09/01/09 St. Louis, Missouri
Here’s a thought to get our engines started this morning… Bill Bonner had this to add to my ranting about our national debt going to over $20 trillion in the next 10 years, due to deficit spending…
“The Obama administration, for example, expects to run $9 trillion in deficits over the next 10 years – and that number is based on a recovery! Imagine what will happen if the economy doesn’t recover?”
Now, that’s a nice comforting thought to start our day right? NOT! WAKE UP! Morning has broken, and the coffee is on… If you are still of the thought that this is all going to end up “seashells and balloons”, then you need to stop and smell that coffee!
Yesterday, I told you that the Asian stocks had sold off and that risk assets were being taken off the table. But that didn’t last long, and by mid-morning, I witnessed a nice currency rally that wiped out the overnight selling. At one point during the morning a customer called to buy some euros (EUR), and when the salesperson asked me for a price, I said, “you know, they may want to come back tomorrow morning, after the overnight markets beat up the euro like we’ve seen so many times lately.”
But wait! That did not happen last night! So, I was wrong! The euro is getting some real love this morning after German unemployment fell in August, which was totally unsuspected. Euros and Swiss francs (CHF) are the only currencies I see that have gained on the news this morning. So the Big Dog, euro, must have told the other little dogs to “stay on the porch”… Stay Rex!
German unemployment fell by 1,000… OK, now I know that this has the same feeling as removing a bucket of sand from a beach, when unemployment in Germany is 3.46 million! But, I never said that Germany’s economic recovery was a tidal wave! It’s smoking embers, that are in need of stirring, some small twigs, and leaves… My beautiful bride is an “expert” at getting a fire started like that; I should send her over to Germany… That would really kick the domestic demand to another level! HA!
Baby steps… That’s the way we’re going here… So, we’ve had IFO and ZEW think tank reports on confidence all print stronger. We had the GDP surprise on the upside… And there was something else last week, but it slips my mind right now. The point here is that the Eurozone’s largest economy is waking up… We just have to hope it doesn’t hit the “snooze” button, now!
A reader sent me a note yesterday asking if I thought there would be a collapse of the Eurozone and thus the euro. If I had $5 for each time these stories have hit the streets, I would be sipping on a multi-colored drink in a tall glass with one of those tiny umbrellas, in a tropical setting… The point I’m making here is that on the outside, Spain and Italy have problems… But what’s changed? These two had problems before they joined the Eurozone, and have had problems since joining the Eurozone… Me? I totally believe that these two get down on their knees each night and give thanks for being allowed to join the Eurozone!
So… In case you missed my answer in there… I don’t see that happening, at least not in the near future.
OK… Enough of that! The Reserve Bank of Australia (RBA) met last night, and left rates unchanged, as I suspected they would, and the following statement regarding their thoughts on the economy was relatively upbeat… However, the markets were looking for an indication of “when” the RBA would hike rates, and that didn’t happen… So… The markets were disappointed, and when they are disappointed with a central bank, they take it out on the currency! So the Aussie dollar (AUD) got pounded overnight.
Now… Aussie GDP for the second quarter is going to print tonight. I would have to think that the RBA maybe had a peek at the report, and thus they’re gearing down the “interest rate hike” talk… So… We could be looking at even weaker Aussie dollar prices tomorrow morning… Unless, that is, second quarter GDP is as strong as it was once believed to be!
Did you see where Canada printed a HUGE deficit last week? Not a good thing… The Canadian balance position has teetered back and forth between surplus and deficit, but has recently remained in the red… You know me and deficits, so, I put a red mark next to the Canadian dollar/loonie (CAD)…
But then, you hear news like last night… Get this! PetroChina has agreed to pay C$ 1.9 billion for a stake in a Canadian oil sands project. PetroChina will buy 60% of Athabasca Oil Sands Corp.’s MacKay River and Dover oil-sands projects.
That’s 1.9 billion Canadian dollars/loonies that will have to be purchased… And you have to think that China will be spending the “few loose dollars” they have in their pockets, which would put pressure on the green/peachback!
Canada is still in a recession here, folks… But… Could these be cheaper levels given the merger and acquisition activity? Only The Shadow knows!
OK… So, here I am, one hour from when I began writing this morning, and all that glossy and shiny talk about the euro’s rally is fading. The Big Dog has lost 1/4 euro in the past hour… So… I wasn’t wrong after all!
OK, you’ll love this – or maybe you won’t… But I do, and since I’m writing this letter, I get to talk about it! HA!
Here’s the title of the story that flashed across the screen, and of course, caught my attention… “Goldman Sachs Wrong on Economic Recovery, Macro Hedge Funds Say”
You’ve got me on this one! I’ve got to read on… “Paul Tudor Jones, the billionaire hedge-fund manager, who outperformed peers last year, is wagering that Goldman Sachs Group, Inc. and Morgan Stanley [are] wrong in declaring the start of an economic recovery.
“‘If we have a recovery at all, it isn’t sustainable,’ one Hedge Fund Manager said… Calling this a ‘ski-jump recession, with short-term stimulus creating a bump that will ultimately lead to a more precipitous decline later.’”
WOW! These guys must be reading The Pfennig! OK, I kid, because these guys would never bet caught with The Pfennig in their hands… They probably put it between the pages of The Economist so others think that’s what they’re reading! HAHAHAHA!
Speaking of “must be reading The Pfennig”… I saw a thing that came across my desk yesterday that 57% of Americans would vote out every politician if the vote were taken right now! WOW! I didn’t know so many people read The Pfennig! Recall, I said weeks ago to “fire them all”… Well, let’s hope that 57% grows to 95%, and Americans really do go through with their threat to vote them all out, if they continue to take us down the road to socialism/fascism/collectivism…
OK… You may recall a couple of weeks ago, I started asking you questions about the stock market rally, and it’s ability to continue on… I truly believed that the stocks were overbought, and the P/E ratios were out of control. Now, I see quite a few jumping on that bandwagon, and calling for a stock market reversal.
Do we really think the government will allow that to happen? Didn’t the President himself say that he thought it was a good time to buy stocks… Isn’t that sort of like a wink and a nod from the President that everything will be OK?
Beyond those conspiracy thoughts, let’s just say the markets get to go where the participants take them (I know, it’s not reality, but let’s just play along), and stocks begin to reverse their gains from March… I would think it to take an adverse affect on the currencies and their gains since March too… Throw commodities in there too!
Now, in the old days, I would look at a stock sell-off and say, currencies will rise… “Honey, put on the red dress tonight, we’re going out on the town!” But… These aren’t the old days… This is the new improved way of throwing all risk assets into the same barrel! And I don’t like it at all!
OK… The Norwegian krone (NOK) traded with a 5 handle yesterday for the first time in a month of Sundays! It has traded back over 6 overnight… But, it was a good strong move from the krone yesterday nonetheless!
Well, today we’ll see the ISM Index (Manufacturing) from August, and for the first time in 19 months it is expected to be above 50! New readers might wonder what I’m talking about here… But it’s simple… 50 is a line in the sand that says any number below it represents contraction of manufacturing, and any number above it represents expansion of manufacturing… So, if it prints above 50 as expected one would say that manufacturing must be recovering.
Let’s look at that closer… Come on, closer, closer, closer! We’re experiencing a global recession, and global trade has been sketchy at best… But here’s US manufacturing showing expansion… And… The rise has been quite steady since March… With March printing at 36.3, April 40.1, May 42.8, June 44.8, and July 48.9… See the steady rise?
What else has happened since March? That’s right, thank you for paying attention there in the back of the class! Yes, the currencies have been rallying versus the dollar… So, the dollar is much weaker than it was in March… The dollar index was 89.05 on March 5th, and today it is around 78… So… How did manufacturing/exports rise during this period of time? Because the dollar was weaker!
Let’s keep that in mind, eh? For if we get an adverse affect on the currencies from a stock sell off, this recovery in manufacturing could go kaput!
We’ll also see pending home sales for July, and vehicle sales for August… Cash for Clunkers will push up the vehicle sales… But what happens next month?
Gold has backed off by about $8 in the past two days… It’s a dip… Therefore it must be an opportunity to buy at a cheaper price! I suggest you take advantage of it.
Chuck Butler
Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.
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