U.S. labor market. Chairman Bernanke pointed this out in his speech to the Senate Budget Committee yesterday, saying the job market remains a “long way” from returning to normal.

China’s inflation unexpectedly moved higher in January, according to reports released yesterday. Consumer prices rose 4.5% from a year earlier, a number that was higher than every economist’s predictions. The rise in prices was partially due to a weeklong holiday in January, which increased the number of shopping days available for consumers to make purchases. The higher inflation rate reduces the possibility of further policy easing in the near term, but most economists are expecting inflation to cool in the coming months.

The hike in consumer prices in China is yet another indication that the Chinese economy is not headed for a meltdown. This is good news for the commodity-based currencies of the New Zealand (NZD) and Australian dollars (AUD), and both hit near-term highs yesterday. The Kiwi traded back above 84 cents for the first time since September of last year. A report released in New Zealand showed employment grew last month, albeit at a slower rate than expected. New Zealand employment rose 0.1% in January versus a median forecast growth of 0.4%.

The Aussie dollar’s recent moonshot stalled a bit yesterday, as the Greek negotiations stumbled. The AUD$ has been on a two-month move higher, vaulting from below 97 cents at the end of November to a high of 1.0845 yesterday. The Reserve Bank’s move to keep interest rates unchanged, and their positive outlook on global growth prospects, has given investors confidence in the Australian dollar.

The guys who read the technical charts say the Aussie dollar looks overvalued at the current levels and suggest waiting to see a pull back to $1.05 before making any additional purchases. Another story I read on Bloomberg suggests the Aussie’s recent rally will force the Reserve Bank to resume cutting interest rates as higher Aussie dollar prices will negatively impact Australian exports. I guess it is just additional proof that you can spin things any way you want. I still feel the commodity currencies are the place to invest.

Then there was this… On my drive to work this morning, I heard a newscaster saying how it was nice to see Congress finally coming together to pass an important piece of legislation. I wondered could it be real deficit reduction? Tax reform? Tort reform? No, it was the bill that would ban members of Congress from profiting from using inside information in trading stocks. Shouldn’t this be illegal already? In fact, it is, as members of Congress are not exempt from existing insider trading laws, but the Constitution’s protection of their “speech or debate” makes it extremely hard to investigate violations. A 60 Minutes report back in November showed some members of Congress, including House Speaker John Boehner and Minority Leader Nancy Pelosi, had bought stock in companies while legislation that might affect those businesses was being debated. I guess it is good news that they are finally doing something about the loophole, but wouldn’t their ethics already prevent this? Oh, I forgot, I am talking about Congress.

To recap. The Greek leaders have been given 15 days to find additional cuts to offset pension costs. The ECB and BOE meet and both may be adding to their bond buying. The ECB has to decide if they want to take a haircut on their Greek debt. Chinese inflation pushed higher, causing a rally to the commodity currencies. And our Congress is set to pass a law which really shouldn’t be necessary.

Mike just pointed out a headline that the Greek parliament has come to an agreement on additional cuts which should seal the deal on a second round of funding. This should send the euro and the risk currencies higher today!

Chris Gaffney
for The Daily Reckoning

The Greeks are Given Another 15 Days to Find More Cuts 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.

Here’s the skinny. The European Central Bank has made key concessions over its holdings of Greek government bonds that will contribute to a reduction of Greece’s debt burden. The ECB has agreed to exchange the Greek government bonds it purchased in the secondary market last year at a price below face value, provided the debt restructuring talks under way find a successful outcome.

The ECB won’t make a loss on the transaction, but it is not clear whether the bank will exchange the bonds at the below-par price at which it purchased them or whether it will make a profit.

I find this to be very interesting, as the ECB previously didn’t want any part of this trade. And once again, I point to the fact that I told you last month that there would some changes to the ECB’s stance and that some semblance of calm would come over the eurozone. Not that they are out of the woods by any stretch of the imagination. It’s just that calm now means that all the negativity gets drowned out, temporarily.

So the euro has stretched all the way to 1.3280 overnight. And the rest of the currencies are following the old Big Dog’s lead.

And gold really took off! The shiny metal gained back all it had lost the previous two days, as the flight to dollars and the so-called “safe haven” was reversed. I would really like to see gold have some real direction, though. It goes up $25 and then goes down $25. But I did look like the Mighty Oz yesterday when I said that that it could be a good move to buy some gold at the cheaper price.

I have a couple of things to go over this morning that just made my blood boil yesterday. If you’re not interested, skip ahead.

First, my blood pressure just began to tick higher and higher when I read “Congressional Earmarks Sometimes Used to Fund Projects Near Lawmakers’ Properties”.

And another.

And then this one regarding the Federal’s Reserve’s explicit goal, to devalue the dollar.

A friend of mine sent this to me and asked what I thought. I said, “It’s nice to see someone other than the Butlers, Rogers, Caseys, Gallands, Bonners and Wiggins telling people that this is happening and what it’s going to do the value and purchasing power of the dollar!”

Yesterday, Big Ben Bernanke told the Senate that Congress should focus for now on economic growth, rather than budget deficits. “Abrupt action to reduce the deficit in the next few months could seriously damage the recovery,” he said

Lawmakers are torn. The have the general public banging on their doors to cut deficit spending and they have the Fed chairman banging to promote growth. It’s like a devil on the lawmakers’ collective right shoulder and an angel on the left. Who will win? I bet you all know which one I would side with if I were a lawmaker, even if I didn’t get re-elected — because it’s the right thing to do.

I would tell Big Ben, “Look, buddy, you’ve cut rates to near zero and held them there for over two years and you tell us they’ll stay there for another two years. You’ve implemented two rounds of quantitative easing. The government has done “cash for clunkers,” tax rebates, stimulus and many other stupid pet tricks to promote growth. But as the two old ladies in the old hamburger commercial said, ‘Where’s the beef?’”

I would continue to tell him that I’ve decided to go another direction. I would find ways to cut the deficit burden and remove the shackles holding back small business.

But I’m not a lawmaker now. I was once an elected official of my little river town, an alderman. But then lost re-election by 1 vote! Then I found out that a lot of friends and acquaintances that would have supported my re-election didn’t vote, because they thought I would win easily. I decided then that lawmaking, even in a little river town, wasn’t my cup of tea.

The Chinese renminbi, (CNY) after seeing weeks of give and take in the value, finally pushed higher versus the dollar last night, to an 18-year high! Of course, the news regarding Greece had a lot to do with this move higher, but add to that that Chinese Vice President Xi Jinping is on his way to visit the US. When the Schumers and Grahams try to box Xi in a corner and badger him about China’s currency policy, Xi can simply point to the fact that the renminbi is at a 18-year high versus the dollar!

I have to mention the move that the Mexican peso (MXN) has been on for the past month. I’m not a fan of pesos, but they sure have gotten some wind in their sails with all the talk about the US economy recovering. That alone should make you want to back away from pesos, because if the US economic recovery is lacking terra firma, as I believe (as does the Fed, or else they would not be keeping rates near zero and laying the groundwork for more QE), the peso rally could be short-lived. But for now, it’s trading like it’s the new Pet Rock!

Another currency that has been very strong for some time now but looks to me to be very overvalued, the Japanese yen (JPY) is seeing some selling this morning on the news that the Ministry of Finance reported that Japan’s current account surplus for calendar year 2011 was the smallest since 1996. It’s still a surplus, but it’s dwindling away.

Yesterday, I told you about the Misery Index and how the US Misery Index had increased in 2011. A very astute reader mentioned to me that since I talk about John Williams and Shadowstats all the time, that instead of using the government numbers for the Misery Index, I would use the Shadowstats numbers. Very good point!

The US Misery Index goes from 11.30% per the government to 29% per Shadowstats. OUCH!

Remember a couple of weeks ago I told you about Byron King and his story about the US becoming energy independent? According to The Wall Street Journal:

“The US has reversed a decades-old trend of increasing dependence on foreign energy and is closer to complete energy self-sufficiency than it has been in nearly 20 years. Data from the Energy Department show that through the first 10 months of 2011, the US met 81% of its energy requirements from domestic sources.”

That’s great news! But then why is the price of oil still around $100? The cost to get the oil or natural gas out of the ground remains very high, and until those costs come down, if ever, the price of gas at the pump will remain high. In fact, I saw a story on HLN yesterday morning saying that gas would reach an average price of $4 a gallon by May.

To recap, the currencies and metals began to rally yesterday midmorning on rumors that the ECB was going to ease their stance on holding Greek debt. When those rumors proved to be true, the currencies and metals rallied even more strongly. Chinese renminbi reached an 18-year high versus the dollar last night, ahead of a visit to the US by the Chinese vice president. And the Japanese current account surplus is at the lowest level since 1996.

Chuck Butler
for The Daily Reckoning

Fed to Devalue Dollar by 33%? 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.

Take for instance yesterday, when I said that thing in Greece were unraveling very quickly… Less than an hour after I hit “send” on the Pfennig, I saw a quote from French President, Sarkozy, who said, “we couldn’t be closer to a deal in Greece”… Hmmm… Seems that there was no reason for me to be so Donnie Downer on Greece! Yeah, and I’ve got some swampland I need to sell you… Hey Disney World was built on swampland, so you’ve got that going for you! HA!

This morning, the euro (EUR) has climbed back above 1.31, on news that the Greek leaders have agreed to meet today (now probably) to put the final touches on structural economic reform, which has been demanded by the Trokia (or Troika — tomato, tomato, it’s all the same) and consists of the IMF, the European Commission and the European Central Bank (ECB). The Trokia had demanded these economic reforms before the next round of bailout funds are released. The Greek leaders need to cut 850 million euros from their spending, which will account for 1.5% of GDP…

This trading range in the euro lately has been as tight as a pair of new shoes on a rainy day… The euro has either bumped up above 1.31, or fallen below it… 1.32 had been a tough row to hoe for the euro, and so, the trading range has been established… And I believe it will remain there as long as the Sword of Damocles is hanging over Greece…

Remember when I kept telling you that the Bank of Japan (BOJ) and the Finance Ministry were saber-rattling and trying to verbally intervene to get the yen (JPY) weaker, but that it wouldn’t be long before they were digging into that treasure chest of yen that has been allocated for intervention? And then nothing? Nada, zilch, zero, a big goose egg!

Ahhh Grasshopper, it only appeared to us that the BOJ was sitting on its hands… Last night the Finance Ministry released a report showing that the BOJ had conducted 1.02 trillion yen ($13 billion) worth of unannounced intervention during the first week of November. So, who knew? Who knew the BOJ could be stealth-like? This way, the markets weren’t aware of the intervention, because the BOJ spread it out, and was quiet about it… And it worked, (as best as intervention can, that is) bringing the yen from its post-WWII high of 75.35 to 76.50… But, that’s not what the BOJ had to have had on their minds… The yen is still too strong for exporters at 76.50, so… Can we expect to find out about more “stealth intervention”? I think so…

The Aussie dollar (AUD) is stronger this morning on a relief trade… The Reserve Bank of Australia (RBA), unexpectedly left rates unchanged, and instead of dire words, signaled optimism that global economic growth will strengthen. The Aussie dollar touched $1.0810 after the rate announcement, but has since fallen back below $1.08… But not far, and still stronger than yesterday!

The New Zealand dollar/kiwi (NZD) really liked the fact that the RBA left rates unchanged, because it has clutched on to the Aussie dollar’s coattails in recent times, and if the Aussie dollar is going to rally on the news, then kiwi gets to rally too!

I see where The Washington Post, (WP) must have a Pfennig reader… For they ran a report last night about how the unemployment rate here in the US is falling because of the millions of workers who have given up looking for work… The Washington Post writer believes that if all 2.8 million people who have given up looking for work were actually counted as “unemployed” that the Unemployment Rate would be 9.9%, not 8.3%…

Of course, the WP writer would do a better job if they dug even deeper into the phony, trumped up BLS labor report, to find how John Williams at Shadow Stats thinks the unemployment rate is really 22%…

While I’m here in the US, St. Louis Fed Head, James Bullard was speaking in Chicago yesterday, and had this to say about the Fed keeping interest rates near zero to counteract a high degree of slack in the US economy… “If we continue using this interpretation of events, it may be very difficult for the US to ever move off of the zero lower bound on nominal interest rates. This could be a looming disaster for the United States.” — James Bullard.

Fed Head Bullard is telling you all and anyone who will listen that we are all turning Japanese! He didn’t say it, but the scenario he described is exactly what has happened to Japan… I sure hope someone is listening in the Fed Head circles…

Today, the data cupboard will print Consumer Credit for December… You may recall how this number exploded in November by $20 billion… Well, December credit is expected to hit $7 billion… This data is covered little, and I wonder why… It’s very telling about what’s going on, don’t you think?

Over in Germany this morning, the December print of Industrial Production (IP) was very weak, as it decreased 2.9% from November. There could be two things at work here… First, there’s not much work that gets done as Christmas closes in for German workers… And second, the German economy softened… But none of the other data we saw from this time period indicated that, so I’m going to go with what’s behind door number 1!

Today, Big Ben Bernanke will testify before the Senate on the economic outlook and the Federal Budget situation… Last week, when Big Ben talked to the House, the lawmakers tried like all get out to get Bernanke to fess up to messing up the economy, but as I reported here on Friday, he redirected the lawmakers questions to him talking about what he wanted to talk about, which was how he wants the lawmakers to get deficit spending under control.

It will be interesting to see how Big Ben is treated in the Senate… Either way, he’s a master of redirecting, and the talk will all come back to lawmakers getting deficit spending under control! Which is a good subject to talk about, but I’m sure what the lawmakers have to say about what Bernanke is doing to the dollar is also a good subject to talk about!

Last week I told you how the Swiss franc/euro cross rate was nearing the floor of 1.20 that the Swiss National Bank (SNB) set last fall. I said then that it would be interesting to see the SNB’s resolve in defending this cross level… New SNB Chairman, Thomas Jordan, is setting the markets straight on his resolve. Jordan said, “We remain firmly committed to defending the minimum exchange rate of 1.20 francs per euro. This commitment applies at any time, from the moment the market opens in Sydney on Monday to when it closes in New York on Friday. We will not tolerate any trading below the minimum rate.”

Well… I guess he told the markets where he stand, eh? But… As I’ve said before, money talks and bulldookie walks… It’s now up to the markets to see if the SNB is really going to defend the cross or not… Which, by the way, this morning is weaker than it was last week at 1.2070…

One of the things that I look at periodically is the “misery index”, which is comprised of the Unemployment Rate and the inflation rate… I like to see where the US is compared to other countries like Norway and Australia or Canada, etc.

Well, my most recent look at the Misery Index showed the following recent results…

US 11.30% up from 2011’s 10.60%
Canada 9.9% down from 2011’s 10.10%
Norway 3.0% down from 2011’s 5.9%
Australia 8.3% up from 2011’s 7.60%

I think it is important to a country’s psyche to have a lower misery index number…

So… If that’s as interesting to you as it is to me, I’ll keep this up-to-date going forward.

I see where the 3.6 million workers in the German metal and electrical industries union are demanding 6.5% wage increases. This is going to be a very heated negotiation, because in 2010, German companies did quite well, but… Most economists believe that the German economy will slip this year, along with the rest of the Eurozone, into a recession…

And in the UK it appears that the Bank of England (BOE) will extend their bond purchase program (quantitative easing)… And remember what I’ve told you now for a couple of years… What happens in the UK usually comes ashore here within 6 months… So, if the BOE is extending QE, then the Fed will be doing it soon enough…

And gold is still trying to find traction to move higher, as it slips on the overall better feeling about what’s going on in the global economies… I find this to be temporary… So, could be a good time to pick up some gold at cheaper prices, eh? I said could be…

Then there was this… From The Economist… First, I’ll give you the snippet of the Economist story and then tie it all together in a neat bow… OK… Here’s The Economist… “China and the US might be laying the foundation for another Cold War over China’s territorial claim for the South China Sea, The Economist’s Banyan columnist writes. None of the nations with interests in the South China Sea is making progress toward settling disputes. “So the chances are that America, with its mighty Navy and abiding interest in the freedom of navigation and commerce, will become still more involved.” — The Economist

Chuck again… Remember Rome? Remember how the Roman army got too extended putting out fires everywhere? Hmmm… Iraq, Afghanistan, Iran, South China Sea, doesn’t this scare anyone else?

To recap… The RBA left rates unchanged, and surprised the markets last night, sending the Aussie dollar over $1.08. It has slipped back below the figure this morning, but still stronger than yesterday! Japan has been doing stealth intervention to keep a lid on yen, going back to November, and The Washington Post figures out the funny bookkeeping at the BLS…

Chuck Butler
for The Daily Reckoning

RBA Sounds Upbeat About Global Economic Growth 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.

Well… Speaking of things that probably aren’t safe to do… Jumping on the government’s “strong data bandwagon” probably qualifies… But that’s not stopping the lemmings — or as my friend, Bill Bonner, calls these people the “sheeples” — from jumping on the bandwagon… That’s why I back off and say, “something smells strange here”… And so I begin to dig into the numbers…

Now, let me first tell you that the current government/administration isn’t the first one to cook the books in an election year, so, I’m not just picking on the current administration. I’ve always maintained that the books were cooked, and get extra burnt during an election year. Yes, wouldn’t you do the same thing? Get reelected is the call to order, and there’s no better way to do that, than to show the sheeples how much better they are today than four years or whenever ago…

You know this is all leading to the major story from Friday… The Jobs Jamboree… Where the Bureau of Labor Statistics, (BLS) told us that 243,000 net jobs were created in January, and that the Unemployment Rate fell to 8.3% from 8.5%… OK… Maybe, just maybe, the net jobs are close to being correct… The thing that the government doesn’t tell us is that the employment to population ratio isn’t keeping up with the unemployment rate.

And, the unemployment rate is a joke… I’ve gone over this so many times in the past, so, here’s the Reader’s Digest version of this explanation… As people give up looking for work, they are no longer counted as “unemployed”… Well… In January 1.2 million people dropped out of the labor force… Yes, that’s right, in one month, 1.2 million people dropped out of the labor force, so… The unemployment rate drops… And this will continue to occur the rest of this year, folks… So, now you know!

Look… I’m not saying this report wasn’t a good sign for jobs… All I’m saying is that we shouldn’t be holding any ticker-tape parades for the labor picture in this country…

So… Why am I all in a fuss about this, today? Well… To watch the reaction to the jobs data was like watching everyone rush out to buy a Milli-Vanilli record… Boy are they going to be really disappointed when they find out it was all a sham…

OK… So, on Friday, the sheeples ran to stocks, and bought them like they were funnel cakes at a state fair. Bonds got whacked, but that’s fine with me, because they should get whacked… But currencies, save for the true commodity currencies of Australia (AUD) and New Zealand (NZD), got whacked… But the real trip to the woodshed was for gold (& silver)… And that hasn’t stopped this morning, as gold has lost over $50 of its price since the Jobs Jamboree on Friday!

