Central Banks Sell Euros In 2nd QTR...

Good day… And a Happy Friday to one and all.. We have news this morning that there was a horrible shooting in Aurora Colorado last night, at a theater, where 14 are now dead, and more than 50 are injured… I don’t know more than that, but that’s just awful news! These thing never make sense, and I can never reconcile them… I was all prepared to be happy today, as I am going to the baseball game tonight with my spring training buddies… Now, this… UGH!

Well, after yesterday’s rally in the risk assets, we had a day of settling down. The currencies and metals are wearing the same clothes they had on yesterday afternoon… And I don’t mind, not one iota… It’s nice to see a rally hold water. And with no data today in the U.S. data cupboard, we could very well go into the weekend with the levels the currencies and metals achieved yesterday. But, you never know what’s around every Eurozone corner!

Yes, there is some minor slippage but for the most part, we’re on track to end the week on an uptrend for the currencies and metals… Gold for instance was up $15 as I headed for home yesterday afternoon, and this morning it is up another $3… The Aussie dollar (A$)  got as high as $1.0425 yesterday, and sits at $1.0415, as I write this morning… I think that given all the data that printed this week, and the two testimonies by Big Ben Bernanke, the markets are ready to take a breather today…

But knowing how these markets guys think, they’ll probably shift the focus from the U.S. to the Eurozone today, just to prove me wrong! That’s how I feel most days… the markets do the opposite of what I thought, just to prove me wrong! HA! Yeah, Chuck, as if, they even know you exist! On a side bar… yesterday I made a Monty Python reference and not one reader caught it! I was very proud of myself for that reference and it flew right by everyone…

As I said above, Gold gained $15 yesterday… It appears now that the market gurus are finally figuring this out, that if the U.S. economic data is awful, and for the most part it has been, then Gold should be bought. Of course that’s the case! But, sometimes it takes these market gurus a little extra time to figure these things out! And it’s not just U.S. problems that should be pushing Gold higher and higher, think of Sly Stone at Woodstock… I wanna take you higher! The Eurozone has its own problems that should be pushing Gold higher… I wanna take you higher!

So… I wonder how many people have seen the movie Woodstock, and know what I’m talking about when I say think of Sly Stone… Long ago in a galaxy far away, I used to hand a VHS of the Woodstock movie to every new person that started working for me, and they had to take it home and watch it… That’s pretty funny… because they all did it… But at least then, we had a base from which to have a conversation!

OK… sorry… I’ve had a few readers send me emails this week asking me to talk about the drought here in the U.S. and what it will mean for food prices… I had a good friend of mine, Dennis, send me a note a week ago, telling me about his drive from Chicago to downstate Indiana… He said that he observed the corn crops to either look healthy, from irrigation systems, or like it does around Halloween time, from no irrigation.

That leads me to believe that while corn, for instance, might not be the bumper crop it usually is, that it won’t be a complete disaster. But that doesn’t mean the price for corn might not go up… In fact, the price of corn and other grains has already shown moves higher. So, expect food prices to rise again. I say again, because they have moved higher for a long time… I have a slide I use in my presentations that show the rise in Food Stuffs from January 2002 to March 2012 as +147% or.. +10.3% annual increases…

But there’s no inflation, Chuck, CPI printed just the other day, and showed consumer inflation was only 1.7%… I can hear you saying… that Chuck is just trying to get us all lathered up about inflation again, when the Gov’t says there is no inflation.. HA! Well… we do have deflationary housing, as illustrated by the -5.3% drop in June Existing Home Sales… and we have deflationary wages… but… that doesn’t change the fact that besides the Foodstuff increases, we have Livestock up +141% during that same period of time, Metals up +530%, and the rest of the CRB commodities up +171%…

And… the price of Oil continues to rise… UGH! The only good that does, is it gives the petrol currencies a boost…

Speaking of data from yesterday… Leading Indicators did go negative, like I said I thought they would, but… I think the print was even worse than I thought… June Leading Indicators here in the U.S. were -.3%… That’s going the wrong way, folks… but it plays well with my call that we’re about to be hit with the back side of the financial storm that first hit us in 2008… And the Philly Fed Index (regional manufacturing), printed very weak at -12.9 this month.. But, the pull the previous 2 years of Philly indexes had on the risk assets, was thrown out the window yesterday… Yes, we saw some slippage after the Index printed, but that didn’t last long… and certainly wasn’t the 1.5% drops we saw last month. So, that’s out of the way, and we don’t have to be scared of a weak Philly Fed Index’s pull on the risk assets… We DO need to be scared about where the heck manufacturing is going here in the U.S. for it has trended down so far this year…

