11/23/10 St. Louis, Missouri – Well… How do you feel about the roller coaster ride we went on yesterday? I know, it knocked the wind out of me, and the risk assets… And yes, I did keep my arms and legs inside for the ride, but the whipping around was just too much for me! And the risk assets… So, I’ll stop beating around the bush, and get to the meat…
Front and center this morning… North Korea fired artillery at South Korea’s Yeonpyeong island in the Yellow Sea off the countries’ west coast, setting houses on fire. According to residents, the South returned fire. A spokesman for South Korea’s Joint Chiefs-of-Staff confirmed the exchange but didn’t have details except to say “scores of rounds” were fired by the North.
OK… Just what the world needs, right? Another war! I know, I’m getting ahead of myself here, as right now this is just the “exchange of pre-Christmas cards,” right? NOT!
So… Here was the roller coaster ride yesterday… As I signed off yesterday, I told you that the NY traders were already marking down the euro (EUR)… Well, all the euphoria of an Irish bailout/rescue package was put on the shelf when, not wanting to stand any prosperity, the Irish government announced that it would resign leaving the country in turmoil. Then… The ride got a little more tricky and wild when questions began to come to the forefront about the health of banks in the UK… And then, while the markets were questioning the UK banks, they decided to wonder aloud as to the health of Spain and Portugal… Would Spain and Portugal need bailouts too?
And so… The euro was sold, which led to a sell-off in all the currencies on the day… Gold and silver were destinations of these sold currencies, and enjoyed strong performances versus the dollar on the day… But that was yesterday, when all of gold and silver’s troubles looked so far away, but it looks as though they’re here to stay…
But really… One would think that with the geopolitical risks on “high” with the goings on in North & South Korea, that gold would be kicking some dollar rear-end and taking names later… But, the risk assets of currencies, precious metals and stocks have all been thrown into the same barrel since the financial meltdown of 2008, and until that changes, gold’s fundamentals get thrown to the side of the road.
But hold on, folks, because as the roller coaster ride showed us yesterday that things can change very quickly, sentiment can change on a dime, and focus shifts… It can happen that quickly…
Which is why I always say is that short-term moves in markets cannot be forecast… It’s the trends that win… And trends develop because of fundamentals… And trends are what move currencies and metals, not technicals…
(I’ll be sure to get a few emails on that last statement)!
The Swiss franc (CHF), which had seen some rough days recently, is getting bought this morning, with the geopolitical risks flaring. The Canadian dollar/loonie (CAD) has shown that parity with the US dollar is easier gained then held. Of course the price of oil has slipped in the past week too, which doesn’t help the loonie.
What might help the loonie down the road is the determination of Finance Minister (FM) Jim Flaherty, who is seeking to balance the budget (novel idea, eh?) through spending cuts… Remember when Canada was the first G-8 country to raise interest rates earlier this year? Well, Flaherty is determined to make Canada the first G-8 country to balance their budget by 2015.
The Aussie dollar (AUD) and New Zealand dollar (NZD) are still reeling from the grenade thrown into New Zealand’s lap by the rating agency, S&P this past weekend. You may ask, if it is bad for New Zealand, why would the Aussie dollar get dragged down… Hey! Good question! And this is where I would normally say… Ahhh grasshopper, come sit… You see, Australia and New Zealand are kissin’ cousins across the Tasman, and while one can outperform the other for periods of time, these two are normally seen as one… And therefore, they get bought and sold on each other’s fortunes… But remember, Australia is the larger of the two, with a much larger economy… So, Australia can weather storms that come across the Tasman better than when the storms go the other way.
OK… The Fed/Cartel sure is getting stones thrown at them ever since they announced the next round of quantitative easing (QE)… And this time, it’s not just me doing the stone throwing!
Criticism from foreign officials, have introduced enough uncertainty into global financial markets to potentially undercut the Fed’s plan to drive down interest rates, which rise or fall as investors anticipate Fed action. And while yields have come back a bit in the past couple of days, they are still considerably higher than when the QE was first announced…
The Fed/Cartel, and its chairman, Big Ben Bernanke, are pushing back, (according to the NYT) making their case on substantive grounds but also haltingly adopting the tactics of Washington battle, like strategically placed interviews, behind-the-scenes assuaging of opponents and reaching out to potential allies on Capitol Hill…
I heard a battle cry yesterday from a Fed Head that was a cry to “not make the Fed political”… Well, you probably need to go talk to the boss, because according to the report in the NYT, that’s exactly what he’s doing…
I’ve long considered the ECB, Reserve Bank of Australia, Norges Bank, Riksbank, Bank of Canada, and Reserve Bank of New Zealand to be what I would call “prudent”… These are all banks that do not allow political interference, and do not seek it either!
OK… As promised yesterday… Today we begin “stuffing” the turkey… The two days of economic data being stuffed this week begins today… First off, we’ll see the second print of third quarter GDP here in the US. The first printing showed us that GDP was 2%… The “experts” believe that this revision will show that GDP was 2.4%, which would be a nice upward revision, if it were true…
Today, we’ll also see the color of the October Existing Home Sales. Then there’s the Personal Consumption data for the third quarter, and the Fed meeting minutes will print this afternoon from the infamous QE announcement meeting… Those should be interesting, eh?
