I don’t know what the markets mean when they flock to dollars and yen (JPY), the two big dogs when it comes to debt creation. But it is what it is, so we carry on, and look for other things that make sense!

Like the Chinese buying eurozone government debt. I explained this all previously, but for those of you new to class, the eurozone is China’s largest export destination. Did that surprise you? I bet you thought it was the U.S. But no, it’s the eurozone.

China is making progress with its attempt to switch from being a country that depends wholly on exports to drive its economic growth, to one that shares the load of driving the economy with domestic demand, but they aren’t there just yet, and therefore, exports remain very, very important to the Chinese. Therefore, they cannot afford to lose their biggest customer.

And this is part of the plan, folks (China’s plan to replace the dollar standard). The Chinese have become the world’s financier, taking that away from the U.S., and they have also made big inroads to removing the dollar as the settlement mechanism — in terms of trade — by signing currency swap agreements with a boatload of countries.

These currency swap agreements allow China and the country with whom they are trading to exchange each other’s currencies and not use dollars, as the way it was done since the end of World War II.

Last year, I told you that the New York branch of the Bank of China had begun allowing deposit accounts in CNH, the new, deliverable Chinese currency. The account size is limited, but the idea of deposits was what stirred the drink, folks.

Now there’s word that the U.S. Fed had approved an application by ICBC (Industrial and Commercial Bank of China) to acquire retail bank branches in the U.S.  ICBC will pay $140 million to buy an 80% piece in Bank of East Asia USA.

People that should know better are not making a big deal of this, and saying things like, “This is too small to be concerned with,” and so on. But it’s a foot in the door, folks.

And just another baby step for China to remove the dollar as the reserve currency of the world.

OK, after going through all that, I see a news story go across the screen that says “China’s Sovereign Wealth Fund (SWF) Stops Purchasing European Sovereign Debt.” Let me try to break this down (and let this be a warning to the U.S.).

Obviously, China has bought enough European sovereign debt (ESD) to fill their desires. If The Chinese SWF can back away from its biggest customer, then it should have no problem backing away from its second-biggest customer (the U.S.).   I think that China will attempt to invest in Europe to help keep the ship afloat — they just won’t make a big deal of it.

OK, I didn’t mean for this Thursday Pfennig to carry on about China for the whole letter. So I’ll stop there, and return to our regularly scheduled programs.

The dollar’s mighty hammer stopped swinging so wildly yesterday, and in the overnight markets, we’re actually seeing a handful of currencies that are attempting to gain back some lost ground to the dollar in the trading days since last Friday’s jobs jamboree disaster.

The Norges Bank, Norway’s central bank, is meeting as my fat fingers fly across the keyboard. I don’t think the Norges Bank is going to cut rates today, so it will be interesting to hear what the Norges Bank has to say.

You see, right now, I’m not a fan of the Norges Bank, when normally I am a fan. What has soured my taste right now is the fact that the Norwegian economy and fundamentals are calling for higher interest rates.

But the Norges Bank has been struggling with a strong krone (NOK) (to the euro (EUR)) for some time now, and a rate hike would only make their struggle more difficult. But in Chuck’s world of “when I’m the head of a central bank,” I wouldn’t let those kinds of things bother me — especially if I were head of Norway’s central bank. They have oil revenue coming out of their ears, they have to offset the inflationary problems that oil revenues bring and they can do that with a combination of a strong currency and appropriate interest rate levels.

I see where global investors have given Fed Chairman Big Ben Bernanke a 75% approval rating. Of course they did! Big Ben has been responsible for keeping the stock market ship out to sea with his quantitative easing, and ZIRP (zero interest rate policy). Of course, with this highest rating for the Fed chairman comes the EXPECTATION that he take further action this year to accelerate a revival in U.S. financial markets.

I wonder what these people will say in a few years when we see the unintended consequences of Big Ben’s policies. I doubt they give him a 75% approval rating then, but on the other hand, maybe they will, for we could be talking about QE4 or QE5 or QE10!

The price of oil seems to have found a bid at $96, as it has held that figure for three consecutive days now. The petrol currencies of Norway, Canada, Russia, Brazil, the U.K. and even Mexico will breathe a sigh of relief if $96 is the bottom for this sell-off.

While I like seeing the price of oil lower, I know in my heart of hearts that this sell-off was overdone. You see, it all started with the Jobs Jamboree disaster last week, and has continued until reaching $96. That’s a fall of $8 in a week. Talk about overdone!

Gold had a very interesting day, as the price dropped, recovered, dropped, recovered and finally gained a bit. When I see this happening, I think that the “price manipulators” are being matched by the Chinese and Indians taking advantage of the cheaper price. And talk about a sell-off being overdone! But when the “price manipulators” smell blood, they attack, and attack they did this past week. I would love to give these “price manipulators” my version of Jackie Gleason on The Honeymooners. One of these days, price manipulators, to the moon!

The eurozone has approved the next scheduled payment to Greece. There was some thought going around yesterday that eurozone leaders would hold up the payment, as penalty to the Greeks for attempting to elect an “anti-euro” government. Of course, that government didn’t have enough seats and couldn’t put together a coalition that worked, so it dissolved, and the Greeks will have to vote again.

There are renewed calls for Greece to leave the euro. I still don’t think that will happen, as the problems for Greece would multiply, not be reduced, by leaving the euro and going back to the drachma. But hey, that’s never stopped leaders of a country from doing stupid things before!

I would think the euro would be better off without the baggage in the long run.

The Swiss franc (CHF) continues to be strong. Not as strong as a year ago, but strong, nevertheless. And that’s killing the Swiss National Bank (SNB). The cross to the euro remains stuck at around 1.2015 — spittin’ distance to the floor set by the SNB last September. I’m surprised that the markets haven’t tested the SNB’s resolve here. But they haven’t, so life goes on in Switzerland.

The Bank of England (BOE) just ended their meeting today and left rates unchanged. No surprise there — what can they do? They’ve cut rate to the bone, they’ve increased their version of QE/ bond buying… yet the economy does a double dip in the recession pool..

I told a small group of people yesterday that just like the euro and dollar are an ugly contest, so too is the British pound sterling (GBP) and the euro. And here, the euro loses. But really? Investors think that things in the U.K. look better than in the eurozone? Really? Maybe they are, but I sure would be looking elsewhere in Europe. (Remember, Norway, Sweden, Switzerland, Poland, Hungary and the Czech Republic don’t use the euro!)

Then one of my fave reads on Bloomberg is the author and columnist Caroline Baum. She always makes sense to me, and you don’t find many writers on economics that do that! Her latest column on Bloomberg is about the labor picture here in the U.S., titled “Government’s Snake Oil Won’t Cure Jobs Ailment.”

In the column, Ms. Baum talks about how the jobs problem could be structural. “What if the Fed, through all its efforts, can’t buy more employment? What if unemployment is structural, with an inadequately trained workforce or labor immobility preventing employers and job seekers from hooking up? Signs are pointing in that direction.”

She goes on to say: “Structural unemployment, like the nation’s other fundamental deficits, is a tough challenge for policymakers all around. Jobs are a big issue in the presidential election. No elected official wants to see the public suffer, financially or emotionally, from being unemployed. There a strong desire to do something even if nothing is the lesser of two evils.

