Chuck Butler

I told you yesterday that the Australian dollar (AUD) was weaker because of the uncertainty of the leadership vote that Prime Minister Gillard won over the weekend, but that it would bounce back quickly, and that’s exactly what it did. I had just hit send, and I noticed the A$ ticking higher, and by midmorning, the A$ was back to $1.0750, where it seems to have stalled out, but remains a buy for those investors around the world looking for yield, and don’t want to go out on the limb with Brazil.

The euro (EUR) is stronger this morning by one-third of a cent. Yesterday morning, the euro looked as if it were about to catch a cold, and this morning, it looks as if it has beaten the cold back and is ready to move on. We’ve got a couple of very important things to look at this morning with regard to the euro.

First, eurozone confidence for economic outlook improved more than economists forecast this month. I can’t point out enough times, without sounding like a broken record, that this is another step in the stabilization of the eurozone that I talked about in December. Yes, while writers all over earth are writing about the eurozone breakup, I’m here alone, talking about stabilization, and so far, stabilization is winning. But that can all change in a heartbeat, so I’m not slapping myself on the back just yet. But again, like the so-called experts that called for a collapse of the Chinese economy more than two years ago — and I said it would be moderation instead — the experts that have far more gray matter than I — and have large numbers of research team members — say that the eurozone will break up… so it must be, eh? Not so fast! Not yet…

The other thing to talk about in the eurozone is tomorrow’s European Central Bank (ECB) LTRO (long-term recovery operations) day in which the old three-month loans get turned in and rolled for another term (most likely), and there is an amount allocated to new loans, which the ECB would love to not have to tap, but I think that’s like wishing for all the weight I’ve accumulated over the years to just melt away.

So here’s the skinny: There are three tenders expiring this week, totaling euro 255 billion. There are seven-day loans and three-month loans. I think that almost all the loans that are expiring will be rolled, and some will be rolled out to three years. I read those people that follow this very closely believe that new loans totaling euro 400 billion would be a good result, and any number greater than 500 billion would be a bad result.

I think this operation tomorrow holds the key to the near-term direction of the euro, folks. This is important to the euro’s value. Today, we could see a lot of forecasting of the outcome, and that could swing the euro in one direction and then another. So be careful today, this could get crazy today with the so-called “experts” calling for this and that.

And then, finally, with the euro: Italy sold 6.25 billion euros of debt in bonds this morning, 3.75 billion of 10-year bonds at 5.5%, the lowest rate on that tenor of bonds for Italy since last September. They sold 2.5 billion of five-year bonds at 4.19%, down from 5.39% at the last auction. And so on. The most-important thing here is the sign of additional stabilization.

The price of oil remains around $108. The other day, I highlighted the fact that the Canadian dollar/loonie, (CAD) which normally is sensitive to moves in the price of oil, was lagging the other petrol currencies’ reactions to the higher price of oil. Well, that remains to be true. The Russian ruble, (RUB) Norwegian krone (NOK), Brazilian real (BRL) and even the U.K. pound (GBP) are finding it easier to gain versus the dollar with the higher price of oil by their side, than the Canadian dollar/loonie.

I think that the markets are just leery of pushing the envelope with the loonie right now, given the nascent recovery in the U.S. But the loonie is back to parity with the green/peachback this morning, so maybe the loonie can play some catch-up.

I mentioned two of the four BRIC currencies above, in Russian rubles and Brazilian real, and right now, they look strong. But they bounce around so much. The other two BRIC currencies, the Indian rupee (INR) and Chinese renminbi, (CNY) are moving in the right direction again, after some weakness. So maybe these BRIC currencies can finally all get moving in the right direction.

Speaking of India, I was tough on the Beaver when I took the Indian Central Bank (RBI) to the woodshed for failing to identify the inflation pressures last year, which put the rupee behind the inflation eight ball. But in the past three months, the Indian rupee is the best-performing currency in Asia. Pretty unreal to me, given what was going on with the rupee three months ago!

