Euro Drops 2 Cents on Bank of Spain Takeover

As I was packing up to go home yesterday afternoon, the euro (EUR) had moved beyond 1.24, and I said, “I wonder what’s got the euro so perky this afternoon”… Well, that “perky” feeling the euro had at that time was wiped out and more by fears that Spain’s problems are now going to take center stage… Greece is an afterthought at this point, now it’s Spain…

You see, this past weekend, the Bank of Spain (BOS) had to take over a bank named CajaSur… It’s the first bank takeover in Spain, and the fear is that it won’t be the last! But this is the kind of stuff that falls under the $1 trillion “aid package”… That doesn’t absolve Spain of these problems, though. So… The euro has lost over 2-cents from yesterday afternoon’s level…

I told you a long time ago about this bailout stuff, that once Greece was given money, the rest of the weak sisters of Europe would jostle to get in line for their own “hand-out”… So, now it’s Spain’s turn.

The problems in Europe are beginning to be felt all around the world… The Aussie dollar (AUD) is feeling the pressure too… The Aussie dollar has fallen from 90-cents to the 80-cent handle and the calls for the Aussie dollar to reach parity are now just faint, whispered words in the distance. It’s not like things are going bad in Australia… It’s just that traders and investors have had the bejeebers scared out of them by the Eurozone problems, and they are taking their risk trades off the table, and bringing them home to Treasuries.

10-year Treasury yields have fallen from 3.80% earlier this month, to 3.06% this morning… The price had gone from around 99 to 103.50… I’m not going to get up on my soapbox again regarding Treasuries, but… Really? Again? This is happening again? Uh-Oh!

Pretty soon, we’ll be hearing those commercials all over the radio again from mortgage lenders, hawking those low home loans… There’s nothing wrong with getting the lowest interest rate on a mortgage that you can get… But, isn’t this what started the housing bubble in the first place? Low rates, so that everyone could afford a home?

I was reading an article the other day, where the father of modern portfolio theory, Harry Markowitz was being interviewed… When asked about the causes of the financial crisis he responded, much like I thought he would, which, is much like I would have… Here’s Mr. Markowitz from the Journal of Financial Planning

“There are two heavies in this story. One is Congress, pushing homeownership through Freddie Mac and Fannie Mae so that people who really shouldn’t own homes were able to buy them. Two is the disconnect between who initiated, who wrote, and who sold the mortgages.

“Then the people who bought those mortgages and held them and there wasn’t anybody retaining the risk, and of course, the people who bought these mortgages, these pools relied on the rating services.

“The rating services did a lousy job. The rating services were good at valuing some securities, but they were lousy at valuing these new instruments, which were very complex. So, complexity is a danger.”

This morning, all risk is getting taking off the table… The news last night that North Korean President, Kim Jong-il, ordered the military to be on alert, has risk takers running for the hills, this morning… Now… Someone with an ounce of sense would think that this would be HUGE for gold… Geopolitical problems usually benefit gold… But after gaining $18 yesterday, the shiny metal is down $2 this morning.

But, this risk aversion that is sweeping through the markets this morning is strong, and it won’t stop to pick up any hitchhikers along the way. That means that US stocks are in for a nasty day… Hey! Why would stocks get to skip through the tulips while the rest of the risk assets are getting trashed?

It’s all seashells and balloons for Japanese yen (JPY), though… Yen has gained versus the dollar and the euro during all this risk aversion, and yen now trades below the 90-handle to the dollar… I’ll be an old man sitting on a park bench and it will hit me… It’ll be a V-8 moment, and I’ll say… “So, that’s why investors thought Japanese yen was a safe haven”… Until then… I’ll still keep saying it makes no sense whatsoever!

Last week, it was cost cutting week among governments around the world… This week, although a week later, Italy has joined the “cost cutters” in announcing budget cuts totaling 24 billion euros over the next two years. Of course, just like we saw in Greece and Spain, these budget cut announcements are then followed by negative reaction by the public… So, we can be sure the cable news outlets will be showing us those reactions, eh?

In Sweden overnight, unemployment surprised to the upside, after being forecast to fall last month… The krona (SEK) really got smacked around after the increase in unemployment, as the rise in unemployment pretty much takes the hopes of a rate hike off the table.

The US contingent of US Treasury Secretary, Secretary of State, and Fed Chairman are in China… I had a reader ask me how I knew that the US Treasury Secretary was in China to give the Chinese economic advice? Well… I knew, because 1. That’s what every Treasury Secretary has done for the last eight years, and 2. Because that’s what I read and saw on TV…

The Secretary of State is there to talk about the sinking of a South Korean ship, allegedly by North Korea… And the Fed Chairman? Maybe he’s there to talk about dropping renminbi from a helicopter! HA!

Ok… Enough of that! No wait! There’s this statement that ties it all together, folks… You have to read between the lines, but I think you’ll see it with no problem…

US Treasury Secretary Geithner said he’s “as confident as [he’s] ever been that China has a growing incentive to let the yuan (renminbi) gain against the dollar.”

Did you see it? The US Treasury Secretary says it all right, there… They want the dollar to be lower versus the renminbi… He wants a “cheaper dollar”…

Of course, he doesn’t really say “cheaper dollar” for that would scare the bejeebers out of all the dolts buying our debt… So, he turns the table and says he wants the renminbi to gain versus the dollar… IT’S THE SAME THING!

Oh… And just for fun (for the Chinese that is) the renminbi weakened versus the dollar by a large amount last night! I think that Treasury Secretary Geithner needs to go back and remind the Chinese that he means the renminbi get stronger versus the dollar, not weaker!

Then there was this… In a classic case of “you make it; they take it”… There could be another bailout coming in the US… This time the bailout would be for troubled union pension funds. The amount? Only $165 billion… But that’s now… Wouldn’t the pension have to pay out until all the workers die? So, this could become a pipeline of bailout funds, just like Freddie and Fannie!

There’s a bill being presented on Thursday this week that would put the Pension Benefit Guarantee Corporation behind struggling pensions for union workers. It’s being introduced by Senator Bob Casey, (D-Pa.), who says it will save jobs and help people.

And I thought that the President said last week that there would be no more bailouts…

To recap… Risk is being swept off the trading table this morning, as North Korea is rattling their saber… The euro which had rallied all day yesterday, has given back those gains, and more, falling 2-cents in overnight trading. Gold, which normally would benefit from geopolitical problems is down $2… Cost cutting is still making the rounds, as Italy announced budget cuts of 24 billion euros in the next two years.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning