08/25/10 St. Louis, Missouri – An awful Existing Home Sales report yesterday is causing more people to jump on my bandwagon… You know, the one about the double dip recession, which will be fueled by another housing slump… Of course I call it a double dip, but in reality, I truly believe it to be a “single scoop,” for I don’t believe like our government officials, and Fed Heads that we “came out of the recession.”… But that’s just me, thinking logically, as always!
Did you strap yourself in for the Existing Home Sales for July report yesterday like I warned you to do? Good thing, because, July Existing Home Sales fell -27%!!!!! (Consensus was for a -12% decline!)
And for a moment (actually an hour or two) the currencies traded the way they should trade, fundamentally speaking, after the US prints a report like that… They rallied! The euro (EUR), which was hanging on to 1.26 by the skin of its teeth yesterday morning, rallied to 1.27… But the biggest turn-around came from gold and silver… Gold, which was down $8 yesterday morning before the Existing Home Sales report printed, rallied to be up $7, which using my new math abilities, tells me that it was a $15 turn-around! Silver followed and kicked some sand in the dollar’s face too. Gold is up another $5 this morning, so you can say you know what happened, you can say that I was wrong, you can say, most anything you want to, but in the end… I’ve told you that gold is the uncertainty hedge, and after yesterday’s despicable report, there’s a ton of uncertainty in the markets and there you go… Gold is up $20 since the report…
OK… The euro has given back 1/2-cent of that 1-cent gain yesterday… And we’re back to not being able to decide if we’re going to the “risk aversion” fair, or go to the other side of the tracks for “risk on”…
That move down is in spite of the fact that German Business Confidence, as reported by the think tank IFO, rose to a three-year high this month. The August rise in Business Confidence marks the 4th consecutive month of increases, moving the Index now at 106.7 to the highest level since June 2007… I cringe any time I think of June 2007, personally… Long time readers know what I mean…
So… I guess yesterday’s data from Germany, the Eurozone’s largest economy, showing economic growth for the second quarter grew 2.2%, was well received the by the business community… And that’s a good sign for continued economic growth, folks… When business confidence is strong, there’s capital investments, there’s hiring, there’s profits… And I know that we lost track of that “business model” here in the US a decade ago, it sure would be good to pick that up again!
All this leads me to believe that if we can get past this latest round of focusing on the Eurozone GIIPS, that the euro has some good fundamentals to move higher versus the dollar…
I had a nice conversation with my friend, John Mauldin, in the San Francisco airport on Saturday. John is writing a new book, and shared with me some of his thoughts about the euro… He doesn’t believe in euro strength going forward, and in fact is in the camp of those that believe it will go back to parity to the dollar…
Well… Again, I’m not saying that the euro can’t go to parity… But, we have to remember that: In 2005, there were lines of analysts that said the euro would collapse and we would begin a multi-year rally for the dollar…and it didn’t happen…
In 2008, those same analysts were once again singing the praises of the dollar for a multi-year rally… And it didn’t happen…
In 2010, we’re hearing the same cries… But you have to ask yourself this question… What about the stuff we cover every day regarding deficits, recessions, unemployment, etc. represents the chances of a multi-year rally for the dollar?
Well… You just got a sample of my main presentation in San Francisco… So, did it make you feel like you were there? You can taste some sourdough bread, while feeling the wind in your hair as you hang on a trolley car, right? HA!
So… John and your Pfennig writer disagree on this… But that’s OK… We didn’t almost come to blows over it… In fact, I thought… That’s great! There’s still a two-way market, and not everyone is on the same side of the boat with me! It’s difficult enough for me, alone, not to cause a boat to list to one side! HA!
