A Risk-Negative Feeling Casts Its Net Over The Markets

Well… It looks like it’s going to be a “risk off” day, and a risk-negative feeling has cast its net over the markets this morning. Front and center, China printed a much weaker-than-expected services component of their PMI, and Australia’s trade deficit widened, which is a turnaround from the recent narrowing we’ve seen in this trade balance. These two things have pretty much put the brakes on any risk taking, and so it is that we begin our Wednesday, October 3rd, 2012.

Gold and silver are bucking the risk-negative feeling this morning, posting gains, albeit very small ones. Yesterday, gold and silver tried several times to move higher, but couldn’t remove the governor that was placed on them. I brought you some quotes from the bond king, Bill Gross, yesterday, but I missed this one and since it refers to gold, then it fits right here! “The latest round of quantitative easing made gold even more attractive, and owning the metal should be considered as part of a diversified portfolio. Only gold and real assets would thrive in a “ring of fire” of US fiscal problems.” — Bill Gross

Yes, I find myself continually explaining to people who don’t own gold (or silver) that it’s not a useless, barbarous relic like the people who don’t own it tend to refer to it is as. But once investors own gold (or silver) they see what all the hub-bub is about. They see what countries around the world are doing to their respective currencies, and if there is a financial catastrophe, then gold is the only asset that can offer protection. I tell people that owning gold (or silver) is like an insurance policy for your wealth. And just like any insurance policy, you hope you never have to really use it, but if you do have to use it, you’re happier than a lark that you had the insurance!

Have you noticed how the media really isn’t talking about the “fiscal cliff” for the US that’s coming when we turn the calendar to 2013? In case you’ve been living under a rock, the “fiscal cliff” is what economists have referred to the combination of personal tax rates being raised, and $1.2 trillion of discretionary spending cuts being implemented. (OK, that’s watered down a bit because the $1.2 trillion is spread out over 10 years), but spending cuts are going to be forced on the US economy along with much higher tax rates, at a time when the US economy is teetering.

I was reading a story on Bloomberg this morning that really made me think. The title of the story is “Employment Rise On Restaurants in US Doing Quick Service.” In the story, the writers state that restaurants and bars are heading toward their strongest year of job growth since 2004, led by fast food and quick service outlets. So, we’re supposed to be happy because we’re becoming a burger flipping economy? Is this what we sent our kids to college for? Yes, at least they are working, but come-on! I can’t believe this is happening.

And here’s some data that will make you scratch your head and wonder how employment is rising in these areas. Total restaurant traffic remains in pre-recession levels. Americans stepped out to eat 61 billion times in the past 12 months, down 62 billion visits from 4 years ago. Hmmm.

The first Presidential Debate takes place tonight. I don’t really get into these things, but I have to wonder if this is the place and time when the challenger begins to hammer on the debt, and offer some solutions. I’ve long said that this is where the ball finally gets volleyed over to the US and the pressure on the dollar returns, for, let me ask you this (and believe me now, and hear me later, I’m not being political here)… If you were running for president, wouldn’t the debt be on the top of your agenda? It would be on mine, and I’m not even running for class president!

Ok… Onto other things. I told you above that the Australian trade deficit widened in August from 1.5 billion to 2 billion (A$’s) Exports proved to be the main culprit for this widening. Commodities exports were slower and the prices were lower, that’s a bad combination, folks. If this continues we could very well see more rate cuts. I believe that the Reserve Bank of Australia (RBA) is finished for 2012, but going into 2013, we could very well see another 50 basis points of rate cuts, bringing their internal rate to 2.75%… As long as the RBA doesn’t surprise the markets with rate cuts, the Aussie dollar (AUD) can deal with the rate cuts, albeit in a lower value environment. The Aussie dollar lost the $1.03 handle on this trade data, and is looking vulnerable to any further weak data.

