I just saw a story go across one of my screens that said, “Greeks run university professor out of the country for telling economic truths.” I immediately thought, Good thing that doesn’t’ happen here in the U.S., for I would be a man without a country, eh?

Let’s get to the tape of what happened yesterday and what we can look forward to today. I left you yesterday morning with the thought that the tourniquet had been wrapped around the deep wounds the currencies had received from the dollar the previous day, and it looked as though a handful of currencies would gain on the day. Well, that thought carried through for the day, but the trading ranges were very tight.

The euro (EUR) is getting a weak wind in its sails this morning on news that German Chancellor Angela Merkel is leaving open a potential compromise on debt sharing for the eurozone. Confused? Don’t be! That’s what I’m here for! What this is saying is that even though Merkel has dug her heels in on this eurozone bond issuance idea that I talked about yesterday, she’s leaving open that option. And that’s a good sign, if you believe that a eurozone bond issuance, instead of each country doing their own auctions, would be good and help restore the eurozone and euro.

I think, though, that a true “eurozone bond” will continue to meet strong opposition from Germany. But there’s a compromise that could be worked out, and that’s a general eurozone redemption fund. So each country could retain their sovereignty and issue their own debt, but they would have to contribute to this general eurozone redemption fund, from which bond maturities would be paid. So you see this would very well calm the markets and allow the eurozone countries the ability to scale back their debt. Now, that’s a very good concept, and one that should have been hammered into the skulls of the eurozone leaders at the EU summit… but NOOOOOOOOO! They would rather talk about stuff that’s not going to work!

As longtime fans and first-time callers, you all know that I don’t believe that the Japanese yen (JPY) should be as strong as it is versus the dollar. I believe I’ve made that perfectly clear. But I’ve also said that you shouldn’t throw yourself in front of a bus either. Which is akin to trading versus a trend. And the trend in place right now is to buy dollars and yen. Sure, the Japanese government doesn’t like to see this yen strength, for they have set out to achieve an inflation rate of 1% this year, and they won’t get there with the yen so strong. (They won’t get there either way, who the heck are they kidding?)

But the trend is your friend, right? So yen strength is here for now. I threw in the towel on yen a month ago (remember?). I gave up using fundamentals on yen. It’s a currency on its own course. Oh, by the way, Japan’s latest CPI (inflation) for April printed at +0.2%. That’s a long way from 1%, BUT better than a kick in the shins for the Japanese leaders.

Yes, one day the “debtor countries” like Japan and the U.S. are going to feel the heat. Obviously, that “day” isn’t today, or next week, or month. but I do believe that the dog days of summer are going to return the heat to these two. Especially if stories like the one I have for you coming up after the break get some attention. We’ll be right back!

Well, what do we have here? USA Today yesterday (thanks, John Min) had a front-page story titled “Red Ink 4 Times Official U.S. Tally.” Oh, haven’t I told you before about how our government tends to stretch the truth when it comes to real numbers? And I’ve complained about the fact that the government doesn’t have to account for things like corporations, small businesses or even states! But there it was in USA Today. When using accounting that would put corporate heads into jail, the U.S. reported a $1.3 trillion deficit last year. However, when using accounting that everyone else in the U.S. has to use, the deficit was really, truly and officially — drumroll, please — $5 trillion.

Now, from 2004 to 2011, government deficits would actually be six times the government’s figure of $5.6 trillion.

I can hear the fans of the government style of accounting saying that you shouldn’t include retirement programs in the budget, because — and get this — “Congress can change what it owes by cutting benefits or lifting taxes.” OK, tell me when you think THAT might happen! Are you kidding me? That’s a pretty weak argument. There’s no political will to do what needs to be done. There’s no political will to cut the discretionary spending, which is chump change compared with the Medicare, Social Security and Medicaid expenses.

Onto something else, I feel like the boy who cried wolf — only I’ve been crying wolf for over a decade now! Of course, the problems with the dollar did occur, so some of my crying wolf has helped people. But this debt thing here in the U.S. just continues to grow and grow, sort of like my waistline the past five years.

The Swiss franc (CHF) continues to hold onto the 1.2010-15 cross to the euro, just keeping its head above water enough to keep from taking on water. At any time, traders could very well take out that 1.20 level, leaving the Swiss National Bank (SNB) no course but to react and sell francs and buy euros. And that’s why I tell people at conferences to steer clear of the franc. But what happens if the SNB has no resolve and the traders call their bluff? Then the franc strengthens and I’m wrong.

The Australian dollar (AUD), which on Tuesday was nearing 99 cents again and then experienced what all the other currencies experienced on Wednesday, is back on the rally tracks for the second consecutive day this morning. Maybe those measures we’ve talked about showing the A$ was oversold were correct. But then, in previous turnarounds by the A$, the bounce was more significant than what we’ve seen the past two days. So maybe there’s more to come? If near-term history since 2010 is any indication, that would be a yes, there’s more to come. But I’m not banking on anything from the past holding true these days, fundamentals having been thrown out the window with the bath wash.

