Eurozone to Discuss Using EFSF for Italy and Spain

The big news — if you want to call it that, since I prefer to think of it more like boring news — was that the Fed heads opted to go retro a la ’60s. Of course, earlier this week, I told you that I thought this is what the Fed heads would do. They extended their “Operation Twist,” which is simply continuing to do what they’ve been doing for months now — sell short-term Treasuries and buy long-term Treasuries. What this has to do with the unemployment problem of the country, I can’t tell you, for it has nothing to do with the unemployment problem!

But that’s what the Fed heads gave us to work with, folks. Sure, Big Ben Bernanke said that there “were signs that hiring is slowing and the U.S. economy is facing significant threats from financial troubles overseas.” But all he had for us was the promise to keep rates near zero to at least very late 2014, and this Operation Twist.

The markets were disappointed once again, and I told you yesterday that this would be the case, for even though the markets want to see something more aggressive, the Fed is basically out of bullets. They need that last bullet, which has QE3 inscribed on it, to fire after the elections. By then, the economy should be looking pretty weak.

Gold plunged on the Twist and Shout news, but then recovered most of the lost ground, but still lost $8 on the day. As I glance over to the currency screens, I see that gold is down another $9 this morning. Silly, fickle traders and hedge funds. Did they really think the Fed heads had more to give them? Apparently so, and when the disappointment set in, so did the selling of the risk assets.

The selling in the currencies wasn’t as harsh as in gold and silver. The Australian dollar (AUD) lost its grip on the $1.02 handle, and the euro (EUR) did the same with the 1.27 handle. But the slippage wasn’t like a turn on the slippery slope, so the currencies are holding their heads above water this morning.

Some of the euro’s slippage this morning can be traced back to the weak manufacturing PMIs that printed for the eurozone this morning. However, the weakness there is being offset somewhat by the news that German Chancellor Angela Merkel told reporters that she was in favor of the Italian proposal to use the EFSF (European Financial Stability Facility) to buy Italian and Spanish bonds.

There’s also the thing that I mentioned last week, when it was announced that the auditors were going to have their audits of the Spanish banks completed in 10 days, that the challenge was going to be quite heavy on the auditors. It was announced yesterday that the auditors won’t have their reports ready for some time.

So while the auditors work on their reports, the eurozone leaders are poised to announce a deal that was brokered by the G-20 leaders, which would provide $943 billion to buy bonds from Spain and Italy. The details will be announced at the eurozone summit, June 28-29.

It’s all window dressing, folks — more debt, more debt and more debt. If you give a country like Italy or Greece an “out,” they are going to take it, and this is a “get out of jail free card” for Italy and Spain doesn’t address their indebtedness, which requires them to issue bonds in the first place! But that’s just me.

Debt is bad, if you have no way of paying it off, and if you have to borrow to pay it off, then that’s even worse! That’s what we do here in the U.S. with every Treasury auction; we retire maturing issues and then sell new ones to pay for the retiring issues. The problem that we have here is that with every Treasury auction, we sell more than we had coming due, which is a direct reflection of the deficit spending.

I think that this is a good stopping point for me on this debt thing before I begin to get a rash. So I’m going to recruit longtime friend Doug Casey. Doug is a very outspoken individual. He says the things that most people don’t want to hear, but need to hear. We think alike on most things.

Recently, he was interviewed, and what he said hit a chord with me, because this is exactly how I’ve felt, and tried to convey to you all for years now. You may not agree with what Doug or I have to say, but if it causes you to stop and think, then we did our job. Here’s Doug, regarding government debt:

“The governments themselves have spent way more than they had or ever will have, and that’s par for the course when you believe spending is a virtue. However, it was the false signals government interference sent to the market that caused the huge malinvestments that only began to go into liquidation in 2008. That has to do with another definition of a depression: It’s a period of time when distortions and malinvestments in the economy are liquidated.

“Unfortunately, that process has barely even started. In fact, since the bailouts started in 2008, these things have gotten much worse. If the government had gone cold turkey back then, cut its spending by at least 50% for openers and encouraged the public to do the same, the depression would already be over, and we’d be on our way to real prosperity. But they did just the opposite. So we haven’t yet entered the real meat grinder.”

The U.S. data cupboard gets emptied out today, and all the data prints are not considered to be Tier 1 reports. But we will see leading indicators, which I follow, and of course, the weekly initial jobless claims. The data cupboard will not be opened tomorrow — a rare day of no data prints — and not having to deal with data will start tomorrow off as a fantastic Friday already!