However, having blinders on right now is probably not a very safe thing to do… And stocks look pretty shaky when you consider that profit margins are circling the bowl, having suffered their biggest quarter-to-quarter drop in the 4th QTR of 2011, since the financial meltdown in 2008… I’m not a stock jockey, so I’ll just leave that at that…

The Aussie dollar pushed the envelope very close to $1.08 on Friday, and the New Zealand dollar/kiwi, traded through 0.83-cents… But, those lofty figures from Friday have been wiped out this morning. The Aussie dollar saw their latest retail spending data weaken, which is probably that last nail in the coffin as far as whether the Reserve Bank of Australia (RBA) will cut rates tomorrow or not… At this point, I would say, why not? Everyone else is cutting rates to promote growth, and it doesn’t hurt their currency…

OK… For new readers… I’m not into countries that debase their respective currencies… But, the markets have turned to a “promote growth at all costs” mentality… So we have to play along… Yes, the “plays along with others” is important in our grades!

I do believe that after this weak retail spending data in Australia, and the price action since, that the rate cut has now been priced in… So, sell on the rumor, buy on the fact is probably in play here.

Look how long I’ve gone this morning without a mention of the euro (EUR)! Not that I was saving the best for last! Another week has gone by without an agreement in Greece with private creditors… And now this past weekend, the Trokia (which is a slang term for the three organizations that have the most power in Greece. And consists of: The European Commission, The IMF, and the European Central Bank (ECB) saw their plans for new austerity measures in Greece rejected by Greek party leaders… So, this is all unraveling very quickly, folks… The Greeks can’t come to an agreement with private creditors, nor can they agree with the Trokia…

Things are pretty dire in Greece… And yet the euro remains above 1.30… Doesn’t that give you any indication of what the markets think of dollars right now? Not that it will always remain that way… Remember, when the year began, I told you that I wouldn’t be surprised to see the euro fall to 1.18, or rise to 1.40…

I would also remind you that I tell you all the time that when picking currencies to own, you want to find countries with sound fundamentals, good fiscal positions, something that the rest of the world wants, or has ties to China…

Friday, we also heard St. Louis, Fed Head, James Bullard, say that the Jobs Jamboree probably removes the need for additional quantitative easing (QE)… Of course he called it “bond buying” as QE is now a dirty word, in Fed Head circles…

OK… One of my chartist friends (whom I’ve talked about before), Scot Pluschau, sent me a note on Friday about how the volume indicators are screaming bearish in the Dollar Index… Here’s a snippet from his post:

“As for this week’s Commitments of Traders Report in the Dollar Index, the Commercials got to bang the register a little liquidating 9,703 short contracts that they were piling on near the highs. As of this report they are short 47,734 contracts and long 3,302, which is greater than a fourteen to one NET short position. This is still a very bearish structure of the COT report as far as I’m concerned.”

Then there was this… Did you see what David Stockman, the former Budget Director under Ronald Reagan, had to say last week regarding Big Ben Bernanke’s testimony before lawmakers? Well… Stockman was full of you-know-what and vinegar, when asked about Bernanke, and he let loose… Remember this is David Stockman talking, not me! (For the legal beagles.)

Bernanke giving politicians advice about fiscal stability is “about as useful as an arsonist’s lecture on fire prevention. His radical zero interest rate policy has destroyed the bond market, crushed the yield curve and eviscerated any resolve to address the deficit on Capitol Hill.”

He went on to say this about the debt… “Basically, they’re going to be facing down a $7 trillion decision and it’s going to hit [the] economy like a ton of bricks if you let the everything expire. And if you don’t you’re going to be borrowing $1 trillion a year and wondering how long Bernanke can keep printing the money. It’s a giant trap that’s been created.”

But when the government can cook the books and print a strong jobs report, everyone takes their eyes off the ball… We need to remain focused on the ball!

To recap… The Jobs Jamboree had the stock jockeys planning a ticker tape parade on Friday… 243,000 net jobs were created in January, with the Unemployment Rate falling to 8.3%… Chuck digs deeper into these numbers and shows that the ticker tape parade should be saved for the NY Giants! Looks like the RBA will cut rates tonight (tomorrow for them) but maybe the rate cut is already priced in. And Greece seems to be unraveling quickly here, folks…

Chuck Butler
for The Daily Reckoning

Jobs Data Sends Currencies and Gold Lower 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.

I think the currencies are well bid this morning, because most economists and analysts believe the US Jobs Jamboree this morning will be strong, thus fueling the global growth thoughts. So, the Jobs Jamboree is the 500 lb. elephant in the room, today, so we might as well go right to it!

January’s Jobs Jamboree is expected to show job creation of 140,000… You may recall that December’s trumped up figure was 200,000, but as I pointed out then, I’m sure a lot of that was seasonal part-time workers. So, while 140,000 isn’t going to give our economy a strong push, it’s better than what we saw all of last year. The Unemployment Rate will remain at 8.5% according to the Bureau of Labor Statistics (BLS)… Of course, long time readers know that I don’t believe anything that the BLS prints, and prefer to use the numbers that John Williams prints over at Shadow Stats, where he believes that unemployment is really around 23%…

The thing to really watch in this report, though, is the Average Hourly Earnings, and Average Weekly Hours… This is where wage inflation shows up before most people know what’s going on… I would bet that wage inflation is nowhere to be found in this report, and that’s the kind of thing that the Fed wants to hear, so they can point to deflation when they implement their next round of quantitative easing! OK… That’s just me forecasting that the Fed will do that, I don’t have any inside information of the Fed Heads’ thoughts… Just what I read…

So… The way the market has been dealing with the Jobs reports is that a strong report is bad for the dollar and vice versa… We’ll just have to wait-n-see, but the price action of the currencies this morning indicates to me that the markets will keep that strange perverted way of reacting to the Jobs Jamboree…

Yesterday, I found myself watching news headlines go across the screens throughout the day, and each time I looked up from what I was doing, a different headline would catch my eye. Here’s a snippet of the ones that caught my eye yesterday.

1. Bernanke urges Congress to put US fiscal policy on a sustainable path

2. Bernanke warns that the nation risks the possibility of a sudden financial crisis unless action is taken

3. Bernanke says discretionary spending cuts will not fill gap

4. Fed Chicago President Evans said the central bank needs a clear low-rate commitment or a third round of purchases of Treasuries and Mortgage bonds to further stimulate a still struggling economy.

5.  US debt balloons to $15,356,140,000,000

6. Weekly Initial Jobless Claims drop from 379,000 to 367,000 last week.

OK… Let’s address these and why they are important to the value of the dollar…

1. This isn’t anything new here, folks… Even Big Al Greenspan warned lawmakers of their addiction to deficit spending… What I do believe Bernanke was doing here though, was deflecting blame. The lawmakers wanted to chastise him for his low rate policy to 2014, and Bernanke was quick to deflect it to the lawmakers’ problems.

2. Again, Bernanke is deflecting… However, he’s absolutely correct here. But then he wouldn’t be if there hadn’t been deficit spending going on for a decade!

3. Yes, the discretionary spending cuts will not bring us back to a sustainable path, but at least they are a start! And if we continue to go along without any cuts at all, our debt will be around 140% of GDP in 2015… When we reach the point of no return, only the shadow knows, but without real spending cuts, we’ll get there faster than even “doom and gloomers” think…

4. This is simply laying more groundwork for QE3. And another round of QE will deep-six the dollar once again!

5. When you put down all the zeroes, and all the commas, and the numbers, it’s pretty daunting, don’t you think?

6. Long ago, I told you that eventually, companies run out of people to cut…that is without closing their doors, so eventually the 400,000 per week figures for new claims was bound to come down… But if you did it as a percentage of the working force, I would think the number would not look so good… As if 367,000 new claims last week was a “good number”…

OK… That was fun, eh? This morning, the euro is holding its own around 1.3160, and that’s in the face of a weak Eurozone Retail Sales for December, report that printed this morning.

I think that given the ongoing Greek saga, and this weak retail sales figure, the euro would be getting taken to the woodshed… However, that’s not happening, and there are two reasons that I believe outweigh the bad reasons… First and foremost… The euro is the offset currency to the dollar… If the lemmings aren’t flocking to the dollar for so-called safe haven reasons, the euro gets to add to its value… And second… The news coming out of China regarding the Eurozone is promising…

Chinese Premier Wen Jiabao, who has been meeting with German Chancellor, Angela Merkel, told Ms. Merkel, “China may be prepared to assist in resolving the Eurozone debt crisis.” The markets are fixated on the thought that “may” is a “will”… It remains to be seen if China does find a way to participate in helping the Eurozone… As I said yesterday, China will find a way, for they understand that they need to be the world’s financier, if they want to have the reserve currency of the world!

Gold and silver had very good price action yesterday, and are struggling to gain traction this morning ahead of the Jobs Jamboree… In keeping with my thoughts on the direction of gold… I saw this in the UK Telegraph… “Troy Asset Management began buying gold at $450 an ounce in 2005 and now has 16pc of its £60m Troy Spectrum fund invested in the precious metal. Troy’s co-manager Francis Brooke tells Robert Miller why he believes the value of gold will continue to rise. Gold will rise against heavily debased currencies.”

The Swiss National Bank (SNB) is going to have to show how strong their resolve is regarding the “floor” that was established for the euro/franc cross at 1.20… The cross currently stands at 1.2045… So, it’s getting close to the level that the SNB will have to do something or suffer the consequences of having the franc rise to bloated, overvalued levels once again. This will be “the test” for the SNB… It will be interesting to see how the SNB reacts now that former Governor Hildebrand is gone…

And there was a story that I read last night regarding the Chinese renminbi (CNY)… The Chief Executive of Fosun International Ltd., told reporters yesterday that he believes the “yuan (renminbi) will likely depreciate against both the US dollar, and the euro this year, especially before the Eurozone debt crisis is resolved.” He bases this thought on the “flight to safety of dollars that will occur this year due to the Eurozone problems”…

OK… This is the first thought I’ve seen on the renminbi that goes that way… But, being fair, I printed it even though I don’t believe in it…

Then there was this… From The Wall Street Journal…

After years of delay, Congress took a big step toward approving new rules to ban lawmakers from trading stocks based on information they pick up in the halls of Capitol Hill — a move aimed in part at helping repair the institution’s low approval ratings.

The US Senate was poised to pass legislation Thursday that would ban insider trading by lawmakers, after senators reached an agreement to vote on a series of 20 amendments to the bill. Brody Mullins has details on The News Hub.

The Senate voted overwhelmingly, 96-3, to pass the legislation, called the Stop Trading On Congressional Knowledge Act, or Stock Act. The bill now moves to the House, where Republican leaders said they would vote on it next week.

OK… Who are the low-lifes that voted against this? Just shows to go you that there’s always people who think they are above the law…

To recap… It’s a Jobs Jamboree Friday, and the markets are all expecting 140,000 new jobs created in January, not the stuff that strong economies are made of, nor what December produced, but still better than nothing! But if the markets like it, the currencies should be good today, after holding their gains yesterday… China’s premier is giving signs that he will allow China to participate in the Eurozone… And the SNB is going to have to show their resolve soon…

Chuck Butler
for The Daily Reckoning

Currencies Hold Ground Ahead of Jobs Jamboree 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.

Overnight, it’s been a roller coaster ride, with the euro (EUR) being sold ahead of the French bond auction, and then recovering after the auction results, which were not bad results, as yields on their bonds fell… The same result in Spain this morning, too… More baby steps of stabilization… However, Greece continues to weigh heavily on the euro, and all other currencies as far as that goes. The ECB remains on the sidelines, and I think they’ll remain there for some time, waiting until the last minute. This is worrisome for the markets, and I think a statement by the ECB that they remain the lender of last resort would go a long way here…

The other day, I told you that German Chancellor Angela Merkel was going to China, not to bash the Chinese for their currency policy, but to gain China’s confidence in the eurozone. In Merkel’s meeting today with Chinese Premier Wen Jiabao, Wen stated, “China is still researching the best way to participate in the European Financial Stability Facility (EFSF).” That’s a good sign…

As I’ve said for over a year now, China knows the steps it needs to take to become a world leader, and push the renminbi (CNY) to the front of the class for reserve currency status. And one of those steps is becoming the world’s financier, like the U.S. did after World War II. China already performs this function here in the U.S. and has taken the back road into Europe, but I think the country will increase its financing of eurozone debt as it wrests the title of world’s financier away from the U.S.

Gaining a wide distribution of the renminbi is another step that China has begun, as I’ve reported here. This whole change for China isn’t going to happen anytime soon, but it will happen at some point in the future… I’m thinking 2020, but could be as soon as 2017…

Yesterday, I told you how manufacturing reports in Germany, China and Australia were all stronger than expected. The U.S. version of this report was strengthened from December, but was not as strong as forecast. But the U.S. version has a good grip on expansion at this point. The weak dollar helps, and I know you’re going to say, “But Chuck, the dollar has been stronger recently…” Yes, it has… but it’s still weak!

Moving on… I found this to be a case of the kettle calling the pot black… Japanese Finance Minister Jun Azumi took a shot at the U.S. Fed and their interest rate policy last night. First, Azumi was warning the markets about the yen’s (JPY) strength, and how he was in a position to do something about it (intervene by selling yen). And then he said, “Speculative moves are increasing in the market, and we can’t overlook them. Against the backdrop of the Fed’s plan to keep interest rates exceptionally low until 2014, short-term speculative buying has increased, contributing to the yen’s gain.”

Speaking of the Fed… They sure have had a pile of junk thrown at them and will continue to have it thrown at them… You see, government spending has been a HUGE part of economic growth measured by GDP. Now, everyone would love to see the government out of the deficit spending deadly cycle they’ve been on for some time… And they will attempt to do so, starting next year. But what becomes of the economy, if the piece that the government spending was taking up isn’t taken over by something else? Ahhh, grasshopper, you have become so smart! Yes, the economy circles the bowl…

There were a couple of reports done recently that outline the hit that the economy will take in 2013 and beyond as the government withdraws their support of the economy… JPMorgan Chase’s guy thinks that 1% of GDP will be lost in 2013, as $500 billion in spending cuts come on board in January 2013. And then another $250 billion gets taken out by allowing the Bush tax cuts to expire. Bank of America’s guy thinks the hit will be worse… He believes that the first hit will be $586 billion at the end of this year. And then $100 billion per year gets taken out, as required by the agreement when lawmakers couldn’t agree on spending cuts.

I’m all about less government and less government deficit spending. And if we have to suffer through withdrawal pains, then that’s what we need to do. We have to break this addiction to government deficit spending.

Let’s talk about something else. The other day I told you that the Aussie dollar (AUD) had climbed back above $1.06, and the next line of resistance wasn’t until $1.0770, so it had “room to run.” The A$ has climbed above $1.07 now, so the “room to run” is growing smaller. But that’s just a line of resistance. There’s not a “hard stop.” The A$ reached $1.10 and change last year, so it does have that ability. The one thing that concerns me is how quickly this move higher has happened. Let’s not get ahead of ourselves here, A$ traders.

I read this morning that the Canada Pension Plan Investment Board, which manages about $155 billion, plans to increase its longer-dated investments in Australia to boost returns. The pension board already has about $10 billion allocated in Australia and the A$. Pretty interesting stuff here.

Speaking of Canada, Canadian manufacturing wasn’t on par with the reports from Germany, China and the U.S. yesterday, as it slipped a bit in January. The stronger Canadian dollar/loonie (CAD) can be blamed for that. I’m not concerned here. Canada has the “stuff” other countries want, and will continue to attract investment.

Gold is eking out another small gain this morning, after adding about $5 to its value yesterday, it’s up $4 this morning. I would rather see these small moves that fly under the radar than the wild swings we’ve seen in recent years.

A little game today of “who said this?” I’ll give you this quote and you guess you said it. The answer is at the end: “Gold, unlike all other commodities, is a currency. And the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating.”

Remember yesterday when I told you that the Congressional Budget Office had forecast that the U.S. will print a trillion-dollar budget deficit for the fourth-consecutive year in 2012? I completely forgot to mention the most important thought on this forecast. The CBO has also forecast that the budget deficit in 2013 will narrow and in future years will continue to narrow. Just how did the CBO come to that conclusion?

First we have the reduction of deficit spending that we talked about above. And then the real reduction comes from an increase in government revenue for future years. You know what government revenue is, don’t you? Taxes! In fact, the CBO believes that taxes will increase by 30% in the next two years!

There are still people out there that think having debts are OK. When taxes to the public have to rise 30% to help pay for them they are not! And that’s just the tip of the iceberg. As each year comes from here on out, large numbers of baby boomers are going to hit the retirement age. And those unfunded liabilities I told you about last week? I guess we’ll solve that problem when we get there, eh?

To recap, the New York traders didn’t reverse the currencies’ overnight gains yesterday, and the currencies and metals were allowed to add to their gains all day! The gains were small, but still gains. China is mulling over how to participate in the EFSF. It’s easy: Write a check! U.S. manufacturing was up nicely in January, and Canada’s was down slightly. And the CBO’s bomb they threw at us is a doozy!

Oh, and the answer to our game of “who said this?” is… Alan Greenspan!

Chuck Butler
for The Daily Reckoning

Who’s Still OK With Deficit Spending 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.

After watching time and time again, the overseas markets take the dollar to the woodshed, and then when the New York traders come in, the price action all gets reversed. I thought to myself, “Self, doesn’t it look like New York traders have orders from the top of the house to make sure the dollar doesn’t fall off a cliff? Why, yes, self, it does look like that!” Now let’s get back to reality…

Here’s an illustration that shows us just how dumb the markets are these days… Yes, I know they’re always right… but in all my days as a currency analyst, trader and writer, what happened yesterday would have never happened before 2008…

First of all — for one of the few times recently — consumer confidence surprised the experts who thought it would rise by a large margin, by falling by a large margin! I don’t want these things to happen… I just want what’s the correct reaction to happen… And given what the Fed Heads had to say, real unemployment at 23% and home prices still falling, consumer confidence should fall… and, finally, it did! But what happened afterward is just not right!

Pre-2008, a weak consumer confidence report would have sent the dollar to the woodshed, and currencies and metals onto the rally tracks… But not any longer, it seems… That bad stuff in the U.S. (except quantitative easing) sends the markets to dollars… stranger than fiction… but it is what it is, and we have to deal with it!

