Chuck Butler

Good day… And a Wonderful Wednesday to you! As Gomer Pyle used to say, Surprise, Surprise, Surprise! Yes it’s me! I’m back! Well, sort of. Before I go on, though, please let me say that I am so thankful for all of you who have sent thoughts and prayers my way. This has been a very trying 3 weeks, which really isn’t over, just yet. I got a Big Kick out of reading Chris and Mike the past three weeks, as I’m sure you did too! I know the rest of the boys and girls on the trading desk have really had to kick it into another gear the past few weeks, and I feel bad that I wasn’t there to guide them, and give them moral support. But, I was doing something more important… Taking care of myself!

My beautiful bride was not so happy to hear that I was thinking of going back to work. But it had to happen at some time. So, I got ready, and went in to work yesterday. I was there for about four hours and then it hit me. What was I doing there? I realized I had rushed coming back, and so, here I am at home writing this morning, and the rest of the week. See how much I’ve learned? In the old days I would have ignored what my body was telling me, but not any longer!

I saw that we had a very strong currency and commodities rally around the time of the last FOMC announcement of QE3, but from my view in the cheap seats, that rally is fading fast. (Although we had a mini-rally yesterday.) The markets got what they wanted, but it appears they’re like a rich kid who comes down on Christmas morning and sees presents coming out of the woodwork, and says he’s disappointed with his take! Well, Chris told you how I was gloating about my call for QE3, and how I said it would come at that meeting. But, I had no one to tell! My beautiful bride thinks I’ve gotten on the gloom and doom train, so she won’t listen any longer, and the only living thing left to talk to were the chipmunks that were running around the yard!

So… Why is this round of QE3 not displaying the long lasting effect of its predecessors? Well, I think that we have all become “Comfortably Numb” to what the Fed is doing. (I say “we” but that doesn’t include me, or you, dear reader, for I won’t let you!) In addition to becoming Comfortably Numb, there’s the attention span of traders. It’s about the same as a 2-year old! And within a couple of days, the attention was back on the problems of Spain. The problems of Spain didn’t ever “go away”. It’s just a game of volleyball between the US and the Eurozone for the attention of traders and investors. The Eurozone was hoping that a debt auction by Spain yesterday would act as the “set” and they could get the ball back over the net to the US.

And for a while yesterday, things looked as if the Eurozone would get the ball back over the net. There was a good article in The Wall Street Journal (WSJ) that said the Eurozone governments have begun discussions over creating a central budget that could help smooth over some of the economic divergences in the region. And guess what? Germany indicated that it supports the idea! I’m telling you this now, so you can hear me later… It started with a whispering campaign; and ended up with a Eurozone bond.

That’s a lot to ask for, considering the fumbling, stumbling actions of the Eurozone leaders… But, like I tell anyone who will listen these days, at least the Eurozone leaders are trying “something” to erase debt. Maybe they’ll be wrong, and maybe they’ll be right, but for goodness sakes they at least get an “E” for effort. What have we done here to erase debt? Nothing, absolutely nothing, say it again! About 10 days ago, we passed the $16 trillion mark for national debt. It was just 10 months ago that we passed the $15 trillion mark! Do you see a trend here that’s gaining momentum? I do… But then I saw it back in 2001!

And here’s some data that my friend (thanks Dennis!) sent me. Through the first 11 months of fiscal year 2012, tax revenues collected by the US government were $2.1888 trillion, and our total outlays were $3.352 trillion, resulting in a deficit of $1.164 trillion. That’s equivalent to collecting 65-cents in tax revenue, borrowing 35-cents, and then spending the entire $1. On August 31, 2007 just 5 years ago, the total debt in the US was $9 trillion. And now it’s $16 trillion. How will this end? In tears, my friend, in tears.

This past weekend I was doing some reading and saw the latest results from the IMM positions report. And as of last week, the net short positions of US dollars increased by a large margin, so much so that they added to the previous 3 weeks of net short USD positions increasing, the level last week indicated that we could see a correction. And that’s exactly what we’re seeing! The same thing has happened every year since 2008. The dollar gets sold to a point, and then magically it rebounds to end the year! How does that happen? Well, you know me. I could give you a handful of conspiracy theories on this. But, I won’t, so let’s just say what the great Maradona said when he scored a goal that in the replays showed he hit the ball with his hand. He said it was the “hand of God” that guided the ball into the net. So, the hand of God has guided the dollar higher, at the end of each year, each of the past 4 years.

However, on the other side of the fence… The researchers at the Royal Bank of Scotland Plc (RBS) issued a report that said the “dollar Index’s rally from its lowest level in more than 6 months may be near an end, as they cited trading patterns.” Hmmm… Don’t you love these guys who say, “may”. You know in their heart of hearts that they want to say “will”, but their legal beagles won’t let them. So they water down their research.

Yesterday, Spanish Prime Minister (PM), Rajoy confirmed that a package of structural reforms is due to be announced tomorrow. When asked if Spain would apply for a bailout, he said, “At the moment, I cannot tell you.” Oh, come on Mr. PM! You know you’re going to apply for a bailout! There’s no way your country can continue to service the high interest rates on your debt that the bond vigilantes have pushed rates to. And that thought is what pushed the euro back down overnight after its brief rally yesterday.

So. The euro (EUR) is at a 1-week low this morning and all the other currencies are weaker than they were a week ago. They must have read in the Pfennig that I was getting ready to come back to work! In all seriousness I kept thinking after the QE3 announcement and the wild rally in the euro that took place, that it was too much. The euro’s fundamentals are not on terra firma, but, as the offset currency to the dollar, it was bought as dollars were sold.

Now that the ball has been volleyed back to the Eurozone, the spot light is on them, and not the US Fed with their call to buy $40 billion of mortgage backed bonds a month, until the unemployment rate is 5.5%… I don’t know who’s charge is more of a stretch. The Eurozone’s charge to deal with debt, or the Fed’s charge.

We were blessed with a truck load of economic data yesterday, led by the S&P/CaseShiller Home Price Index for July, which showed a rebound in home prices. Consumer Confidence bounced higher, from the previous month’s drop. There’s more, but those are the Big Boys of the data prints yesterday.

Speaking of Fed Heads. Did you happen to see in my friend, John Mauldin’s, letter last week what Fed Head Dudley had to say about QE3? Here’s Mr. Dudley, “I am tempted to draw upon the hackneyed comparison that likens our dissolute Congress to drunken sailors. But patriots among you might take umbrage, noting that a comparison with Congress in this case might be deemed an insult to drunken sailors.

“Just recently, in a hearing before the Senate, your senator and my Harvard classmate, Chuck Schumer, told Chairman Bernanke, ‘You are the only game in town.’ I thought the chairman showed admirable restraint in his response. I would have immediately answered, ‘No, senator, you and your colleagues are the only game in town. For you and your colleagues, Democrat and Republican alike, have encumbered our nation with debt, sold our children down the river and sorely failed our nation. Sober up. Get your act together. Illegitimum non carborundum; get on with it. Sacrifice your political ambition for the good of our country — for the good of our children and grandchildren. For unless you do so, all the monetary policy accommodation the Federal Reserve can muster will be for naught.”

Wow! Talk about telling it like it is! Fed Head Dudley gets the Aaron Neville award this week!

Ok, Chuck move along. These are not the droids we’re looking for. In Canada yesterday, July retail sales, rose more than expected, coming in at +0.7% (consensus was +0.2%) and helped the Canadian dollar/loonie rally (CAD) yesterday. But like I said above, that mini-rally has faded overnight. In Switzerland we heard a speech by the Swiss National Bank President, (SNB) Jordan which carried the “company line” of the “franc is still overvalued, and it should weaken over time, and that the SNB stands ready to take action.” Pretty soon, this company line will become so numbing that traders won’t even hear it any longer, for all words and no action over time can cause a currency to move in a direction opposite of what the central bank wants.

The Aussie dollar (AUD), while not as lofty as last week, still remains above parity, and that can be attributed to quite a few things, folks. Included in the list is the fact that Central Banks around the world are diversifying their reserves and including Aussie dollars… A wise man once told me: if central banks think it’s a good thing to own, you should too! But, I think this wise man was giving more credit to central banks than he should! HA!

Commodities have held their gains and that has helped underpin the Aussie dollar too. But, if the drag of the undertow from the Eurozone becomes too much for the Aussie dollar to withstand, it will succumb to the euro’s weakness. You have to dig deep to find the answer to why this happens. But global growth is a big deal, and with the Eurozone, and US in the growth dumpster, you can see how the Aussie dollar gets hit. For what have I always told you? That the Aussie is the proxy for global growth.

Then There Was this… Did you see the news that the US Commodities Futures Trading Commission (CFTC) member Bart Chilton was talking about the silver investigation at the Hard Assets Conference in Chicago, last weekend? Bart Chilton said, “the commission’s investigation of the silver market continues,” and that he expects to say something about it soon, and then get this. “He continues to believe that the market has been subject to illegal activity.”

Chuck again. WOW! He really said that! But will he do anything about it? That’s the $64 question, folks. You can make your wagers. I think I’ll say nothing will be done about this illegal activity he believes the silver market has been subject to!

And then, there’s this special request that my marketing guru, Jason, has asked me to talk to you about. About a month ago, I announced that the Pfennig was now in blog format, with the ability to respond, and open a conversation, albeit through the blog. The site is tre’ cool, and it has all the bells and whistles along with the archives! So, make sure you visit www.dailypfennig.com

To recap. Chuck is back! And the currencies are losing their lofty levels of a week ago, when QE3 was the rage. But, the markets have become comfortably numb on QE, and so their attention span has them drifting back across to the Eurozone, where Spain is the country du jour these days. Spanish PM Rajoy puts the bailout thought for Spain in the markets’ heads, and the euro loses ground. And Fed Head Dudley chastises the lawmakers, and begins to sound like Chuck!

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

  • Varange

    Scary times, here in Perth, Australia. Perth is the capital of Western Australia where much of the mining is happening. The optimism here at the moment is similar to what we saw at the height of the housing bubble. Politicians freely promise to spend money that they think they can steal from people in the future, and the Average Joe thinks the sun will shine forever. At the same time, the manufacturing sector is going to hell in a hand basket.

    Arrghhh! It’ll be ugly when it all turns to cheese.

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