European Monetary Fund: You Heard it Here First

Well… After a couple of weeks of waiting, and wondering if it was going to print or not… There was a very nice article in The Wall Street Journal on Saturday that featured… Me! And my Pfennig! I’m sure that most of you missed it, so if by chance you would want to read what Jeff Opdyke had to say about me and the PfennigClick here.

Well… Friday’s Jobs Jamboree turned out to be very interesting, after looking under the hood… According to the Bureau of Labor Statistics (BLS) the US lost 36,000 jobs in February, much less than what was expected (-68K), and the unemployment rate remained at 9.7%. Of course we all know that the “real unemployment rate” is 21%. It all comes back to the games people play, now… The most important piece of the Jobs Jamboree is the Avg. Hourly Earnings, which printed at 1.9% gain… So, those that are working are seeing some increases… Marginal increases, but still!

And… The BLS did add 97,000 jobs out of thin air, so the job losses were really -133,000… I also found it suspicious that the BLS waited for some time on Friday, before posting that +97,000 adjustment… Before they did, the markets were led to believe that job losses were dwindling. Again… The games people play… It sure looks like they tried to pull a fast one on the markets… But, I’m sure it was just a technical thing… Right?

So… The dollar began to go into the tank shortly after the BLS adjustment, and traded down for the rest of the day on Friday, and the overnight markets of Asia and Europe have not reversed that move from Friday. In fact, the overnight markets have added to the gains by the currencies.

Recall on Friday I told you that Pending Home Sales had dropped 7.6% last month, and then that was followed up by a not-so-good Jobs Jamboree… The rate hike campers here in the US are beginning to feel like a forgotten lover… There’s just no love coming from the Fed regarding rate hikes, and with that thought falling over the markets, the high yielders took off, as rate differentials came back into play.

The other currencies that took off were the petrol-currencies… You know them, you love them, here they are…. The currencies of: Norway (NOK), Canada (CAD), Mexico (MXN), and… Even the beaten and downtrodden, UK (GBP) are gaining ground versus the dollar as the price of oil nears $82!

OK… A Greece update is needed here, I think… Basically, the Greek 10-year bond issue was taken down by dealers, but at a cost to the Greeks… This is exactly what I keep talking about regarding the US debt and the need to finance… If we keep kicking the deficit spending-can down the road for someone else to deal with, we will run into a financing problem like Greece; and to take our bonds, the buyers will demand higher yields… Uh-Oh!

There was news over the weekend, that France was ready to give Greece some financial support… And former Federal Reserve Chairman, Paul Volcker, has this to say about the euro (EUR)… “I’m still a believer in the euro, the lack of a unified government to back up the European Central Bank is a ‘structural crack’ and maybe fortunately it’s tested with a country as small as Greece, which doesn’t present an insuperable financing problem.”

I was typing that, and I just couldn’t get that Monkees song, “I’m a Believer”, out of my head!

OK… I’m back now… Looks like we have two central bank meetings this week, the Swiss National Bank (SNB) and the Reserve Bank of New Zealand (RBNZ)… Although the RBNZ has been talking hawkish lately, it might be too soon for them to hike rates this week, although they have to be feeling a bit behind their kissin’ cousins across the Tasman, who have raised rates four times in the past six months!

The Swiss will not and can not raise rates at this time…

There will be two jobs reports this week from Australia and Canada… So, there are a few things on the plates of the countries we follow this week.

Here in the US the data cupboard is pretty empty most of the week with some real data coming in Thursday and Friday… First we’ll see the Monthly Budget Statement, and I have no idea why, but the expectations for February’s deficit is $210 billion! OUCH! Then the trade deficit prints for January, and then finally on Friday the retail sales for February… I don’t think any of this is going to be rate hike positive, and therefore not dollar positive… But we’ll have to wait-n-see, eh?

OK… Call me clairvoyant… Nah… I’m not that! I’m just a guy that sees things and thinks of ways to make them work better… In this case I’m talking about the announcement over the weekend of the European Monetary Fund… That’s right! I did talk about the Eurozone creating this European Monetary Fund, a week ago, long before anyone even whispered it! Why did I think this? Because I knew that the European Central Bank (ECB) and the European Union were not going to go for any assistance to Greece by the IMF… So… I figured that it would be best for them to form their own IMF… And lo and behold, look what they announced this past weekend!

“The European Monetary Fund, patterned after the International Monetary Fund, is a key part of an initiative backed by Germany and France to strengthen cooperation and surveillance of public finances across the Eurozone, government officials said. German Finance Minister Wolfgang Schäuble revealed details of the plan during the weekend.”

OK… I’m going to have to come back down, now… I was floating after hearing that announcement! I’m sort of like those Windows 7 commercials… The European Monetary Fund was my idea, and I’m a PC!

While I was looking around The Wall Street Journal this weekend, I saw a story that caught my eye… Here’s a snippet from the WSJ… “Bank of America, Citigroup, JPMorgan Chase, Wells Fargo and other lenders reported a large increase in the volume of troubled loans they bought back last year. Barclays Capital estimated that banks repurchased about $20 billion in such loans, with half of the total written off. ‘Most investors haven’t really focused on this issue and are surprised on how much impact this could have, including on earnings,’ said Ajay Rajadhyaksha, head of US fixed-income and securitized strategy at Barclays Capital.”

Doesn’t that stuff scare the bejeebers out of you? Mortgage loans that were made in the past six years are toxic! Of course, not all of them are… But it seems like all we ever hear about are these mortgage loans going bad and having to be written off…

Well… China was in the news this weekend, talking about their shrinking trade surplus… The thought here is simply that if China’s trade surplus continues to shrink, the pressure applied to the Chinese to allow the renminbi (CNY) to float, will be eased… For those of you keeping score at home, China’s trade surplus was $44 billion a year ago… Today, it is $8 billion.

One of my fave economists, Nouriel Roubini, said that he believed the Chinese would “limit the renminbi’s appreciation to 4% over the next 12 months because of a super cautious outlook on the global economy.”

I personally think that China will allow more than that as we go along, starting with a 2% or so gain by summer… But then, that’s just me.

There was a good story in the USA Today regarding gold, this past week, that long time colleague Ed Bonawitz, sent me… Here’s a snippet…

“If you like to have your investments close at hand – say, buried 12 paces northeast of the old apple tree – then gold bullion is the kind of investment you’d like. But even if you’re not worried that the dollar will plunge, owning gold isn’t a bad idea.

“You hear many people pushing gold these days, citing our nation’s $12.4 trillion debt. Gold is the classic hedge against inflation. If the US resorts to printing money to repay our debts, the value of paper dollars will fall, and gold prices will skyrocket.”

To recap… The Jobs Jamboree was worse than printed by the BLS, and not dollar positive… The price of oil is shooting higher again, and taking the petrol-currencies of Norway, Canada, Mexico and even the UK higher versus the dollar… Recent data has the rate hike campers here in the US feeling left out, and therefore the rate differentials kick in for Australia, Brazil, and South Africa… And… Oh yes! Chuck was in The Wall Street Journal Saturday!

Oh.. And one more quote… This one from John Maynard Keynes… “When the facts change, I change my opinion… What do you do, sir?”

Chuck Butler
for The Daily Reckoning

The Daily Reckoning