Currencies and Metals Rally Further

Good day… And a Tom Terrific Tuesday to you! Yes… I’m back! After a trip to Vancouver for the Agora Investment Symposium, and then onto my summer vacation… I did read the Pfennig each and every day while I was gone, so kudos go to Chris and Mike for a wonderful job. I’ll mention something here, front and center, that I found interesting in what Mike had to say…

He said that in the “old days,” the desk would joke about how the currencies would rally when Chuck was gone. And he was wondering if that would be the case this time. A quick look at the Pfennig archives tells me that on July 20 (my last day here), the currencies were weaker than they are now. For instance, the Australian dollar (AUD) was 1.04 then and is $1.0585 now. The euro (EUR) was 1.2240 then and is 1.24 now. And gold was $1,579.45 then and is $1,614.50 now. So I would say the old days are back! And to all of you who would like to see me leave again for an extended period of time so these currencies could rally further, you need to send your cards and money to the Chuck Butler retirement fund! HA! No, you could contact the Big Boss, Frank Trotter, and see what could be worked out.

So much has gone on while I was gone. The central bank leaders of the two largest economic countries in the world have put their foot in the door to additional stimulus, thus keeping the markets all lathered up, over and over again. I find this exercise to be fruitless. Take my advice, guys: Don’t be the “buy the rumor and sell the fact” crowd. Why not just react when something actually happens? Now that would be revolutionary, wouldn’t it?

The markets, from my view in the cheap seats, have decided to give the euro the benefit of doubt, that the German Constitution Court will approve the ESM funding directly to banks, bypassing governments. Since we won’t know for sure until September, the markets, to their credit, have said, “OK, no sense in beating the tar out of the euro until we know about the ruling.” And the euro received a “get out of jail free card”… for now. Of course, that doesn’t mean the euro is out of the woods, by any stretch of the imagination!

Last night, the Reserve Bank of Australia (RBA) left their official cash rate (OCR) at 3.5% and came to the conclusion that the current stance of monetary policy was appropriate. That means they are more than satisfied with their previous rate cuts, and even mentioned that it’s too soon to see the full effect of the rate cuts made earlier this year. So good for them! No sense in going willy-nilly cutting rates when you don’t need to. The A$ is up slightly overnight, so the nonmove was pretty much expected by the markets.

The euro is up slightly too this morning, popping over 1.24. The Norwegian krone (NOK) has outperformed the euro and most other currencies overnight on the news that June manufacturing production beat the estimates, rising 0.8%. I was looking yesterday on the plane coming home at the latest Big Mac Index The Economist produces. Now, before I go on with this discussion, purchasing power parity is something that people used to use as a way to value a currency. Basically, they do a survey and calculate the exchange rate that would leave a Big Mac costing the same in each country. For instance, here in the U.S., a Big Mac costs $4.33, but costs just $2.29 in Russia. So a dollar buys more Big Macs in Russia. OK, you get the picture.

Norway’s krone had the second biggest percent of overvaluation. Strange, huh? Switzerland is also high on the overvaluation list, while Australia is barely overvalued. Canada, Japan, New Zealand, Mexico, China, South Africa, Russia and Hong Kong were all undervalued. But remember, this is all for fun. I don’t put much stock in this, but in my early days doing currencies, we used to really get into this purchasing power parity thing.

Quite a few of the “emerging markets” have currencies that are on the undervalued side of the ledger on the Big Mac Index (except Brazil). And that does play well with my thought that the real gains in currencies going forward are going to be in the emerging markets.

OK, from fun stuff to serious stuff. The “get out of jail free card” that the markets have given to the euro has a time limit on it, and that time limit’s first alert will come in less than two weeks. That’s when the Greeks have to convince its creditors that they can put economic reforms back on the tracks. If the latest plans to cut 14.5 billion euros from their spending appear to be unrealistic, then the next tranche of bailout money (31.2 billion euros) will be held back.

If that happens, then Greece will be unable to finish recapitalizing it big banks. Without credit, the Greek economy would come to a screeching halt! Pensions and public sector salaries would not be paid. A major mess could incur. For the Greeks, that is. Therefore, I don’t see the eurozone leaders quick to dismiss the Greek plans to cut 14.5 billion euros of spending. We shall see, eh?

I began reading about 3-D printers a couple of months ago. These things are fascinating to me, folks. It will become a new way of manufacturing for the future. Our friends over at the 5-Min. Forecast did a great two-piece story on how an assault rifle was created using a 3-D printer! Well, now the propeller heads working on this stuff — and I say that as a compliment — are working on new ways of printing electronics! It’s the future, folks. Are you ready for this?

Could this be the Hula-Hoop I’ve said that the U.S. needs to invent? Yes and no. There are still many questions to be answered regarding things like cost, savings, availability and the list goes on. But something to be aware of and think about, for sure!

I sent this info to Chris last week, but didn’t see where he used it, so even though it’s a week old, I think I plays well with the currency rallies we’ve seen in the past two weeks…

  • As of July 31, USD net longs continue to be pared back, dropping from 134.9k contracts to 77.7k, a 14-week low and well down from the levels that prevailed in early June (275k)
  • The spec market still held a substantial net EUR short. Meanwhile, the spec market has rebuilt net longs in AUD, NZD and JPY.

What that means, folks, is that the contracts that are being written to buy or sell a currency versus another currency have seen the U.S. dollar long positions being pared back by quite a bit.

I saw this morning on the Bloomberg that U.S. banks are lending the most since 2009. The Fed said that they believed that the banks were easing their lending standards. Uh-oh! And then they also said that the competition among institutions was heating up. Double uh-oh! We all know what happened the last time these institutions began to compete for loans, now, don’t we? One of the slides I used in my one of my presentations in Vancouver basically said that we were seeing bad borrowing habits coming back. And now this story on the Bloomie. This won’t end up good, folks…

You should have heard the crowd in Vancouver gasp when I showed them the Debt Clock for 2015, just three short years from now. Our national debt will be $24 trillion, and the unfunded liabilities will be $117 trillion. I’ve been warning this same group of people each year about the growing national debt and unfunded liabilities for quite a few years, but they were still taken back by the sheer size of those numbers when they were right there on the screens. And that won’t end up good either, folks.

Speaking of debt, Chris wrote yesterday about the money spent on the Mars rover and we received this response from a longtime Pfennig reader (I say longtime because of what he talks about):

“Without taking sides, I will only relay that the TV news interviews with NASA officials over the weekend mentioned the figure of $2 billion on this Mars mission. I assume some of that went into hardware and some into jobs for the engineers and technicians who built the thing. So at least we have that going for us, I guess.

But what gets MY blood boiling is the $8 billion that will be spent this election season, mostly on negative ads, which don’t say anything except, ‘Be very afraid of THAT guy! I won’t tell you what I can, could or would do if elected, but be very afraid of THAT guy!” Then to top everything off, Congress goes on a five-week vacation with all of the problems hanging over the country.’”

To recap: Chuck’s back, and while he was gone, the currencies rallied! And Chuck gives you options if you want to see the currency rally go further! Ha! The RBA kept rates unchanged last night, and mentioned that it is satisfied with its currency monetary policy, which doesn’t sound like it will move rates either way anytime soon! The new Big Mac Index is out — not as big a deal as it used to be.

Chuck Butler
for The Daily Reckoning