Chuck Butler

Good day… No contact from James Bullard, so I guess he doesn’t read the Pfennig… HA! I was hoping he would read yesterday’s letter, and answer my questions in writing, since I was unable to ask him in person the other day. But I guess that was like wishing, and hoping, and thinking, and praying that someone at the Fed would answer those questions, because… I know that someone at the Fed does read the Pfennig… Wink, wink…

OK… Let’s put that aside for the moment, and talk about something else. The euro (EUR) is seeing some big selling this morning, after a mini-rally yesterday. Spain, and remember I told you the importance of Spain yesterday, had to go to the markets today to auction 3.5 billion euros of 10-year notes… The auction was covered at 1.5x, which isn’t bad, but isn’t the greatest either, and at a yield of 6.98%… That’s key here, folks, for the Italian bond yields have gone back and forth through 7% — and 7% is where Portugal and Ireland had to ask for help…

Currency traders, knowing all of this, have marked down the euro this morning after those auction results. But, as I said, the euro did have a mini-rally yesterday, on news that the German Chancellor is joining with France President Sarkozy to ask the European Central Bank (ECB) to step in and deal with this mess. To administer the EFSF (European Financial Stability Fund), and to issue a common bond, and… To buy bonds that the markets won’t take without demanding higher yields… In other words… Merkel and Sarkozy want the ECB to become the Fed…

I can see the Bundesbank (Germany’s Central Bank) members of the ECB just shuddering, as what is before them… They know in their heart of hearts that they will have to deal with this mess, and the things they end up doing will not have been a part of their banking training, that is unless they took a course on how not to provide price stability… But… In the end… The euro was Germany’s idea. They shoved the idea on everyone’s plate, and with that in mind, now it is Germany’s central bankers that will have to put their banking morals in their back pockets…

I don’t like that anymore than they do, folks… But, just looking at what’s going on over there, you’re left with very few options… And I’ve said from the get-go, that a common bond would have to be issued to deal with this mess, and people snickered at me, and said that will never happen, for these countries will not accept losing their sovereignty… And of course, you’ve all heard me say this before, but these countries in the Eurozone already gave up their sovereignty when they turned their legacy currencies into euros…

Geez Louise, Chuck, are you going to spend the morning talking about the Eurozone? Well, maybe… But probably not… I’ve got a whole pocket full of things to talk about this morning, and we don’t’ have the time or space to do it… But I’ll get to as many as I can!

I have to say that I was impressed with the Capacity Utilization and Industrial Production numbers that printed yesterday here in the US. October CU and IP were both stronger… CU was 77.8 versus 77.3 in September… People have asked me for years, why Capacity Utilization is one of my fave economic reports, and it is simply that Cap U is one of the very few “forward looking” pieces of data and I would rather look forward than in the rear view mirror all the time! The TIC Flows were strong too in September, which makes sense given the flight to safety that went on in September… October saw a reversal of the flight to safety, with November turning around again…

Today’s data cupboard has the usual fare… Weekly Initial Jobless Claims — which has slipped below 400,000 the last two weeks at 398,000 and 390,000 respectively — is expected to be around 395,000, so no “real improvement”… The rest of the data centers on Housing Starts and Building Permits… Tomorrow we get the other forward piece of data, Leading Indicators…

So… I’m hoping that I don’t have to even begin to say that “with the euro getting sold, the rest of the currencies are struggling too”… I’m sure that my dear readers are well aware of this scenario now… But just in case… There you go! And individual fundamentals for the countries has been thrown out with the bathwater… Where’s the white flag? I’m getting ready to raise it, with regards to being a fundamentalist!

But is all this just window dressing for the real fireworks that will begin to get shot off next Wednesday? What’s next Wednesday, you ask? Well, other than being the busiest day of travel (ahead of the Thanksgiving Holiday)… It will be the deadline for the Debt Super Committee (DSC) that was formed as a part of the agreement to raise the debt ceiling back in August, to come up with $1.2 trillion of cuts… I told you about a month ago, that they would fail to do this, and look at what I see on the news this morning… Reports of the DSC members bickering, and playing the “he said, she said” game of placing blame… I’m telling you again — a month later and less than a week before the deadline — that the DSC will fail to reach their objective…

