Front and center this morning, the risk rally continues to hold its head above water. It’s pretty interesting in that there’s really nothing of substance to spur this rally. Yes, Greece is very close to forming its coalition government that is all for staying in the euro (EUR), but as I said yesterday, this will come with pleas to renegotiate the bailout terms, and most importantly, it doesn’t solve their solvency issue one iota! But then, on the other hand, why would the dollar rally?
Gold turned the tables yesterday and got back on the rally tracks, and is up $3 this morning. I think gold turned the tables on its negative performance yesterday on the news that more and more market observers are jumping on “the Fed will implement additional stimulus” bandwagon. In fact, according to a number of Fed watchers, they expect the Fed heads to extend their Operation Twist at the end of next week’s two-day meeting.
I’ve said over and over again, during the past couple of years, that it makes sense for us as a country to push the tenor of our debt out on the yield curve as far as possible. For if people want to lend us money at 2.66% (the yield on the 30-year Treasury), then that’s their problem, not ours!
So the Fed’s selling of short-term Treasuries and buying of long-term Treasuries is simply an bond extension operation. It does nothing for the economy now, folks. Except, of course, give those primary dealers that deal in Treasuries with the Fed some BIG FAT paychecks!
Me saying that it’s their problem, not ours, reminds me of something that our Treasury secretary from back in the ’70s told a group of leaders from around the world, “It’s our currency, but it’s your problem.”
Lookie there! It still holds true today, but not only is the dollar everyone else’s problem (that holds dollars), but now we have Treasuries also being everyone else’s problem, as long as they hold them and expect to get paid back their principal in today’s dollars. Because that’s not going to happen! The dollar’s value will have been inflated away, and they’ll wonder what happened when they go to either spend the dollars or convert them back to their base currency.
I know, I know, I’m a little hard on the beaver here — the beaver being Treasuries. I’ll stand my ground here, because when you see a bubble, it doesn’t mean the bubble will find a pin in the room right then! But the longer it floats around the room, the bigger the bubble gets, and then when no one believes it will ever will burst, we’ll have a Minsky moment.
OK, back to the risk rally. The markets are being fooled by the news coming out of G-20. The reports say that a host of the G-20 leaders, led by the U.S. president, are putting pressure on Germany’s chancellor, Angela Merkel, to switch from the austerity measures plan to a plan promoting growth and financial union.
I’m not the sharpest tool in the shed, folks, but to me, this is a lot like the U.S. lawmakers and officials banging on China to allow the renminbi (CNY) to float. The Chinese smile and say kind things, and once the U.S. officials leave, the Chinese go right back to the slow general appreciation of the renminbi.
I suspect that Merkel is all smiles and nodding along with those calling for her to change, but it’s all a big show for the markets. Merkel is NOT going to agree to pooling euro-area debt, or boosting deficit spending to promote growth. For one thing, the German constitution, if you will, is not going to approve her saying that she’ll pool euro-area debt. So the G-20 leaders are barking up the wrong tree. But someone’s to blame for the U.S. economic slowdown, right? I mean, in today’s world, it’s always somebody else’s fault for something.
Spain’s debt costs continue to go higher. Again, this problem goes away with a “eurozone bond,” but that’s not going to happen, folks. Not many people are listening to Merkel. She’s not going to agree to financial union, because she can’t!
And this looks like a good place to insert this quote from Bill Fleckenstein. He’s the author of one of my all-time favorite books on the economy. I learned so much history about Big Al Greenspan from this book. Anyway, here’s Bill talking about debt problems:
“Now the whole world is having to face this sort of thing all at once. Europe is broke, and the banks are in trouble. Maybe not all of Europe, mostly the PIIGS, but so are we, as are the U.K. and Japan. The reason Europe is in trouble is because the ECB won’t print unlimited amounts of money like the Fed, the Japanese and the British do.”
So back to the thought on the risk rally — I do believe that the markets are being swayed by the comments coming out of the G-20 meeting, and that’s why the risk rally has some legs (not strong legs, but legs nonetheless). Apparently, G-20 is prepared to make a statement today that addresses global growth, and it will go like this: “Should economic conditions deteriorate significantly further, those countries with sufficient fiscal space stand ready to coordinate and implement discretionary fiscal actions to support domestic demand as appropriate.”
OK, maybe a roster of those “countries with sufficient fiscal space” would be helpful here, right? Because that list could be counted on very quickly. It starts and ends with China. Norway would be also on the list, but I doubt they want to get involved with all this. So has China agreed to this? That will be the $64,000 question, eh?
