Chuck Butler

Good day… And a Marvelous Monday to you! It’s not a Marvelous Monday for the currencies, stocks, commodities, the Miami Heat, or my beloved Cardinals… Of course, those two teams will get through their rough patches… But the risk assets… Talk about getting slammed on Friday… Whoa! That was one nasty move, and so, here we are on this Marvelous Monday sifting through the ashes of risk assets that got burned on Friday.

So… Is it over? The selling that came fast and furious on Friday? I guess the only thing that stopped the selling on Friday was simply time ran out on the trading day, and with it being a Friday, there was no Asian market to pick up where the US left off… So… Saturday and Sunday brought out the calmer heads in Asia, and the risk assets of currencies and metals found a bid… Not a strong bid, but enough to wrap a tourniquet around the bleeding…

So… What caused this selling? Well, you can go back and lay the price graph over the time line, and see that precisely at 7:30 (CDT) the selling began… So… What happened at that time? Strange as it might seem, it was the import prices data that stirred the selling drink. Apparently, in May, import prices surged, as the Import Price Index showed a 12.5% increase! Now… You and I are not falling for Fed Chairman, Big Ben Bernanke’s belief that inflation is only “transitory”… But, apparently, the markets did… For when they saw that 12.5% increase, they went bonkers! Inflation! Inflation! Sort of like, “The Russians are coming! The Russians are coming!”

But herein lies the problem that I have with the selling… If inflation is ready to take off on a moon shot, wouldn’t the assets that are associated with protection from inflation garner the attention of buyers? Apparently not! At least not on Friday. You see… Nowadays, you can’t do any decent sized selling without triggering more sales, which triggers even more sales, as price-stops are taken out, and just like everything else in life, what is considered a “correction” ends up going all the way to the other side, over-compensating and leaving whatever it is that is correcting, so far removed from what we had before the correction… Not sure if I explained that clearly… But, at 5 AM, that’s the best I can do today!

The data cupboard here in the US is empty today, but that’s the calm before the storm, as the rest of the week has some market moving data on the docket, and ready to print… Data prints like PPI, Retail Sales, the stupid CPI, The TIC Flows, Industrial Production and Capacity Utilization, Housing Starts, and so on… So, it could be a wild and wacky week for the investment sector. I guess as the week goes along, we’ll see that Retail Sales will end up being the most important print of the week… And with that, it’s time to pull out the BHI (Butler Household Index), dust it off, and see what it tells us to look for when May’s Retail Sales data prints tomorrow… The BHI, is indicating that the May Retail Sales will be soft, a little disappointing, as I don’t recall seeing many shopping bags, or UPS deliveries to the house in May… (But I was gone for 2 weeks in May, so maybe I missed some!)

In addition… The regional manufacturing indexes from NY and Philadelphia will print… These are normally pretty “Wild West” type reports, but… Given the fact that last month’s ISM (national manufacturing Index) gapped down, big time, it will be interesting to see if the regionals give us some indication of any more rot on the ISM vine.

Throwing salt in the euro’s wound on Friday, was European Central Bank (ECB) President, Trichet, who just won’t let the bailout of Greece go as planned… The ECB is in disagreement with Germany, and this is not doing the euro (EUR) any favors, folks… You see, Germany’s central bank, the Bundesbank, has long been considered the “model” for central banks, in that they provided price stability, and was totally autonomous from the German government. Most of what the ECB does, and says, is a direct result of the fact that it was modeled from the Bundesbank… I remember classic battles between German Chancellor Kohl, and Bundesbank President, Tietmeyer…

So, with that closeness to the Bundesbank, you can see why the ECB – with its strong difference of opinion with German Finance Minister, Schaeuble, on how Greece should be handled – is not THAT strange… At least to guys like me that were doing currencies and writing a newsletter back in the mid-’90s! (Yes… The Pfennig began in 1992… Believe it or not, but back then (no Internet to speak of remember), the Pfennig was hand-written, and placed on the sales desks, who would then fax the letter to their customers that were important to them. I still have those hand-written Pfennigs… They are a real hoot to pull out and read every now and then…)

But I digress, and I apologize… Down in New Zealand overnight, the country received two aftershocks of magnitudes of 5.5 and 6.0, so not just some rattling around… The aftershocks were located near Christchurch… The Gems of the South Pacific, Australia and New Zealand, just have not been able to catch a break from Mother Nature… And every time something like this happens it throws the recovery of the country out of line… And that hurts the currency of each respective country. This time it was the New Zealand dollar/kiwi (NZD) that got sold overnight.

Well, folks… There is some damaging news for the Fed (and government) going around this morning… It began with this story that can be found over at Zero Hedge.

Apparently, the writer believes that QE2 was not for the US economy, but instead for foreign banks… The writer makes a great case for his belief… And after looking it over, I have to say that it certainly has merit… The biggest one is the fact that the US economy is going backwards, and this after $2 trillion in stimulus the past three years… But, there’s the story, you can make your own decision.

My friend, John Mauldin, had a great piece in his weekly newsletter last week… In it he explained how the US has as much to lose as Europe if Greece defaults, due to default insurance that was sold by US institutions to European institutions… That’s pretty damaging stuff, so… No wonder the president was saying last week that the US would support Greece!

So… I’m watching the euro climb higher this morning from the level it held when I came in… Not sure if it’s a rebound or just bottom fishing going on… You know… Not long ago I was telling you about how in 2005, 2008, and 2010, there were investment people calling for the collapse of the euro, and each time the euro proved to be resilient… Well, with the selling we saw on Friday, those same people – who have been wrong three times, now – came back out and said, “This is it”! But… Bundesbank head Weidmann played down the risks from Greece, saying, “the euro can weather a potential Greek default.”

Then there was this… From Yahoo! Finance (thanks Scott!):

WASHINGTON (AP) – The federal budget deficit is on pace to break the $1 trillion mark for a third straight year. Record deficits are putting pressure on Congress and the Obama administration to come up with a plan to rein in government spending.

Already, the deficit through the first eight months of this budget year is $927.4 billion, according to the latest report from the Treasury Department released Friday.

Three years ago that would have ranked as the highest ever for a full year. Instead, this year’s deficit will likely exceed last year’s $1.29 trillion imbalance and nearly match the $1.41 trillion record reached in 2009. The budget year ends on Sept. 30.

I just shake my head in disgust, folks… this has gotten completely out of control, and to try and control it now is going to be tough…

To recap… The currencies and metals (and stocks) got whacked on Friday, and it was a classic “one sell triggers another sell” type of day. The Import Price Index increased 12.5% in May, and got the ball rolling on a selloff of the risk assets. New Zealand experienced two aftershocks last night, and their currency got rattled too, and… It’s a big DATA week here in the US so get ready for a wild and wacky week!

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

  • sharonsj

    Inflation is already here. It’s been here for two years but nobody bothered to notice except the us hamsters–uh, ordinary folks–forking out huge sums just to keep running in place.

    This voodoo trickle-down economics is killing us. I’d like to stick a giant pin in Wall St. and the politicians. Wait, make that a pitchfork.

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