Unemployment Woes

What a HOTSIE-TOTSIE weekend we had here in the Midwest. Lots of blazing sun sent outside partiers searching for shade and a breeze! But I like it that way! We cut down some very large trees that were almost dead last year, and most of our shade for the backyard was gone. But that didn’t stop everyone from having a good time at Braden Charles Butler’s birthday party!

The currencies have been in search of some shade and a breeze too. But we did have a bit of healing on Thursday and Friday and in yesterday’s thinned-out trading. Yesterday, the big news was that recent polls revealed that the conservatives are holding on in Greece, which would allow some stabilization. In other news, Spain announced that they were going to recapitalize their troubled banks, and Italy held a solid bond auction. But that was yesterday, and today all that good stuff for the risk assets is being wrapped up with yesterday’s fish. In other words, all those things aren’t helping today.

Today, I’m seeing some slippage from the price levels of yesterday. Not only in the currencies, but gold and silver, as well. Right now, it’s just some small slippage. When the New York traders return to their desks after a weekend at the Hamptons, they’ll decide which direction we’ll head to today. Will it be risk on or risk off?

In Germany this morning, another solid bond auction left German 10-year bunds at record low yield of 1.347%. Stranger than fiction, people are lining up to buy these bonds at those levels. Makes no sense to me, but if you had to buy eurozone, I certainly would load up with German bunds over the rest of the lot! So if this auction carries any weight with the New York traders, we could very well see a risk-on day. Right now, though, it’s a muddle-through day.

The debate about whether Germany would accept a eurozone bond is still be bandied about. But as I said on Friday, I like the concept of a bond fund to pay maturities from so that there would be no questions about the ability to pay back debt. Let’s hope for each country’s sovereignty sake that they choose wisely.

You know the German chancellor, Angela Merkel, is a savvy politician. And not only has she backed the maturity fund idea, but has asked France’s new President Hollande, “Do you really want growth? I don’t think you can handle growth!” HA! No, what she has actually done is propose a six-point growth plan for the eurozone that uses a lot of the ideas that Germany has in place that has kept that economy going during these rough times for everyone else in the eurozone. Like a Europewide program to promote startups and small and midsized business that mirrors the program that has been so successful that is offered by the KfW Development Bank in Germany.

Merkel also wants the rest of Europe to adopt the German model for dealing with unemployment, which involves reforming the labor markets of each country. Hey! At least she’s trying something! And if it has worked in Germany, why can’t it work elsewhere?

That’s something I would like to see happen here in the U.S. that is a reform of the labor markets. If you want to get small businesses to ramp up their hiring, tell them that the protections against wrongful dismissal are being relaxed and see what happens. But I better stop there, before I really get a lot of people mad at me for some of the other ideas to ramp up jobs.. You can’t please all the people all the time, my dad used to tell me.

So it looks like German inflation is falling. Amazing, but true, but I think it has to do with the slower activity in Germany (we’ve seen industrial production weaken, remember?). Most of the German states have reported falling inflation, and if that happens, I would have to think that the European Central Bank (ECB) will look to cut rates further. (So maybe buying those German bunds is so crazy!)

The three-day advance by the Australian dollar (AUD) was stopped this morning, but the day is still new and the A$ is only down by a very small amount right now. So it’s nice to see it snap back! Not that I’m a cheerleader for the A$. It’s just when I see that something is oversold, it’s nice to see it snap back. And fundamentally, the A$ is still better than most currencies.

Another currency that really snapped back last week was the Brazilian real (BRL): a 5.8% move in the currency just since May 23, when it hit 2.1065. I doubt the Brazilian government likes seeing this strong move, and I wouldn’t be surprised to read or hear tomorrow that the government was in the market selling real to weaken it.

In Norway, unemployment fell to a three-year low with the most-recent report. The tight labor market is going to make it very difficult for the Norges Bank (Norway’s central bank) to cut rates, as they’ve been discussing. Personally, I would like to see the Norges Bank take a step back from the rate cut table for the time being. The only reason the Norges Bank feels that rates need to go lower is that they want the krone to get weaker versus the euro, and a debasement of the currency (rate cut) should do the trick. But Norges should think about how rate cuts have been 50-50 on whether they help or hurt a currency recently.

China did not print their PMI (manufacturing index) this past weekend, as is their normal course of business, but instead is scheduled to print in two days, on the 31st. Remember what I told you last week about the government’s PMI and the private sector’s PMI issued by HSBC. This week’s report will be the government’s manufacturing in May and will go a long way toward restoring confidence in the global growth idea.

The British pound sterling (GBP) hasn’t seen that Olympics host country bounce yet, and maybe it won’t. But I would think that the closer to the opening of the Olympics we get, the better chance the currency has to see that host country bounce.

We’ve talked about some snapping-back currencies this morning, but one is so low that to snap back right now would take something extraordinary: The Indian rupee (INR) can’t seem to catch a bid right now, and the government has been sitting on its hands watching this unfold. You may remember me telling you a couple of months ago how the Indian government made an announcement that they would be protecting the rupee. And I chastised them: 1) for getting involved, and 2) if they were going to get involved, why had they waited so long?

That “protection” didn’t come. It was all talk and no walk. And as my dad used to tell me, money talks and bull**** walks. I used to think that India with its strong economic growth could overcome the problems that rising inflation brought them. But I was wrong. See what happens when you put faith in a central bank?

The S&P/Case-Shiller home price index for March will print today here in the U.S. From what I’ve seen lately, prices on homes are seeing some healing, and this report should confirm that. But as I said before, the unemployment problem and the foreclosures that are coming down the pipeline will be enough to keep home prices in the dumps.

Then from The New York Times, talking about unemployment benefits:

“In February, when the program was set to expire, Congress renewed it, but also phased in a reduction of the number of weeks of extended aid and effectively made it more difficult for states to qualify for the maximum aid. Since then, the jobless in 23 states have lost up to five months’ worth of benefits.

“Next month, an additional 70,000 people will lose benefits earlier than they presumed, bringing the number of people cut off prematurely this year to close to half a million, according to the National Employment Law Project. That estimate does not include people who simply exhausted the weeks of benefits they were entitled to.”

See what I mean now? Unemployment will continue to weigh heavily on any recovery in the home prices. That doesn’t mean that home prices can’t gain. It just means that the gains will be measured in small amounts due to the drag of the unemployed.

To recap: In yesterday’s thinned-out trading overseas, the currencies posted their third consecutive day of healing. But that appears to have ended this morning. Chuck spends a lot of time talking about Germany this morning — it being the largest economy of the eurozone.

Chuck Butler
for The Daily Reckoning