Good day. And a Marvelous Monday to you! And welcome to October! Yes, or as I like to call it. Rocktober! I missed most of September, so the year has really gone by fast for me! But there are still three months left to the year, so I’ve got that going for me! And three months until Taxmageddon hits the US economy like a slap to the face. And don’t forget those $1.2 trillion in discretionary spending cuts (over 10 years) that are to go into effect on January 1, 2013. We’ve got a lot of things to look forward to when the calendar turns to 2013. Of course I’m being facetious but, we might as well begin to get used to higher taxes and spending cuts, because, if we don’t see those things in the near future, out national debt will continue to grow.
OK. Friday morning, I glossed over the downward revision of US second quarter GDP. It was not because I didn’t think it to be important, but that I had pretty much told you all that when the first print of second quarter GDP showed up that we would see it revised downward, and we did. You can only cook the books for so long. But the real reason I skipped-to-my-Lou right through the downward revision was that, not even the cable news media was making a big deal out of it. Of course I have my conspiracy theories on why that’s happening, but, as long-time readers of the Pfennig, you dear readers know all too well, that the government has to make us feel good so we go out and spend to keep their “game” going.
Ok. This morning, the euro (EUR) is tracking higher, as just about closing time on Friday, the results of the Spanish bank audits printed. They showed that the Spanish banks needed about 53 billion euros to recapitalize. Remember when the “experts” kept saying that these troubled Spanish banks would need more than 100 billion euros, but yours truly said that the number would more like 60 billion euros? Well, once again, look who was closer to the real figure! And. This news has given more optimism to the Spanish banking sector, for 53 billion euros is far less than what has been allocated to the recapitalization… And remember, the German Constitutional Congress didn’t shoot down the direct payments from the ESM to the troubled banks. So, maybe this so-called big problem for Spain will be nothing more than a tempest in a tea cup. Maybe. Spain isn’t out of the woods just yet, folks.
Anyway. The euro is tracking toward the 1.29 level as I write, while most of the other currencies saw some heavy selling overnight, only to rebound in the European session, leaving them about where they finished Friday. Part of me thinks that the euro has been sold to date because of these problems that have spread from Ireland to Spain, but what if… What if, most of the negative stuff has been priced into the euro at this point? I mean the debt crisis stuff, not the recessionary news like manufacturing in the region contracting for a 14th consecutive month and unemployment reaching the highest level on record. The euro has proven in the past that, economy-wise, things can look pretty awkward, but the euro is able to gain on the dollar. What does that tell you about the dollar?
But I’m not “all in” on the thought that most of the negative stuff, debt crisis-wise, has been priced into the euro at this point. Just making an observation.
Last Friday, when we were looking down the barrel of a downward revision in GDP, The Canadians were printing a stronger-than-expected GDP for July at 0.2%. (I know, pretty feeble, but, at least it is rising from June’s 0.1% gain, and not being revised downward!) So, the Canadian third quarter got off to a good start. The Canadian dollar/loonie (CAD) has been stuck in the mud around $1.0170 for a couple of weeks now. A lot of that has to do with the price of oil, and how it got smacked down about 10 days ago, and has been working to rebound since.
The Reserve Bank of Australia (RBA) meets this afternoon (for us) and I don’t expect any rate movement from them today. The economists in Australia are leaning toward a 25 Basis Points (0.25%) rate cut. The Aussie dollar (AUD) will react to the announcement, but if the RBA does what I think they will do, and that is nothing, the Aussie dollar will look to the statement following the announcement. Most people, and I told you this months ago, think the RBA has one more rate cut arrow in its quiver that it will shoot before year-end. So, to me, if that’s true, then go ahead and shoot the darn arrow and get it over with!
I had a couple of dear readers send me notes on Friday asking me why the New Zealand Mortgage Banks had cut rates, as I had reported Friday Morning. Well, demand was probably lacking, and when demand is soft, you cut prices. The other reason might be because these mortgage banks wanted to be ahead of the Reserve Bank of New Zealand (RBNZ), and then it became like the gas wars we used to have here in the US. Only people my age and older remember these, so sorry youngsters, you’ll have to ask your parents what the gas wars were like.