Gold also has found its way to the green numbers for two consecutive days. I’ve got to say that the performance of gold (and silver) has been very disappointing this year. But people like Bill Bonner told us all that this could be the first year in the past decade that gold takes a breather, and if we had listened, this would not be so disappointing. And earlier this week, I told you what I believed about the price action from $250 to $1,200 and then from $1,200 to $1,900 and then back to $1,555. The year isn’t half over, so we could still see gold recover this year. But if not this year, then 2013 should be the year of recovery. I say that because I truly believe that the commodity bull market is not over. It has just taken a breather. The challenges to the global economy remain and will remain for years to come. This uncertainty will be the match that lights the fire. And before the legal beagles prepare to slap my wrists, that’s all my opinion, and I could be wrong!

The euro did bump up to 1.26 briefly while I was writing, but is back down a bit. This will be an interesting day with the thin volume in the markets. So be prepared for a wild ride, but then the past couple of Fridays before three-day weekends have been lackluster. So what’s it gonna be, markets?

I completely forgot to mention the incomparable newsletter writer Richard Russell, an absolute must-read for me. I’ve used so many of Richard Russell’s snippets and quotes over the years, you would have thought I would pull that name out without thinking about it!

And I actually heard from the Mogambo Guru yesterday! The Mogambo sent me an email. Longtime readers of the Mogambo Guru know how good he is with his descriptions of government blunders, so you can only imagine an email from him! Thanks, Richard… you are a real friend!

The Chinese renminbi (CNY) has been on a three-week losing streak as the Chinese government guides the currency weaker in an effort to keep their exports on pace to support the slowed-down economy. I’m not too concerned about this three-week move, which has only really been less than 1%. China left the renminbi unchanged for over almost two years during the financial meltdown in the U.S., and then they went back to allowing appreciation. We could very well see that again as the U.S. prepares to enter the backside of the financial hurricane. But remember, the Chinese want desperately to remove the dollar standard, and have publicly said so. They won’t get that to happen with their currency at current levels.

As I’ve told you many times in the past, the Singapore dollar (SGD) mimics what the Chinese renminbi does. So with the three-week losing streak in renminbi, so too do we have a three-week losing streak in the S$. But again, its loss during that three-week losing streak has been less than 1%.

Then, in keeping with my call that the U.S. is preparing to enter the backside of the financial hurricane, I saw this on ZeroHedge.com. You can always find stuff like this there:

“Here in the U.S., I think that The Bernank’s plan was to pretend they didn’t need to print more money, get commodity prices down and then hope that the economy would respond favorably to that development. This wouldn’t have negated the need for more printing; however, it would have bought time and allowed for a potentially lesser degree of action. Instead, what has happened is that the global Ponzi is completely and totally incapable of holding itself together without consistent and increasingly large infusions of central bank money. The debt burden is too large, the malinvestments too pervasive, the corruption too systemic. The whole house of cards that is the global economy will vanish into dust rather quickly without more and more printing. So what do you think they are going to do? If I am correct and the U.S. economy itself is now in the early stages of what will probably turn into a serious economic slowdown, then it will not be easily stopped with incremental central bank policies. The fact that they have waited this long and the fact that the global economy is in the midst of a serious slowdown tells me one thing. They are way behind the curve, and by the time they realize this, it will be too late to stem the momentum. That said, I do expect them to respond, and the fact that things will have gotten much worse than they expected will mean a major response. I’m not talking Operation Twist part deux. I mean a serious print. Potentially, the BIG ONE.”

See, I’m not the only person crying wolf on this economy. It makes looking to gold and silver as safe havens an interesting thought.

To recap: The calm that was in the currencies yesterday morning held through the day, and is still prevalent this morning. The tourniquet has been wrapped around the currencies and metals for now. There’s news out this morning that German Chancellor Merkel is open to a compromise on the eurozone bond issuance idea. Chuck offers up his idea of a compromise. The U.S. fails to account for its expenditures like it demands corporations do. Our deficit last year was really $5 trillion, as if the reported $1.3 trillion deficit weren’t bad enough!

Chuck Butler
for The Daily Reckoning

Accounting for the US Government 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?".

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?".

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?".

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?".

We continue to remind callers that diversification is the key to long-term investing success, and the best strategy is to make an investment plan and stick with it. But before I get in trouble with the lawyers, I better get back to the purpose of this letter, which is to give readers a recap of what is going on in the currency markets.

The Greek crisis jumped back onto all of the trading screens last night after the Greeks finally admitted they couldn’t form a coalition government, and planned another election in June. The problem with these new elections is that there is a high risk that leftists opposed to the terms of an EU bailout will sweep to victory in this next election and send the eurozone into a deeper crisis.

