One Last Ditch Effort To Agree

Today’s Pfennigfor your thoughts…

Good day, and a Tom terrific Tuesday to you!

Well, another day of the Greek Drama, has the Greek leaders heading to Brussels with their latest attempt at submitting an agreement that everyone can feel good about.

I would think that after the “no” vote in Greece over the weekend, the eurozone leaders would be a little more receptive to the Greek proposal, and not have that holier-than-thou attitude.

But then they have the gold. and he who has the gold, makes the rules, right? I’m just hoping that the eurozone will see the “greater good” here, and not just say “no” to everything the Greeks propose.

Of course that doesn’t mean the Greeks can go hog wild on getting loans with no strings attached. There just has to be some give and take here, wrap it up, and move on.

Again, this is Greece, and not Illinois.

Oooooh, that was an ugly swipe at Illinois. But then you get what you deserve, right?  And Illinois has a real debt, and underfunded pension problem folks, just like Greece. And just like Greece is going to find out. I told my friend Dennis Miller, yesterday that the folks in Illinois are going to learn that pensions can be adjusted.

So, with all this high drama, and “unknowns” hanging over the euro this morning like the Sword of Damocles, the euro is getting sold once again.

Yesterday, as the day went along, the euro pared its losses and gained back some of the lost ground from the overnight sessions, but once again the overnight session has brought some pain to the euro, and as I write, the euro is trading below the 1.10 handle.

I do realize that “time is running out” for the negotiations, especially if you are one of the many traders that believe a Grexit is still in the cards. I’m just not one of those. I’ve said all along that I believe that an 11th hour agreement will be carved out. OK, so maybe we’re into overtime now, but at least the two sides are still talking!

In other things going on in the eurozone besides negotiations with the Greeks…

German Industrial Production for May printed weaker than expected, coming in flat vs. a 0.1% expected gain. April’s 0.9% gain was revised downward to 0.6%…  a setback if you will for the recovery that seemed to have been going on in the eurozone, especially in Germany.

Could it be that all the fuss and confusion regarding Greece’s ability to pay their debts is weighing down the eurozone economy?  I think so, folks. But the important thing is that the recovery is still intact, it’s just had a setback.

And no, I didn’t forget to update you on the ELA’s that I talked about yesterday.

The ECB decided to keep its ELA for Greek Banks at the previous 89 billion euros. But then the ECB announced that they were adjusting the haircuts on collateral accepted from Greece.

That probably rules out a lot of the collateral that Greece either had on deposit or was going to put on deposit. So, the ELA (Emergency Loan Assistance) is in place, but might be adjusted due to collateral.

I think that was the ECB’s way of saying, “OK, Greece, you voted “no”,  we’re not going to pull away the punchbowl completely, but we’re beginning to pull it away nonetheless.”

The other somewhat bigger news overnight, the Reserve Bank of Australia (RBA) left rates unchanged, just as I thought they would. Whew! I was sweating that one out, given my track record on calling what I thought the RBA would be doing lately…

Unfortunately for the Aussie dollar (A$), the RBA was not very kind to their currency. The RBA made a point of making sure the markets understood the A$’s current weakness isn’t enough for them.

RBA Gov. Stevens had this to say — and remember, don’t shoot the messenger:

The Australian dollar has declined noticeably against a rising U.S. dollar over the past year, though less so against a basket of currencies. Further depreciation seems both likely and necessary, particularly given the significant declines in key commodity prices.

And the A$ is getting whacked. And when the A$ gets whacked so too does the New Zealand dollar/kiwi. Remember, these two have tons of trade with each other, so the currencies can’t get too far out of whack with regards to the normal ranges.

The Chinese renminbi was allowed to appreciate last night after the news yesterday that the Chinese were injecting stimulus into the stock market and economy.

China is injecting stimulus, and why is that different than when the U.S. did it and I banged on the U.S. leaders for doing it? Well, it’s the lesser of the evils out there folks.

Of course, normally I would say let the markets take control, and they’ll direct everything according to the economy, and keep the Central Bank planners out of the equation.

But, China is a different cat.

First of all, they do have the funds just sitting there to use, and what good are “reserves” if you don’t use them when needed?

And second. In this “controlled economy” that is busting at the seams to be a capitalist economy, the “controllers” still have the conn.

In the U.K. overnight, May Industrial Production printed better than expected, which was one of rare pieces of good data from the U.K. lately to print. But, with all the unknowns in the eurozone, and the euro falling like a rock, the British pound sterling is falling even faster and further than the euro!

How is that? Good data, can’t support a currency anymore? Well, I guess when you are so closely related to the eurozone, even though not a part of it, it’s a guilt by association thing.

I read a piece last night that talked about Japanese yen being bought as a “safe haven.” I said to myself, HOGWASH!  Yen has not been getting bought, and neither has Swiss francs, and neither has oil, or gold! The only safe havens, and I use that term loosely here, are the U.S. dollar and U.S. Treasuries.

Once again, U.S. Treasury yields are dropping, with this morning’s 10-year yield at 2.26%. Spanish 10-year government bonds yield 2.35%, so what’s wrong with that picture?

Or maybe nothing is wrong with it, as long as you believe, like I do, that rate hikes here in the U.S. are not going to be seen this year, and IF they are they will be so minuscule that it will be like the Fed shouldn’t have even bothered!

But IF the Fed decides to hike rates and if they do it will be by the smallest of margins, they will be doing it because they told the markets last year that they would be hiking rates this year, and so far, we’re 7 months into “this year” and no rate hike.

