Chuck Butler

I had to laugh yesterday when the New York traders came in and didn’t sell the currencies right away… I said to myself, “Self, maybe the ‘big boys’ read the Pfennig and now know that I’ve uncovered their ‘game,’ so they have to lay low for a while!” HA! Whatever the case, the currencies held their gains most of the day, and even added on in some cases.

Overnight, it’s been a roller coaster ride, with the euro (EUR) being sold ahead of the French bond auction, and then recovering after the auction results, which were not bad results, as yields on their bonds fell… The same result in Spain this morning, too… More baby steps of stabilization… However, Greece continues to weigh heavily on the euro, and all other currencies as far as that goes. The ECB remains on the sidelines, and I think they’ll remain there for some time, waiting until the last minute. This is worrisome for the markets, and I think a statement by the ECB that they remain the lender of last resort would go a long way here…

The other day, I told you that German Chancellor Angela Merkel was going to China, not to bash the Chinese for their currency policy, but to gain China’s confidence in the eurozone. In Merkel’s meeting today with Chinese Premier Wen Jiabao, Wen stated, “China is still researching the best way to participate in the European Financial Stability Facility (EFSF).” That’s a good sign…

As I’ve said for over a year now, China knows the steps it needs to take to become a world leader, and push the renminbi (CNY) to the front of the class for reserve currency status. And one of those steps is becoming the world’s financier, like the U.S. did after World War II. China already performs this function here in the U.S. and has taken the back road into Europe, but I think the country will increase its financing of eurozone debt as it wrests the title of world’s financier away from the U.S.

Gaining a wide distribution of the renminbi is another step that China has begun, as I’ve reported here. This whole change for China isn’t going to happen anytime soon, but it will happen at some point in the future… I’m thinking 2020, but could be as soon as 2017…

Yesterday, I told you how manufacturing reports in Germany, China and Australia were all stronger than expected. The U.S. version of this report was strengthened from December, but was not as strong as forecast. But the U.S. version has a good grip on expansion at this point. The weak dollar helps, and I know you’re going to say, “But Chuck, the dollar has been stronger recently…” Yes, it has… but it’s still weak!

Moving on… I found this to be a case of the kettle calling the pot black… Japanese Finance Minister Jun Azumi took a shot at the U.S. Fed and their interest rate policy last night. First, Azumi was warning the markets about the yen’s (JPY) strength, and how he was in a position to do something about it (intervene by selling yen). And then he said, “Speculative moves are increasing in the market, and we can’t overlook them. Against the backdrop of the Fed’s plan to keep interest rates exceptionally low until 2014, short-term speculative buying has increased, contributing to the yen’s gain.”

Speaking of the Fed… They sure have had a pile of junk thrown at them and will continue to have it thrown at them… You see, government spending has been a HUGE part of economic growth measured by GDP. Now, everyone would love to see the government out of the deficit spending deadly cycle they’ve been on for some time… And they will attempt to do so, starting next year. But what becomes of the economy, if the piece that the government spending was taking up isn’t taken over by something else? Ahhh, grasshopper, you have become so smart! Yes, the economy circles the bowl…

There were a couple of reports done recently that outline the hit that the economy will take in 2013 and beyond as the government withdraws their support of the economy… JPMorgan Chase’s guy thinks that 1% of GDP will be lost in 2013, as $500 billion in spending cuts come on board in January 2013. And then another $250 billion gets taken out by allowing the Bush tax cuts to expire. Bank of America’s guy thinks the hit will be worse… He believes that the first hit will be $586 billion at the end of this year. And then $100 billion per year gets taken out, as required by the agreement when lawmakers couldn’t agree on spending cuts.

I’m all about less government and less government deficit spending. And if we have to suffer through withdrawal pains, then that’s what we need to do. We have to break this addiction to government deficit spending.

Let’s talk about something else. The other day I told you that the Aussie dollar (AUD) had climbed back above $1.06, and the next line of resistance wasn’t until $1.0770, so it had “room to run.” The A$ has climbed above $1.07 now, so the “room to run” is growing smaller. But that’s just a line of resistance. There’s not a “hard stop.” The A$ reached $1.10 and change last year, so it does have that ability. The one thing that concerns me is how quickly this move higher has happened. Let’s not get ahead of ourselves here, A$ traders.

I read this morning that the Canada Pension Plan Investment Board, which manages about $155 billion, plans to increase its longer-dated investments in Australia to boost returns. The pension board already has about $10 billion allocated in Australia and the A$. Pretty interesting stuff here.

Speaking of Canada, Canadian manufacturing wasn’t on par with the reports from Germany, China and the U.S. yesterday, as it slipped a bit in January. The stronger Canadian dollar/loonie (CAD) can be blamed for that. I’m not concerned here. Canada has the “stuff” other countries want, and will continue to attract investment.

Gold is eking out another small gain this morning, after adding about $5 to its value yesterday, it’s up $4 this morning. I would rather see these small moves that fly under the radar than the wild swings we’ve seen in recent years.

A little game today of “who said this?” I’ll give you this quote and you guess you said it. The answer is at the end: “Gold, unlike all other commodities, is a currency. And the major thrust in the demand for gold is not for jewelry. It’s not for anything other than an escape from what is perceived to be a fiat money system, paper money, that seems to be deteriorating.”

Remember yesterday when I told you that the Congressional Budget Office had forecast that the U.S. will print a trillion-dollar budget deficit for the fourth-consecutive year in 2012? I completely forgot to mention the most important thought on this forecast. The CBO has also forecast that the budget deficit in 2013 will narrow and in future years will continue to narrow. Just how did the CBO come to that conclusion?

First we have the reduction of deficit spending that we talked about above. And then the real reduction comes from an increase in government revenue for future years. You know what government revenue is, don’t you? Taxes! In fact, the CBO believes that taxes will increase by 30% in the next two years!

There are still people out there that think having debts are OK. When taxes to the public have to rise 30% to help pay for them they are not! And that’s just the tip of the iceberg. As each year comes from here on out, large numbers of baby boomers are going to hit the retirement age. And those unfunded liabilities I told you about last week? I guess we’ll solve that problem when we get there, eh?

To recap, the New York traders didn’t reverse the currencies’ overnight gains yesterday, and the currencies and metals were allowed to add to their gains all day! The gains were small, but still gains. China is mulling over how to participate in the EFSF. It’s easy: Write a check! U.S. manufacturing was up nicely in January, and Canada’s was down slightly. And the CBO’s bomb they threw at us is a doozy!

Oh, and the answer to our game of “who said this?” is… Alan Greenspan!

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

  • c.l.shannon

    so – the roughly 50% of the citizens that actually pay taxes will see a 30% increase in their tax bill? that on top of inflation and wage stagnation seems a particularly bleak future. time to check the inventory of the ‘mogambo’ bunker and make sure there is enough gin and vermouth …

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