Portugal Requests a Bailout

There was BIG news from the Eurozone yesterday afternoon, so let’s get right to it, and discuss the ramifications… And don’t forget that the Bank of England (BOE) and The European Central Bank (ECB) are both meeting this morning… It’s time to put up or shut up for the ECB, and their president, Trichet…

OK… So first things first… Portugal finally bowed to the pressures of the markets, and formally requested a bailout from the European Union (EU) & IMF… It is estimated that between 60-80 billion euros will be needed to keep Portugal going through 2013… (Can you say, “kick the can down the road”? I knew you could!) Personally, as you know, I’m against bailouts… But, if you’re stuck with them, you might as well make lemonade out of lemons, right? So… In my opinion, I have to think that the attacks on the Eurozone and the euro (EUR) could be coming to an end, for the really “bad” countries of Portugal, Ireland, and Greece, have all been taken care of… Of course, that’s only if the next tier of Spain, Italy and Belgium remain steady Eddie.

I also think that this is good for the rate hike prospects of the Eurozone… For, if the ECB doesn’t have to concern itself with the problems of these deficit-laden countries, they can focus on attacking the inflation pressures that continue to build… Of course, as I’ve already indicated here previously, I do believe the ECB will opt to hike rates at their meeting today, and as I’ve said before, that rate hike will throw open Pandora’s Box of interest rate differentials, thus pushing the envelope of the Aussie dollar (AUD), and other higher yielding currencies.

So… It was interesting yesterday… I was in my office, putting together my presentation for Panama, which will happen later this month, and I saw the news blurb come across the TV, that Portugal had officially requested a bailout. I came out to the trading desk, and said, “Is the euro getting sold? Portugal has just requested a bailout.” And Ty Keough, said, “Are you kidding? The euro is trading at its highest level of the day at 1.4335!” So… I was all prepared to write this morning about how the euro shook off the news of Portugal’s bailout… Well, yes, and no… The euro has seen selling that brought it back to 1.4275, so not as lofty as yesterday’s figure, but not as bad as one would think it to be, given the Portugal news.

I would have to think that the markets’ persistent pressure on the ECB to hike rates, is underpinning the euro at this point… Of course, as we all know, the markets are usually way ahead of themselves, and the rate hike could have already been “priced in” for the euro, which is the reason it rose to 1.4335… So, the actual announcement of a rate hike will be “old news” and the statement by ECB President, Trichet, after the announcement, will be key to any further euro appreciation… Remember, I talked about this earlier this week… If Trichet would happen to remove any words previously included in his statements about inflation pressures, then the markets will take this rate hike as a “one and done”…

And, one more thing regarding the rate hike… The German Economic Institutes are welcoming the prospective hike, saying low rates are “increasingly endangering” German price stability and warning that a wage-price spiral looms. And when Germany talks, the Eurozone listens… That’s what happens when Germany is the largest economy in the Union!

OK… Let’s get moving on to something besides euros and the ECB and Portugal! The Aussie dollar continues to move higher. Last night the Aussie dollar received its latest boost from a report showing that Australia added jobs, and the jobless rate fell, unexpectedly I might add, to 4.9%… Overnight, the Aussie dollar rose to its all-time high level, since it began freely floating in 1983… $1.0482, is the new high, which was reached overnight… The Aussie dollar has backed off a bit in the European Session, but not much… Trading right now around $1.0470…

And the price of oil is so close to $109 that it could spit in $109’s back yard! So, you know what that means, right? The Canadian dollar/loonie (CAD) is still well bid! The other “petrol” currencies of Norway, and even Mexico and Russia, are not being treated as kindly as the loonie this morning… As it looks as though profit taking has stopped these two, after about a week of strong moves higher.

Here in the US, the data cupboard has been pretty bare this week… And as you all know, there’s a ton of debate going on in Washington DC about the budget, and the pending government shutdown… I haven’t really spent much time talking about this, because I just always thought they would put this to bed with back room deals, and under-the-table negotiations… But, it looks like this is going to be a classic “Mexican standoff”… And according to Wikipedia… “A Mexican Standoff is: a slang term defined as a stalemate or impasse; a confrontation that neither side can foreseeably win.” Yes, I think I nailed that description!

The pending government shutdown won’t be a good thing, folks… But, if it does one thing it could be better… And that is if it brings to light, to every American citizen, just how stupid our deficit spending has become… And, yes, to my kids who are teachers, and my beautiful bride who taught pre-schoolers, I did mean to say “STUPID”… At least I didn’t call anyone “Stupid”! HA! Of course, if you put two and two together, you know that the lawmakers and the Presidents are responsible for the deficit spending in the budgets… OOOPS, Did I say that out loud? Yes, I did! Just put two and two together there folks, and you have stupid is as stupid does, as Forest Gump’s mother used to say!

And, you know how I’ve told you about the Fed Heads that have recently shown their colors to be hawkish, with their calls for an end of quantitative easing… Well, on the other side of the coin is Fed Head, Pianalto, who had this to say last night… “We have a lot of ground to make up in terms of job losses and output so our policy is appropriate.”

So… Don’t be packing quantitative easing’s bag to leave, just yet… And.. As I’ve said previously many times… I truly believe that QE3 will happen… But it won’t be back-to-back with QE2… QE3 will come after the Fed Heads see that the economy doesn’t have legs to stand on its own, unemployment remains a problem, Housing remains in the dumps, and… Stock prices are falling…

My former colleague, and writer extraordinaire, David Galland, was describing this exact scenario in Casey Research’s letter yesterday… David believes that after QE2, though, we could very well see a dollar rally on the thoughts that the economy is out of the woods, and the Good Lord knows that the world is short dollars right now Big Time! But, this scenario would be short-term….

So, once again, we as diversification investors have a choice… Once QE2 ends at the end of June, we can look to take profits, or we can simply batten down the hatches and ride the storm out…

Well… Brazilian Finance Minister, Mantega, is quickly becoming a real pain to me… In fact, I would say that he gives me a rash! Last night, Mantega warned the markets that he has “an array of tools to stem the real’s gains.” These Brazilian guys are really beginning to make my blood pressure rise… They have tried everything to stem the real’s (BRL) gains, and they all work, for a short time… Like now, the real lost ground overnight on this news… And then the deep pockets of the markets come back. When will they ever learn? When will they ever learn?

Apparently, they aren’t going to learn it now, for more taxes have been added… I understand Brazil’s problem… Their manufacturers are getting hammered because the real is so strong, and their main trading partner (China) has a currency that, while gaining recently, has been pretty much pegged to the dollar… (Yes, I know the official peg was dropped in July of 2005)

Then there was this… So… I’m sure that a few of you saw this earlier this week, but I wanted to bring it to everyone’s attention… Ed Steer, who does a great job of educating investors on what moves the metals, reversed his previous stance that held to the idea that the Perth Mint didn’t have the actual gold and silver to back their “pooled” and “certificates”… He apologized to his readers and to the Perth Mint… This is something that I’ve encountered over the years, this claim that the Perth Mint doesn’t have the gold and silver to back their “pooled” and “certificates”… I’ve always held to the words in their contract with us… So, it was nice to see a writer reverse his previous thoughts on this, which were wrong!

To recap… Portugal has officially requested a bailout – which will be between 60-80 billion euros – from the European Union and the IMF… The euro initially wasn’t phased by this news, but eventually saw profit taking. The ECB is expected to hike rates today, which should open up Pandora’s Box of interest rate differentials for other high yielding currencies. And the Aussie dollar hit an all-time record high last night!

Chuck Butler
for The Daily Reckoning