And then according to the agreement made in August, if the DSC fails, we are supposed to see $1.2 trillion of discretionary spending cuts automatically kick in… Again, a month ago, I believed and still believe that those “automatic cuts” won’t happen… The ratings agencies will begin to take the US credit rating to the woodshed, and the problems for the dollar will come right back…

Oh, and by the way… Our national debt reached $15 trillion, this morning… $15,000,000,000,000 — it’s more intimidating with all the zeroes, don’t you agree? But that’s just a drop in the hat to the Unfunded Liabilities that keeps creeping higher and higher. How’s this look? $116,428,974,000,000 — pretty scary, eh? But…

If we do nothing, and continue to go along believing that deficits don’t matter… On this day in 2015, that’s just four years from now… The national debt will be $23,651,000,000,000 and the unfunded liabilities will be $142,602,000,000,000…

OK… This is interesting… R.E.M.’s “The End of the World as We Know It”, is playing right now on my iPod…

And US traders, leaders, administration, think that the Eurozone has a problem? That’s what I keep thinking about, folks… Yes, the Eurozone has a problem, but on a scale, the US is in deeper dookie, it’s just that the Eurozone problem is now… I read a story yesterday that just plays well with my conspiracy frame of mind… Now, let me make sure I do this properly… This was something that I read; this is NOT ME SAYING THIS… But, as conspiracy theories go, this one would be interesting to play out… It all began with a TV reporter in Australia, doing a report on the Eurozone mess… And then it came to this thought by someone… “US financial institutions advised the PIIGS how to hide debt, and borrow more, and did so with the idea that eventually these “debt bombs” would explode, thus making the euro collapse versus the dollar.”

Now, I’m not saying this is what really happened, but one can imagine this happening, right?

OK… As long as I’m getting into trouble this morning, I might as well go down this next road…

Then there was this… According to the US government statistics, consumer inflation is on a downward slope…

Interesting, don’t you think? Is gas cheaper at the pump? NO!

Did it cost you less this year, when you signed the check for your kid’s tuition? NO!

And so on…

So I’m thinking that the government is trying to pull the wool over our eyes once again. Let me take you back… The Fed’s biggest fear is deflation (we all know it makes things cheaper, but that doesn’t count here)… What did the Fed resort to the last couple of times deflation popped up? They implemented quantitative easing…. They also mentioned that unless we visit deflation again, there wouldn’t be any more QE… Well… By the time I head to spring training, we’ll have three months of CPI data… If my hunch is true, we’ll have three straight months of the government telling us that inflation is falling… The Fed will then have the ammunition to implement QE…

I’m not afraid of being wrong here, folks… For… If I am, that means the US economy is recovering nicely, people are going back to work, and so on… That certainly is a better scenario for all of us, eh?

The price of oil hit $100 yesterday, and then proceeded to trade through that all the way to $102! Apparently, the wind in oil’s sails came from news that the Cushing to Seaway pipeline would see improvements allowing it to transport 400,000 barrels a day… This announcement means that Canadian oil-sands production would be delivered to the Gulf Coast market, competing more directly with Brent-based barrels.

So that we’re not confused… Here in the US we use West Texas (WTI) price of oil, and the rest of the world uses the Brent Oil which is more expensive (currently priced $111)… Hope that helps…

To recap… The euro is getting sold this morning, after seeing a mini-rally yesterday. The selling is coming from the fact that the Spanish debt auction this morning was “OK” but not great, with yields nearing 7% — the level that led Ireland and Portugal to ask for help. With the euro down, the rest of the currencies are struggling. Even the Chinese renminbi is weaker this morning… And then Chuck talks about the US debt… And talks some more, and talks some more, until you were tired of hearing about it!

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.

  • Bethel

    This is beginning to look like a clinical problem, where the “People” can’t take proper inventory, can’t add and subtract, can’t benefit from history, can’t utilize what already belongs to them; somnambulating off the cliff.

    Once more with feeling!

    It appears that the U.S. brain trust is operating on one hemisphere to address the economic crisis. Conventional U.S. economic policies have had questionable effect on debt and deficits, dependent on the elusive counterfactual, lacking in the breakthrough. Macroeconomic policies have been applied without a foundation in basic accounting, and job creation efforts have occurred without going back to basics.

