Chuck Butler

Good day… And a Tom Terrific Tuesday to you! All is alright in Chuck’s world today, as my beloved Cardinals rebounded from the late inning loss on Sunday, to a rousing win yesterday. It was a beautiful day here yesterday for Columbus Day, I hope it was nice where you are.

Well, all is not alright in the Eurozone or with the euro (EUR) this morning, as we’ve seen an almost 1-cent loss since last Friday. There are all kinds of stories as to why this move has occurred, but none of them are new news, so it’s one of those days when you just shrug your shoulders and move along, otherwise you’ll spend all day trying to figure out why the euro has dropped like this… I’ll just mark it down to what I feel was simply going too far too fast, and it had to go back and fill in the gaps from last Friday. Did you hear that Eurozone banks are now charging for deposits in Swiss francs (CHF)? Yes, in an attempt to get depositors to hold more euros, these banks are charging for Swiss franc deposits… I guess that desperate times call for desperate measures!

The Eurogroup meeting ended with no progress on the ability of the ESM to take on losses from legacy assets of unhealthy peripheral countries… And Greece has requested a two-year extension on its current bailout. And Spain still hasn’t requested assistance… Remember the old Saturday Night Live skit where each week on the Weekend Update, they would give an update that Generalissimo Francisco Franco was still dead… They could do one now, and give a weekly update on, “Spain has still not requested assistance”…

The Eurozone leaders will get this ESM thing worked out… Think about the progress they’ve made in the past two years regarding having a Emergency Fund that could be used to deal with problems that arise. The ESM (Eurozone Stability Mechanism) doesn’t solve their debt problems, folks, but what it does it give the countries some breathing room and time to work on cutting debt without having their bond yields go sky-high. I think the Commissioner of Eurozone Economic and Monetary Affairs, Olli Rehn, said it quite well when he said, “Thinking of where we were 2 ½ years ago when we had no instruments of crisis management, we had to create the Greek loan facility and the temporary European facility. We are moving forward and we are supplementing the economic and monetary union with one important building block.”

I see that US Treasury Secretary, Geithner, was speaking in India, and was quoted as saying that the “US economy is now growing close to potential.” Hmmm… I’m not sure if he’s complementing the economic growth or dissing it! Because if this is our “potential”, we’re in some deep dookie, folks! He did have some nice things to say about the Indian policy changes that I mentioned last week. He said the “policy changes will result in gains in investments.” My old colleague and friend, Ashish, who follows the goings on of his home country like a hawk, believes that the policy changes will not fail, and that they should be good for the rupee (INR)… I’m from Missouri, and I’ll have to be shown, for I’m not convinced, yet…

Did you see that the IMF is sounding the warning bell and saying that the “risk of another global recession is alarmingly high”… They also warned that “the US could slip back into recession if leaders fail to prevent a ‘fiscal cliff’ of tax hikes and spending cuts from taking effect at year-end.” Last week I mentioned that I wondered why the media wasn’t talking about this “fiscal cliff” and then it hit me, it was one of those V-8 moments, when you do the head slap and say, “Why didn’t I see that?” The “that” that I’m talking about here is simply that the fiscal cliff isn’t going to happen… Once the election is over, whomever wins will direct the lawmakers to delay the spending cuts, and do something to soften the blow of the tax hikes, and they will look like the proverbial White Knight riding in to save the damsel in distress… Or maybe it’s Dudley Do-Right saving his sweetheart, Nell, or Underdog saving Sweet Polly Purebred!