Both of the parties who won the largest percentage of the last vote want to remain in the euro (EUR), but promised to “renegotiate” the terms of the bailout agreement. The second round of elections could shift the results further left, making the withdrawal of Greece from the euro a higher probability.

In addition to the Greek crisis, yields on both Spanish and Italian bonds rose yesterday as investors sold and sought safer havens. Moody’s Investors Service downgraded 26 Italian bank ratings, citing Italy’s recession and increasing bad debt. It also warned that Spanish banks face additional challenges.

And there is probably more bad news to come from the rating agency, as a Moody’s official said the rating agency is postponing possible downgrades on more than 100 banks worldwide as it assesses the fallout from JPMorgan Chase’s trading losses.

None of this was good for the euro, and the single currency unit approached the 12-month low of 1.2624, which it reached on Jan. 13. Bad news for the euro corresponded to an up day for the U.S. dollar, which is seen as the only “safe haven” in the most-recent crisis. The U.K. economy fell into a second recession, while Europe has avoided the double dip, according to official numbers released yesterday.

The pound sterling (GBP) was seen as a safe haven from the euro crisis, but the pound weakened the most in a month versus the U.S. dollar after the BOE said the U.K. economic growth was likely to remain “subdued” in the near term.

Central bank Governor Mervyn King admitted the U.K. faced threats from the euro crisis as he released the quarterly report on inflation. “Concerns about the possibility of a disorderly resolution” in the euro area have “adversely influenced asset prices, bank-funding costs and confidence,” the BOE said in the report. “The MPC [Monetary Policy Committee] judges it likely that the possibility of such extreme outcomes crystallizing will continue to weigh on U.K. activity for some time, even if these outcomes do not actually occur.”

Shifting to the U.S., markets will be eagerly awaiting the release of the minutes from the last FOMC meeting, scheduled to be released early this afternoon. Chairman Bernanke said after the most-recent meeting that he is prepared to “do more” to boost economic recovery, which the markets took to mean another round of quantitative easing.

Investors will be analyzing the minutes of the last meeting to try and get a sense of whether or not QE3 is in our future. If there is any indication that another round of easing is in the offering, the equity markets will run higher and the dollar will get sold.

But before we get the minutes this afternoon, we will also get a boatload of other data releases here in the U.S. Housing starts are expected at 685,000, a slight increase from last month’s 654,000, and the month-over-month increase is expected to be a much-better 4.7% increase, compared with last month’s dismal 5.8% fall.

We will also get a report on building permits, which is a more “forward looking” report. Permits are expected to have fallen in April, down 4.5% from March levels. We will also see industrial production and capacity utilization, both of which are expected to show a slight increase during April.

Yesterday was chock-full of data with the release of the CPI and retail sales data. The inflation data showed consumer prices here in the U.S. rose at an annual rate of 2.3% in April, just as a majority of economists had predicted. Readers know neither Chuck nor I put much faith in this “official measure” of prices, and would rather look at John William’s ShadowStats, which pegs the price increases to a more-realistic 10%.

The retail sales numbers weren’t as encouraging, as sales slowed to a 0.1% increase during April, down from a 0.8% gain in March. Other data showed the New York state manufacturing activity improved, mostly due to falling energy prices, and business inventories were up a bit, at a 0.3% increase.

One of the most-important pieces of data released yesterday didn’t get any press in the mainstream media (no surprise there). Data showed the total net TIC flows dropped $49.9 billion in March, but the newsies chose to focus on China’s increase in its holdings of U.S. Treasuries in March. Our friends over at The 5 Min. Forecast had some interesting things to say about the increase:

“Yes, China beefed up its holdings of U.S. Treasuries in March, according to figures out this morning from the Treasury Department. But if you widen the scope and go back six years, a couple of interesting things happen. First, the increase in March was so small as to barely show up on the chart…

“And second… China’s holdings peaked last July. Coincidentally, that was the last month before Uncle Sam lost its AAA rating. The numbers declined markedly through the end of 2011, and stabilized in the first three months of 2012. This is especially interesting when you consider how Chinese imports of gold grew at the same time Chinese purchases of Treasuries were shrinking.”

They point out that China is slowly accumulating gold, but you wouldn’t know that by the recent price movements. The shiny metal dropped again yesterday, to a new low for 2012, at $1,526.97. It has bounced back up from its lows, but is still trading in the $1,540 range.

I pointed out my thoughts that gold is an excellent place for investors seeking a safe haven, but the recent trading patterns show that most investors feel it is more of a “risk” asset. The correlation between gold and the dollar has been moving closer to –1, which would indicate a perfectly negative correlation (a negative correlation indicates gold moves down as the dollar moves higher). The 30-week correlation coefficient between the greenback and bullion is now at -0.66, compared with -0.24 in September.

But some of the biggest investors feel gold will rebound from its current levels. Bloomberg reports that the median estimate of 11 analysts who track gold indicates the price will average $1,740 in 2012. Goldman Sachs’ commodity research team believes the Fed will start a third round of QE in June, which will push the value of gold higher.

Billionaire George Soros raised his stake in gold, according to a filing yesterday reflecting first-quarter holdings. Central banks are buying bullion at the fastest pace in five decades, adding 439.7 tons in 2011, and they will probably purchase a similar amount this year, according to the World Gold Council. Sounds like a good opportunity to increase metals holdings at good prices!

Chuck is working out in Las Vegas this week, giving a couple of talks to packed rooms as usual. I miss attending these shows with Chuck, who is treated a lot like a rock star at them. Fans constantly drop by the booth to shake his hand and pick his brain on the markets. He sent me the following reflections from the floor of the Las Vegas MoneyShow:

“Most people here at the Las Vegas MoneyShow believe, as I do, that the back side of the storm is about to hit the U.S. But then again, 250 of them were Pfennig readers in this humongous room I was in yesterday!

“I said something to the people there when talking about the Pfennig, and it hit me like a brick! I’ve been writing the Pfennig in one shape or form for 20 years now! WOW! Who would have thought that those handwritten notes to salesmen each morning would turn into this 20 years later!

“Even when I was ‘retired,’ after Mercantile performed ethnic cleansing on Mark Twain employees, I wrote the Pfennig from home. Back then, Alex was only 3, and used to sit on my lap and pound away on the keyboard so that portions of the Pfennig looked like this: : )*%PLKE#&^)*!

“Alex is almost 17 now — amazing how time flies, eh? But the point here is that longtime readers that go back to Mark Twain Bank days have been with me through a lot. I’m thankful for your loyalty.”

Chris again. Yes, I remember back 20 years ago, when I would find a handwritten note from Chuck on my desk when I arrived each morning. Back then, we didn’t have the Internet, so he would jot down his thoughts and leave copies on everyone’s desk. We started passing these notes along to the investors we were talking to via fax, and eventually Chuck switched to passing it out electronically.

Then there was this. I haven’t commented on JPMorgan Chase’s $2 billion trading loss, which really put egg on the face of Jamie Dimon, the outspoken CEO of the company. Dimon was one of the loudest voices protesting the additional banking regulations working their way through Washington.

Yesterday, I read a story that I immediately thought would be a great story for this morning’s “Then there was this.” The story, which appeared on Bloomberg and was also picked up by our local paper, was titled “Fed Conflict Raised for JPMorgan.” The article points out that Dimon is one of three bankers sitting on the board of the New York Fed, as required by law.

That’s right, the Federal Reserve Act of 1913 actually mandated that three of the nine seats on the regional reserve bank board be occupied by bankers. The article quotes Sen. Bernard Sanders, who sees an obvious conflict in Dimon’s two roles. “It is an obvious conflict of interest for Jamie Dimon, the CEO of the largest bank in America, to serve on the New York Fed’s board of directors,” Sanders said in an emailed statement. “This is a clear example of the fox guarding the henhouse.”

To recap. Greeks will be returning to the polls in June, and the currency markets are worried about the outcome. The euro dropped again, both on the new Greek elections and a cut to Italian bank ratings by Moody’s. The pound sterling dropped, and may not be the “safe haven” that some investors thought. We got a boatload of data released yesterday, and will get even more out this morning. Most of the data showed the U.S. economy continues to “muddle through.” China is continuing to increase its gold holdings, along with some very influential investors. And I ended today’s Pfennig with a note from Chuck, who is speaking to the masses out in Las Vegas.

Chris Gaffney
for The Daily Reckoning

British Pound Sterling Losses “Safe-Haven” Status 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 euro (EUR) continued to drop on Monday, falling to its lowest level in almost four months as more and more people begin to imagine a euro without Greece. The dollar has been the biggest benefactor of the latest eurozone crisis, as investors moved money back into the US Treasury markets. The rush back to safety pushed the yield on the US long bond back below 3%, and the shorter maturities are also lower.

The Greeks are still without a unified government after the biggest anti-bailout party decided against joining the government. It is looking more and more as if the Greeks will be forced back to the polls for another round of voting.

And the Greeks aren’t the only ones heading to the polls. The Irish will vote on a referendum May 31, which asks the public to approve the “EU Stability Treaty.” While a sharp turn to the left in Greece and the return of the Socialist party to the French presidency has sent the euro lower, an Irish rejection of the EU treaty could be the last straw for German-led austerity measures.

On the flip side, the stability pact requires only 12 nations to ratify it, and German Chancellor Angela Merkel seems to be warming to adjustments to the treaty’s stringent fiscal rules. While a Greek exit is still a possibility, Germany could still allow them to stay after loosening the rules on maximum deficits. Many of the countries that use the euro are in better shape than Greece, but still need the ability to stimulate their economies.

All of this will be debated and discussed at the next EU summit meeting on May 23. Francois Hollande will be representing France, but it will be interesting to see if the Greek government gets organized enough to send a representative to the bargaining table.