    Generally when dealing with liabilities one will also survey assets, a balanced approach. The nation’s brain trust has not done so since all policy interventions have increased liabilities: the national debt, annual operating deficits in excess of $1 trillion, annual debt interest payments of $2 trillion per decade, bailouts, stimulus packages, QE1 & 2, public assumption of toxic assets i.e Fannie Mae – Freddie Mac mortgages and shaky derivatives etc.

    Economic policies, if they are to succeed, must first breakout from the encirclement of deficit financing and austerity measures used to address the double envelopment of America’s past, present, and future liabilities. This breakout can only be accomplished by an asset-based approach. America has real assets, a gold reserve [no need for a gold standard] and 700 million acres of public land with mineral estate, which if monetized or securitized, will yield $32 trillion, the subject of Obama Memo#8, appearing in “The Coming Crisis blog, June 1, 2011. Obama Memo#8 [link below] is an illumination of Obama Memos 1-3, published in “The Daily Reckoning,” December 22, 2009; all mailed to their namesake in real time. Not that the President’s bubble, then or now, is permeable to new ideas.

    Though contemporary Keynesian dogma, [sustained by Krugman, Stiglitz, Roubini, and others], considers gold to be a “barbaric relic” it does not proof out. The American Gold reserve, 8,133 tons, without a gold standard, has a commodity value of $400 billion at $1,500 per troy ounce. If monetized or securitized with a 10% cover ratio, this gold reserve will yield 4 trillion inconvertible gold notes, effectively $4 trillion [note the gold is not sold]. At $2,000 per troy ounce, where the price is headed, the yield is 5.2 trillion inconvertible gold notes. All Federal Reserve Notes in general circulation from 1933-71 were backed by a 25% cover ratio, an arbitrary consideration in the present fiat money era.

    These new “debt free” gold notes, separate and apart from Federal Reserve Notes in general circulation, can be used to amortize or re-purchase foreign creditor debt holdings. In the case of re-purchase, debt interest payments become disposable income, perhaps $2 trillion per decade, depending on interest rates. The contra-lateral proof for this approach exists in the standard practice of gold banks which lease portions of the U.S. gold reserve for 1%, in turn, securitize them into a $6-7 trillion annual gold market. Bullion Bank Trading – A Closely Guarded Secret – Precious Metals – Resource Investor Source: It appears that the usual suspects, the bullion banks, know how to properly exploit a “barbaric relic,” while the public is lulled into thinking it’s glass beads.This is the fearsome cost of Keynesian intransigence apropos gold, or more accurately gold standard.

    Conversely, libertarians, gold bugs, and others, seek a reprise of the gold standard, despite its noted limitations; principally the failure to meet the contemporary expansion requirements of money. The topic also obscures the true utility of the U.S. gold reserve, as discussed above.

    Benjamin Franklin actually preferred land backed currency to the precious metal-backed kind [History Magazine Cover Story, October 2010]. He successfully argued for its adoption in Colonial Pennsylvania in 1729, and later printed this type of currency for the Colony. His example was later adopted by the French (Assignat, 1792) and Germans (Rentenmark,1924). The United States possesses 700 million acres of public land with mineral estate i.e. oil, natural gas, coal etc. With a modest valuation of $10,000 per acre, the land will yield $7 trillion at a 100% cover ratio (1x); $14 trillion at a 50% cover ratio (2x); and $28 trillion at a 25% cover ratio (4x). The Marcellus Shale tract alone is valued at $1 trillion, one of scores in the U.S. [note public land is not sold]. With 32 trillion inconvertible gold and land notes on hand, effectively $32 trillion, America can tame its national debt and unfunded liabilities with enough money left over for robust human capital development, public investment, and tax holiday for the populous and business, all of which will generate additional wealth.

    These propositions require no borrowing, taxation, or over-issuance of fiat money, and are thus perfectly suited to America’s feckless body-politic.

    In the case of the Eurozone, a reduction of the gold cover ratio of Euros, from 15% to 10% would produce 1/3 more “debt free” Euros, separate from those in general circulation, with which to deal with the Eurozone debt and deficit crisis; with a lot left over for public investment, tax reduction and human capital investment.

  • Two Dollar President

    Bill – Please contact me regarding mentoring – Two Dollar President –

    Also would appreciate the solicitations from African envoys asking for money and or soliciting my favorable receiving of such too please stop – TY –

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