Chuck Butler

Good day. It’s Anzac Day in Australia and New Zealand today — their end of the summer holiday, much like our Labor Day holiday. But just because we have these two on holiday today doesn’t mean we don’t have anything to talk about! There’s the FOMC meeting conclusion, problems in the UK (I told you they weren’t out of the woods) and a mini-currency rally going on.

Front and center this morning, the currencies are stronger versus the dollar, but the sad thing is that it’s more of the risk-on/risk-off trading. You see, US corporations earnings got the ball rolling as Apple reported some strong earnings last night. That sent the US stock futures higher and got the overnight markets stocks moving higher. When that happens, it’s a risk-on day, and that means, “Here we go again.” No, that means the other risk assets of currencies and commodities should follow along. And they are.

I spent a lot of time going over the risk-on/risk-off stuff yesterday, so I won’t go there again, except to say that I look forward to the day when we return to trading on fundamentals, and not just throwing all risk assets into a barrel and playing games.

OK, did you see the housing data yesterday for the US? Sadness again. New-home sales fell by 7.1% in March, to an annual pace of 328,000. The markets’ experts had forecast an increase of 1.6%. The time to clear the entire inventor supply of unsold homes increased, and according to the people at S&P/Case-Shiller, composite home prices fell -3.49% in February versus a year ago.

So home prices overall continue to fall, dipping to their worst level in nearly a decade, and haven’t reached a point that spurs the activity that is needed to heal this sector. And that won’t happen until the jobless problem in this country is corrected. The problem with home prices continuing to fall is that even people that make their mortgage payments find that they are underwater, when it comes to the value of their home versus the mortgage amount owed. This really throws a spanner in the works for the government, who looks for activity here to help spur the economy.

Of course, I could go off on that thought, about the government looking for activity in homes (remember using them like an ATM?) to help spur the economy. But I won’t. You all know exactly how I feel about what the government did to facilitate the housing bubble, and if you don’t — because you’re a new reader — I’m sorry. But the kinder, gentler me isn’t going to point blame fingers. Remember, Big Brother is watching.

US consumer confidence dipped ever so slightly in March. Maybe those that were surveyed read the recent report on the repercussions of foreclosures. Besides the apparent problems for those that have experienced foreclosure, there are other repercussions that this long and deep recession (I still refer to it as a depression) has allowed us to see.

Eight million children, or one in 10 kids, will be affected by the foreclosure crisis by the time it’s over, and it’s far from over! And in Nevada, where foreclosures have hit the worst, 19% of the children in the state are affected by a foreclosure.

OK, my two older children are teachers, and my beautiful bride has retired from teaching preschool. So I know that when children miss school for extended periods of time, they fall behind. When they fell left behind, they drop out. There are other things to think about, folks.

OK, that’s depressing. Time to change gears and head to the UK, where recent trading there has been pushing the pound sterling (GBP) higher versus not only the dollar, but the euro (EUR), too.

I kept telling you to be careful here, because things in the UK are not good. And this morning, we saw evidence of that, when first-quarter GDP printed at a negative 0.2% versus the previous quarter, and flat year on year. There are some fundamental underlying weaknesses in the US domestic economy, folks. That’s why I was so surprised that the markets were looking past this fundamental weakness and marking up the pound. That ended this morning.

There was some data from the eurozone this morning, which flew under the radar. But you know me — that’s where I like to hang out, under the radar, so I can find these little ditties! The European Central Bank reported that lending has slowed, and the demand for credit has fallen sharply. OK, folks, that’s a good sign!

I know there are tons of analysts that continue to tell you that the euro is going to collapse — of course, they’ve said that for over two years now. Was there a timetable on that call for a collapse?

Anyway, I began the year by telling you that this was going to be a very volatile year. The euro on Jan. 2 was 1.2965. I told you then that I wouldn’t be surprised to see the euro fall to 1.18, nor would I have been surprised to see it rise to 1.40. For all of 2012 so far, the euro has remained in a tight range. Any time it rises above 1.32, it gets knocked down, and whenever it falls to 1.30, it gets pushed back up.

The debt problems of the eurozone are awful, but as I’ve said many times, this is an ugly contest. Right now, the markets believe that the debt problems of the US are greater, and therefore the dollar is “uglier than the euro.” Of course, that could change in a heartbeat, but for now, that’s the way it is.

This morning in the eurozone, Germany saw their auction of debt not be as successful as the others were this week. They were able to sell enough, but the maximum target was not reached. I find this news to be strange, but I think the markets are sending the Germans a signal that they want a bump in yields. Even a country like Germany has their yields get bid up.

Spanish Budget Minister Cristobal Montoro presented his budget to parliament this morning. The budget contains the severest austerity measures since the nation was under rule by Gen. Francisco Franco.

Again, it is my thought that three-five years from now, the pain of all these austerity measures will be in the past, and they will have done something meaningful about their debt problems, while here in the US, we still won’t have the political will to do what needs to be done. Whose currency will be in more demand then? As if the dollar is in demand now — NOT!

But economist Paul Krugman says that what the eurozone is doing with the austerity measures is “economic suicide.”

Now, I’ve never been a fan of Paul Krugman; in fact, I try not to pay attention to what he says at all! But he offered up a contrasting opinion to what I was saying, so to be fair, I included it.

A reader sent me a note, taking my reference to My Fair Lady yesterday by saying the “pain in Spain.” He took it further and wrote: “The pain in Spain stains mainly those on the gravy train.”

The latest misery index is out, and the US is doing better than last year. A year ago, the misery index here in the US was 11.60%, and now, it’s 10.90%. You can check the misery index here.

The whole thought process surrounding why the Bank of Canada (BOC) would look to hike rates had cold water thrown all over it yesterday when a report showed that Canadian retail sales dipped 0.2% in February. I was just wishin’ and hopin’ and thinkin’ and prayin’ that retail sales would be strong. But that was not to be. So we carry on.

The report pushed the Canadian dollar/loonie (CAD) down just briefly, the pull from the other currencies to gain versus the US dollar was able to overcome the report and send the loonie higher.

Gold is pretty much flat this morning, after gaining a bit yesterday. After the wipeout of gold’s price last month, the shiny metal has kind of settled in here at around $1,640. The demand on our metals desk remains very strong, and the numbers from the US Mint continue to show very strong demand for gold and silver coins.

I had someone ask me to explain to him why I bought gold. First of all, I didn’t just buy gold. I began quite a few years ago. and I’m still buying it! But the point to make with this guy was simply that I view gold as portfolio insurance. You buy insurance for your home, your car, ATV, etc. I thought why wouldn’t I buy insurance for my second-largest asset, my investment portfolio. I’ve been warning readers about the US debt problems for over a decade now. So if that’s how I felt, why wouldn’t I look to insure my wealth? The fact that gold and silver have been the best-performing assets for the past decade doesn’t hurt!

Before I head to the big finish, I read a report that talked about the Chinese renminbi/yuan (CNY) and how the researcher for the report didn’t feel that the renminbi was undervalued any longer. On a trade-weighted basis, he felt that the renminbi was now on a level playing field in the currency world.

That may be, and could very well be the reason for the Chinese to widen the trading band on the renminbi. The Chinese continue to see more reasons to loosen the shackles on the renminbi. But again, I don’t think this halts the slow appreciation of the renminbi. But it’s no one-way street, folks. The Chinese have proven that they don’t want to see that kind of thought process in the renminbi.

Then, one of my all-time fave investment people is Jim Rogers. He’s a friend of ours, but I rarely get to see him. Jim had a couple of things to say in a recent interview that I thought were vintage Jim Rogers and played well with what I tell you. So when asked if he had paid attention to the latest jobs report, Jim he replied, “I barely pay attention to the stuff you’re talking about. It really doesn’t change my view. As if you think some government statistics, which are wrong or late, would affect anything in my investment world. No, I don’t even know or pay attention to such things.”

When asked if the current price of gold was a good price to jump back in, Jim replied, “What I said was if gold gets to $1,100 or $1,200 or $1,300, I would hope I’m smart enough to buy more. I don’t know if it’s going to go there or not. I may buy it at $1,850 if war breaks out with Iran. It depends on what happens in the world. What I said was that it won’t surprise me if gold goes down much lower; that’s normal for the way markets work. And if it goes there, I hope I’m smart enough to buy more. But if it goes to $1,550, I would probably buy more. Just depends on what happened.”

Thanks to Jim Rogers for his thoughts this morning. You always know that when he speaks, he doesn’t pull any punches or beat around the bush. You get it straight on. Then it’s up to you to decide if you can handle it or not!

To recap: The currencies began to rally yesterday, but really got firmly on the rally tracks once Apple announced their earnings last night. So the risk-on/risk-off trading still has the conn in the markets. The UK announced negative growth for the first quarter of 2012, so they are not out of the woods yet. Canada printed a negative retail sales number that really threw cold water on Chuck’s thought that a strong number would push the BOC to hike rates.

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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