The euro (EUR) holds on to 1.29 for now. Spain hasn’t made its formal request for assistance, and Italy had a successful bond auction. Today we will see the final manufacturing index data from the major countries of the Eurozone. I expect sharp declines in Spain and Italy, as they begin to make cuts in deficit spending; France will also not look too rosy, and Germany will begin to show the rot on the vine of being connected to all these countries that are weak. So, 1.29 in the euro may not hold today, if the markets are in the mood to mark it down when the weak data prints.

One of the things that has been supporting the euro since July, has been buying of peripheral debt by institutional money. I say July, because that’s when European Central Bank (ECB) President, Mario Draghi, said that the ECB would do “whatever it takes” to save the euro. And since then, yields have been dropping in the peripheral countries like Italy and Spain. I saw data that shows that the peripheral country bond rally has outperformed the US treasuries in recent times. I think this is good news for the euro and the peripheral countries. But, as fast as money from institutions comes in, it can go back out.

The New Zealand dollar/kiwi (NZD) felt the tug from the Aussie dollar overnight, and followed its kissin’ cousin across the Tasman down the slippery slope. Kiwi had been so resilient lately, but that resiliency proved to be not so strong once the Aussie dollar started down the slippery slope.

Today, we get the pre-Jobs Jamboree data from ADP. The folks at ADP always submit their employment data, and it very rarely associates with the BLS’s version of job creation. The markets don’t pay too much attention to the ADP report, but for those of you keeping score at home, ADP says that 140,000 jobs were created in September. Remember, that last month they reported 201,000 only to have the BLS version report 96,000.

I’ve given you all the “adjustments” that the BLS makes to the numbers each month, with the biggest one being the Birth/Death Model. For those of you new to class, the Birth/Death Model, is an adjustment that the BLS uses in attempt to capture new business hiring that wouldn’t be on the books just yet. Unfortunately, the BLS uses this as a catch-all, in my opinion. So, that’s why I say each month that we’ll have to see how many jobs the BLS adds to the number. It’s all fun and games until somebody loses an eye! Hey! That’s me! But. I didn’t get to have fun and games! Oh well, the BLS does get to, each and every month!

The Japanese yen (JPY) has been stealth-like in its recent weakening. But we’ve seen this before, it looks like yen is about to decline like it should, given its fundamentals, and then it rallies again. But for the most part it has been stuck around 78 for some time now. Still very overvalued in my book!

The Asian currencies have been going back and forth in recent trading sessions. Take the Singapore Dollar (SGD). One day it’s booking gains and the next day it’s booking losses. This is a dirty float currency, in that the Monetary Authority of Singapore (MAS) sets the trading band, but the markets move the Sing dollar within the band. The MAS uses the Sing dollar to help fight inflation, which EVERY country should! And that is one of the reasons that I list Singapore as one of the handful of currencies I tell people they should look to when diversifying with currencies.

Then There Was This… I know this has been “Bill Gross Week” in the Pfennig. But he has given so many great quotes this week, that I feel that you should all read what this man — considered by many to be the greatest bond guy ever — has to say. And let me explain that when you are a bond trader, you have to know economics. Otherwise you would be taken advantage of very easily. So, here’s more Bill Gross, talking about what happens when the US is no longer the first place to go to for safe investments.

“If that be the case, the US would no longer be in the catbird’s seat of global finance and there would be damage aplenty, not just to the US but to the global financial system itself, a system which for 40 years has depended on the US economy as the world’s consummate consumer and the dollar as the global medium of exchange. If the fiscal gap isn’t closed even ever so gradually over the next few years, then rating services, dollar reserve holding nations and bond managers embarrassed into being reborn as vigilantes may together force a resolution that ends in tears. It would be a scenario for the storybooks, that’s for sure, but one which in this instance, investors would want to forget. The damage would likely be beyond repair.”

To recap. It’s a risk off day, as risk is a dirty word today after China printed a weaker-than-expected services component of their PMI, and Australia’s trade deficit widened, as exports weakened. Gold is attempting to book some gains this morning, these recent attempts have been met with heavy selling by mid-morning. The ADP jobs report prints today, giving us an indication of Friday’s Jobs Jamboree.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning