Chuck Butler

The Friday action in the currencies and metals began the day with a bias to buy US dollars, and that remained in place as we finished the week on a high note for the dollar. Gold got taken down again on Friday. You can’t tell me it was anything other than a manipulated take-down! And given the grotesque large short positions that the price manipulators hold, there could be even more downward movement in gold and silver. But one has to wonder if they (the price manipulators) have the intestinal fortitude to conduct another take-down at this point; I mean, their take-down on Friday brought gold and silver below their 50-day moving averages. I think that if they go for more downward movement even the CFTC will be able to see it for what it is.

The currencies and metals are attempting to rebound this morning, but the upward moves have been small to this point. But there’s not much in the way of news that would cause this turn-around. An ECB (European Central Bank) member told reporters over the weekend that the ECB oversight for Eurozone banks would be gradually phased in during 2013. There will be much “back and forth” even between Eurozone members on this ECB oversight, but it’s coming.

Besides that news, the data cupboard for Europe is pretty bare until later this week, so the euro (EUR) will be on its own — and of course, any words that swing it one way or the other, by speakers, of which there appears to be quite a few in the next few days. Spain still hasn’t requested assistance, and pretty soon, the markets are going to forget about Spain, and move on to someone else.

Could that someone else be the US? Well… That’s been the M.O. of the markets for some time now. We are about two weeks away from a presidential election, here in the US, and we’re also about two weeks away from dealing with a debt ceiling again. This debt ceiling problem has taken longer to get here than I thought it would, when I first mentioned this last spring. I thought for sure that by the end of August, we would be having those wonderfully joyous discussions about raising the debt ceiling! But NOOOOOOO! But it will get here, soon.

Speaking of US debt. I was doing some research for an article that I’m writing on debt, and what to do with it. When I came across three things that makes you stop and scratch your head, wondering why we do this when we don’t have the funds to pay for it? And don’t get mad at me about the time frames here, this is how the data was presented.

1. Welfare spending has topped $1 trillion per year

2. There has been a 64% increase in the Food Stamp Program in the last 4 years

3. There has been a 114% increase in the Food Stamp Program costs in the last 4 years.

Now… Last week I made a generalization about people receiving government assistance. And I apologize for that generalization. And discretionary spending, like these programs, aren’t going to make or break us. But the general thought on my part is simply, if we don’t have the funds to pay for something, we don’t buy it. No spending without funds in the bank. If we follow that, we can at least slow down the annual additions to the national debt.

Did you see this weekend’s Pfennig & Pfriends? It was a video of the Big Boss, Frank Trotter’s presentation at the Freedom Fest this year. In the presentation, Frank shows why we believe that the dollar is in for a long term problem, given the government’s propensity to want to devalue the dollar to pay back debts with cheaper dollars.

OK… Japanese leaders must be jumping with joy, as the Japanese yen (JPY) is finally showing some weakness. Japanese yen moved through its 200-day moving average (DMA) last night, and is sliding toward 80. I think if we see yen go through the 80 figure, we could very well see a prolonged slump for yen, and one that I’ve been waiting to see for some time now. I haven’t read anything that says that the Bank of Japan (BOJ) was selling yen, so this is just investors, traders, hedge funds, growing tired of waiting for further movement (stronger) in yen, and deciding to blow out of positions.

In Australia overnight, the Aussie Treasurer, Swan, released the Mid-year Economic and Fiscal Outlook reports. The good news in the report is that the Aussies are still forecasting a budget surplus in the current fiscal year. Cool beans! Now, one would think that investors would find this to be a good reason to buy Aussie dollars (AUD) but not today, thank you! And I told you previously about how the markets are forecasting more rate cuts for next year, with the total being around 75 Basis points (3/4%). I’m of the opinion that these forecasts are too aggressive, but I wouldn’t rule out rate cuts next year. The reason I’m of the opinion that these forecasts are too aggressive, is that I truly believe that China has turned the corner, and by next spring, when I head off to Cardinals Spring Training, it will be very evident that China is growing and demanding raw goods and materials again. And we all know who they go to for these raw materials, right? That’s right… Australia.

I was doing some reading this weekend, and came across an article that expressed what I truly believe to be the upcoming case. And that is the Corporate Earnings in the US will begin to show rot on the vine. The reason I believe this, is you can only squeeze so much blood from a turnip. In other words, most of the profits they had been booking for the past couple of years came as a result of reduced overhead, and not improving machinery, etc. David Nicklaus of our St. Louis Post Dispatch said it best… “The plateauing of profits isn’t a surprise. Cost-cutting efforts generated much of the boom, and there’s a limit to how much efficiency companies can squeeze out of their workers and equipment.”

Going further with the thought that company profits have topped out, you have to think about how the US economy is growing at less than a 2% clip, and now the multinational companies have a recession in the Eurozone and a slowdown in China to contend with.

Sure, the QE3 stimulus can give life support here for a while. But as I previously stated about QE3… I think the markets, and the people have become comfortably numb, and QE3 doesn’t have the same bang for the buck as the previous rounds of quantitative easing. This is similar to what Japan found out nearly two decades ago. But, here in the US our Fed Heads don’t believe that we’re on the same road that Japan went down and that “our QE is different”.

The IMM futures positions report from last week showed that dollar short positions rebounded, this after two weeks of being closed out. The euro was the biggest beneficiary of these dollar short positions, and the record level of Canadian dollar (CAD) long positions were pared back after the dovish comments by Bank of Canada Gov. Carney.

And US Existing Home Sales fell by 3.3% in September. This obviously gives us conflicting thoughts on the Housing Market, as New Home starts were stronger. Home prices rose in September from a year ago, by 11.3%… And THAT, my friends, is probably why the Home Sales fell.

Then There Was This… From The Economist

“The renminbi/yuan is displacing the dollar as a key currency. In a speech on the same day, a deputy governor of China’s central bank pointed out that China no longer hovers up dollar reserves with its past abandon. And according to a new study by Arvind Subramanian and Martin Kessler of the Peterson Institute for International Economics in Washington, DC, the dollar’s influence is waning in the emerging world. Currencies that used to shadow the greenback are no longer following it so closely. Some are floating more freely. But in other cases they are steadily falling under the spell of a different currency: the yuan.

“The greenback has in the past played a dominant role in East Asia. But if anything, the region is now on a yuan standard. Seven currencies in the region now follow the yuan, or redback, more closely than the greenback.”

Chuck again. Well, this doesn’t surprise me. For you’ll remember that I was the first to say that the Chinese were making moves to replace the dollar standard. It now appears that, especially in Asia, the renminbi/yuan will continue to grow in stature as its economy and trading activity grow in size, once again.

To recap. The bias to buy dollars held true throughout Friday’s trading session, but appears to be giving back gains, this morning. That is, except the Japanese yen, which is showing the rot on its vine as it heads toward 80. Dollar short position futures increased last week, reversing the previous two weeks of dollar short positions being pared back. US Existing Home Sales fell 3.3% in September, and Chuck talks about US debt again… and again… and again.

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

  • Pfc. Parts

    Chuck, I have to agree with the idea that if we don’t have money, we shouldn’t spend it. No more aircraft carriers, no more military pension programs, no more government spending!

    The government has all the money Chuck. All of it. You of all people must understand the nature of fiat currency.

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