Are the Markets Wrong on Norway?

Good day. I’m thinking this will be a fantastic Friday, because baseball takes up again tonight! Yes, these last two nights without baseball has been quiet and boring, which is fine sometimes, but I miss my baseball!

The currencies and metals traded in tight ranges yesterday, as they licked their wounds from the previous day’s bloodletting. We watched gold lose $10, then gain $10 (a $20 swing) and then lose $5, and so it went back and forth all day. I would yell out to our metals trader, Tim Smith, to look at the swings. Tim is a believer of the price manipulation going on, and he always makes mention of it when we talk of gold and silver. It’s nice to have someone else believe these things; I hate to be the only boy crying wolf!

Yesterday, Australian Treasurer Wayne Swan, was in Beijing for talks with the Chinese about the Australian dollar (AUD) becoming the third currency directly convertible to the renminbi/yuan (CNY). Folks, that removes U.S. dollars from the middle of the terms of trade between these two countries, and even with China slowing down — and probably bottoming out in second quarter — that represents some very large numbers that will no longer require the use of U.S. dollars!

The last couple of years, I’ve said over and over again that China, having suffered from the financial meltdown of 2008, was attempting to convert their export-led economy to a domestic demand-led economy, with exports providing the gravy. It will be important as we go along this year, with both the eurozone and the U.S. melting down again, to see just how far along the Chinese have come with this switch.

One of the keys could be the fact that personal income in China has increased over 13% in the last two years. So the Chinese have far more disposable income than they’ve ever had before, and that bodes well for a country that wants domestic demand to be the driver of their economy.

While we’re talking about China, the big news out of China overnight was the printing of their second-quarter GDP, which printed at +7.6%. As my mom used to say when she would make me take some awful medicine, “Now, that wasn’t so bad.” I’ll even go back to my customer who had a business in China for years, and who told me that you can believe only half of what the Chinese report. So half of 7.6% is 3.8% — now show me another country that grew 3.8% in the second quarter! And as I’ve said repeatedly, it is thought to be the bottom.

Aussie dollar (A$) traders and investors liked the color of the Chinese GDP, and the A$ is attempting to gain back the over 1-cent loss it took yesterday. And the euro (EUR) is pretty much flat on the day, as it bounces back and forth around the 1.22 handle.

Earlier this week, I talked briefly about the Libor scandal. The Wall Street Journal (WSJ) is reporting that U.S. Treasury Secretary Timothy Geithner sent a private email to the Bank of England (BOE) Gov. Mervyn King, calling for six changes that were meant to improve the credibility and integrity of Libor. Hmmm, not that I’m going to point any fingers here — I’ll let the WSJ do that — but the Treasury secretary is going to have to do his best impression of Lucy, because he’s got a lot of “splainin” to do!

On a side bar here, a longtime reader sent me a note the other day, and told me that I needed to get a personal Twitter account. You know, one in which I could tweet the Butler patio talks without legal beagles. What an excellent idea! The problem is I don’t know when I would find the time do that stuff. Maybe when I retire, eh? But could you imagine me “raw,” without the filters? That would be some good stuff! I guess as long as you agree with me, it would be good! HA!

OK, sorry about that — a thought slipped into my head, and the next thing I knew, my fat fingers were typing it out. Gotta do something about those rogue fingers!

I’m seeing that traders are forecasting a rate cut in Norway this fall. You know, I always say that I learned many years ago that the markets are never wrong, and there are times I believe they are wrong, but to go against them at that time would be bad. This is one of those times.

Have the traders completely forgotten or tuned their hearing aids down when Norges Bank (Norway’s central bank) Gov. Oystein Olsen signaled a rate hike as early as December? Or when the finance minister proposed tougher mortgage rules last week? Norway has a housing bubble going on, and we all know from experience that the longer you pump air into that bubble, the worse things are when it pops.

Norwegian property values have soared 30% since 2008. And here’s why: very low borrowing costs, rising wages and the lowest unemployment rate in Europe. A lot can happen between now and December to change the outlook, but if we skipped ahead to December right now, knowing what we now know, I would bet that the Norges Bank would be hiking rates, not cutting them.