I was just reading a story that caught my eye regarding the Eurozone… This morning, Eurozone manufacturing for this month was stronger than forecast, and last month! The Eurozone manufacturing index printed at 55.4% (their index is just like ours, anything above 50% is expansion and good!)
One would think that data like this would have helped the euro to regain some ground, instead the markets are focusing on a mis-statement by German Finance Minister, Schaeuble, who said that “Germany is not swimming in money but rater drowning in debt”…
He did not mean to say that Germany had the problem with debt… He meant to say that Germany had all these periphery countries around it with debt problems… Germany’s creditworthiness is not open to question, folks… That’s a fact…
Somebody needs to say something to clear this up now, as the euro just got sold off another 1/2-cent!
Then there was this… I was there the first day… The first day the TSA began their new pat-down searches instead of wanding… Basically, since a good part of my right side is titanium, I’ve gotten wanded and then patted down for three years… No biggie… But now, the TSA not only pats you down, they basically grope you… (I’m sure anyone having to pat me down, is not a happy camper about it! HA) Now, personally, I let this roll off my back like water on a duck’s back, but apparently people do not like being groped in public! I look at this new screening process like everything else in life… We let things lapse, then attempt to correct them only to have the meter go 180 degrees the other way; after a while things get back to normal… So… Patience will help you as you travel this Christmas season…
To recap… We had some artillery exchange between North and South Korea overnight to add to the wide roller coaster ride the risk assets took yesterday. The Irish government is near collapse, and questions about the health of UK banks, and the overall creditworthiness of Spain and Portugal came back causing a flight to quality, with Treasury yields going down, the dollar and Swiss franc going up… Eurozone manufacturing is strong, but the markets have ignored that data. And New Zealand is still reeling from the shot across its bow by S&P this past weekend.
Chuck Butler
for The Daily Reckoning
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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September 2009, the Irish government was browbeaten with a carrot and a stick from the ECB and Germany into guaranteeing all Irish bank’s deposits to prevent a run on their banks at the time, and that was critical because a run on those banks would have been the tipping point that revealed all the toxic debt, not just in Irish banks but globally, it might well have, probably would have been the trigger for the collapse of the whole world banking system.
The ECB had to have this concession because remember at the time Iceland had just defaulted and the cost was enormous, yet a fraction of what would happen in Greece or Ireland, Portugal or Spain if they also went the way of Iceland. Iceland is not even part of the EU (yet) but the banks in question were loaded up with mostly British and Dutch deposits, failure of Icelandic banks meant the Euro deposits would have to be honored by EuroZone governments. Ditto Spanish banks in particular, French and German exposure in Spain is huge so Spain cannot be allowed to falter or the contagion will take out Northern Banks.
Now, the government knows the Irish voters rejected the Lisbon Treaty in a plebiscite when they voted on it, and it is my believe (as an Irishman with dual citizenship in the US) that this is exactly what the opposition warned of during that election, but the EU literally forced Ireland to hold another election on the treaty so that they could “get it right” and coercive language was used to get the nation to go along. That guarantee of the bank deposits by the government was the fatal flaw, it meant that now all bank losses would become government fiscal losses and nobody but the banks themselves and presumably the ECB knew the scope of the toxic rot in that banking system. Had the taxpayers of Ireland known what they were going to be on the hook for then they never would have voted to ratify the Lisbon Treaty.
Almost 2011 and the government has been saying it was fully funded, they refused to ask for a bailout. The Irish government knew they would be out of office as soon as they did ask. Pundits concluded that they were using this “obstinate” delay to negotiate with the EU to keep their advantageous corporate tax rate of 12.5%, but I think it was more serious than that, they wanted to unlink bank losses from government fiscal responsibility, in effect telling the northern EU that if they wanted to save the banking system that the ECB and richer nations could bailout the banks directly. But the ECB and Germany would not go along even though this could have resulted in the end of the EuroZone and even the EU itself. So, Irish banks got a forced bailout that the Irish tax payers are on the hook for, dictating permanent austerity, permanent high unemployment, and no chance of ever repaying the debt, never, not in 20 lifetimes. (unless Irish oil and gas deposits on the west coast are far larger than previously thought).
And only days after the announcement of the “request” for assistance the government has resigned and called new elections, also only days after the announcement the estimate of how large the bailout will be has already grown from 75-80 billion Euro to now 120 billion Euro, I ask you how in hell 4.5 million Irish are supposed to repay a loan of 120 billion on top of all other previously existing Irish debt? This is more than 26,660 euro (just under $37,000) per man woman and child in Ireland. Just in new debt issued to bailout bankers. Anybody that thinks the average Irishman will not fight to default on “EU” debt, to leave the EU if need be, to return to the punt, has got to think again, there are EU, mostly German by the way, bureaucrats in almost every government department looking over the shoulders of Irish officials making sure that they are being as austere as they can be, dictating policy to the Irish government, so what Hitler could not accomplish in the 1940′s Germany via the ECB has done and it is badly resented.
I give the EuroZone and probably the EU itself less than 3 years to survive this mess, just long enough for the uber rich to feather their nests at the expense of the poorer nations, possibly to grab economic concessions like cheap leases for Irish offshore oil and gas. Some believe that these fields are as rich or ricer than the North Sea deposits. If that is the case then I am all for Irish independence from the EuroZone at least and the EU if necessary. As a citizen I would vote for it.