Speaking of the U.S. Another reason for the Fed to be on the sidelines is the lack of labor progress.

I can hear you saying, “Wait a minute here, Chuck, we’ve been booking more than 200,000 in new jobs each month, how can you say there’s been no labor progress?”  Ahhh, grasshopper. I’ve said this month over month, have you been listening?

Yes, there may be rising job creation, but it’s not “bread winner” jobs. That’s the problem with the BLS report, folks, besides the hedonic adjustments, it’s simply a survey, and it doesn’t designate whether the jobs were minimum wage, or new CEO’s.

Well, there’s been a ton of stuff written in the past few days regarding the jobs numbers last week. So much so that I wanted to highlight them, but there are far too many to highlight.

So, I’ll just pick up one here to point out some stuff that I’ve been saying all along, that people are just now picking up on, but picking up on it, which is a good thing!

There’s David Stockman, you know the former budget director for President Reagan. Now David Stockman has been quite critical of the current administration at times, but this criticism that I’m going to show you is about how the jobs numbers last week didn’t tell the whole story. Stockman said:

When you get right down to it, however, even labor hours do not fully capture the actual jobs disaster happening in America. That’s because we keep shedding high productivity hours in the full-time jobs sector in favor of low-skill, low-pay gigs in bars, restaurants, Wal-Marts and temp agencies.

So notwithstanding another month of 200,000 plus headline job gains, here’s where we actually are. The number of breadwinner jobs full-time positions in energy and mining, construction, manufacturing, the white collar professions, business management and services, information technology, transportation/distribution and finance, insurance and real estate – is still 1.7 million below the level of December 2007; in fact, it is still lower than it was at the turn of the century.

Still 1.7 Million below the level of December 2007? YIKES! So, there you have the “no progress” that I talked about above. Any further questions?

The U.S. data cupboard will have just one major piece of data today, and that’s the May Trade Balance, which is a deficit, so it should just be called the Trade Deficit, because as long as I can recall it’s been that way.

Well, the May Trade Deficit is expected to be wider than the April Deficit of $40.9 billion. I would say that’s probably the case, given the strength of the dollar, making our exports so darn expensive.

We already were behind the 8-ball because of the high cost of our exports due to the wages here in the U.S. and then add on to that, a stronger dollar, and you have weaker exports.

And gold is down a couple of bucks again this morning. Yesterday’s early morning gain in gold was wiped out as soon as the NY traders arrived… and that’s all I’m going to say about that!

Before I go to the big finish today, I wanted to give a shout out to my friend Dave Gonigam over at Agora Publishing’s 5 Minute Forecast (The 5).

Dave decided to use some of my thoughts on Greece from the Pfennig on Monday for The 5. I always love it when I see my name up in lights.  Well, while reading The 5, as I always do every day, I noticed something from James Rickards that caught my eye.

I warn you to put away the sharp objects before reading his thought for the global financial system… but for those of you who follow Jim from time to time, this will be somewhat watered down compared to what he talks about when he has an open forum!  So, here’s James Rickards from The 5 yesterday:

But “the makings of a massive global meltdown are still in place,” Jim says, zooming out to his wider outlook.

As you know, Jim anticipates a financial “avalanche.” It’s just that Greece and China won’t be the snowflakes that set it off. It will be something else. “The event that causes the crackup will come like a thief in the night. Yet it will come.”

And the global elites are preparing for that day — perhaps as soon as October, he suggests. “Years from now, historians will look back at this date as the day the rules of international finance were completely rewritten.

“If you’re a senior and rely on the government for income, you’ll be badly hurt. If you have any portion of your savings wrapped up in stocks. or if you hold any of your savings in U.S. dollars. you could instantly become poorer when this deal gets inked.

I didn’t know whether to talk about this when talking about China or when talking about gold, because it concerns both! So, I’ll just talk about it here! This was an article on Bloomberg and can be found in its entirety here.

What I’m talking about here, is this guy at Bloomberg (Hoffman — you can read all his credentials when you click on the lick to the article) believes that when China backs their currency with gold that it will be a “game changer.” Of course I’ve said that for 5 years now, so it’s nice to see someone else joining me on my bandwagon.

Here are a couple of snippets:

Why would China consider such a move? Hoffman explains that Chinese policy makers are already trying to establish the yuan as a reserve currency, and backing it with gold would help attract foreign capital.

China is expected to receive approval from its central bank for a yuan-denominated gold fix, with a potential for an announcement as early as next week.

Hoffman explains that a gold standard would not necessarily create a big constraint to the Chinese central bank, as many believe.

“It could be at any price they fix. There’s a lot of things that they can do to make this work,” he says.

Hoffman estimates that to create an exchange rate of one ounce of gold for every $64,000, the country would need about 10,000 metric tons of the metal. “That’s nine times the national official holdings and about 6 percent of all the bullion ever mined globally,” Hoffman says.

Chuck again.  Notice this guy, Hoffman, is quoting what the World Gold Council (WGC) says China has in gold reserves, and not the more up to date numbers that gold Researcher Koos Jansen has put together, that shows that China already has 10,000 tonnes of gold, and probably closer to 14,000 tonnes.

So, when China begins to do the price fix of gold in renminbi (it still has to be approved, but it will) that’ll be the first step to backing the renminbi, folks. And for all of you who snickered the first time I ever mentioned this at the Orlando Money Show in February 2010, I forgive you. HA!

That’s it for today…

Regards,

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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