Well… Remember yesterday when I told you that I believed the Japanese Finance Ministry was setting a trap for currency investors willing to take the chance that there would be on intervention to weaken the yen (JPY)? Well… I think the trap was greased last night, as Fin. Min., Noda, pledged, “appropriate action” on the currency…
That’s the M.O. for the Japanese Finance Ministry… First jawbone the currency weaker, and if that doesn’t work, send the message to the Bank of Japan to go in with both guns a-blazin’, selling yen to get it weaker… Or intervention if you will…
Yesterday, Japanese yen was trading around 83.50… This morning, after the jawboning by the Fin. Min., yen is 84.55… So, some slippage, but not enough, I’m sure the Fin. Min. is thinking…
Ty sent me a story yesterday regarding yen… The gist of the story is that the world’s central bankers and finance ministers won’t shed too many tears regarding the disproportionate burden being placed on the yen…
Yes… Remember years past, when the US and Europe banged on Japan about their unfair advantage (according to them) in exports… Well, this strong yen is going to cause some problems for Japan, as I told you yesterday. The biggest problem is one with China… Japan’s currency is so far out of whack with the Chinese currency… And recall that these Asian countries attempt to keep their currencies in alignment with each other, so that competition for exports is on an even playing field.
Ty also sent me a note from the über-respected Martin Weiss, who pointed out that the Bank of International Settlements – the Central Bank of Central Banks in Bern, Switzerland – says the government debts in Spain are 73% of GDP and the debts in Ireland are 83% of GDP. In the US, they’re even bigger – 90% of GDP.
YIKES! My calling the deficit picture here in the US “An Inconvenient Debt” comes to mind, immediately! The BIS also said that “if the US government allows the current trends in deficit spending to continue, our debt burden will grow… 90% of GDP this year, 95% next year and, in the future, 400%. Three times worse than Greece!”
I’m not going to keep going on with the “Inconvenient Debt” thing this morning, it’s there, it’s always there, and it’s not going away!
And in the words of the great Thomas Jefferson:
It is incumbent on every generation to pay its own debts as it goes.
A principle which if acted on would save one-half the wars of the world.
Well, I told you yesterday that Canadian Retail Sales could be a good indicator of whether or not the Bank of Canada (BOC) would hike rates on Sept 8th… Well, the report was better than the previous report, but not as strong as I would like to have seen it. Canadian Retail Sales grew in June by 0.1%, which is really much better than May’s retail sales, which were revised to -0.4%… However, I don’t think the move is the thing that rate hikes are made of… However, having said that, I’m still keeping the light on for a BOC rate hike on 9/8…
The Canadian dollar/loonie (CAD), traders didn’t like the report and the loonie saw more selling yesterday… To me, this is nothing more than an opportunity to buy loonies cheaper… Shoot Rudy, do you truly believe that oil is going to continue to fall in price? Sure there’s a recession going on in the US but that doesn’t mean we stop driving! And I can tell you that in the countries of India and China, where the new middle classes are hungry for cars, that gas is in demand!
The Japanese yen intervention speculation that now exists, helped to wrap a tourniquet around the bleeding in the Aussie dollar (AUD)… Here’s the skinny: If demand for Japanese yen backs off, currencies like Aussie and New Zealand kiwi (NZD) will replace that demand for yen…
The data cupboard today, follows up yesterday’s Existing Home Sales with New Home Sales for July… We had better strap ourselves in for this report too, as it could be volatile too… We’ll also see Durable Goods Orders this morning…
Then there was this… Tell where the logic is here… (This was all over the news yesterday, so you’re probably already aware of it…)
The most expensive public high school in the nation’s history will open its doors to students next month in Los Angeles… The cost? How’s $578 million sound to you? That’s more expensive than the nest egg Olympic stadium in China ($500 Million). The district has a $640 million budget shortfall, and over the past two years, 3,000 teachers have been laid off. The district has even proposed shortening the school year by six days to save money.
So… Riddle me this, Batman… Where’s the logic of building a “Taj Mahal” public school like this, when California is already swimming in red, and now this school district is too?
To recap today… Existing Home Sales plunged -27% in July, the first month of completely being off the housing cocaine… That being the tax credits and stimulation… That report was so awful that it caused gold to turn-around to the tune of $15, and close up $8 on the day. The euro rallied to 1.27, but has all-but given back those gains this morning. And the Japanese Fin. Min., Noda, threw a grenade from left field on the markets by doing some jawboning to weaken the yen.
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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Existing home sales plunge, but the home builders are jumping today.USG, KBH and the rest of the industry seems to have these news priced in already.