Still… The debt mounts here… And the White Knight, Dudley Do-Right, and Underdog are not going to be able to save us if we don’t start dealing with our ever-expanding debt… Should I? Nah… Move along, Chuck, you don’t need to get your blood pressure rising again, talking about the debt in the US, but wait! I do want to mention something that should scare the bejeebers out of most who haven’t become Comfortably Numb with the debt numbers…

Carmen Reinhart and Ken Rogoff, two very highly regarded economists, recently wrote about the rising debt-to-GDP ratios of many countries… They concluded that “Our empirical evidence supports the view that current debt trajectories are a risk to long-term growth and stability.” OK, I’ve long told you that, you don’t need Reinhart and Rogoff to tell you that, but… Here’s the kicker, they believe that once a country exceeds 90% debt-to-GDP ratio, their inability to grow and their inability to pay back become BIG problems… So… I looked up a chart of US debt as a percentage of GDP from 1790 to 2010… And the US debt-to-GDP ratio at the end of 2009 was 82%, increasing from 60% in 2007… And, given what we know about our debt in the last two years, we have to be getting very close to 90%… Uh-Oh!

OK… On to other things… Like the Canadian dollar/loonie (CAD)… I told you yesterday in my short-n-sweet Columbus Day edition, that the IMM futures positions showed that long positions in loonies were near record highs… And that was before Canada posted a very strong 52,100 net jobs for September, beating the forecasts for a 10,000 jobs gain. While we’re not seeing the economic growth expand like this, yet… The economy certainly has the chutzpah to add 52,100 jobs… And the loonie should continue to be underpinned by this strong economy…

The Aussie dollar (AUD) bounced off its 3-month low yesterday, on news that iron ore prices increased to their highest price since August 16… But to me, the Big Elephant in the room with the Aussie dollar is the debt crisis in the Eurozone… Yes, I’ve questioned this several times in the past, but it is what it is, and anything, like the implementation of the ESM, to remove the dark clouds over the Eurozone, is good for risk sentiment… And anytime risk sentiment is improved, the Aussie dollar will benefit…

Then There Was This… I wasn’t the only one to find the numbers from last week’s Jobs Jamboree highly questionable… There was Jack Welch formerly of GE, and a host of others… But the one that really caught my attention was Michael Pento… Who believes that the labor report was a “phony government release used to attack Gold Market”… He went on to say that, “after digging a bit into the report, investors in the yellow metal should find those fears without grounds. Friday’s figures revealed that the underemployment rate, which includes those part-timers who would prefer a full-time position and also those people who desire to work but have given up looking, remained unchanged at 14.7%. In addition, only 114k jobs were added in the establishment survey; and the all-important manufacturing sector of the economy actually lost 16k jobs.”

Chuck again… Yes, all very suspect… And don’t for a minute believe what the BLS has on their website for numbers… These books have been cooked, I may have to go to the corner and wear a dunce cap as my penance for saying that, but it’s what in all my years of following this stuff, I see…

To recap… The currencies and metals spent the thin market Columbus Day holiday trading with a bias to buy dollars… The euro has lost almost 1-cent since Friday, and to Chuck it’s merely a case of going too far too fast for the single unit… The Eurozone ESM is now operational, although there are still questions as to the extent that it can be used. And Eurozone banks are now charging for Swiss franc deposits in their banks… The Canadian jobs report blew out the forecasts, and the IMM futures positions continue to love loonies…

As I head to the Big Finish… I’m noticing some rebound in the currencies, led by the euro, so the ESM implementation might just be enough to get the risk sentiment revved up today!

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is the Managing Director EverBank Global Markets. The father of the Daily Pfennig® newsletter, Chuck has a career in investment services and currencies spanning 35+ years. His tacit knowledge of the global markets along with his inventive spirit has led to the creation of many distinct and innovative currency-based products. A respected analyst of the currency market, Chuck has made frequent appearances on MarketWatch, USAToday, CNNfn, Bloomberg Television, and CNBC as well as quoted in The Wall Street Journal, US News & World Report, and The Chicago Tribune.

Recent Articles

A Tale of Two Crises

James Rickards

Jim Rickards updates his "There Will Be No 'Grexit'" thesis as two stories dominate global financial headlines. Find out why global capital markets are a tale of two crises.

The Medicine of the Future Is You

Stephen Petranek

The most promising and exciting advance in all the history of medicine is upon us, and yet it is actually not new at all — it’s as old as humans. The advance? Our immune systems. Stephen Petranek has more on how immunotherapy could change the way we treat cancer