The dollar rallies on a day when the Congressional Budget Office (CBO) issued a report in which they forecast the U.S. budget deficit to be greater than $1 trillion — for the fourth consecutive year — in 2012. Now, isn’t that special, as the Church Lady on SNL would say! As most of you know, and all new readers are about to find out… The budget deficit at the end of the year is what is added to our national debt.

Now, I know a lot of economists — and people that I think should know better — seem to think that this growing national debt is no problem… That superpowers are allowed to grow such debts without recourse, because of their status as a superpower… Hmmm… Of course, they have no proof that this will have no bad recourse, while the proof of empires that got over their heads in debt, go back so far, with so many instances, that you would have to be wearing blinders to not see what’s ahead for the U.S. and the dollar!

But that’s just me. I’m no Harvard grad. I’m not an economist. I’m just your friendly neighborhood realist that understands that the depreciating dollar has been like a tax to U.S. citizens, as the purchasing power has been chopped off at the knees. That rising debt will have to be dealt with by either raising taxes to the hilltops or allowing a depreciating dollar, thus inflating away the debt. Or both! And spending cuts… No, in contrast to what Angela Merkel believes, the debt cannot be “austerity measured” away. But some exercise in spending cuts does shorten the work that the increased taxes and inflating dollar value have to do.

And there will come a day when the U.S. abuses the ability to run up debts because of it being a superpower. Look, I’m a proud American, and this is not what I want to see happen, but this is the cruise ship we’ve embarked on… we have no power to stop the cruise ship from its destiny with an iceberg, we can only make sure we have on our life jackets, and the shortest route to the lifeboats… Which means nondollar investments, along with gold, silver and other commodities…

OK… a lecture from your friendly neighborhood realist this morning… Not what you wanted first thing this morning, I know. I apologize, but when I have something on my mind, my fat fingers begin to type away, and the next thing I know, I’m halfway through the letter and haven’t told you a thing about the markets this morning! UGH!

Well, another morning of currency and metals strength… let’s see if their strength can hold up to the New York traders. The things that have the currencies all lathered up this morning center around two manufacturing reports… one from China, the other from Germany. First, China saw their manufacturing index rise again, marking two consecutive months of increase in the index.

China printed a 50.5 level for the manufacturing index called PMI — this is an increase of 0.2 from December’s 50.3 reading. So once again, the Chinese economy continues to make those that called for a collapse over two years ago go hide and hope no one remembers what they said!

And Germany… Germany’s PMI manufacturing index rose to 51 in January from 50.9 in December. For those of you new to class, these manufacturing indexes use a number of 50 as the line in the sand between contraction and expansion for the manufacturing sector. So any number above 50 represents expansion…

So it was with China and Germany overnight. This good sign from both reports has put wind in the sails of the currencies, and metals this morning. The biggest beneficiary of the Chinese data is Australia. The Aussie dollar (AUD) is back to climbing toward $1.07.

I know that the prime minister has nothing to do with the currency’s value, and monetary policy. But I found it interesting that Australian Prime Minister Julia Gillard to reports last night that the Aussie dollar will likely stay “relatively high for years to come.” I’m sure that comment won’t make the exporters of Australia happy.

Australia is not of the caliber regarding manufacturing as China and Germany, but the Aussies also printed a stronger-than-expected PMI manufacturing index last night. The Aussie rise was stronger than those in China and Germany, printing at 51.6 in January versus 50.2 in December. I think it’s important for lawmakers and kings, presidents and other dictators to take notice here, that even though the A$ is very strong, not only has their manufacturing also remained strong, but their trade balance has turned to surplus!

It can be done. But you need to have the “stuff” that other countries want and need. Raw Materials in Australia, keep the wind in their sails.

The Chinese and German data also have gold and silver moving higher this morning. You see, if China and Germany are still pumping out the manufacturing, the global growth isn’t fading away, and with global growth comes inflation.

Remember about a month ago, I gave you some great info on the trading pattern of gold and silver and how they for the past 10 years (except 2008) had booked their lows in January. This year will have been no different, as gold is off to its best start of a year since 1980! 127,000 ounces of American Eagle gold coins were purchased from the U.S. Mint in January, the most in a year. Hey! There’s a reference to last Jan.! I guess that data and info I gave you came in handy, eh?

So it’s not just the global growth thing pushing gold higher. The eurozone debt debacle continues to fuel gold’s run to higher ground.

Moving over to silver, my colleague here, Aaron Stevenson, sent me an article on silver yesterday that was pretty interesting. The writer gave all the reasons why he believed that there was about to be a paradigm shift in silver. I can say that I didn’t disagree with his thoughts. He believes silver is going to break out to the upside, and I agree!

So here’s the definition of a paradigm shift: a radical change in underlying beliefs or theory.

Here’s a snippet of the article: “The coming paradigm shift in silver will not happen due to technical analysis, fundamentals or supply and demand forces, but rather due to a change in mass psychology of investors. Even though fundamentals and supply-demand forces will play a part in this shift, they will not be the ultimate cause. I believe technical analysis as it is used today only charts the amount of manipulation and mass psychology in the silver market.”

The U.S. data cupboard will print its own PMI manufacturing report for January today, and it too is expected to be stronger than December’s print. And in a pre-game look at the jobs jamboree that will print this Friday, the ADP employment change for January will print today, along with vehicle sales and construction spending.

Then there was this, from The Washington Post:

“Data released Tuesday showed that seasonally adjusted housing prices have reached a post-bubble low, as the minor surge that began in 2009 fizzled, to be followed by the almost continuous slide of the past 18 months.

“The housing bust, in other words, appears to be even worse than it was at the nadir of the recession.

“For millions of homeowners, that’s an unsettling reality, and potentially an issue in the presidential campaign. But the damage may be far more widespread.

“By making people less wealthy, according to economists, the decline in home values inhibits consumer spending and hampers the nation’s stop-and-start economic recovery.”

I was just going over my presentation for the Orlando MoneyShow next week and there’s something there that plays well with this. In 2004, I began to notice that housing in my small river town was not selling as quickly as in the past, and it occurred to me then that we were in a housing bubble. I began to write about then, and people thought I was crazier than a loon. We all know what happened a few years later. But the next thing was that in 2009, I said that home prices would lose another 10%. And once again, people thought I was crazy. Who’s crazy now?

To recap, the currency rally yesterday morning was wiped out as U.S. consumer confidence hit the skids in January. The currencies are back on the rally tracks this morning, as both Germany and China printed stronger-than-expected manufacturing data. Australia too, printed strong manufacturing data. Gold and silver are stronger on those reports and the continuing debt debacle saga of the eurozone. And a guy believes that silver is about to take off to the moon!