Oh! But… hasn’t the dollar been relatively stronger this year so far? Ahhh grasshopper, you see now why I used to say “be careful what you wish for” Because, you can’t have both right now… You can have strong manufacturing, but a weak dollar, or vice versa… When the president said in the state of the Union address this year that manufacturing would double in the next year, what was he really saying? He was saying that the dollar will get much weaker… Unfortunately, for him and the Gov’t’s plans, the Eurozone imploded this year… So much for the plans of mice and men…

Well.. I was reading last night (man was it quiet at the house, no baseball, no Alex, no Kathy for a time) and I came across some research done by the people at RBC, who by the way, usually do really good research, and the report talked about how for only the second time since the euro was introduced (so over 10 years of time) Central Banks sold euros in the 1st QTR. I would expect that the 2nd QTR would be the 3rd time… and so on down the road until the Eurozone begins to turn the tide on the debt problems. And that won’t be good for the euro, because for over 10 years, central banks, especially the Chinese, supported the euro…

The German Parliament voted and passed the resolution to have the ESM recapitalize the troubled Spanish Banks… But remember… this is still the final decision of the German Constitutional Court, and they have stated that they will not have a decision on this until September… That’s a long time to go with uncertainty hanging over the euro like the Sword of Damocles… and another reason that I just don’t like the euro this summer…

That same research had some great stuff about the Aussie dollar (A$)… First of all, for years, I’ve called the A$ the proxy for global growth… But the report took that thought a step further, showing that the A$ is a “shock absorber”, and that it is always out front and center either moving higher in Risk On days, or moving lower in Risk Off days.. But the shock absorber idea comes from the fact that on average, the A$ has rallied more in phases of Risk On, than it sold off on phases of Risk Off… Great stuff! And plays well with my call on the A$!

The Weekly Initial Jobless Claims climbed back to 386,000 last week… proving that I was right about the previous week’s lower figure… Hey! Even a blind squirrel can find an acorn! Of course the so-called experts / Economists, don’t think this is any indication that the job market has seen a downturn… Of course it would take something as obvious as a man with a hatchet in his forehead for them to get the call right! Sorry… didn’t mean to go all Halloween on you, it was just the most obvious thing that popped into my head!

I was also reading this really dumb report on what the Fed thinks works now… Apparently, the Fed Heads now believe that monetary policy works through the interest rate channel, so that by tweaking rates they can affect aggregate demand and in turn economic activity and inflation.

Do you believe that? If tweaking interest rates works so well to affect aggregate demand, then why is Japan on its second decade of zero interest rates with no economic growth? Or, closer to home… The U.S. interest rate has been near zero for a few years now.. Where’s the aggregate demand? Where’s the economic growth? Are these guys blind? I’m at a compete loss of words after reading that report… I shake my head, turn around and yell at the walls!

Then There Was This.. Egon von Greyerz of Matterhorn Asset Management lists all the reasons he believes Gold will erupt soon… So, let’s see what Egon has to say…

“We have gold intervention, manipulation and suppression by governments, banks and hedge funds. We have a paper market in gold which is around 100 bigger than the physical market, facilitating this market intervention.

Governments dislike gold since it reveals their deceitful actions in destroying the value of paper money by printing unlimited amounts of it. The media don’t understand gold. Financial TV ridicules gold and even the most respected newspapers, like the FT, don’t appreciate that gold is money.

But in spite of all the adversity that gold has encountered in the last 12 years, the yellow metal has still appreciated over 6 times since 1999. And even with the major investment demand that we have seen in the last few years, only 1% of world financial assets are in gold.

So why is gold likely to erupt in the next few weeks? After a strong move into late August 2011 we have had a correction/consolidation for almost 11 months. During this time, every single fundamental factor in the world economy has deteriorated. The Eurozone countries are in a complete mess and can never recover. The UK economy is in a terrible state but they are just lucky that they can print money which Eurozone countries can’t do. The same is the case with the US. Debts are increasing at an exponential rate and there is no attempt by government to stop the spending of money the country doesn’t have. Total debts and exposure in the US is approaching $500 trillion. This includes unfunded liabilities and derivatives. The latter are likely to become worthless when counterparty fails, something which is very likely to be the case. Most economic figures are deteriorating in the US. The US has had the fortune of all the focus being on Europe but that will soon change.

Japan has massive debts and the economy is extremely weak. And China with its major credit explosion will also suffer badly when the whole world stops buying their goods”

Chuck again… yes… all that’s true… but until more people own physical Gold, I don’t see how we get past the manipulators… But at the same time, I truly believe that we will gain a wider distribution of physical Gold that will put the hurt on the manipulators… I sure hope I don’t have to wait too long for that to happen!

To recap… the currencies, with some slippage, have held most of the water on their rallies from yesterday through the overnight sessions… There’s no data today in the U.S. so the focus will either shift to the Eurozone, or remain here, with the markets taking a breather. U.S. data yesterday was weak with both Existing Home Sales and Leading Indicators negative… Central Banks are selling euros for only the 2nd time since the euro was introduced, and the price of Oil continues to rise…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning