Austerity Plans Meet Voters In Spain

Things were not so spring-like for the euro (EUR), which has drug down all the other currencies, and for once, even the Chinese renminbi (CNY) is weaker this morning! Gold and silver, after spending the day on Friday in complete “rally mode” are weaker this morning, too… So, it’s a dollar rally, and it’s all because of the problems in the Eurozone… Let’s go to the tape!

OK… I just saw the results of the Spanish election that took place this past weekend. It looks like the elected officials that wanted to implement austerity measures have been thrown out of office on their collective ears… Now that’s just plain wrong! These people were simply attempting to keep Spain from joining the likes of Portugal, Greece, and Italy and Ireland… For the longest time, I kept telling people that I thought Spain would eventually be OK… But not now. Not when the elected officials see that there’s no way they’ll get re-elected if they attempt to cut spending…

And with that in mind, traders began to sell the euro…and the euro began to drag the other currencies down with it. Oh, all of the other currencies seem to have their own special story as to why they are weaker this morning, but in reality, it simply comes back to the Big Dog, euro…and the euro is much weaker this morning. On Friday when I left, to meet good friend Rick, for an ice-cold adult beverage, the euro was trading around 1.4170… This morning, it is 1.40, and I’ve seen it weaker than that! So, the 1.41 and 1.40 levels were blown through very easily…

Look… The euro has been on shaky ground for a long time now, but… because of its position as the offset currency to the dollar, it has skated along the thin ice without falling through. As I was explaining to the lovely ladies in Tampa last Tuesday morning… It’s like going to a junkyard to find a car that will get you to work each day… All of the cars are wrecked and quite ugly… But one does start, and gets you to work… Yes, both the euro and dollar are ugly, because of their lawmakers having the genius to get their respective countries into debt problems… But the dollar is uglier at this point…

Yes, but now, the playing field is going to begin to get evened out if Spain is going to go the way of Portugal, Greece, Italy and Ireland… I think that this type of theme is going to play out for a bit longer than we would prefer, with the silver underlying for the euro being the fact that the European Central Bank (ECB) has already begun to remove stimulus, and has hiked interest rates, with the chance of another rate hike next month. The Fed Reserve will prove to us that they are people of their words, and end quantitative easing 2 on time… But, as I’ve said over and over again for some time now… I think QE3 will come along about the time that we’re either getting our Halloween costumes out, or our Christmas decorations out! And that’s when the dollar gets taken to the woodshed…

Of course, I could be wrong about all that, but it’s what I see, and that means that non-dollar investors, and diversifiers will have to batten down the hatches, or… look to buy at cheaper levels!

And the rating agency, Fitch, isn’t helping the euro any this morning… They downgraded Greek debt once again, which is no surprise, but they did throw a cat among the pigeons when they issued a warning, that any form of Greek debt restructuring would be considered a default… WOW! So, all this talk of restructuring Greek debt is not going to go anywhere now…and things are looking pretty bleak for Greece if they can’t restructure their debt… You all might recall that I had brought up the thought previously that since most of the Greek debt was held by Eurozone banks, they would probably be OK with extending the maturities and suspending the interest payments for a couple of years… But it doesn’t look like that’s going to happen now, eh?

So… Did you see the news last week that China had taken over the number one spot from India as gold buyers? Yes, this is the domestic brand of gold buying, which for years was dominated by Indian consumers… But the exploding middle class in China is looking for stores of wealth, and the only one they’ve found so far, is gold… (Probably some silver too)… Chris was telling me when we were in Panama a month ago, that the Chinese middle class is now larger than the total population of the US and they are buying gold!

Pretty much explains the reason why gold held pretty firm earlier this month, when silver took a ride on the slippery slope… (Of course we all know why silver was sent for a ride on the slippery slope, as I’ve talked about it here many times)

Here’s another little-known fact that I read in my friend, David Galland’s, letter on Friday… “During the last major precious-metals bull market in the 1970s, only about 10% of the world could own gold – either due to legal restrictions or a lack of liquid capital. Today, few countries prohibit gold ownership, and a far higher percentage of the world’s population has transitioned out of poverty.”

So… You see, the news from China that their domestic buying of gold had outpaced India for the first time, plays well with the thought that the Chinese middle class is exploding and that 30 years ago, they were not allowed to buy gold!

And while we’re talking about China, I keep making a big deal out of the fact that China has basically removed the relevancy of the dollar out of their trade (except with the US, of course)… They have signed currency swap agreements with a number of countries, with rumors of signing even more… When they sign these currency swap agreements, dollars are no longer used in the “terms of trade”, and only the two currencies of the countries are used… Well, strap yourself in, because now there are talks that China is readying the pen to sign agreements with S. Korea, and Japan… With those two countries in hand, China would have wrapped up Asia…and affectively removed the dollar as a clearing mechanism currency from trade in the region…

Did you see where Norway decided not to lend money to Greece? Again, another reason that I think Norway is one of the few countries in the world that has its head screwed on right! And since Norway is independent and not a part of the Eurozone, they can do that! You’ve got to love a country that sees a bad investment, and decides to not throw good money at bad money… Oh, did you hear this? The US is looking into loaning the likes of Ireland and Italy money… I tell you that in contrast to Norway…

The data cupboard is chock-full-o-data this week, although most of the reports are considered second tier… The markets will focus on: New Home Sales tomorrow, Durable Goods Orders on Wednesday, along with the House Price Index. On Thursday, we’ll see the next revision of first quarter GDP, which originally printed at 1.8% (seeing that the government probably issued orders to make it better the next time around, HA!) Then on Friday, when everyone is attempting to get out of town for the Memorial Day weekend, we’ll see Personal Income and Spending, along with the U. of Michigan Consumer Confidence report.

None of these reports will be supportive to the dollar, unless the government pulls a rabbit out of their collective hats and somehow first quarter GDP prints stronger…

And… The World Data Calendar is pretty thin this week too, with no central bank meetings or earth-shattering data to print…

Then there was this… I saw the heading on this article and it caught my eye… “US mortgage lenders own more than 872,000 foreclosed homes”… Here’s the gist of what they are talking about…

“All told, they own more than 872,000 homes as a result of the groundswell in foreclosures, almost twice as many as when the financial crisis began in 2007, according to RealtyTrac, a real estate data provider. In addition, they are in the process of foreclosing on an additional one million homes and are poised to take possession of several million more in the years ahead.

“Five years after the housing market started teetering, economists now worry that the rise in lender-owned homes could create another vicious circle, in which the growing inventory of distressed property further depresses home values and leads to even more distressed sales. With the spring home-selling season under way, real estate prices have been declining across the country in recent months.”

That’s a pretty sad state of affairs right there, folks… It all comes back to the lack of jobs…

To recap… The Spanish elections have sent the euro to the woodshed this morning, as the lawmakers in Spain who attempted to implement austerity measures were thrown out of office. Apparently, voters in Spain don’t think the debt problem is real… So, the question now is whether or not Spain joins the likes of Portugal, Ireland, Greece, and Italy… The markets have decided to say “yes” to that thought, and “no” to the euro. The euro has dragged the rest of the currencies, even the Chinese renminbi lower versus the dollar this morning.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning