Chuck Butler

The Greek talks returned to the headlines this morning. I know I said this last Friday, and I was a little too optimistic and turned out to be wrong! But… I do expect this agreement on a private-sector involvement in Greek debt to get hammered out this weekend… It seems that the opposition from eurozone policymakers is backing off, and that has me optimistic once again.

The currency guys are optimistic too, for they are willing to keep the euro above 1.31 at this point… Here’s the skinny on the whole process: Greece must repay 14.5 billion euros of bonds in March, and unless all bondholders agree to receive a haircut, a default could happen, and then default insurance contracts begin to get kicked in and things get pretty ugly from there…

So… a haircut it is… that’s fancy talk for “losses”… But since I haven’t been to someone that cuts hair in over 10 years, I find it strange. I know in my heart of hearts that Greece is going to default, sooner or later… But… if the actual default can wait for more stabilization to happen in the eurozone, then the foundation might be strong enough to withstand a default. The center is strong, but needs to get stronger. A default now would be ugly for all of us!

I know, people are going to send me notes to ask me where my “If they can’t make it, let them go bankrupt” thought that I had in 2008 go? I’m not saying bail them out anymore… and I’m not saying that the government should sell their soul to the devil… I’m just saying give it more time before defaulting…

OK… As I said above, the currency guys are allowing the euro to remain above 1.31 this morning on the Greek news… Yesterday, we saw the euro rise to 1.3160, and then fall right back down to below 1.31… But this morning, as I said, it’s back to above 1.31…

With the euro hitting all the green lights this morning, the rest of the currencies can too, and lookie there… one of my fave currencies, the Canadian dollar/loonie (CAD), is back to parity this morning! With the Fed announcing that they are keeping rates near zero for an even longer period than first announced, currencies that have even the slightest rate differential in their favor versus the dollar have really taken off to higher ground.

I just noticed that the Swiss franc/euro cross was 1.2075… That’s getting quite close to the floor level the Swiss National Bank (SNB) put in place a couple of months ago. So the “new guy” at the SNB will earn his stripes right out of the starting blocks, if he defends the 1.20 cross rate ceiling… I told you that when Philipp Hildebrand resigned there would be a pop in francs as the markets test the resolve of Hildebrand’s replacement. So all that’s happened as the franc has risen from $1.04 to $1.09… And more importantly for the SNB, the cross has risen from 1.23 to 1.20 (European-style pricing) I expect the SNB to do “something”… not sure what, but they will attempt to defend the 1.20 cross… Good luck with that SNB!

Well… commodities, and not just gold and silver, liked the sounds coming from the FOMC meeting the other day… Commodities like copper, cocoa, soybeans, sugar, cotton, cattle and lean hogs have all gained nicely since Wednesday… Just to be clear here, it wasn’t just the fact that the Fed pushed zero rates out longer. It was the Fed rhetoric that was laying the groundwork for another round of quantitative easing (QE). All ingredients to soaring inflation in the future, so investors are buying commodities now, ahead of the rush to buy them in the future… It’s the guy and the snow tires story again!

A day after Reserve Bank of New Zealand (RBNZ) Gov. Alan Bollard did his “I’ve got to say something to weaken the currency” dance, the kiwi (NZD) got a nice boost when it received a surprise: New Zealand announced last night that they had posted their first trade surplus in five months… The trade surplus for December was $278 million… Hey! It’s not China-like, but it’s better than a sharp stick in the eye. I can’t say that anymore. It’s better than the average bear!

It’s been a tough row to hoe for the kiwis as they try to recover from two earthquakes last year. But recent reports have shown some nice growth in the economy, and even Bollard, who makes a habit of talking bad about the kiwi currency, saw his RBNZ issue a report saying that the RBNZ should see a “gradual lift in activity in 2012, consistent with demolition and repairs to housing and infrastructure getting under way,” with full reconstruction to come in 2013.

I bet it just killed Bollard to have to say that! He’s known to be quite hard on the Beaver…

OK… a quick trip over the Tasman to New Zealand’s kissin’ cousin. Here in Australia, exports of raw materials and gold continue to keep the economy strong. Speaking of gold, I was reading yesterday about jewelry demand, which is the primary driver of gold demand. Yes, believe it or don’t. I was reading about this jewelry demand and how 55% of global gold jewelry demand comes from China and India.

Gold bars are a close second to jewelry demand… And again, the Asian buyers are the leaders of the pack when it comes to hoarding gold bars… I think that sometimes it pays to step back from the forest so you can see the trees.

