Euro and Aussie Dollar Lead Currencies Lower

On Friday, I left you with the thought that the risk assets were attempting to heal from Thursday’s bloodletting. There were no U.S. data to swing the traders one way or the other, so it appeared that the week would end with some healing in the risk assets. But that appearance didn’t last long, and soon the small gains that had been booked were wiped out. But still, no major sell-off as on Thursday, so at least the risk assets had that going for them!

This morning, we have more selling going on. The currencies led by the euro and Australian dollar (A$) are both down significantly, and gold just can’t seem to find a bid these days. The S&P futures are down early this morning too. So at this point of the day, it appears that we’ll see a down day, a day of risk aversion and weaker values.

We went into Friday with the thought that four of the largest economies in the eurozone were going to send their leaders to a meeting in Rome to work on a plan that would be presented at the European summit this coming weekend. I don’t know if the eurozone leaders took my suggestion of coming up with a blueprint on how they will address this debt debacle as a whole, and stop the putting out fires one at a time. I guess we won’t find that out until this next weekend. I sure hope they did; otherwise, I feel that the eurozone and euro will be in for a world of hurt.

In Germany, they did announce that German Chancellor Angela Merkel had agreed to underwrite the debt of Germany’s 16 states, which is a form of burden-sharing, and will be called “Deutschland Bonds,” which will give Germany two tiers of bonds: straight government bonds and these new “Deutschland Bonds.”

So what does that have to do with the eurozone as a whole? What’s good for the goose is also good for the gander, right? So if Merkel will agree to sharing debt burden within Germany, then why not for the eurozone?

If I were Angela Merkel, I would be very concerned about joint debt sales in the 17-nation currency union, as long as budgets are set by the national governments. In fact, German Finance Minister Wolfgang Schaeuble said it all when he told reporters that, “as long as the national states make the decisions, they have to be liable. If you can spend money on my tab, you won’t be thrifty.” And doesn’t that make sense?

Now switch gears, and come across the pond to the U.S. The U.S. government makes the budgets, and they spend our money — not theirs — which means they don’t have to be thrifty, right? But apparently, this just doesn’t occur or appear in the thought box above a trader’s head that what’s going on in the U.S. is more absurd than what’s going on in the eurozone.

There are two reasons we get away with it, folks. The first and biggest reason is the fact that the U.S. dollar is still the reserve currency of the world, and the second reason is that most people in the U.S. don’t give a rat’s tail about how much debt the U.S. has, or worry about how that it will get paid down, or worry about the tax burdens their kids and grandkids are going to have to deal with. Of course, that’s not you, dear readers, but think of yourself as the “minority” when it comes to awareness of this situation here in the U.S.

They know all about Greece, because the media makes a big deal out of a country that has the economy about the size of the economy of the Dallas-Fort Worth area, even though New York City’s economy is larger than Greece’s. When I go out on the road to talk to people, you would be amazed at the number of people that 1. don’t know the consequences of these debt burdens here in the U.S., 2. don’t know that the dollar, even though it’s in rally mode now, has lost a major chunk of its purchasing power and 3. don’t know that they can do something to protect themselves from the potential further declines of the dollar.

But as I’ve said, take the Pfennig readers and the people I talk to while out on the road, and it’s still a small group, when compared with the U.S. population as a whole.

Speaking of a country with debt, over in Japan, they are set to pass a consumption tax hike bill. This would be a brand-spanking-new tax on the Japanese people. So this illustrates what I was just talking about regarding the tax burdens on our grandkids.

So here, in the land of debt, they will pass a new tax to help pay for government debt. But here’s something to think about regarding Japan’s economy: The new tax, if passed this week, will go into effect in 2014. So don’t you think that the Japanese economy could get boost from consumers rushing out to buy before this tax gets implemented? So short term, it could be a good thing; long term, it’s not such a good thing.

I saw a story headline on Bloomberg this morning that caught my eye. The title: “Central Banks Commit to Ease as Threat of Lost Decades Rises.” So if you’re like me, that title intrigued you, and you’ll read on. According to the Bloomberg, “Central bankers are finding it easier to support their economies than to spur expansion as the prospect of Japanese-like lost decades looms across the developed world.”

OK, Chuck again here. Now, I’ve said that the U.S. was turning Japanese for almost a decade now, and every time the U.S. implements another form of stimulus and keeps their interest rates near zero, they play right into the Japanese lost-decades scenario. Peter Dixon, the global equities economist at Commerzbank, said, “Japan’s experience shows central banks can mitigate the worst effects of the current environment, but it’s going to be very hard for them to stimulate demand.”

I think the Fed heads are finding that to be very true. So why meddle in the first place? If a country’s economy needs to clean out the excesses, then let it! Part of our financial meltdown problem is the fact that the Fed had to meddle in recessions that we — the U.S. economy — werer supposed to experience going back to 2001. Eventually, these problems build up and then spill out. That’s exactly what has happened: The more you meddle, the bigger the problem down the road. Just ask Japan!

So the U.S. data cupboard gets re-stocked this week, but for the most part, I believe that the focus will be on the European summit, which will begin on Thursday. But for those of you keeping score at home, today, we’ll see new home sales for May, which should remain about the size of April’s 343,000. Another regional manufacturing report, this time from Dallas. Tomorrow, the S&P/Case-Shiller home price index and consumer confidence.

As we go along this week, there will be more, but no sense in talking about them now. But keep in mind the mantra that has been taken on by the traders once again, and that is the dollar gets rewarded for awful/weak data in the U.S. Strange as it might seem, that’s what’s happening!

I said above that gold just can’t seem to find a bid lately, and that about says it all! The past few months have really been a test of convictions for gold owners. I don’t know this to be true — it’s just my opinion — but I would have to think that given the currency debasement going on all over the world, investors will be seeking out gold as a store of wealth. It’s just going to take some time, as it will take some time for the sheeple to realize what their government has been doing to the purchasing power of their currency.

And China continues to allow the renminbi to weaken versus the dollar — by small amounts, yes, but still… this has to be the longest they’ve gone in this direction since 2008. In fact, the BRICS are all performing very badly these days — something I did not foresee a few years ago. These countries had everything going for them.

Then There Was This… Are you ready to scream at the walls? I just returned from a trip to the wall. Here’s a story that was in The Washington Post this past weekend. Enjoy:

“One-hundred-thirty members of Congress or their families have traded stocks collectively worth hundreds of millions of dollars in companies lobbying on bills that came before their committees, a practice that is permitted under current ethics rules, a Washington Post analysis has found. The lawmakers bought and sold a total of between $85-218 million in 323 companies registered to lobby on legislation that appeared before them, according to an examination of all 45,000 individual congressional stock transactions contained in computerized financial disclosure data from 2007-10.

“Almost one in every eight trades — 5,531 — intersected with legislation.”

Chuck again. Did you walk away for a moment to visit a wall nearby?

To recap… The healing of the risk assets faded on Friday, and an all-out risk aversion is going on this morning, led by the euro and A$. The eurozone leaders of the four largest economies met to hopefully lay out a blueprint to present to the Eurozone summit attendees this coming weekend. I say hopefully, because if they don’t, the eurozone and euro are in for a world of hurt.

Chuck Butler
for The Daily Reckoning