Chuck Butler

Good day… Should be an interesting week, as the ECOFIN people meet and Greece is still working on their debt and… this will be my first full week of work in over a month, so all in all, pretty interesting!

What I also found interesting on Friday was the price action of silver… I don’t know if you follow silver or not… I do — very closely, I might add! But silver was outperforming gold by a long shot, rising over $1 on the day, which you don’t normally see in the silver price action. My colleague Aaron yelled over the desk to ask me what was going on with silver, as he too watches it closely… I couldn’t really find anything out there, so the thought came to me very quickly that silver must be playing “catch-up”…

I don’t know if you follow this stuff or not, and I don’t really put that much emphasis on this, but from time to time, I come back to the gold/silver ratio… but what was once thought a real indicator for silver has to be pushed to the back of the closet these days, for the gold/silver ratio has spread out to over 50-1… That’s pretty crazy stuff… and doesn’t look right… So maybe, just maybe, silver was playing catch-up to gold, which had gained over $90 so far this year, and silver’s gains were negligible until Friday…

Both metals are up this morning, so we have that going for us, eh?

The Aussie dollar (AUD) touched $1.05 this morning and is spittin’ distance of the figure now. And lookie there, it’s back over $1.05! Just like that! I would say that the A$ is benefitting from a lower-than-expected PPI (wholesale inflation index) number… which indicates to me that the markets still have an appetite for rewarding currencies that have been debased to promote growth. If you’re an Aussie bondholder, this is what’s called the “golden scenario”… That’s when rates are being cut and the currency maintains its value or even increases in value. The bonds and currency rallying = the golden scenario…

When I was a foreign bond trader, I saw this happen only a few times… I saw it Germany in the mid ’90s, and in Australia and New Zealand around the same time… I haven’t traded foreign bonds since 1998 and don’t recall if there were other instances since then. But it’s happening now… the thing about the golden scenario is that it doesn’t last long…

The euro begins another week as the most-talked-about currency, with the U.S. dollar coming in second and the renminbi (CNY) placing third. The euro (EUR) is trading above 1.29 this morning, as it has range traded for over a week now, but around the 1.29 level, which is probably driving the analysts that have called for a collapse of the euro crazy… I’ve told you probably three or four times since the year began what I think the euro will do this year… so as to not beat a dead horse (no animals were hurt), I’ll go to what I really want to point out this morning about the euro…

In the past couple of weeks, we’ve seen the economic data from Germany to be better than forecast for them. We’ve seen the Italian and Spanish bond auctions go quite well, with more bonds sold than planned, and at lower yields! And money market rates have eased…

I talked about the beginnings of a stabilization here on Friday, and I just can’t help but think that this is just the beginning. Now, that doesn’t mean that everything we see from here on out from the eurozone is good… baby steps, wobble, go backward sometimes and even stumble… So… we have that to watch for.

Every winter, about 2,600 political, business and financial leaders meet in Davos, Switzerland, for a five-day boondoggle. There are always some very good sound bites from Davos, and this year will be no different. You’ll see the eurozone contingent continue their attempt to calm the markets, and then you’ll have the euro naysayers like George Soros doing his best to deep-six the euro…

Speaking of deep-sixing something… I can’t put enough emphasis on this, folks, but the Asian countries are removing dollars from their terms of trade. One by one, the Asian countries draw up new currency swap agreements that basically exchange the two countries’ currencies and remove dollars from the terms of the trade. This has long been one of the benefits of having the reserve currency of the world, for if two countries want to trade oil, they have to convert their currencies to dollars and settle the transaction in dollars.

This kept dollars in each country’s reserves by the truckloads… But first it was China alone signing swap agreements to remove dollars from the terms of trade. Then Russia joined in, and now India is jumping on the bandwagon. India and Iran have signed a currency swap agreement for oil…

Now… let me be clear here… I do NOT want to see this happening, for I live here and work here and use dollars for my gas, groceries and giggles. And… once I’m gone, my kids and grandkids will learn what it’s like to not have the reserve currency of the world… It’s a sad thing…

However, since I began writing in 1992, I have always made it a point to not let my love of country get in the way of telling it like it is… I was even called unpatriotic years ago… and that hurt!

But… at the same time, I warned and warned about the growing debt and people thought I was nuttier than a fruitcake. Well… when countries turn away from using your currency, I think it speaks volumes… So… how does that fruitcake taste these days?

Last Friday, we saw the latest existing home sales data, which was pretty strong… But here’s the thing I keep harping about… home prices… The national median sales price of existing homes fell 2.5% in December year on year. This is the 13th straight monthly decline in home prices. Foreclosures and short sales accounted for 32% of the total sales… So all in all, I would say the data were not good… one-third of the sales were forced by foreclosure, and the median home price fell 2.5%…

I don’t think home prices have found a bottom yet… One of the reasons I feel strongly about that is the fact that the “robo-signing” case that held up foreclosures in 2011 has been settled, which means foreclosures could really ramp up in 2012 and push prices downward.

The data cupboard is empty today and doesn’t really get restocked later this week… We will have an FOMC (Fed Reserve) meeting on Wednesday, but since the Fed told us that interest rates are going to remain at current levels until mid-2013, this is a little anti-climatic, eh?

OK… back to the currencies… I guess the Bank of Canada’s (BOC) bunker mentality is beginning to pay off for them, but I’m sure they didn’t really think that this would happen… The “this” I’m talking about is a larger-than-expected drop in consumer inflation. Canadian CPI fell 0.6% in December from the previous month, and the year-over-year rate stands at 2.3%… Still higher than the target rate of 2%, but moving in the right direction as far as the BOC is concerned…

The Canadian dollar/loonie (CAD) took the data and digesting it, moved lower… The loonie is attempting a rally this morning trying desperately to grab onto the coattails of the Aussie dollar.

Remember when I told you that we could see a “pop” in the Swiss franc should then Swiss National Bank (SNB) President Philipp Hildebrand resign, as the markets would want to test the resolve of the new president? Well… Let’s see… the franc has really been on a run in the past 10 days and has climbed back to a dollar price of $1.0750… After falling to a $1.04 handle… I think this is simply the markets testing the SNB, folks… nothing to hang one’s hat on for any extended period of time… leave this to the “traders”…

I mentioned at the top and then forgot to talk about it until now… But the Greek/private creditors meetings have stalled on a deadlock over the interest rates to be paid. People close to the meetings still believe that an agreement will be ironed out soon.

Did you see what the Bank of Canada’s Gov. Mark Carney had to say about the U.S. economy? You had better sit down for this… Mr. Carney said that the “U.S. economy might never recover.” He went on to say, “It will take many more years for the U.S. economy to get back on its feet, and it might never completely recover. In fact, they are not in our opinion ultimately going to get back fully to the U.S. we used to know.”

Then he made a statement that qualifies him as a recent addition to the “Mr. Obvious Club”… when he said, “If Canada is to grow, it must look beyond the U.S. for trading partners.”

Then there was this… my friend, and former colleague David Galland did it again this past weekend… He wrote something that made me want to pump my fist in the air and say “Yes!” I don’t have the room here to do him justice, but he wrote about the U.S. government meddling in the economy and in private business… If that’s the stuff that interests you, and I would hope it does… then click here and read the first part of the letter on government meddling: After clicking the link, click on “The Contrarian View of Argentina”…

To recap… Currencies are in rally mode this morning, along with gold and silver. Silver outperformed gold big-time on Friday… just playing catch-up, I think. The ECOFIN meeting begins today, and Greece is still working with the private creditors on an agreement. The FOMC meeting this week is a nonevent. And the data cupboard is empty today.

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

  • kavik

    “Money” is obsolete..just ain’t relized it yet……….

  • Richard

    Humans can not survive without money. Or, at least not in a modern civilized way. You have no respect or understanding of her infinite beauty. Simple but elegant, that is the true nature of money. And the amazing thing is not that ‘Its the conceptual dynamo of human energy exchange’ but that no one has the curiosity to ask the question, “How?”

    Now for my pointless comment to the author of this article. Instead of figuring in foreclosures and short sales, just take the homes which were not sold under duress and chart their median price change…maybe it will indicate some underlying strength, or decay. Just curious. Plot them against the pure foreclose median price changes using a line chart. Voile, you have your own homemade MACD erector set.

    For some reason I really enjoyed reading your article this evening — Thanks

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