The “fear factor” has been reduced in the eurozone, as it appears that private investors are accepting their medicine, and taking their dose of the Greek bond swap. Societe Generale, France’s second-largest bank, and UniCredit have announced that they will accept the terms of the bond swap, along with a long list of other companies that too have announced acceptance of the terms. This flood of private investors announcing that they would accept the terms has lifted the fear factor for the euro (EUR) this morning. But by all means, that doesn’t mean the euro is out of the woods, folks.
All it takes is for a big company to diss the bond swap, and the fear factor will rise again, which won’t be good for the euro. OK, I explained the terms of the bond swap the other day to you, so I won’t go through that again, but as I said then, the holders of current Greek bonds don’t have much choice other than to accept the terms of the swap, for it is better to get “something,” rather than “nothing” on an investment!
German factory orders disappointed this morning, falling -2.7% in January, but the euro hardly noticed!
OK, with all the talk yesterday about gold and the manipulation, etc., I mentioned Warren Buffett. So here’s where I was going to go with that, but ran out of time and money. In the Berkshire Hathaway annual report, Warren Buffett provided us with some great quotes:
“In the U.S., where the wish for a stable currency is strong, the dollar has fallen a staggering 86% in value since 1965, when I took over management of Berkshire. It takes no less than $7 today to buy what $1 did at that time.
“‘In God We Trust’ may be imprinted on our currency, but the hand that activates our government’s printing press has been all too human.
“High interest rates, of course, can compensate purchasers for the inflation risk they face with currency-based [dollar-based] investments — and indeed, rates in the early 1980s did that job nicely. Current rates, however, do not come close to offsetting the purchasing-power risk that investors assume.”
And then there was this:
“In other words, the interest rates in today’s money market accounts are not enough to offset inflation. You can’t see it, but due to inflation, if you leave cash in the bank, you will lose money every year. Investing in domestic money market accounts these days is like keeping your money under the mattress. It’s financial suicide. You don’t have to settle for that.”
Chuck again. OK, Mr. Sage of Omaha, you’re either telling us to get dollars out of money market accounts and invest them in either stocks or currencies, but since you don’t own any currencies, you must mean stocks. But unless you go to another country’s stock market, your U.S. stock market investments are still dollar-denominated. And didn’t he talk about the loss of purchasing power-holding dollars? I find this letter to be very confusing.
Of course, most currencies these days are in the “no interest rate paid” camp, too. Those are all the ones that aren’t commodity currencies! But interest on a currency deposit is not the only reason you look to buy a currency. You want to always view a currency as the “stock of a country.” So you’ve examined stocks before, and you look for: balance sheet, leadership, ability to attract investors, yield, something to sell that others want and other things. Now do that for currencies, and you’ll find that you end up with a handful of currencies. That’s right, with all the gin joints in the world, and all the currencies in the world, we end up with only a handful that meet that criteria? WOW!
Take Norway, for example. Their balance sheet is impeccable. Their leadership top-notch, their ability to attract investment is good at times, their yield is nascent at best, but they do have something to sell that other countries need: oil. Chris gave you an update on the recent data prints in Norway last week, and I’ve said several times now that if we were truly trading on fundamentals, Norway would provide a nice alternative to the euro — as it did prior to 2008.
When Switzerland devalued the franc (CHF) last fall, tons of franc holders swapped their francs for Norwegian krone, (NOK) and both currencies have done well after the franc’s initial drop. I think that swapping to the krone was a good idea at that time, as they would represent a “true safe haven,” as far as I’m concerned. However, the Norges Bank (Norway’s central bank) blew a gasket at the size of the flow into the krone, and we saw an immediate jump in the krone’s value. And with everyone and the their brother very touchy about currency strength these days, that didn’t sit well with the Norges Bank, and they began to talk rate cuts to scare investors away.
Yesterday, I typed something in error regarding the Reserve Bank of Australia (RBA): I didn’t put the n’t at the end of did when talking about what the RBA did with rates. I said the RBA did move rates, but that was in error, they didn’t move rates. Hey! I did get the part about them keeping their easing bias correct!
The Australian dollar (A$) really took one to the chin this week after the RBA meeting. And then to pour salt in the A$’s wound, it appears as though the Aussie economy is slowing, which would allow the RBA to move on that easing bias. However, the data are so old that I’m not sure anyone could get a picture of the economy, reviewing fourth-quarter GDP when we’re close to ending the first quarter! Oh, well. Fourth-quarter GDP for Australia grew 0.4%, which was about half what the economists forecast. This put the annualized GDP for Australia at 2.3%. not bad for a country that had a drought and a cyclone the size of the whole country devastate the economy in 2011…
With China announcing a lower target for their GDP, this will affect the economic growth for Australia. But here’s the catch as I see it: I think that China will grow at a faster clip than they have targeted, which will surprise the Aussie economy in a good way! Therefore, all the Chicken Littles are crying for no reason.
My dad used to say, “What are you crying about? Come here and I’ll give you something to cry about!” That would shut us up with the crying and whining! So China needs to tell the markets the same thing.
With the Greek bond swap going well so far, a tourniquet has been wrapped around the risk assets this morning. Gold is up $7, which seems like a good thing, but after all the selling through manipulation, $7 seems like a drop in a bucket.
Stocks all around the world, not just here in the U.S., have been getting hammered, so the tourniquet is welcome today for the stock jockeys. But as I asked the other day, stocks are getting sold, currencies and metals are getting sold, and Treasuries are not getting bought, as the yield stays steady Eddie at 1.97% — so where’s the money going?
Under the mattress? In coffee cans to bury in the backyard? For new riding boots? New cars? Oh, I know! Campaign contributions! That’s it, that’s the ticket! HA!
The Canadian dollar/loonie (CAD) slipped just below parity yesterday, and remains there. The price of oil slipped $2 yesterday, but remains well above $100, thus underpinning the petrol currencies of Canada, Norway, Brazil, Russia, Mexico and the U.K.
The Reserve Bank of New Zealand (RBNZ) meets tonight (tomorrow for them) and I expect no rate movements to come from this meeting or their fed funds rate, the official cash rate, or OCR. The OCR is expected to remain steady, so all the focus will be on the RBNZ Gov. Alan Bollard to explain why he isn’t reversing the emergency rate cuts that were made last year, after the two earthquakes hit New Zealand. This should be interesting.
And in China, the renminbi (CNY) slipped for a third consecutive day. But this slipping is very small, folks, nothing to get panicked about. What we should be panicked about, though, is the news that the U.S. Congress had passed a bill imposing trade tariffs on China (Congress added Vietnam too), The president is expected to sign the bill right away. This could be more than a tempest in a teacup, folks. We’ll have to watch this carefully.
And in the category of “this is difficult to believe,” Brazil has passed the U.K. as the world’s sixth largest economy. Just 10 years ago, you would have thought that Brazil was about to circle the bowl. But I read that in the past 20 years they have amassed the largest commercial cattle herd and lead in the production of coffee, sugar cane and tropical fruits. (See, they have things to sell that others want!)
But before you begin to call us up and back up the truck with Brazilian reais, let me remind you that the Brazilian government has been doing everything they can to keep the currency from gaining in value. Most of their efforts are only temporary, but do cause wild swings in the real…
My friend Dennis sends me a weekly letter that goes through a number of items, and I can always find good stuff in it. Yesterday’s was no different! I know the president proposes a lot of things, but this one is very interesting to me, especially given the states’ and municipalities’ weakness right now. The president proposed to eliminate the tax exemption on municipal bond interest for upper-income Americans above a 28% marginal rate. Therefore, a taxpayer in the 35% tax bracket would be paying a 7% tax on their muni bond income…
Now… does that make sense to do? Not now, especially. UGH! Let’s hope this proposal gets thrown to the side of the road.
And then, the U.S. government paid $454 billion of interest expense on the outstanding debt/Treasuries during fiscal year 2011. That was a 10% increase over 2010. At that rate of increase, it won’t be long before interest expense or debt servicing it eats away all our tax receipts.
To recap: The fear factor has been reduced in the eurozone this morning, as it appears that private investors will opt to accept the Greek bond swap, thus clearing the way for the next tranche of bailout money to Greece. The RBNZ meets tonight and will have to explain why they aren’t removing the emergency rate cuts. Strong fundamentals still point to Norway, but breaking the pull that the euro has on it is proving difficult.
for The Daily Reckoning
Chuck Butler is the Managing Director EverBank Global Markets. The father of the Daily Pfennig® newsletter, Chuck has a career in investment services and currencies spanning 35+ years. His tacit knowledge of the global markets along with his inventive spirit has led to the creation of many distinct and innovative currency-based products. A respected analyst of the currency market, Chuck has made frequent appearances on MarketWatch, USAToday, CNNfn, Bloomberg Television, and CNBC as well as quoted in The Wall Street Journal, US News & World Report, and The Chicago Tribune.
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