Either way, the New Zealand dollar/kiwi (NZD) liked the cuts, and like I said the other day, cuts from the private sector go a lot further than central bank cuts, and help a currency much more.
In China this weekend, they printed a Manufacturing Index that came up short of expectations. But the difference was pretty marginal. The expectations were for a reading of 50.1 and the actual print was 49.8. However, 49.8 represented the third consecutive reading of below 50. And this news is what sent the currencies down the slippery slope in the Asian session, but as I said, a recovery took place in the European session this morning.
There’s a story on the Bloomberg this morning that calls the Swedish krona (SEK) the new Swiss franc (CHF) for investors seeking higher interest rates. OK, that’s really going out on a limb. Yes, Sweden has a trade surplus and a falling debt load, but come on! Yes, I’m well aware of the fact that the krona is the best performing currency of developed markets since June, as it outperforms its neighbor Norway (NOK). Since June, when the krona fell to 7.3285, it has gained 3.1%…
More from the Bloomberg article… “‘The Swedish krona has all the pillars that you need to be a safe haven,’ said Peter Frank, a FX strategist at Banco Bilbao Vizcaya Argentina.” Chuck here, OK. I’ll give you “safe haven”, but taking over from the franc? I’m from Missouri; you’re going to have to show me that one! But, that’s not to say I don’t like the krona. I do. Sweden and Norway are excellent euro alternatives, folks.
Remember last week, when I was telling you about global growth’s faint heartbeat? Well, The World Trade Organization (WTO) put out their latest forecast for World Trade, and they are forecasting that growth will be 2.5% this year, compared to 5% in 2011. A lot is on China’s back, as they attempt to carry the load for the world. I think they are up to the task, but it won’t be easy for them!
Later this week, we’ll see what becomes of central bank meetings from the Bank of England, the European Central Bank and the Bank of Japan. All are expected to keeps things steady Eddie. But you never know! But of these central bank meeting, the European Central Bank (ECB) really is the only central bank that has some room to maneuver, so you can’t rule out a rate cut from the ECB. More thoughts on this later in the week…
My weekly check of the IMM Positions over the weekend brought more news of investors going short US dollar positions, as the short positions in USD increased to levels not seen since the third quarter of 2011. Remember at that time, we had just gone through the gut-wrenching debt ceiling debacle, and the downgrade of US credit. The most favored currency last week was the Canadian dollar and investors continue to go long the Aussie dollar. Maybe that “hand of God” that I talked about last week won’t make an appearance for the US dollar this year. But then, like I said above, we do have three more months!
Then There Was This…
“More than one in 10 borrowers defaulted on their federal student loans, intensifying concern about a generation hobbled by $1 trillion in debt and the role of colleges in jacking up costs.
“The default rate, for the first three years that students are required to make payments, was 13.4 percent, with for-profit colleges reporting the worst results, the US Education Department said today.
“The Education Department has revamped the way it reports student-loan defaults, which the government said had reached the highest level in 14 years. Previously, the agency reported the rate only for the first two years payments are required. Congress demanded a more comprehensive measure because of concern that colleges counsel students to defer payments to make default rates appear low.
“‘Default rates are the tip of the iceberg of borrower distress,’ said Pauline Abernathy, vice president of The Institute for College Access & Success, a nonprofit based in Oakland, CA.”
Chuck again. Yes. I had a brief discussion about housing with my darling daughter’s husband Jerry (he gets so excited to see his name in the Pfennig) yesterday. And yes, housing has seen a bit of a bounce off the bottom which is a result of home prices falling to levels that made the homes attractive, and I said, “But I don’t believe we’ll see a complete recovery in housing until the unemployment problem is corrected.”
This news that the student loans are being defaulted on, is another sign of that distress that the unemployment situation is causing.
To recap. The euro is tracking higher this morning on more optimism from the Spanish banking sector, as the audit revealed that 53 billion euros will be needed to recapitalize the banks, which is far less than the experts thought would be needed. China posted a third month of below 50 for their manufacturing index (49.8), and that has weighed on the commodity currencies overnight, although they did come back during the European session.
for The Daily Reckoning
Chuck Butler is President of EverBank
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