“On the fiscal front, attempts to correct long-term structural imbalances with short-term tax-and spending are doomed. Cyclical medicine leaves the patient with more debt and the same old ailments.

“What happens if the monetary authority misdiagnoses the cause of high unemployment and uses its usual tool, the printing press, as a cure? For the same money, the Fed will buy itself more inflation and less growth. That’s the sort of jolt the economy can do without.”

As I’ve said since the financial meltdown and the jobs problem began, that a lot of those jobs were not going to return. It appears that I hit that one bang on.

To recap: A few of the currencies are showing some life this morning, while the majority are still under the spell of the dollar and the flight to safety that began after the Jobs Jamboree disaster last week. China gets approval to buy a U.S. bank. Another baby step, folks. The Norges Bank meets today and will probably follow the lead of the Bank of England and leave rates unchanged. And we have a special treat with a snippet of a column by Caroline Baum!

Chuck Butler
for The Daily Reckoning

China Stops Buying Eurozone Debt 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?".

Both of these elections couldn’t have gone any worse for the euro. France’s new leader, Francois Hollande, ran on an anti-austerity platform, and for now, that will carry a lot of weight with traders and investors as far as wanting to take on euro exposure. Of course, history tells us that eventually Hollande will see things along with the Germans. But maybe, and here’s that phrase I dislike, “this time’s different.”

Greece still hasn’t formed a government, so talk about a screwed-up country! Sorry, I don’t mean to insult anyone that’s Greek, but come on, the country had a government that was doing the right things, bringing their excessive deficit spending down, but the pain apparently was too much for the citizens. I’ve got news for them: That pain was nothing compared with being bounced out of the euro!

With the Big Dog (euro) getting hung out on a line, the footing for the currencies has been very slippery. And with the proxy for global growth, Australia — seeing their central bank debase the Australian dollar (AUD) — the rest of the commodity currencies are also in search of terra firma.

Gold and silver have really seen heavy selling, but by whom? We’re not seeing it here on our metals desk, but we’re not a “bullion bank” or big-swinging metals dealer, so maybe they’re seeing something different.

U.S. stocks are getting their due, too, dropping four days of the last five. This has people running to U.S. Treasuries again. Oh, by the way, the U.S. Treasury will auction $72 billion worth of new Treasuries this week. The U.S. government is doing their best to provide job security for the Treasury people. In the first six months of our fiscal year 2012, the U.S. government has spent $1.84 trillion.

For comparison of numbers purpose only, for the entire year of 2001, the U.S. government spent $1.86 trillion, which happened to be an all-time record at that time! But this current group will double that all-time record of 2001 this year.

Speaking of 2001, I gave a presentation this past weekend to a group of people who had no idea who I was! Give or take a couple of current Pfennig readers, it was a new group that would hear things they hadn’t heard before. A lot of them signed up to read the Pfennig, so welcome to you!

The thing I was going to talk about, though, was I showed them the U.S. Debt Clock of 2001, when our national debt was $5.7 trillion, and then showed them the Debt Clock, circa 2012: $15.7 trillion! The U.S. government has increased the national debt by $6.7 trillion in the last five years, but the previous five years weren’t exactly good, as the debt increased $3.3 trillion.

I also told them that in 2001, Chuck had more hair, less weight and few believers.

OK, I’ve got to go on to something else before I explode here and begin throwing things! How could we as a country allow our leaders to do this to us, our kids and grandkids?

But right now, everyone wants to take pot shots at the eurozone debt crisis, and not pay any attention to the U.S. debt crisis. Look, the eurozone, as a whole, and the U.S. each contributed about 20% to the global GDP last year, so it’s not like we’re comparing apples to oranges here. Both of these problems are nothing to ignore.

The brightest shining star of the eurozone, Germany, saw their industrial output jump 2.8% in March from February, which was three times the consensus forecast. And February’s -1.3% decline was revised upward to finish at -0.3% — much better — and suggests to me that Germany probably skirted by the recession gauntlet.

It looks like Australia is going to turn their modest budget deficit of $44 billion into a budget surplus next year. And with that news, the Aussie also announced that bond sales would decrease by 80%!

Remember when I told you that I had the feeling that Australia was becoming the new Switzerland? Well, if they can pull this off at a time when a lot of countries are finding it difficult to live within their means, then a big feather will be in their cap! And think about this: Reducing their bond sales will make the rest of the outstanding issues more valuable. Or at least that’s what I learned from the guy that taught me all about bonds, my friend, Ed Bonawitz.

Now Australia’s kissin’ cousin across the Tasman, New Zealand, is going in the opposite direction with their Budget. The New Zealand budget deficit widened in the nine months through March, to NZ$787 million. Of course, NZ$787 million isn’t exactly $1.2 trillion, but New Zealand is much smaller than the U.S. So that goes back to my thought on comparing the U.S. to the eurozone.

The New Zealand dollar/kiwi (NZD) has really shown some weakness lately, as it no longer can cling to the coattails of the Australian dollar. And now this budget deficit isn’t going to sit well with traders.

But hey! The Japanese yen (JPY) is securely back on the rally tracks! See how mixed-up the investing world is these days? Japan’s debt is beyond the atmosphere, the U.S.’ debt is up to its eyeballs but investors seek out these two when the risk takers head for the hills.

The Chinese renminbi (CNY) has been bouncing back and forth in a very tight range lately. Today, the renminbi is a bit weaker, but that’s a tiny move in the renminbi world. A week has gone by since the U.S. Treasury Secretary Geithner was in China to urge them to do things more like the U.S. Hopefully, the Chinese will continue to ignore the calls by the U.S. to do things more like them.

Years ago, when it was fashionable to kick the Chinese for our trade deficit, when all they did was sell us stuff that we ended up buying. I told you all that the currency level of the renminbi was not going to correct our trade deficit. Our financial meltdown took that task on and reduced it by a large amount, but the trade deficit remains a problem. Why? Oil. Go ask the OPEC members how many dollars they have in reserve from their oil sales.

Why doesn’t the U.S. Treasury secretary sit down with the OPEC members and see if he can get them to change the way they do things? He’s tried it with China on numerous occasions.

I don’t mean to kick sand in the Treasury secretary’s face. I’ve talked enough about his past at the New York Fed before and after the financial meltdown that I won’t bore you with repeating all that.

The Singapore dollar (SGD) continues to remain strong. The Monetary Authority of Singapore (MAS) gave the wink and nod for further S$ strength, so when the Chinese renminbi decides to stop trading in a range and get back on the rally tracks, the S$ will follow along.

I see the British pound sterling (pound) continues to surprise me with its strength. Remember, I told you that the U.K. had gone for a double-dip recession. The Bank of England (BOE) had decided to add to their bond buying (stimulus). But the pound hangs tough. I guess right now it’s good to not be the euro.

The U.S. data cupboard is pretty empty today, so there’s nothing to look for to drive the markets this morning. I guess they are on their own!

Then, in keeping with what I talked about above, regarding history with French and German leaders, German Chancellor Angela Merkel told reporters ahead of a meeting that she’ll have with France’s new leader, Francois Hollande, that the fiscal pact is not up for renegotiation (from AFP):

“Merkel said Hollande would visit the German capital shortly after his inauguration as president, expected to take place on May 15, without giving a date for the much-awaited meeting.”

“The German chancellor irked Hollande by openly campaigning for his rival, Nicolas Sarkozy, who comes from the same conservative political family as Merkel.

“During the campaign, Hollande won few friends in Berlin by criticizing Merkel’s insistence on austerity as the way out of the eurozone debt crisis, seeking to shift the focus to growth.

“But Merkel told reporters that both budgetary consolidation as well as growth was necessary in Europe and reiterated that the EU’s fiscal pact — aimed at reducing ballooning deficits — was not up for discussion.”

This is not what the euro needs right now — or the eurozone, for that matter! They need a united front to implement austerity measures to get deficit spending under control.

To recap: The risk takers have all headed for the hills. Stocks, currencies, commodities including gold, silver and oil, are all down. And U.S. Treasury yields are falling again. German industrial output was very strong in March, and February’s number was revised upward, thus suggesting that Germany will not go into recession. Australia announced that they will have a budget surplus next year and reduce bond issuance by 80%! And the Japanese yen continues to run alongside the dollar.

Chuck Butler
for The Daily Reckoning

Elections Throw Euro Under a Bus 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, say Porter Stansberry and a good number of the analysts and experts here.

We’re attending an investment conference — for professionals only. It’s a beautiful place for one. The island is a barrier island, mostly sand…surrounded by ocean or marshland. There is a golf course…tennis courts…bocce courts… Maybe even a kangaroo court. Or an appeals court. And a royal court. Not to mention a food court.

The lodge looks like it was built in the ’20s…it has that glamorous look that seems to call out for a white sweater and white flannel pants… You feel you should dress like Cary Grant and hope to meet Claudette Colbert on the lawn.

The rooms are luxurious…large and quiet, while the lobby is lush with rich fabrics and comfortable chairs. The staff is poised, gracious and almost genteel. They would be good people to look after you if you were going broke or insane. Not that we’re planning on either. But it’s always a good idea to be prepared. Whether you lost your mind or your money, the nice people running the place would probably wait a few days before kicking you out.

There seems to be almost no one here. The lobby is empty most of the day. We wonder how it stays in business.

This is also where George W. Bush convened a meeting of the G7 heads of state. In the room next to ours, the walls are hung with photos of Tony Blair, Silvio Berlusconi, George W. Bush…and others.

They’re all gone from office now. Except one, Vladimir Putin, a man who looks like he might never leave.

But the news down here is upbeat. Thanks to fracking and horizontal drilling. They say these techniques are making billions of barrels of oil available. Believe it or not, the US is set to be the world’s top producer by 2020, according to a Goldman Sachs study.

An oilman from Texas showed us a map. It included a large chunk of Southwest Texas, colored to show where drillers had bought oil rights and where they were operating.

Heck, there is hardly an empty county in the whole state! The expert took the map apart, analyzing who was working where…and how much oil they were likely to get.

The results were staggering.

“Oil will fall below $40 a barrel,” predicted Porter Stansberry, our host.

Whether that will happen or not, we don’t know. But it got the group talking excitedly.

“Cheap oil will set off an industrial renaissance in America,” one suggested.

“Sell the oil and gas companies,” recommended another.

“It will help put the US economy on the road to real recovery,” said another.

But hold on a minute. A report at The Financial Times tells us that “the era of cheap oil is over,” because “marginal oil production costs are heading towards $100 a barrel”:

Tracking data from the 50 largest listed oil and gas producing companies globally (ex FSU) indicates that cash, production and unit costs in 2011 grew at a rate significantly faster than the 10 year average. Last year production costs increased 26% y-o-y, while the unit cost of production increased by 21% y-o-y to US$35.88/bbl. This is significantly higher than the longer term cost growth rates, highlighting continued cost pressures faced by the E&P industry as the incremental barrel continues to become more expensive to produce. The marginal cost of the 50 largest oil and gas producers globally increased to US$92/bbl in 2011, an increase of 11% y-o-y and in-line with historical average CAGR growth. Assuming another double digit increase this year, marginal costs for the 50 largest oil and gas producers could reach close to US$100/bbl.

While we see near term downside to oil prices on weaker demand growth, the longer term outlook for higher oil prices continues to be supported by the rising costs of production.

Here at The Daily Reckoning we’re not getting worked up one way or another. We’d like to pay less for oil. But we’ll wait to get exciting until we see lower prices.

While the wildcatters and roughnecks are coaxing more oil from the Texas dirt, the mad hatters and pencil-necks at the Fed are ready to print dollars too.

And not just at the Fed. “This is the first time in history that all central banks have printed money at the same time,” observes WashingtonsBlog.

The central banks of Europe, the UK, China, India, Japan and the US are all adding to their holdings (thus increasing the base money supplies of their respective countries). We’ve never seen anything like it. A coordinated, worldwide effort to inflate the money supply. State-sponsored counterfeiting on an epic scale.

But all this money printing is not bringing a worldwide recovery. Instead it is “failing miserably.”

In Europe, the following countries are now in recession:

Slovenia
Italy
Czech Republic
Ireland
Greece
Denmark
Portugal
Netherlands
Belgium
UK
Spain

In America, the last reported GDP results were positive. But take out inventory build-ups and the growth rate was only 1.6%. Not very exciting. Almost every report in the financial press said the results were “disappointing.” But why would they be disappointed? Don’t they know we’re in a Great Correction? They’re lucky there was any growth at all. And if you took out all the stimulus spending, ZIRP, LTRO, TARP, QEI, QEII, Operation Twist, and all the increases in disability…and other transfer payments…

…what do you have?

Most likely, you’d be in the same situation as the UK, Spain and all the other recessed economies.

And here’s more downbeat, but fully expected, news from the US:

(Reuters) — US companies hired the fewest people in seven months in April, a worrisome sign for a labor market that has struggled to gain traction and adding to concerns that the economy has lost some momentum.

The ADP National Employment Report on Wednesday showed the private sector added 119,000 jobs last month, below economists’ expectations for a gain of 177,000 jobs. The March figure was also revised lower.

The report comes two days before the government’s broader and much-watched monthly jobs report.

“This is an upsetting report,” said David Carter, chief investment officer at Lenox Advisors in New York.

“The strength of the US economic rebound is clearly still uncertain. Hopefully we don’t get a third consecutive summer of weaker growth.”

Recent data, including softer labor market figures, have fueled fears that the economy may have lost some strength as the second quarter got under way. Those worries were partly offset by data from an industry group on Tuesday that showed a better-than-expected pick-up in the manufacturing sector last month.

But government data on Wednesday showed new orders for factory goods suffered their biggest decline in three years in March as demand for transportation equipment and a range of other goods dried up.

*** And what’s this? Bloomberg reports that Americans are bolting for freedom:

Rich Americans renouncing US citizenship rose sevenfold since UBS AG (UBSN) whistle-blower Bradley Birkenfeld triggered a crackdown on tax evasion four years ago.

About 1,780 expatriates gave up their nationality at US embassies last year, up from 235 in 2008, according to Andy Sundberg, secretary of Geneva’s Overseas American Academy, citing figures from the government’s Federal Register. The embassy in Bern, the Swiss capital, redeployed staff to clear a backlog as Americans queued to relinquish their passports.

The US, the only nation in the Organization for Economic Cooperation and Development that taxes citizens wherever they reside, is searching for tax cheats in offshore centers, including Switzerland, as the government tries to curb the budget deficit. Shunned by Swiss and German banks and facing tougher asset-disclosure rules under the Foreign Account Tax Compliance Act, more of the estimated 6 million Americans living overseas are weighing the cost of holding a US passport.

A conversation on the subject erupted at dinner:

“Yeah…makes sense that so many people would leave. They just want to save money. Can’t blame them for that.”

“I think there’s more to it. It’s not clear that you can actually save money. Tax rates in the US aren’t that high. And rich people always have ways of sheltering their money.”

“You’d think they wouldn’t leave if they didn’t have to.”

“Well, a lot of people just don’t like to have to report everything they do…they don’t like having Big Brother breathing down their necks.”

“Wouldn’t they just have some other Big Brother breathing down their necks?”

“No…I’ve spent much of my life overseas. Many other countries just don’t try to poke their noses into your affairs the way the US does. And many have more civilized tax collection systems. For one thing they only tax you if you actually live in their countries. You don’t have to file taxes…and disclosure forms…if you live somewhere else.

“The US keeps its citizens on a tight leash. A lot of people want to slip the leash, even if they don’t save any money. They want to be real Americans…not bullied and harassed wimps with no backbone… They want to be free people. And they can’t do that and remain American citizens.”

Regards,

Bill Bonner,
for The Daily Reckoning

The Return of Cheap Oil? 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?".

Speculators, too are blamed for ostensibly bidding up the price of oil. In the political arena, President Obama is taking credit for increased domestic oil production even as his critics point out the slow pace of drilling permits issued by his Administration soon will hamper additional increases in the US oil production.

Yet, the basic reason for higher energy prices is being overlooked, even though it is right before our eyes: Oil prices are up because the value of the dollar is down. Our common sense hides this source of higher prices because we view the dollar as fixed, and prices as moving. News reports explain the sharp rise in consumer prices in February were caused by higher energy and food prices, implying that higher prices cause inflation. Of course, higher prices do not cause inflation. Higher prices are inflation.

The cost of this deception goes well beyond the vilification of the oil industry and free markets. The real price of the on-going debauchery of the dollar is measured by the loss of our prosperity and the debasement of our liberty.

Neither the dollar, nor the price of individual items are fixed. Changes in the relative prices of goods and services occur because of technological change or shifts in supply or demand. The price of computers and televisions fall relative to the price of, well, just about everything. On the other hand, the freeze earlier this winter in Florida reduced the supply of oranges, leading to an increase in the price of orange juice. But, the value of the dollar also changes, usually in ways that are imperceptible over short periods of time. As a consequence, when the dollar price of gasoline rises 6% in a month, as it did in February, it appears that the price of gasoline is up, rather than the value of the dollar is down.

To see more clearly how the price of the dollar has changed, it helps to view price changes over a 10 year period. Since 2002, the price of a barrel of oil has increased four-fold, to $107 last Friday from $26 in 2002. To suggest that oil companies had enough power to impose such a price increase, or that speculators are responsible for a quadrupling of the price of oil is, on its face, preposterous. Instead, the price of oil and gasoline are up because the Federal Reserve has driven the value of the dollar down.

For example, if the dollar since 2002 had been as good as the:

• Chinese yuan, the price of oil today would be $82 and a gallon of regular gas would cost about $3.10;
• Euro, the price of oil today would be $77 and regular gas would cost about $2.90;
• Japanese yen, the price of oil today would be $71 and regular gas would cost about $2.75;
• Swiss Franc, the price of oil today would be $63 and regular gas would cost about $2.50.

Thanks Mr. Bernanke!

Regards,

Charles Kadlec
for The Daily Reckoning

The Rising Price of a Falling Dollar 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?".

From this perspective, North America’s shale gas revolution truly earns its accolade as a “game changer.” As many people now understand, the boom in natural gas reserves and production in the United States and Canada is changing the way North America will power itself in the future.

What a lot of people do not understand is how to profit from this shift.

Natural gas prices are depressed and expected to remain so for the short to medium term, so investing in natural gas options or a natural gas exchange-traded fund is not likely to bring home the big bucks anytime soon. Domestic natural gas equities are an even riskier idea — most producers are scaling back production and selling assets as they hunker down in preparation for a tough few years.

Coal

But the sector feeling the worst impact from gas’ downturn is thermal coal. Demand for the coal burned to generate power in the US is plummeting as utilities take advantage of the cheapest natural gas in ten years. Consumption of coal to produce electricity is expected to fall 2% this year to its lowest level since 1992, while gas-fired consumption rises 5.6%.

Making matters worse, winter heating demand is falling in the face of mild weather: through January, this has been the warmest winter since 2006 and the fourth-warmest on record. With natural gas and warm weather conspiring against it, coal demand is decidedly down — in the second week of February, coal consumption was 4.3% lower than it was a year ago.

Exports are not going to provide any help. Last year, Europe bought 50% of America’s thermal coal exports, but demand from the EU is shrinking as the region struggles to stave off a recession. The economies of the EU shrank 0.3% in the fourth quarter of 2011 compared to the previous quarter, the first contraction since mid-2009.

In response, US thermal coal prices are deteriorating. Appalachian coal, the US thermal-coal benchmark, fell 15% in January alone to sit near US$60 per tonne and has moved little since (by comparison, Australian thermal coal is currently fetching almost US$120 per tonne). Mining costs to dig thermal coal out of the ground range from $60 to $75 per tonne for Central Appalachian producers, which means margins are already razor thin or nonexistent. Several major US thermal coal producers are reducing output and in some cases closing mines, including Arch Coal (NYSE:ACI), Patriot Coal (NYSE:PCX), and Alpha Natural Resources (NYSE:ANR).

Now for some good news. Thermal coal prices in the United States may be faltering, but that doesn’t mean that coal is in the doldrums across the globe. In fact, quite the contrary: global thermal-coal demand is expected to increase by 50% from 2008 to 2035, with the vast majority of increased demand coming from the developing world. That equates to a demand increase of 1.5% each year, and production is not quite expected to keep up to that pace. Rising demand plus not-quite-enough supply equals investment opportunities — maybe not in the US, but elsewhere.

That’s just thermal coal. There’s another component to the coal world: metallurgical coal, the higher-carbon coal used to make steel. Supplies are even tighter with metallurgical coal, which is why Casey Research recommends that energy investors have exposure to “met coal” through either equities or a fund.

Uranium

The abundance of cheap gas has utilities looking to build more gas-fired power plants. Some observers have suggested that this will be to the detriment of the nuclear sector in the US. But that perspective is pretty shortsighted.

It is true that some utilities have delayed plans for new nuclear plants by a few years, primarily in response to the Fukushima nuclear disaster in Japan and the ensuing public backlash against uranium. But that backlash is already fading; and those delays will have only a minimal impact on the nuclear sector in the US. Five new generators are on track for completion this decade, including two reactors approved just a few weeks ago (the first new reactor approvals in the US in over 30 years). Those will add to the 104 reactors that are already in operation around the country and already produce 20% of the nation’s power.

Those reactors will eat up 19,724 tonnes of U3O8 this year, which represents 29% of global uranium demand. If that seems like a large amount, it is! The US produces more nuclear power than any other country on earth, which means it consumes more uranium that any other nation. However, decades of declining domestic production have left the US producing only 4% of the world’s uranium.

With so little homegrown uranium, the United States has to import more than 80% of the uranium it needs to fuel its reactors. Thankfully, for 18 years a deal with Russia has filled that gap. The “Megatons to Megawatts” agreement, whereby Russia downblends highly enriched uranium from nuclear warheads to create reactor fuel, has provided the US with a steady, inexpensive source of uranium since 1993. The problem is that the program is coming to an end next year.

At present the world is producing just enough uranium to meet global demand, but this precarious balance is already tipping. There are dozens of new reactors under construction in China, India, South Korea, and Russia that will need fuel. Production increases from new mines and mine expansions are not expected to keep pace. The race to secure uranium resources is on, and for the first time the US has to compete.

The answer is domestic production. The rocks underneath the United States hold lots of uranium, enough to make a significant contribution to the country’s uranium needs. The biggest impediment to mining this resource is public opposition to the nebulous dangers of uranium mining, but as the Megatons program ends Americans will start to see that the alternatives to domestic production are decidedly worse: competing against China, India, and the like for uranium is an expensive and unstable way to acquire a desperately needed energy resource. In fact, at Casey Research we have been vocal in predicting a
demand-driven boom in US uranium production. We even expect to see “Made in America” uranium garnering a premium over imported yellowcake, in the same way that in-demand Brent crude oil earns a premium above oversupplied West Texas Intermediate crude.

Well-Field Services

The techniques used to unlock natural gas from shale reservoirs — horizontal drilling and well fracturing — worked so well that they created a supply glut that is altering the global energy scene. That supply glut is now prompting natural gas producers to cut back on output, which you might think would be bad news for the well-field service companies that complete those tasks.

Not to worry: North America is also in the midst of a crude-oil production boom, and the common theme linking most of the continent’s new wells is highly technical drilling and production methods. The purveyors of those techniques are the continent’s well-field service companies, and their services are very much in demand.

Well-field service companies have been able to compensate for lost gas fracking business by shifting to oil, as the oil industry has adopted fracking to unlock its shale deposits. If you’ve read about the oil production boom that is keeping North Dakota’s economy hopping, you read about the Bakken shale formation. In the Bakken, wells are drilled horizontally to follow along the oil-bearing layer, and then high-pressure fluids are forced down the well to fracture the shale and release the oil.

Meanwhile, the challenges of producing oil in the deepwater Gulf of Mexico continue to test the limits of drilling technology. Pushing through kilometers of water before drilling through just as much rock and then extracting and transporting oil from a platform rocked by waves and threatened by hurricanes demands a wealth of specialized equipment and operators.

Most oil and gas companies do not own drill rigs, nor do they actually drill or fracture their own wells. They contract those jobs out to companies that drill and frac for a living, known as well- field service companies. And with wells in America’s booming oil and gas fields requiring more complicated and more technical services with each passing year, the services these companies provide are essential to North America’s oil and gas producers.

The Take-Home

When a machine is as interconnected as the global energy trade, no part can change without impacting the rest. The dramatic debut of shale gas in North America has done far more than just depress domestic natural-gas prices — a shift of this magnitude has impacts that reach far beyond one commodity or one country. Some of those impacts are negative, but hidden in the doom and gloom lie opportunities to profit. The key is to open your horizons and embrace the complexity and interconnectedness of the global energy machine… either that, or find a good mechanic who can do the job for you.

Regards,

Marin Katusa,
for The Daily Reckoning

The Upside to a Natural Gas Downturn 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?".

One of the pleasures that I find when traveling is picking up the latest Economist magazine. Sure, they are pretty opinionated and usually on the wrong side of me, but it makes me think. Well, yesterday, it just so happens that the latest Economist had a great piece on Treasury yields. They pointed out that the current bond rally is very similar to the previous trends — going back, we’ve seen a 29-year downtrend, followed by a 32-year uptrend, followed by a 31-year downtrend lasting to the present. We’re talking yields here. And while we could see signs of bond rallies from here on out, especially if the Fed does another round of quantitative easing, the current downtrend for yields is about over.

Interesting, don’t you think? Of course, if the Fed does more bond buying, they are simply giving Treasury yields a stay of execution. Given the scenario, one might think that this would not be good for the dollar, to have people bailing out of Treasuries, and that could be true, but in reality, in the other bear markets for Treasuries, the beneficiary was the stock market. And I remember clearly what happened to the dollar when we had the stock market bubble going on — it was strong! Have we learned our lesson? Will there be another stock market bubble? Well, if you look at some of the latest stock moves, it’s scary.

But for now, the markets are still trying to sift through the wreckage of the eurozone. You all might recall that as we began the year, I told you that I truly believed that the center would hold in the eurozone, and we would begin to see the Chicken Littles for the euro (EUR) and eurozone fade away, and the focus could shift back to the US and its own debt problems. And that won’t be good for the dollar.

So as you see, we’re still stuck in the mud, with no clear direction for the currencies and precious metals. But ever since the “takedown” of gold early in March, the shiny metal has tried to mount a recovery. It will be difficult, I do believe, for gold to put together much of a lasting recovery right now, as long as stocks are the belle of the ball.

And don’t forget that just last week, Fed Chairman Big Ben Bernanke said, “the central bank will consider further stimulus.” And what has been one of the big reasons the Fed has undertaken two previous rounds of quantitative easing (QE)? Well, let’s go to St. Louis Fed President James Bullard for the answer to that. When asked if QE had been successful, Bullard responded with two items that I found to be interesting: Asset prices had recovered, and the dollar had depreciated. So QE was targeting strong stock prices and a weaker dollar.

OK, enough of all that! This past weekend, China reported that their version of the PMI (Purchasing Managers Index), which measures the pulse of manufacturing, had risen to its highest level in a year (in March), which had a number of 53.1. You may recall that recently, China’s PMI has fallen through the line in the sand at 50, so this report was very favorable to the global growth crowd.

And as always, the proxy for global growth, the Australian dollar (AUD), responded favorably. I did read this past week that the Reserve Bank of Australia (RBA) will meet tonight (tomorrow for them) and keep rates unchanged, although most observers feel that the RBA has two more rate cuts to make before the end of July. I don’t see it that way, but I’m just the lone wolf here. The markets observers will push the envelope and pressure the RBA to cut rates. The RBA will eventually respond.

But for now, the A$ gets to have some life from the Chinese number and forget about the rate cuts on the horizon.

I see where Mexico’s and Canada’s leaders will meet with the U.S. president. I can hear all the clamoring starting again about the Amero, which is at the top of the list of strange stories that we hear, the other one being the so-called “revaluation” of the Iraqi dinar. We’ve heard from people for years now that “this is the week it will get revalued,” and that week goes by without a word.