The euro has settled into a tighter trading pattern overnight, and is actually starting to move higher as I write this morning. A better-than-expected GDP reading showed the German economy avoided “double dipping” into a second recession.

Gross domestic product in the 17-nation euro region came in flat for the first quarter, compared with an expected 0.2% decline. Germany’s economy grew 0.5% during the first quarter, a surprisingly strong number, which offset some of the weaker GDP numbers in the peripheral economies.

The dollar index snapped 11 days of gains overnight, as it weakened slightly ahead of a full morning of data here in the US. We start the morning off with the inflation numbers for April, with CPI predicted to have risen 2.3% versus a year ago, down from a 2.7% rise in March. We will also see the Empire Manufacturing number, advance retail sales, total net TIC flows and business inventories. There will be plenty of data for currency traders to move the markets.

If the data show the US economy is continuing to slide, we could see renewed calls for another round of quantitative easing here in the US. The impact of QE3 (or is it 4?) on the currency markets is tough to predict. More stimulus would probably cause the equity markets here in the US to rally, and would give the dollar a short-term boost.

But ultimately, QE is negative for the dollar, as it pumps more money into the markets, driving interest rates lower and causing inflation risks to rise. With this being an election year, the administration is geared now more than ever on the short term, so if the data show any weakness in the economy, we could see another push for stimulus.

An article appearing in yesterday’s Wall Street Journal online was appropriately titled “Rare Speed Bump in Commodities’ Long Run.” The title caught my eye, as it reflects exactly what I think we are seeing, a short-term pause in what I believe will be a continuation of the long commodity bull market. But in the short term, both oil and gold are being sold off.

Worries about the slowdown in China, combined with questions surrounding the eurozone credit crisis have decreased future demand for commodities. Oil dropped below $94 for a short period yesterday before rallying back later in the day. Gold has also dropped, erasing its gains for the year. I just don’t understand why gold is selling off in the face of such uncertainty. After all, gold is the only “real” currency, so why wouldn’t people be moving into gold as they sell positions in “risk” assets? I guess one answer would be that investors are no longer worried about inflation, and some of these investors had accumulated gold positions as an inflation hedge. Others will point toward central bank selling into the markets, getting value from one of the only assets that has maintained value. Still others will undoubtedly point toward “market manipulation,” but I will stay away from that in today’s Pfennig.

Most of the commodity-based currencies have sold off in tandem with the drop in oil and precious metals. The Australian dollar (AUD) continues to slide lower along with the kiwi (NZD) and South African rand (ZAR). Brazil’s real tumbled and traded above two per dollar for the first time in almost three years after finance minister Guido Mantega said the exchange rate doesn’t worry the government. This only led to further selling of the currency, as traders took Mantega’s words as encouragement to sell the real versus the US dollar. Brazil’s government is using a weaker real and lower interest rates to help stimulate their economy. Investors are expecting another cut to the benchmark interest rate by the end of 2012.

Then, Chuck usually uses this section to share something he has read recently that struck a chord with him. Yesterday, I mentioned Chuck’s predictions regarding the euro volatility during 2012, and a couple of readers asked me where they could read his projections. That got me looking through some of the past editions of Chuck’s Review and Focus, and I came across the following in the Jan. 1, 2012, edition:

“As we turn the calendar to 2012, most of us know all too well that this is the year the Mayans predicted apocalypse. But maybe they just failed to finish the calendar! OK, that was my attempt at humor, which I’m sure will get shot down in a heartbeat by many. 2012 will also be an election year, so maybe the Mayans were onto something. Nevertheless, this is the event, or the run-up to the event, that will put the dollar back to its underlying weak trend. I’ll explain in a minute, but first…

“I do believe that in the first half of 2012, nondollar investors using foreign currencies and precious metals will have to have some thick skin and batten down the hatches. This shouldn’t come as a surprise to you, dear reader, for in October 2011, I wrote that we were approaching a perfect storm for dollar strength, and that we should expect to see a period of dollar strength that could last several months. While that perfect storm hovered over the euro and other currencies, not really taking its wrath out on the nondollar investments, the storm became stronger until it finally unleashed itself on the markets late in 2011.

“So here we are starting 2012, just like we’ve started the past few years, dealing with dollar strength. This happens almost every year, due to renewed forecasts for economic vigor in the US, only to see those forecasts fade away by the time summer comes around. And I do believe this is where we are this year, too.”

Chuck wrote those last few paragraphs over five months ago, but he was pretty right on with his call for dollar strength during the first half of the year. Now we will see what happens from here. Will we see that event which puts the dollar back to its underlying weak trend?

To recap: The euro continued to slide yesterday as a Greek exit from the euro was on the minds of most currency traders. Euro leaders will discuss a possible “growth pact” at their summit on May 23, and Ireland will vote on the “stability pact” at the end of May. Looks like volatility in the euro will continue! We will get a ton of data in the US today. Could it point to QEIII? Commodities sold off, forcing commodity-based currencies lower. And we ended with a look back at Chuck’s thoughts for the first half of 2012.

Chris Gaffney
for The Daily Reckoning

Euro Continues to Drop 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 euro (EUR) hasn’t gotten any help from the Greeks lately, and the currency markets continued to move out of “risk” positions and back into safe havens on Friday.

I spent a good bit of time this weekend reading up on the Greek political situation, and stole the “Achilles’ heel” phrase from this week’s Economist magazine. I thought that description was perfect for the Greek vote, as the euro has stumbled because of the recent uncertainty in Greece.

Greek leaders have been unable to form a unified government, and there is a real possibility that the Greeks will be heading back to the polls for another vote. As Chuck reported last week, European leaders have approved the next round of bailout funds for Greece, but with the continued leadership vacuum, I have to think this could be the final payment.

If they have another election, the markets will certainly see it as a referendum on whether the Greeks want to stay in the euro. A vote for the same anti-austerity parties would certainly put pressure on European leaders to rethink Greece’s membership in the single currency.

We have heard warnings over the “end of the euro” almost since it began trading, and I never put much credence in those who felt the euro wouldn’t last. But I do think the euro will evolve with the markets, and a Greek departure is a real possibility.

I think the euro will actually be stronger without Greece, like the buffalo herd that is being chased by a pack of wolves. The exit of one, or even two, of the weakest members will actually make the remaining group stronger. But the exit could get ugly in the short term, which is exactly what Chuck warned all of us about in his “currency projections” for 2012.

The euro also weakened after a report released this morning showed industrial production in the euro region contracted in March. German manufacturing was the one bright spot, but gains in Germany couldn’t overcome slower production in Spain and France. Industrial production slipped 0.3% from February, versus forecasts of a 0.4% gain. From a year earlier, production declined 2.2%.

The Greek political uncertainty weighed on the euro Friday, and today’s poor production report continued to push the euro lower, sending it near the lows for the year. The uncertainty in Europe has investors moving out of anything that can be associated with “risk,” which means the higher-yielding currencies got sold.

Looking at the currency screens this morning, the only currencies that are appreciating versus the U.S. dollar over the past month are the British pound (GBP) and the Japanese yen (JPY). I expected to see the yen at the top of the list, as the Japanese currency is seen as a “traditional safe haven.” But the pound sterling was a bit of a surprise.

The pound is being sought out by investors who are looking for shelter from the turmoil on the European mainland. The sterling has appreciated 3.6% this year, a surprise move considering the poor economic fundamentals in the U.K. The Bank of England has been flooding the financial markets with sterling in an attempt to boost the economy, so the appreciation in the face of all of this liquidity is even more impressive. But is the recent appreciation in the pound sterling justified? I hardly think so. The U.K. economy fell into its second recession in the first quarter, the first double dip since 1975. U.K. output is almost 4% lower than the peak in 2008, and unemployment is close to a 16-year high, at 8.3%.

Perhaps currency investors are just looking for political stability, which the U.K. can provide in contrast with the European turmoil and the U.S. elections. Prime Minister David Cameron is sticking to the austerity programs he instituted after his election two years ago, stating that deficit reduction is needed to keep interest rates low. The S&P rating service has affirmed Britain’s AAA rating and stable outlook, a confirmation of Cameron’s calls for further fiscal tightening.

The more traditional safe haven of the Swiss franc (CHF) hasn’t seen a big rise, as the Swiss National Bank has kept its promise to keep its value tied to the falling euro. So currency traders have turned to the pound sterling for shelter from the European economic storm. As Chuck pointed out last week, the U.K. is winning in the “ugly contest” in Europe, but I would certainly think there are some prettier places to park cash (the Nordic currencies are a prime example).

The Australian dollar (AUD) dropped below parity for the first time this year, a pretty dramatic move from a high of $1.0856 at the end of February. The “breaking of the buck” is a pretty big psychological move, and will probably send the Aussie dollar even lower. The commodity currencies all got sold as investors exited “risk trades.” The carry trade continues to be a popular investment strategy, but volatility in the markets can cause losses for these trades, so the renewed European crisis caused investors to sell the high-yielding currencies and move back into the relative shelter of the U.S. dollar and Japanese yen.

The Australian dollar continued to slide in spite of a report that showed the nation’s housing market is improving. Home approvals unexpectedly rose in March, the first positive move in three months. The number of loans granted to build or buy houses increased 0.3% in March versus the Bloomberg median estimate of a 2% decline.

The Aussie dollar, New Zealand dollar (NZD), and South African rand (ZAR) are all dependent on demand for commodities, and most of that demand now comes from China. Demand for the commodity currencies was boosted a bit after China lowered reserve requirements for banks in an effort to stimulate their economy. The PBOC also turned their currency around again, letting it slip vs. the U.S. dollar. China has held off lowering interest rates, choosing instead to reduce reserve requirements and lower the value of their currency. The 50-basis point move, effective May 18, will inject about 400 billion renminbi of liquidity into the banking system, according to estimates by ANZ.

The two moves by China indicate the Chinese policymakers are concerned about the recent slowdown in the global economy. Chinese leaders are looking to boost their economy after a batch of disappointing economic data was released last week. Two separate reports showed China’s industrial production and retail sales grew less than forecast. The industrial output in China increased 9.3% in April, the least since May of 2009. Estimates of Chinese growth have been steadily lowered, down from lofty double digits to the current estimate for 7.5% growth in the second quarter. China’s growth rate slowed to 8.1% in the first quarter from close to 12% just two years ago.

The Chinese economy continues to be the engine of global growth, so any further adjustments to growth projections can have dramatic effects on the currency markets. Many in the markets are wanting to see the Chinese become even more aggressive in their attempts to stimulate growth, and if growth slips below 7.5%, I think we will definitely see more aggressive moves. The 7.5% level has been widely discussed as being the level of growth necessary to maintain harmony in the Chinese economy. A lower level of growth risks social upheaval by Chinese workers who have come to depend on these higher rates of growth.

And a report out of India showed inflation in the world’s second-most-populous nation accelerated in April. The benchmark wholesale price index rose 7.23% from a year earlier, after climbing 6.89% in March. Higher inflation will definitely limit the room for further rate cuts by the Reserve bank. The RBI slashed the benchmark interest rate 50 basis points last month, and further rate cuts were expected in June. But the recent rise in inflation has cut these expectations and should actually help put a floor under the Indian rupee.

To recap: Greek political uncertainty continues to push the euro lower, with a Greek exit from the euro a definite possibility. The pound sterling is being sought out as a “safe haven” currency, taking the place of the Swiss franc, which is tied to the euro. The Australian dollar fell below parity for the first time this year as risk trades got reversed. The Chinese renminbi turned around and headed lower again after the PBOC lowered the reference rate. And a report out of India showed inflation unexpectedly accelerated in April.

Chris Gaffney
for The Daily Reckoning

Pound Sterling as a Safe Haven? 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?".

That little mini-rally, which a handful of currencies saw yesterday, faded overnight, and those currencies are all back to the levels of Wednesday. UGH! The handful, in case you were wondering, included the Australian dollar (AUD), euro (EUR), Brazilian real (BRL), Norwegian krone (NOK), Swedish krona (SEK), Singapore dollar (SGD) and a couple of others.

Yesterday, we saw the U.S. trade deficit widen from $45.4 billion in March to $51.88 billion in April. It’s not all with China, folks — the majority is with OPEC. Remember, the price of oil in April was well over $100 all month!

We also saw the initial weekly jobless claims, which was flat versus the previous week, at 367,000. The continuing claims remain a problem, folks. I know I talked yesterday about jobs, etc,. and I received a few emails from very disgruntled folks that have been looking for jobs, and don’t believe there are any out there to be found.

That brings me to the thing that I’ve said since 2008 — that a lot of the jobs that were lost were not going to come back, and the jobs that did open up were going to be completely different than what the unemployed person was trained to do. I’m not insensitive to this, folks. I just tried to get it out there a few years ago so that people could begin to make changes.

OK, did you see that the monthly budget statement, which had been a deficit each and every month for so long that I had begun to call it the monthly budget deficit, actually stopped the bleeding in April? The government posted a $59.1 billion surplus in April. WOW!

OK, hold on a minute there. Isn’t April the month that all taxes owed are collected (for the most part, anyway)? The key here is to see where this balance goes the next couple of months. My bet is that it will go right back to the monster deficits that were seen every month prior to April.

Today, we’ll see wholesale inflation (PPI) for April, and the University of Michigan confidence index.

Overnight, we heard that the Greeks were having second thoughts about electing an anti-euro government, and now it appears that the government that will be elected will keep the euro, no questions asked. That’s nice of them! Obviously, calmer, smarter heads prevailed here, because I don’t believe that the Greeks want to see what life is like for them outside of the euro!

Euro traders are kind of lost between two lovers here. They just can’t figure out whether they want Greece to leave or stay.

The Aussie dollar (A$) had climbed back above $1.01 yesterday, but is right back to Wednesday’s level of $1.0050 this morning — losing half a cent overnight. The other day, I talked about the forecast Aussie budget surplus for next year. While that would be great for them, should they achieve that surplus, it won’t really be known if that’s going to be a reality until September.

I also told you, a couple of weeks ago, that I thought bond buyers of Aussie government bonds were behind the resiliency of the A$ in the face of a rate cut. Of course, back then, I thought that the Reserve Bank of Australia (RBA) was going to cut only 25 basis points, and they surprised the markets with a 50 basis point rate cut. That severely inhibited the resiliency of the A$.

And I talked about how it is believed that if Australia does achieve a budget surplus, the supply of Aussie bonds would drop by a large margin. So if that were true, that underpinning that the A$ enjoyed from bond buyers would be damaged. But as I told a small group the other day, “Even if the A$ falls to 95 cents, it’s still a strong currency; just 10 years ago, it was trading around 50 cents.”

As far as today’s prospects for a risk-on day go, I think the chances are slim to none. All the overnight bourses are down, and U.S. stock futures are down.

Everyone is running for the hills after a story in The Wall Street Journal hit the streets last night. According to the WSJ report, “JPMorgan Chase has taken $2 billion in trading losses in the past six weeks and could face an additional $1 billion in second-quarter losses due to market volatility.”

Most of you all know how I would have reacted to this report in “the old days.” So this is your chance to “be like Chuck” and give me your version of what Chuck would have said in the old days. (You don’t really have to send it to me unless you think you have really nailed it!)

I think I’ll talk about silver now (wink, wink). Did you see that China had introduced silver futures contracts that will trade in renminbi/yuan (CNY) on the Shanghai Futures Exchange? The contracts will not be allowed to fluctuate more than 7% per day. I have to wonder how the Chinese are going to take seeing the price of silver brought down in after-hours trading.

And did you know that China is now the world’s leading producer of silver? No, it’s not Mexico, and no it’s not Peru. It’s China. And that’s good because China is the world’s second leading consumer of silver, behind the U.S.

Have you been following the news on Scotland contemplating leaving the U.K.? That would be a HUGE blow to the U.K., not only prestigewise, but monetarily. Scotland’s economy is second in contribution to the U.K. economy, coming behind the southeast part of England.

The pound sterling, which has defied gravity recently, is beginning to feel the weight of doing a double dip in the recession pool, and everything else that’s going on badly there. Like this morning, they reported that March construction output was very disappointing, which points to a downward revision to first-quarter GDP, which already showed that the U.K. economy was going for a double dip.

Gold enjoyed a day in the sun yesterday, but it’s raining on the shiny metal again this morning. It seems that we’ve returned to the days around 2008 and early 2009, where the dollar is rewarded with bad data. Dollar bugs will tell you that this is how it should be, as the only true safe haven is the U.S. dollar and Treasuries. I want to hit these dollar bugs over the head with a gold bar! Maybe then they would find the true safe haven!

Speaking of gold, I did some math about a year ago and ran it here, and with all the talk about the U.S. paying off its debts by selling its gold holdings, I thought it best to pull this back out:

There are 5,046 tons of gold at Fort Knox
There are 7,716 tons of gold at the N.Y. Fed
Total = 12,762 tons.

There are 32,000 ounces in a ton
12,762 tons x 32,000 = 408,384,000

Price of gold is $1,590
408,384,000 x $1,590 = $649,330,560,000

Sorry, but $650 billion doesn’t pay for even the stimulus that was thrown at us a couple of years ago! But if the price of gold were to be pushed up to let’s say $5,000, then we would be talking about making some inroads to the debt! And if the price were pushed to $10,000, then we’re getting somewhere. But we would still be left with a very large national debt.

You see that’s the problem with deficit spending. At some point, the numbers become so HUGE that you can’t make a difference in total unless you come in with both guns blazing! And then keep those guns blazing! Doing one-off corrections are only chinks in the armor.

For longtime readers, do you remember a few years ago when I tried to show the knuckleheads at CNBC that the markets were being manipulated in the after-hours trading and they laughed and told me to take the story to Hollywood? Well, CNBC has come a long way, I guess, for they allowed Eric Sprott to talk freely about manipulation the other day. Of course, maybe not that long a way, as I wanted to include the link to the video here, but it’s not working. And the folks at CNBC did attempt to ridicule him. But he would have none of it!

Maybe CNBC will have it fixed later. Just Google Eric Sprott at CNBC and look for the most-recent video.

Anyway, Eric Sprott, Ted Butler and others, including me, have done our best to inform the public of what’s going on. Maybe one day, We the People will get the message and exercise our right to contact our representatives and discuss this with them.

Then I saw this on Reuters:

“Financial advisers increasingly warn that U.S. Treasury bonds are close to a bubble and suggest that clients look elsewhere for stable and safe returns. Alternatives recommended include investment-grade corporate and emerging-market bonds, master limited partnerships and preferred stocks.”

I liked that they had finally come around to noticing the Treasury bubble, but nowhere on their list of alternatives do I see gold.

To recap: The mini-rally in a handful of currencies yesterday was wiped out in the overnight markets. And the currencies and gold are back to Wednesday’s levels. The Greeks agree to elect a government that keeps Greece in the euro. The U.S. posted a monthly surplus for the first time a very long time in April, but tax collections are made in April, so one would think that if they can’t book a surplus in April, when can they? And JP Morgan has really thrown a spanner in the works for a risk-on day with their after-market announcement yesterday.

Chuck Butler
for The Daily Reckoning

US Posts Monthly Budget Surplus! 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?".