I bet you thought how’s he going to tie this together? Here in the U.S., most people, not Pfennig readers, of course, don’t understand the bad things that come from printing money. We’re too close. But in Asia, they are away from the trees and see perfectly what’s going on. And when the U.S. begins to feel the warp speed of inflation, the rest of the world will too, and the Asians have decided to buy their snow tires now…

OK… today, the data cupboard here in the U.S. will give us a first look at fourth-quarter GDP, which will see a couple of revisions before it is finally recorded. The “experts” believe that the U.S. economy grew at 3% in the fourth quarter. And yes, for a brief time there in the fourth quarter, things did begin to look better. But think about this now and remember it later: The economy was still feeling its oats from all the pumping up that Hans and Franz did… So in other words… it was pumped up by money supply, but now things are beginning to show some signs of weakening again… If the Fed didn’t think that, they certainly wouldn’t have stayed longer with lower rates and would discuss more QE…

While 3% is a good number, it won’t be sustainable going forward into 2012. However, a 3% print today would be good for the global growth campers, and that would certainly fuel some inflation fears, and all that would be good for gold and the currencies today…

Yesterday, the weekly initial jobless claims printed at 377,000, which was 21,000 more than the previous week. Remember that during the previous week, all the media outlets were flashing the number on the screens and the government was all about pointing out the drop in unemployment claims. Yesterday, when the number rose again, there was no flashing the number, nor were there any government people talking about the number… One thing I’ve learned with this letter is that you’ve got to report the good and the bad. Otherwise, people don’t trust what you tell them. I don’t think, though, that the government cares if you trust them or not!

The other econ print we saw yesterday was new home sales for December. They were awful, and closed the worst year of new home sales in a very long time. And the thing that really points out the weakness: The inventory of New Homes rose in December from November, and the median sales price for new homes was 12.8% below its level a year ago! So there’s enough inventory, and the prices are falling, but the homes aren’t selling.

And then the good… Durable goods orders for December were very strong, up 3% versus November. That marks two consecutive months of very strong durable goods orders… I would like to think that this is a good sign… but the data tell me that December marked the second consecutive month of outsized increase in commercial aircraft… What happens when the aircraft orders end? We’ll probably go right back to where we were before the aircraft orders, which was three consecutive months of decline… Sorry, just calling it like I see it…

Then there was this… I came across a great piece by John Williams on the King World website. Most readers know him as the person I quote quite often, as he is the former government accountant that takes the cooked reports of the government and shows you what they would look like before all the hedonic adjustments… Here’s a statement that which is very strong and scary:

“The U.S. economic and systemic solvency crises of the last five years continue to deteriorate. Yet they remain just the precursors to the coming Great Collapse: a hyperinflationary great depression. The unfolding circumstance will encompass a complete loss in the purchasing power of the U.S. dollar, a collapse in the normal stream of U.S. commercial and economic activity, a collapse in the U.S. financial system as we know it and a likely realignment of the U.S. political environment.

“Outside timing on the hyperinflation remains 2014, but events of the last year have accelerated the movement toward this ultimate dollar catastrophe. Following Mr. Bernanke‘s extraordinary efforts to debase the U.S. currency in late 2010, the dollar had lost its traditional safe-haven status by early 2011. Whatever global confidence had remained behind the U.S dollar was lost in July and August.”

“That was in response to the lack of political will — shown by those who control the White House and Congress — to address the long-range insolvency of the U.S. government, and as a result of the later credit rating downgrade to U.S. Treasury debt.”

To recap: The Greeks and private lenders are back at the negotiating table this morning, and once again I’m optimistic that a deal will get done to keep Greece from defaulting, for now. This thought is ringing through the markets as the euro remains above 1.31, thus rallying the other currencies too. Gold demand continues to be strong, and John Williams gives us his thoughts on the coming hyperinflation…

Chuck Butler
for The Daily Reckoning

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Chuck Butler

Chuck Butler is the Managing Director EverBank Global Markets. The father of the Daily Pfennig® newsletter, Chuck has a career in investment services and currencies spanning 35+ years. His tacit knowledge of the global markets along with his inventive spirit has led to the creation of many distinct and innovative currency-based products. A respected analyst of the currency market, Chuck has made frequent appearances on MarketWatch, USAToday, CNNfn, Bloomberg Television, and CNBC as well as quoted in The Wall Street Journal, US News & World Report, and The Chicago Tribune.

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