Chuck Butler
for The Daily Reckoning

Manufacturing Growth Continues 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.

No, Greece didn’t come to an agreement with private creditors. But the eurozone leaders did agree to accelerate the setup of a full-time 500-billion euro (EUR) rescue fund, and adopt the German-inspired deficit control treaty… This helped the euro rise…

Then there was this ditty, a simple twist of words that confused the markets into thinking something that was not assured… Greek Prime Minister Papademos said he “seeks” to reach a conclusion on talks with the troika in concert with the final agreement with private creditors “before the end of the week.” I saw it written that the markets obviously confused the meaning of “seeks” for “expects.” But the markets are never wrong, right? So this helped the euro rise, too…

And then finally, in keeping with the recent trend in Germany for stronger than expected data prints, German unemployment fell 34,000 in January (-10,000 was expected). This brings the German unemployment rate to its lowest level since the series began in 1992! WOW!

The eurozone unemployment is not so good, though… but that plays along with the whole story of Germany’s data versus the eurozone as a whole…

So the euro is back to 1.32 this morning, which means the Canadian dollar/loonie (CAD) is hugging parity to the dollar once again, and rhe Nordic currencies of Norway, Sweden and Denmark are all stronger this morning as well.

Gold has gained back the $11 it lost yesterday before the turnaround, with a $10 gain so far this morning. Commodities as a whole are stronger on the eurozone info… Everything from cocoa to precious metals has green numbers beside their values this morning… And we all know that having commodities on the rally tracks is good for the commodity currencies: Australia, New Zealand, Canada, South Africa, Brazil, Norway and a few others…

I see German Chancellor Angela Merkel is going to be visiting China… I do believe that she will be going to assure the Chinese that Germany is strong, and hope to get more commitment from the Chinese regarding bond buying. She might get somewhere, as long as she doesn’t do a Tim Geithner, and chastise the Chinese for their currency policy…

Speaking of China’s currency policy, I told you yesterday that the Chinese came back from holiday and immediately marked the renminbi (CNY) down versus the dollar. The renminbi was set to post its worst monthly loss in 18 years, before a turnaround last night. Following the Sunday night weakening of the renminbi, the Chinese allowed the renminbi to gain Monday night…

I can tell you what the Chinese were doing during most of January, folks… They were doing the same thing they did in 2008, when the financial meltdown hit the global markets… They sat on the renminbi and waited for the coast to clear before getting back to currency appreciation… Same thing here… The eurozone debacle was teetering on causing another global financial meltdown, so the Chinese just sat on their currency. But the news last night from the eurozone was better, so the renminbi gained in value, thus heading off the title of worst trading month ever!

The latest manufacturing index report will print tonight for China, and that report will be gone over with a fine-toothed comb, as investors and traders want confirmation that China’s economy is simply moderating and not collapsing… You know where I stand on that, and have stood for over two years now… I’m still here, and so is the Chinese economy!

While I’m talking about China, I might as well talk about one of my fave currencies, the Singapore dollar (SGD). There’s hardly ever news from Singapore, so I have to search through all kinds of articles to find a snippet on Singapore. We can call Singapore the best-kept secret. What I found this morning was mention of the S$ closing in on its 200-day moving average. Now, that’s something! Especially since the 200-day moving average was 1.2541 and the S$ flew right through it this morning, and is now 1.2510.

Here’s the thing that happened to the S$ last September when it reached 1.20 and change: It got ahead of the renminbi’s advance against the U.S. dollar. These two normally move in tandem. You can tell that by looking at their gains versus the dollar since July 2005, when the renminbi broke the peg to the dollar. Their gains are right on top of each other, around 28%.

So watch the S$. If the renminbi gets back on daily appreciation, then the S$ will move freely along with the renminbi. If the renminbi halts appreciation for some reason, the S$ will too. For, you see, these two countries are in competition for exports.

Speaking of China, there’s one more thing this morning. The World Trade Organization (WTO) ruled against China, and said that China must eliminate taxes and quotas on the export of nine industrial materials. This is a real blow to China, for now that the West has the WTO’s attention, I believe they will go for China’s throat and challenge other natural resources, including rare earth metals. (Remember last year when China halted rare earth metals to Japan?)

And India, the country that I took the woodshed for not addressing their rising inflation in time to prevent a currency sell-off, is seeing their move to reduce reserve ratios that I talked about last week come to the aid of the rupee (INR). The rupee has been on a tear since the announcement last week. It’s good to see, for this currency had gotten beaten badly around the head and shoulders.

The U.S. data cupboard sees some action today, with the S&P/Case-Shiller home price index for November. Home prices are expected to decrease at the smallest rate in some time but still decrease. We’ll also see the Chicago Purchasing Managers Index (manufacturing). And the consumer confidence hogwash, consumer confidence, is expected to rise by a large amount in January. As usual, we begin the year with lofty expectations of what the year has in store for us, only to see that drift away as the year moves along. The people surveyed for this confidence report must not have heard the Fed Reserve lower their forecasts for 2012 economic growth, or lay the groundwork for more quantitative easing.

Then there was this: Speaking of the Fed and their lowering their economic forecasts for 2012, I saw that The Economist had a note about the Fed leaving rates near zero could end up competing with Japan for record length. The Economist also had this to say about the Fed laying the groundwork for more quantitative easing: “Unemployment, now 8.5%, is seen edging below 8% only by the end of 2013. Inflation, meanwhile, will be at or below the new target of 2%. With unemployment too high and inflation still weak, more monetary stimulus is easily justified. Mr. Bernanke left the door open to that option. The odds are that he will walk through it.”

To recap, the currency/metals rally that got stalled out Monday morning regained its legs and got back on the rally tracks last night and this morning. The eurozone came to an agreement on the size (500 billion euros) of a permanent rescue fund and adopted the German-inspired deficit control treaty. Greece is still negotiating. The news from the eurozone was enough to get the markets feeling comfy-cozy with a rally for the risk assets. Commodities are all stronger, and gold gained back its loss from yesterday. A lot of data to sift through today. The final piece of data will be consumer confidence, and it is expected to be quite strong. Strange, I know.

Chuck Butler
for The Daily Reckoning

Currencies Rally on Eurozone Agreement 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.