The price of oil dipped again yesterday, after gaining for most of last week. You know, I’ve long talked about how the price of oil both helps and hurts the value of the petrol currencies like the Canadian dollar (CAD), Norwegian krone (NOK), Russian ruble (RUB), Brazilian real (BRL) and others. But the push/pull on the Russian ruble has really been noticeable in recent weeks. The Canadian dollar/loonie and Norwegian krone aren’t getting the full oil price effect in recent weeks, but the Russian ruble sure is. The problem for the Russian ruble is that it is somewhat illiquid and doesn’t trade freely in the forward markets, therefore the markups are wide, and the dealers are thin.
I told you yesterday that an adviser to the People’s Bank of China (PBOC) said in an interview that China’s economy had bottomed in the second quarter. That news lit a fire under the renminbi/yuan and got it back on the rally tracks after a couple of weeks of weakness. Last night, another Chinese official said the economy could improve on government stimulus. Well, duh… you think? I’ve said this for a couple of years now, but for the benefit of new readers, China’s stimulus is a calculated stimulus that pinpoints areas of need and that quickly supports a recovery… It’s not just willy-nilly, spread some money around and see what happens…
All this talk coming from China about a recovery is good news for the global growth campers, but I’m from Missouri. They are going to have to show me. If a country can turn things around quickly, China can, but these are different times. The eurozone is in recession, the U.S. has never left its recession (in my opinion), Japan has been in an abysmal funk for two decades and the remaining Asian countries are waiting for China. So big dog China, are you going to lead the global growth campers out of the woods?
All the talk about the “countries with fiscal space” — I’m sure China is saying, we’d love to help you out, etc., etc.
The Fed’s two-day FOMC meeting begins today. Get out all the board games, because they’ll need to pass the time. I can hear Dudley telling Yellen, by George, you’ve sunk my battleship! But seriously, the Fed heads are going to leave rates unchanged, they are going to talk about the weakening economic conditions and maybe just maybe begin “twisting” the night away. But does that take two days? Oh, well, go ahead and take two days… or three or four. We all know what’s to come of it!
The U.S. data cupboard is fairly empty this week, with only some housing reports at the start of the week, so the FOMC “decision” is the highlight of the week for the markets.
German investor confidence as measured by the think tank ZEW plunged from 10.8 to a negative -16.9. That’s a huge move down, folks, and one would think it would be reflected in the euro’s performance this morning, but I think that the markets don’t have their eye on the German data ball right now. It’s all about G-20 and their riding in on the white horse!
The Australian dollar (AUD) added to its gains above parity yesterday and last night. I was doing some reading last night (couldn’t sleep) and came across some stories on the A$ that you just don’t hear about everywhere. Seems there are central banks around the world taking an interest in the A$’s stabilization. Yes, the A$ fell from the sky earlier this year, but has since recovered a bit, back above parity, and that’s caught the eye of some central banks. I would think these central banks have an eye on Australia and an ear on what China is saying about growth improving in the coming quarters. With Australia depending on Chinese growth for a majority of their exports, and thus mining production, etc., this is all good news for the potential gains in the A$. But as I said about Chinese growth, show me!
Then There Was This: I found this on Gold Money, written by Alasdair Macleod:
“The rate at which the majority of the eurozone is descending into insolvency is accelerating. The rescue package for Spanish banks, which appears to have been provisionally set at a figure designed to impress the markets, hardly even produced a dead cat bounce. All it has achieved is to draw attention yet again to the helplessness of the authorities in dealing with multiple debt traps. So what is the answer?
“It depends on the purpose behind the question. If it is to seek a genuine solution, then the answer is to cut public spending rigorously in all countries that depend on markets to fund budget deficits or to roll over existing debts. Only a convincing budget surplus is going to lead to falling borrowing costs. The objection to this solution is partly political and partly on the grounds of neoclassical economic prejudice. The former persists in placing social objectives above economic objectives, while the latter has been convincingly proved to be wrong. Otherwise, please talk us through how a government actually knows best to kick-start an economy into recovery, without ignoring the accumulation of past evidence. Explain why it is that those countries, driven by the consumption so loved by Keynesians and monetarists alike, have turned into basket-cases, while economies driven by a savings culture persistently confound all neoclassical theory by making their citizens better off, in every case.”
Yes sirree, Bob! (BTW, who’s Bob?) To have a government tell us they know best is a journey down the road to ruin. But then, they are so convincing, aren’t they?
To recap: The risk rally still has legs — not strong ones, but legs nonetheless, and it’s all about what is leaking out of the G-20 meeting regarding stimulating global growth and a resolution to the eurozone debt crisis. It’s all a bunch of malarkey, folks. China continues to talk about stronger growth that will come this year, and that has central banks around the world eyeing the A$. The Fed’s FOMC two-day meeting begins today. Get the board games out. And we might be twisting again like we did last summer!
Chuck Butlerfor The Daily Reckoning
Chuck Butler is President of EverBank
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