I know that last paragraph will stir up a hornet’s nest with the folks that believe in those two stories, but don’t shoot the messenger.

One of the reasons the euro has been boosted in price a bit lately is the news that the finance ministers from the 17-member monetary union had put together a package that included 500 billion euros, in addition to the already 300 billion euros already in the fund, which will be used as a stabilization fund.

There are questions about how much further the German constitution can be pushed with regard to becoming more “European.” But Franz Mayer of Bielefeld University says that Germany’s Basic Law is “stretchier than many think.” We’ll have to wait until May to find out for sure if Germany can continue down this road to an equal partner in a united Europe, when the Bundestag meets to discuss the matter.

The BRICS (Brazil, Russia, India, China, South Africa) have really been stirring the pot with their comments and actions lately. All five rallied after they announced that they would form their own form of a “World Bank.” But they are going to have to come up with announcements each week to support their currencies because the effects of that announcement last week have already faded.

The price of oil sure has hit the skids, falling to $102. But it’s still over $100, folks. That’s not real help for the economy, but does underpin the petrol currencies.

And speaking of a petrol currency. The British pound sterling has really been a move to higher ground lately. But I think this is premature. There’s nothing exciting going on in England, and their latest budget is questionable, at best. So be careful here.

Then there was this — this is more of a public service announcement today — from The Wall Street Journal: “Global Payments Inc., which processes credit cards and debit cards for banks and merchants, has been hit by a security breach that has put some 50,000 cardholders at risk, according to people with knowledge of the situation.” That includes MasterCard and Visa cards, folks, so be prepared to get that call from your card issuer, informing you that your card has been compromised. If no call is received, then consider yourself lucky!

To recap: Chuck’s back, and it’s April! The currencies and metals are still looking for some clear direction to take, but volatility remains. The bond rally that began in the early ’80s might be coming to an end, but it won’t die easily, as the Fed prepares for another round of bond buying, thus supporting the price of the bonds. China posted a very strong manufacturing index number, which was a kick-start for the global growth currencies led by Aussie dollars.

Chuck Butler
for The Daily Reckoning

China Posts Strong Manufacturing Data 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?".

But will new technology and fracking be able to rescue America’s energy outlook?  Let’s take a look…

To be clear the world’s easy oil is all but gone, it’s a truism behind $4 gasoline.

That’s why companies are hard at work in some of the world’s harshest climes just to find more barrels of the stuff. Think: 200 miles offshore in thousands of feet of water or even working offshore in the North Sea or off the coast of Alaska.

“The first thing to emphasize” Byron King points out, “is how expensive and risky it is to work offshore. Just a broken anchor chain can cause $180 million of damages — and that’s without any major environmental issues.”

The only bright point we see from our perch is the gradual uptick in onshore oil production in the U.S. Much of this has to do with new drilling technology involving horizontal drilling and what’s called hydraulic fracturing or “fracking.”

This new drilling technique is unlocking oil and gas that just five years ago was considered inaccessible. And As Byron pointed out in his latest write-up, this onshore technology is starting to move the energy needle in America’s favor.

If you’ve ever wondered how this energy renaissance started, you’ll want to check out this latest Daily Resource Hunter info video. In it you’ll find the answer to a question a lot of readers have been asking “What is fracking?” and how can it shape the future of American energy?  To find out, click below:

Matt Insley
for The Daily Reckoning

Can “Fracking” Rescue America’s Energy Outlook? 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 probably misspoke when I said the dollar was stronger in spite of the poor data, since this is the pattern that has developed lately. Good data out of the U.S., showing the economy is getting stronger, lead to dollar weakness, and data that show the U.S. recovery may not be as certain or strong as some believe pushe the dollar higher. The dollar is being used as a “safe haven,” and this thought is supported by the yield on the U.S. 10-year Treasury, which fell again yesterday. As investors worry about the global recovery, they are seeking shelter in the U.S. Treasury market, which causes prices to rise and, conversely, the yields to move lower.

Today, we will get the GDP numbers for the fourth quarter of 2011, which is expected to have remained stable at 3%. The accompanying data, GDP price index, personal consumption and core PCE are all expected to remain unchanged from previous estimates. We will also get the weekly jobs data, which are expected to show another 350,000 filed for first-time unemployment benefits last week. Continuing claims are expected to remain at 3,350,000.

Treasury Secretary Geithner was on Capitol Hill yesterday and told congressmen that the U.S. economy is “regaining strength” but warned the recovery “will depend in part on events beyond our shores.” Sounds as if the Treasury secretary is starting to build up an excuse in case the recovery sputters during this election year. You can believe the administration will point to events in Europe as the reason if our economy doesn’t recover as quickly as they would like.

I give Geithner credit for not painting too rosy of a picture for the House Appropriations subcommittee. “While the economy is regaining strength, we still face significant economic challenges. Unemployment is still far too high, the housing market remains weak and the overall effects of the financial crisis remain an obstacle to growth.” Sounds as if Geithner and Bernanke are both on board for additional stimulus if we see any further deterioration in our recovery.

The Treasury secretary moved over to the Senate to address the Senate Appropriations Committee, and suggested Fannie and Freddie Mac should reduce principal on some home mortgages. “We’ve been encouraging Fannie and Freddie to take another look at the map, at the economics of the finance, because we think there is a strong case in some circumstances to help maximize return of the taxpayer,” Geithner told the committee.

As I reported yesterday, the huge overhang of foreclosed homes and those that are approaching foreclosure are keeping home prices down. Housing remains a vital piece of the U.S. economy, so the Treasury secretary needs to try and figure out how they can try to stop the bleeding. They have already kept interest rates near zero, and are apparently turning to a more-direct approach, having the two largest holders of mortgages (which just happen to be under government conservatorship) institute principal reductions.

Chuck will probably disagree, but there is some logic here, as it is probably cheaper to agree to a $20,000 principal reduction, instead of having to put the home into foreclosure and selling it. The risk is these principal reductions are taken and the homeowners still can’t pay, forcing them right back into default. Short sales are the simplest answer, and should definitely be given a “fast track” with Freddie and Fannie. But enough of the mortgage talk. Let me get back to something I actually know something about: the currencies.

The Japanese yen (JPY) was able to move higher again yesterday after a report showed retail sales rose more than expected in February. Sales increased 3.5% from a year earlier, the biggest advance since August 2010. The increase more than doubled economists’ predictions, who called for an increase of just 1.4%.

The yen also rose on “safe haven” buying, as U.S. data disappointed and an official over at S&P said Greece might have to restructure its debt again. There is also another factor that will probably move the yen higher today and tomorrow, as the Japanese fiscal year ends on March 31. Companies typically repatriate overseas earnings before the end of the year, forcing them to purchase yen.

Safe haven flows will probably continue this morning, as there was more bad news out of Europe. European economic confidence unexpectedly declined in March, according to a report released by the European Commission. An index of executive and consumer sentiment fell to 94.4, from a revised 94.5 figure in February. Economists had predicted a reading of 94.5, which would have been a slight gain, but a revision to last month’s figure caused the drop. First-quarter growth in the U.K. was revised lower, and another report showed disposable income in the U.K. declined, putting additional pressure on the BOE to increase their quantitative easing.

There was a bit of good news in the data released in Europe this morning as a report showed German unemployment fell more than forecast in March. The number of people out of work fell a seasonally adjusted 18,000 versus economists’ predictions of a drop of 10,000. The adjusted jobless rate in Germany dropped to 6.7%, the lowest in two decades. The German economy definitely looks resilient, and unemployment could continue to decline as the pace of economic growth accelerates. The big problem is that the debt crisis will undoubtedly return, possibly derailing the recovery in Europe’s largest economy.

Australian Treasurer Wayne Swan is trying to deliver the nation’s first budget surplus since the global economic crisis began; but he has voiced concerns that the global recovery may not be enough to generate an increase in revenue. “When it comes to the structural underpinnings of the revenue base, we are in a tough new world,” Swan said. “This is a crucial point: Even if we were to witness an enduring global recover, we should not expect to see a similar recovery in revenues.”

Swan’s cautionary tone caused the Aussie dollar (AUD) to drop as investors increased predictions that the Australian central bank would cut interest rates. Continued concern over the Chinese slowdown is also keeping downward pressure on the Aussie dollar, which has fallen just over 1% versus the U.S. dollar over the past two days.

The South African rand (ZAR) was the worst performer versus the U.S. dollar, falling over 1.6%. The rand had benefitted from a renewed interest in the carry trade, and has retreated as the markets have become concerned about global growth and investors have been in a “risk-off” mode. As global equity markets fall, the rand and other carry trade currencies will also probably fall.

Oil was down a couple dollars last night, falling to the lowest level in a week after stockpiles surged in the U.S. There was also some discussion regarding the tapping of emergency reserves in order to offset the recent price increases in the cost of fuel. The U.S. and Europe discussed an agreement on using strategic stockpiles to reduce the price of oil. Apparently, President Obama and U.K. Prime Minister David Cameron discussed the move earlier this month.

The drop in oil prices will probably have a negative impact on the Norwegian krone (NOK), Norway being a major exporter of crude. A report released yesterday said Norway’s jobless rate fell in March as record petroleum investments boosted economic growth and demand for labor. The unemployment rate in Norway dropped to 2.6% from 2.7% in February. Norway continues to be very popular with currency investors, as the country continues to have some of the strongest underlying economic fundamentals of any developed nation.

Chuck has mentioned the BRIC nations were looking to set up a multilateral bank to finance projects in the developing world. India had proposed the new supranational bank after worrying the European debt crisis and other Western financial demands are keeping the existing world banks from concentrating on the developing world. The BRIC nations will be holding a summit tomorrow to discuss the establishment of this new ‘world bank,’ along with further discussions on ways to spur trade and investment in their countries. Brazil, Russia, India, China and South Africa have been working toward more cooperation in policies. This is just another sign of how economic power is slowly shifting away from the developed world and toward the developing nations.

I will share another improvement the new WorldMarkets system will bring next week. Investors who use the Online Financial Center to enter transactions will see these transactions on a real-time basis. These transactions will now appear in a pending status as soon as they are received by the WorldMarkets trade desk. Currently, investors have to wait until the next day to see these transactions, which has been a source of some duplicate transactions and concerns regarding if, in fact, we received the transaction. The new system should go a long way toward solving this problem. In addition, WorldMarkets investors will be able to see their portfolio holdings graphed in a pie chart or bar graph, making it easier to view just how diversified your current holdings are.

Chris Gaffney
for The Daily Reckoning

Data Show the US Recovery Isn’t Strong 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?".

Purchases of new homes in the US fell unexpectedly in February, dropping 1.6% after a revised 5.4% drop in January. This data confirmed the housing recovery in the US is not as solid as some had thought. Friday’s numbers ended a week in which we saw drops in housing starts, existing home sales and new-home sales for the month of February.

The only positive sign for the housing market last week was the data showing building permits jumped, probably due to the unseasonably warm weather. The housing market is still struggling to gain momentum as the massive amount of foreclosures and potential foreclosures continue to hang over the market like the Sword of Damocles.

We will see the final piece of US housing data for the month of February this morning, with the release of pending home sales in the US. Sales are expected to have increased 1%, following a 2% increase in January. Indexes showing economic activity in the Chicago and Dallas areas will be released by the Federal Reserve banks in each of these regions.

Tomorrow will bring a report on US consumer confidence, which is predicted to have dipped slightly, along with a report from the Richmond Fed. Wednesday, we will get what most are saying is the most important piece of data for the week, durable goods, which is expected to show a 3% increase after posting a disappointing 3.7% drop in the previous month.

Thursday will bring an estimate of fourth-quarter GDP here in the US, along with personal consumption, the Kansas City Fed Manufacturing Index and the weekly jobs data. Economists are predicting the GDP estimate will remain at a respectable 3%. And Friday will close out the week with personal income and spending, the University of Michigan confidence numbers and PCE data. Lots going on this week, which should keep the currency markets jumping.

A report released this morning has pushed the euro (EUR) back above $1.33. The report showed German business confidence unexpectedly increased in March, to an eight-month high. The Munich-based IFO said today its business climate index increased to 109.8, from a revised 109.7 in February. This report offsets an earlier report last week, which showed German manufacturing output unexpectedly contracted as European governments and consumers reduced spending.

Another report showed French sentiment also jumped more than expected. Sentiment among factory executives rose to 96 from 93 in February, and economists had predicted the number would remain unchanged. This was the first consecutive monthly increase in more than a year. The confidence numbers indicate business leaders are now looking past the sovereign debt crisis — a very positive indication for the euro.

But another story I read this weekend suggests the EU debt crisis is just taking a short nap, and could re-awake at any time. Italy’s prime minister, Mario Monti, seems to be poking at the sleeping dog with his warning of a Spanish debt default. Monti pointed to Spain’s struggle to control its finances ahead of an EU finance ministers meeting at the end of this week. The finance ministers will be looking for an agreement to increase the 500 billion euro ceiling on the bailout funding, and Monti’s comments were certainly not well timed. Perhaps he is trying to deflect some attention away from problems in his home country?

No matter what the outcome of this week’s meetings, the euro debt crisis is far from over, and I have to believe we will be discussing it for the foreseeable future. Not promising for the near-term prospects of the euro.

Friday brought a bit of a jump to the commodity currencies, with the South African rand (ZAR) and Norwegian krone (NOK) leading the pack. The gain in the value of the South African rand was the first in four days, and helped to trim its worst weekly loss in over six. Stocks and raw materials prices gained on Friday, helping push currency investors back into the commodity-based currencies. These currencies had been sold earlier in the week, so some saw the recovery simply as a bounce back from an oversold position.

Norway’s krone rallied as oil prices surged over $3 a barrel. A Reuters report predicted Iranian oil exports will drop by 300,000 barrels a day this month due to tighter sanctions, sending the price of crude higher. This concern offset an announcement earlier in the week by the Saudis who said they would keep a lid on the recent rise in oil prices by increasing production. The US is pushing China, India and 10 other nations to make further cuts to their Iranian oil imports in an effort to get the Iranians to drop their pursuit of nuclear weapons. Norway continues to be a major supplier of crude oil to Europe, and the recent rise in the price of oil should have a positive impact on the Norwegian economy.

Another major oil producer that should be benefitting from the higher oil prices is Canada. But the Canadian dollar (CAD) fell on Friday after a government report showed the annual inflation rate increased last month less than forecast. The slower inflation data follows a report released Thursday that showed retail sales in Canada were slower than expected. These two reports have currency investors scaling back earlier predictions that the Bank of Canada will be increasing rates this year. Bloomberg data on swap rates suggest a 39% chance of a rate increase by year-end and a 57% chance of no change. The reports sent the Canadian dollar back below parity with the U.S .dollar. It will be interesting to watch the tug-of-war between rate expectations and the price of oil, with a pretty high likelihood that the loonie will remain right around $1.00.

The New Zealand dollar (NZD) moved higher over the weekend after imports dropped, pushing the trade balance into a surplus. Exports exceeded imports by NZ$161 million in February, from a revised NZ$159 million deficit in January. The kiwi is the third-best-performing currency this year, rising over 5.75% vs. the US dollar. No. 2 is the South African rand, which is up over 6.25% versus the US dollar this year. The No. 1 performing currency is the Mexican peso, which has gained almost 10% versus the dollar.

According to Latin America’s most accurate currency forecaster, this double-digit increase in the value of the peso is just the beginning. Currency strategists at Standard Chartered Bank, who are the top forecasters for Latin American currencies, according to Bloomberg Rankings, predict the peso will rise another 8.6% by year-end. The currency is still trading at 55.9% below fair value against the dollar based on purchasing power parity, so another increase of 8.6% doesn’t seem that much of a stretch.

Gold is looking like it will close out the month with a slight loss, but has put together three straight days of gains. Concerns over Chinese growth had put pressure on the price of gold earlier last week, but the metal is finding some support after last week’s fall. Gold has been trading below the 200-day moving average for the past two weeks, which is typically seen as a bearish indicator. But a move by the metal above $1,680 would push it out of the bearish technical pattern, and could confirm a new bullish run. Both gold and silver are up this morning, so the week is starting out positive for precious metals investors.

Then there was this: We are in the last week of our conversion to a new core banking system for the WorldMarkets area. It is a project I have been working on for over three years, so I am more than excited to see the new program go live. In celebration of the move to the new system, I have decided to point out a few of the improvements WorldMarkets investors will see with the new system. Those of you who aren’t WorldMarkets investors (I question why you aren’t) will just have to bear with me. One of the biggest improvements of the new system is more up-to-date pricing indications in the Online Financial Center. Previously, the values shown for the WorldMarkets assets were calculated using end-of-day prices from the previous day. The new system will update prices on these assets throughout the day, giving EverBank WorldMarkets investors a better indication of the values of their foreign currency and metals holdings.

To recap: The housing data were disappointing on Friday and sent the US dollar lower versus most major currencies. This week is chock-full of data, and could lead to some volatile currency markets. German and French confidence numbers came in stronger than expected and helped boost the euro. Norway’s currency rallied as oil added $3, but the Canadian dollar, which is another “petrol currency,” didn’t participate in the rally. The kiwi moved higher after New Zealand reported a trade surplus. The Mexican peso has been the best-performing currency this year, and could double its return by the end of the year according to analysts at Standard Charter. And gold continued to march back up, pushing through a very important $1,680 price point.

Chris Gaffney
for The Daily Reckoning

Housing Data Show an Uncertain Recovery Here in the US 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?".

Barely less.

There’s a 48% chance, if you want to be precise. We’re at 10 minutes to midnight, figuratively speaking.

The Atlantic has introduced an Iran War Clock… not unlike the “doomsday clock” maintained by the Bulletin of the Atomic Scientists gauging the likelihood of nuclear war.

“The Iran War Clock is not designed to be pro-war or anti-war,” cautions writer Dominic Tierney. “Instead, the purpose is to estimate the chances of conflict in the hope of producing a more informed debate. If people hold a very inaccurate view of the odds of war, it could be dangerous.”

With that in mind, the magazine has chosen 22 panelists across the ideological spectrum — from the hawkish Atlantic reporter and ex-Israeli soldier Jeffrey Goldberg to the dovish former CIA analyst Paul Pillar.

“If there is a 0% chance of war,” Tierney writes, “the clock hand is at 20 minutes to midnight. Each extra 5% chance of war moves the hand one minute closer to midnight.

“So for instance, a 10% chance of war would set the clock at 18 minutes to midnight, and a 75% chance of war would set the clock at minutes to midnight.”

Right now, it’s 48%. Rounding off, that’s 10 minutes to midnight. The magazine plans to give us an update every month or so.

Meanwhile in the betting market at Intrade.com, the likelihood of war is pegged somewhat lower — 37% by the end of the year.

Depending on whom you want to believe, Intrade might be a more accurate predictor — for Intrade is an intriguing experiment in what’s come to be known as “crowdsourced prediction.”

“Crowdsourced prediction,” according to IT consultant Bob Lewis, “is based on a simple premise — that crowds are wiser than experts. Those who place their faith in markets insist that online betting on these outcomes delivers more accurate results than the experts.”

This is a bigger business than you might think. General Electric uses prediction market software from an outfit called Consensus Point to generate new business ideas. Other Consensus Point clients include Best Buy, Motorola and Qualcomm. A competing firm, NewsFutures, counts Pfizer, Siemens and Renault among its customers.

So what’s this to you? The crowd’s mood can shift from week to week, even day to day. It can be as fickle as a debutante deciding out who gets to dance with her first at the big ball.

And therein lies a moneymaking opportunity, something a lot more fun and potentially much more lucrative than fooling around at Intrade or similar places.

Let’s get back to the prospect of war with Iran: It’s been hanging over the oil market for weeks. But as our market-sentiment maven Abe Cofnas said on Monday: “No one expects an attack on Iran this week while Israeli Prime Minister Netanyahu is in the U.S. On the bearish side, slowdown in China puts a damper on expected demand for oil. So there is a balance of fears going on.”

That balance led to last week’s “mock trade” in the binary options market. Abe figured by Friday, oil would still be trading in a range between $103.75-108.75. And he was right. It was good for a 19% gain in four days.

Abe’s two for two on these mock trades. The previous week, a play on the movement of the Dow delivered a 24% gain. And the way all of these trades work, it’s “in on Monday, out by Friday.” You know the outcome in four days or less.

Which brings us to this week’s mock trade…

Over the weekend, China reported a trade deficit for February — $31.5 billion. “Exports took a hit from Europe’s economic slowdown,” according to the Financial Times, “stoking concerns about growth prospects in the world’s second-largest economy.”

“All copper traders monitor the news from China,” says Abe. “The Chinese slowdown is on the surface negative for copper demand, but from a trader’s perspective, the chatter among China watchers is pointing to a stimulus to offset the overall slowdown.”

That’s because the latest report on inflation in China came in lower than expected. In China, as anywhere else, if central bankers have fewer worries about inflation, they feel freer to turn on the monetary spigots.

“This becomes very supportive for copper prices,” says Abe, “as it firms up technical buying.”

Addison Wiggin
for The Daily Reckoning

10 Minutes to Midnight: Gauging the Likelihood of War With Iran 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?".