Norway has always been at the top of the class of countries when it comes to the balance sheet, and I cringe when traders use the same brush they use on the euro when it comes to the krone. And I find that to be completely wrong! I’ve said it dozens of times before, and I’ll say it again: One day, traders will realize that Norway is not Greece or Spain or Italy, or even the eurozone, for that matter! As I have always said to my kids when they wonder why I don’t allow them to do something when, “everybody else is doing it” or going, “Don’t you want to be better than everybody else?” That’s Norway: better than everybody else, but traders just don’t see it… yet.

You know, earlier this week, the Fed’s FOMC meeting minutes revealed that a few members were for implementing additional stimulus IF the economy slows down. The more I think about that statement the more I think that the Fed heads wouldn’t know if the economy was slow or not. They are only, in my opinion, interested in asset prices. So the statement should say that they are for implementing additional stimulus if the stock market continues to lose value. And when they do get around to realizing that they need to implement additional stimulus, it will be too late. They are always late to the party.

I have to be careful there to not sound so harsh on the Fed heads. I’m sure they have the economy’s best interests in mind. As I said, the previous paragraph is just my opinion, and I could be wrong, right?

Did you all see the media yesterday fawning over the initial jobless claims from last week? The number of claims for the week was 350,000, the lowest weekly number in four years. But didn’t they forget something? Wasn’t the week one day short last week? And for that matter, not much got done on Thursday and Friday following the Wednesday holiday to celebrate our Independence Day. Media people get me, folks. They really do. Are they just “readers”? Didn’t someone besides little old Chuck in St. Louis, Mo., home of the 11-time World Champion Cardinals, remember that the workweek was cut short last week and that could be the reason the number of claims was so low? I shake my head in disgust, rub my bald forehead and carry on.

Moody’s downgraded Italy by two notches overnight. But then Italy went out and auctioned 5.25 billion euros worth of bonds and had strong demand for the bonds! And as Gomer Pyle used to say to Sgt. Carter (come on, do it with your best Gomer voice), “Surprise, surprise, surprise!” Guess what, Sgt. Carter? Greece is failing to meet 210 of 300 austerity targets. Now, isn’t that surprising? And then you can hear Sgt. Carter yelling at Gomer: “PYLE!” No this isn’t surprising, it was going to take a hell of a good effort for them to meet those targets! Now go peel some potatoes!

Come on, folks, you’ve got to have a little fun with this stuff or it begins to wear you down!

I have two Then There Were This stories today. First, is a story that comes to us from CNBC, and it’s the incredibly intelligent and respected James Grant of the Grant’s Interest Rate Observer, talking about the Libor scandal of banks fixing rates. This is good, folks. Here’s James Grant:

“‘The Fed is in the business of trying to manipulate markets, the macro economy, interest rates, unemployment and inflation through various monetary means, including the twisting around of yield curves and interest rates,’ Grant said…

“Commenting on the growing London Interbank Offered Rate fixing scandal, Grant said, ‘The idea that the banks are in charge of manipulating interest rates is absurd. The central banks do it all the time and they do it massively.’

“The Libor scandal might get bigger, Grant conceded, but outrage should be directed at the world’s central banks, he said.”

Yes, I’ve always contended that the markets should set rates and not be arbitrarily set by central bankers. But it goes deeper than that!

And then this one that really had me screaming at the walls this morning. Thanks to good friend Brad for sending this to me, pulled from CNSNews.com:

“This year, Americans have to work until July 15 to pay for the burden of government, more than six months.

“In a new report, Americans for Tax Reform (ATR) has calculated that Americans will spend a total of 197 days toiling to pay for the cost of government.

“‘Cost of Government Day is the date of the calendar year on which the average American worker has earned enough gross income to pay off his or her share of the spending and regulatory burden imposed by government at the federal, state and local levels,’ reads the report.”

When will the all the people in the U.S. rise up and tell their representatives to stop spending money we don’t have or they will get thrown out of office? Because that’s what it’s going to take, folks.

To recap: The currencies and metals wrapped a tourniquet around the wounds they suffered Thursday, and that has carried through the night. The Chinese second-quarter GDP report, which was to be the big proof that China’s economy has collapsed, came in better than expected at +7.6%! This news helped the A$ regain some of the over 1-cent loss it had the previous day. Gold swung back and forth all day yesterday, but is up a few bucks this morning.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning