Chuck Butler

Good day. And a Tub Thumpin’ Thursday to you! Yes, it’s Thursday, I had to double check, for I’m not used to being here in the office 4 days in a row! Congratulations to Miguel Cabrera (Miggy) who won baseball’s Triple Crown, becoming the first to do it in 45 years! In The American League that is. In the National League aka The Senior Circuit, the Triple Crown was last done by Joe “Ducky” Medwick in 1937!! So, quite the feat achieved by Miggy this year.

It was as if the markets were holding their collective breath yesterday, as the currencies and metals traded in tight ranges throughout the day. What could they be holding their breath for? The European Central Bank (ECB), or Bank of England (BOE) meetings this morning? Hardly! It was probably the presidential debate! Yeah, that’s the ticket! Yeah, and my first wife was a young Elizabeth Taylor, yeah, that’s the ticket! HA! Whatever it was, it held their attention all day, and that takes a bunch, because I’ve told you about traders’ attention spans.

This morning, though, the currencies and metals are ratcheting higher. Spain still hasn’t requested Eurozone assistance, and that has been an underpinning for the euro (EUR) that has gained about ¼-cent this morning to 1.2950. The ECB and BOE are meeting as I type my fat fingers to the bone. I told you the other day that there’s an outside chance that the ECB could cut rates as they still have some scope to do so, and would be welcomed by the markets looking for anything to help the ailing economies of the Eurozone.

I’m not sure what frame of mind the markets are in these days with regards to how they react to a rate cut. During the last global recession (which to me never ended!) the markets would reward currencies from countries that promoted growth, which is against everything I ever learned about how currencies get value. But it was what it was, but then as the media and the government officials all touted a so-called “recovery”, the markets returned to selling currencies from countries that used the debasing of the currency as a means of promoting growth. So, what’s it gonna be, boys?

I think we’re back to the “opposite day” kind of trading, and the markets will reward the euro should the ECB decide to cut rates today. I think that’s why you see the mini-rally going on in the euro this morning. But the BOE is in a different boat. The BOE is looking at the end of their current round of quantitative easing (QE), and wondering if they should extend this stimulus. Would somebody shake the people in the BOE and make them see that QE hasn’t worked, and they need to just back away slowly…

I told you earlier in the week that last week’s IMM Positions showed that short dollar futures positions continued to pile up to extreme levels. The thing that comes to me as a surprise, though, is that these short dollar positions haven’t really shown up in the Dollar Index. The Dollar Index has remained around 79-80 during all this accumulation of short dollar positions. That doesn’t give me a warm and fuzzy, folks, and it adds more ammunition to the “hand of God” discussion we had last week, where the dollar rebounds during the last couple months of the year. Of course, I could get into the discussion about how the Dollar Index is a dinosaur when it comes to valuing the dollar, for it is heavily weighted in euros. But for the sake of this discussion, let’s not refer to the Dollar Index as a dinosaur. And hold the belief that if all these short dollar futures positions can’t weaken the Dollar Index, then IF trading turns around, the dollar could rebound in the short term.

One of the currencies that doesn’t make up the roster of currencies in the Dollar Index, is the Aussie dollar (AUD). The Reserve Bank of Australia (RBA) cut rates earlier this week, then saw an increase in their trade deficit, and saw exports fall significantly. It hadn’t been a good week for the Aussie dollar… Then last night, Aussie retail sales showed a gain of 0.2% in August, but the consensus was for a 0.4% gain, so again, the news wasn’t good for the Aussie dollar… My spider sense is tingling here, folks. The Aussie dollar is still strong, even if it isn’t at the lofty figures we saw earlier this year, and we could very well see some backing off of that strength. The data just hasn’t been there for the Aussie dollar to remain so strong. But, the wild card as I always say here, is China.

Speaking of China… I was giving a quick talk on the world economy the other day and I mentioned that China’s slowdown is different than those in the US and Eurozone. China’s slowdown was brought about by the Chinese government. They had to slow down the Chinese economy before it overheated. Yes, things have gotten a little tough, given the slowdowns in the US and Eurozone, but I think China will handle them. Remember, they don’t have debt coming out their ears, to deal with instead of doing what’s right for the economy.

Debt is the $117,000,000,000,000 elephant in the corner of the room for the US and until somebody acknowledges the elephant in the room, the US’s ability to grow will have a governor placed on it. But then I’ve been preaching about this accumulation of debt for a long time now. In 2001, I wrote a white paper titled: The Demise of the Dollar. All the way back in 2001, the debt accumulation was beginning to become a problem and I saw this as a real problem for the dollar. In 2001, the euro was 92-cents; the A$ was 55-cents; our national debt was $5.7 trillion; and Chuck had more hair, less weight, and few believers.

Did you see that gas stations in California are shutting down because of supply shortages that are driving wholesale prices to record levels? For you really young readers you’ll not remember this, but for the rest of us, we all remember the lines at gas stations to get gas, or the days of the week you could get gas. My dad used to tell me about the gas rationing years ago. I used to say that Americans would rather pay $6 a gallon for gas than to sit in a long line wondering if there would be any gas left when they finally got to the pump! I think that still holds true, and also hold this belief to be true that my dad taught me years ago. There’s no such thing as a shortage, it’s merely something that’s in need of a price adjustment.

The price of West Texas Oil (WTI) fell $3 yesterday. So, something doesn’t feel right, here. The weaker oil price held back the petrol currencies, including Norway (NOK), Canada (CAD), Brazil, Russia (RUB), and Mexico (MXN) from participating in the mini-rally that the euro was putting on this morning.

The price of gold is up $10 this morning. Yesterday, I told you it was up $4 in the Pfennig, and then told Tim Smith, our metals trader, to watch, to see if that $4 gain held up once the NY traders arrived. And it didn’t. You can blame it on whatever, and I can say I know what happened, but I’m only guessing at this point. Let’s see what happens to the $10 gain this morning.

Yesterday, I talked about how I couldn’t believe that the media had dropped the ball on reporting about the upcoming “fiscal cliff”. A reader responded that he believed that once the election is over, that the tax breaks currently in place will be extended and thus no “fiscal cliff”. That makes sense to me, but I still have to plan on what I know to be true, and hope for the best. At this point, 9 out of 10 households will be affected by the expiration of tax cuts. The increases will total more than 20%.

But then, I’ve warned you all about how taxes were going to be increased to help pay for deficit spending. And this is just the tip of the tax increase iceberg. The taxes our kids and grandkids will face are going to be so tremendous and put the kyboshes on their abilities to live their lives like we did. And it all comes back to debt accumulation. That I saw happening all the way back in 2001.

I’ve long told you about how I just love reading articles by Caroline Baum of Bloomberg. She is great! Well, in her latest article, she takes Ben Bernanke to the woodshed. It goes like this. “Bernanke read ‘Monetary History’ as a graduate student and became a self-described Great Depression buff. Not convinced the 1929-1933 contraction of the money supply was sufficient to account for the fall in output, he offered an additional explanation in a 1983 paper, ‘Nonmonetary Effects of the Financial Crisis in the Propagation of the Great Depression.’ Here he posited that the failure of financial institutions and increased cost of credit intermediation were partly to blame for the protracted decline in output and prices.

“Little did he know that 25 years later, he would get an opportunity to test his academic theory. How did he fare? Well… It seems that Bernanke may have inadvertently repeated some of the same mistakes of the 1930’s, in the view of some monetarists.”

I think this is a great read, and if you have time, you should read the whole article.

Then There Was This. From Bloomberg Businessweek.

“CFTC Faces Deluge of Requests to Delay or Ease Rules

“Several derivatives rules are scheduled to go into effect next week, prompting trade groups to ask the Commodity Futures Trading Commission and other regulators to either delay or ease the measures.”

Chuck again. These new rules are pretty onerous on trade groups that use derivatives to actually “hedge their business activity.” So, I understand their asking to delay or ease the measures. But one component that I find to be something that we need, is the position limits. For this would keep price manipulators from accumulating such large short positions.

To recap. The currencies and metals traded in tight ranges yesterday, as if they were waiting for something to happen. This morning, though, we’re seeing a mini-rally in the euro, as the markets wait to see what the ECB does at their meeting today. The ECB still has scope to cut rates, and I wouldn’t be surprised if they did cut rates. Gold is up $10 this morning, Chuck is wondering what happens to that gain once the NY traders arrive at their desks…

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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