Gold and silver are stronger this morning. I wanted to talk about silver for a minute, given all the talk I do about gold. I thought silver needed some love. Anyway, I read a report yesterday that highlighted what the writer thought was a tough line of resistance at $36 for silver. They drew a chart line and talked about how it indicated that $36 was going to be tough to move past.

And then I read a report by a Pfennig reader who I’ve highlighted before named Scott Pluschau. Scott says that “The path of least resistance will be higher.” So then I thought that doesn’t sound like $36 is going to be much of a problem to me. So I’ll stick with Scott’s version!

You can read the whole report here.

Besides, the demand for gold and silver remains strong.

The January trade deficit for New Zealand that I told you about yesterday is really weighing heavily on the New Zealand dollar/kiwi (NZD). For just when you thought it was safe to get back into the kiwi waters, the sharks return! If you go back four years, when New Zealand had the highest interest rates in the industrialized world, investors would look the other way when the country would print a trade deficit. I remember warning investors about this and saying that once the interest rate goes away, investors will notice the deficits.

This proves that point. First, we all know that the Reserve Bank of New Zealand (RBNZ) made emergency rate cuts after the two earthquakes last year, and that the RBNZ has chosen to not reverse those emergency rate cuts, thus leaving N.Z. with lower rates, which don’t hide the trade deficits. But don’t get too discouraged here. If we truly get back to fundamentals and the U.S. dollar heads back down, the kiwi will be pulled higher by the Aussie dollar.

Did you know that our government’s projected tax receipts for next year, 2013, total $2.90 trillion? Yes, that sounds good enough, right? Not so fast! $2.90 trillion is roughly equal to our government’s actual spending of $2.98 trillion in fiscal 2008! That’s right, I said 2008! What’s our projected spending for 2013? Oh, around $4.25 trillion, which is how we get the budget deficit of $1.33 trillion.

When will all this madness in deficit spending end? Not anytime soon, folks. The government will deficit spend until it hurts. Yes, when the government gets its credit card rejected by foreigners, the government will have to stop deficit spending. But not until then will they stop Which just continues to be a drag on the dollar and ruin your purchasing power. That is, unless you have taken steps to protect your purchasing power.

How does one do that? It’s simple! I personally believe that every investor all over the world needs to diversify their investment portfolio and allocate a portion of it to foreign currencies and metals. That way, should the dollar continue to be weighed down by debts and deficits, you will protect your purchasing power. Please notice that I said allocate a portion of your investment portfolio, not go “all in.” You’ll still need dollars, in this case, for gas, groceries and giggles.

Here’s another thing that will weigh heavily on the dollar going forward (thanks to Pfennig reader and friend Dennis for the information): Two out of every three American workers aged 21-64 that HAVE ACCESS to an employer-sponsored 401(k) DO NOT PARTICIPATE in the pretax retirement plan (Source: Employee Benefit Research Institute). No, instead these people are going to make demands on the government to take care of them in retirement.

And think about this too: 7,671 Americans turned 65 years old on average each day during calendar year 2011. And in 2012, the number will prove to be close to 10,000 per day. And for the next 18 years, these number of people turning 65 will be high.

Now think about the Debt Clock that I show you each week, and that “unfunded liabilities” number. Scary, eh?

Then there was this: Last night, the IMF Board concluded and approved the fifth review of the Irish bailout. The board cited “strong implementation” of the program. This allows Ireland to receive its next trance of funding (14 billion euros). The Irish beat the 2011 deficit target, continued to downsize their banking system, met other austerity measures and didn’t burn bank buildings doing it!

I’ve said it before: I think Ireland will be fine. You’ve got to love the way they’ve gone about the business of getting back in line very quietly.

To recap: The currencies and metals are rallying this morning. The euro saw some love after the eurozone economic confidence showed strength and Italy auctioned bonds at much-lower rates. The Australian dollar is back on terra firma after weathering the storm of the leadership vote this past weekend, and the BRIC currencies are finally moving in the same direction at once!

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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