Norway’s Norges Bank did keep rates unchanged, as I expected yesterday, but recall, I told you about the recent run of robust domestic growth? The Norges Bank has its eye on the ball here, and made note of that robust growth. And in noting the growth, the Norges Bank brought forward the date of the first expected rate hike!

Of course, between now and the new data, things could change, so you can’t hang your hat on this move. But still I think it does signal that the Norges Bank is mindful of the growth. So for those of you keeping score at home, the Norges Bank brought forward to early 2013, from mid-2013, the time when they see rates going higher. We’ll have to keep watching this to see if anything changes.

And should things in the eurozone calm down some, as I expect them to, then the Norges Bank will hike rates early in 2013 and show the world, once again, that Norway is not Greece, not Spain, not Italy, nor any of the other deficit-spending members of the eurozone, and therefore should NOT be tarred with the same brush!

OK, here we go again with the two different manufacturing reports from China. Recall me telling you how HSBC does its own report on Chinese manufacturing, which is normally different than the one the Chinese government issues on manufacturing. The HSBC report printed last night and showed that manufacturing slipped further this month, to an index number of 48.1 from 48.4 in May. Not huge slippage, but still, not a good signal for global growth.

But remember, the Chinese adviser to the People’s Bank of China (PBOC) said the other day that China’s economy bottomed in the second quarter. So if that’s true, we should begin to see these manufacturing index numbers rise.

Speaking of slippage, the Japanese yen (JPY) has really seen its value versus the dollar and euro slide this week, and is in danger of revisiting the 80 handle. But that’s like me losing a little weight. It’s like removing a bucket of sand from a beach — it isn’t noticeable! And it’s nowhere near what’s needed! I’ve said it for some time now, and a few months ago, I raised the white flag, but Japanese yen is overvalued, given their debt position, and now they are posting trade deficits.

In Canada, with the price of oil slipping further, the Canadian dollar/loonie (CAD) is slipping too. I have a friend that lives in Canada, whom I’ve written about before. He’s the guy who wrote to Bank of Canada Gov. Mark Carney and questioned Carney’s interest rate policy, and received a response from Mr. Carney! My friend wrote another letter to the BOC governor and pointed out the housing price inflation in Toronto and wondered why Mr. Carney had left rates unchanged, and too low. And once again, Mr. Carney responded. But it’s all central bank parlance — “on one hand this, and on the other hand that” kind of stuff. But I have to give kudos to the governor, for he did respond.

The gist of his latest response, though, was that the BOC’s hands were tied by the goings-on in the U.S. and overseas. And that’s pretty much it. But as I said to my friend, I would ask him, “Why, then, did you lather up the markets with talk of removing stimulus, only to do nothing?” You see, even though I give Mr. Carney kudos for responding, I would still hold his feet to the fire on this stuff!

Here’s something that Mr. Carney didn’t mention in his response. Canada is set to tighten mortgage rules today, cutting the term of mortgages to 25 years from 30 years, and reducing the amount a home buyer can borrow from 85% to 80%. OK, that’s a good step, but don’t stop there!

In the U.K. this morning, retail sales for May were stronger than expected, by a small margin, printing at 0.9% versus the consensus forecast of 0.7%. But you had the big queen’s celebration and all that going on. The pound sterling (GBP) just hasn’t seen that Olympic host country bump yet, but I suspect it’s coming.

Greece did form a coalition government, so all those fears of more elections can be put to bed, and there’ll be no Drachmageddon for now.

And in Switzerland, Swiss exports fell -3.7% in May versus April, and I’m afraid of what the Swiss National Bank (SNB) might think of this. You see, the SNB believes the strong franc (CHF) is to blame for Switzerland’s export problems, which is why it set that floor for the franc versus the euro last September at 1.20 and has had to defend it continually since.

I would think that the SNB wouldn’t take this news lightly, and wouldn’t put it past them to devalue the franc further. Be careful here, folks. This report could be the proverbial straw.

The other day, I mentioned the Russian ruble (RUB) and then went on to talk about how difficult it is to deal in rubles in the forward market. I’ve said this on a number of occasions this year, but the emerging markets just seem to be unencumbered by the goings-on in the U.S. and eurozone. But to find ways to deal here is basically like pulling teeth without numbing medicine! But as a tease, I’m very close to being able to do something with the emerging markets, so stay tuned.

Then There Was This… John Sastry in our Wealth Management division sent me a link to a story and said it was an example of why we have deficits. You won’t believe this story when you read it. It’s truly the stuff that qualifies for the Darwin Awards, but here it is…

“Have you ever bought a brand-new car, only to forget where you put it? How about 300 of them? Probably not — unless you’re Miami-Dade County, which was recently reunited with 298 vehicles it bought brand-new between 2006 and 2007.

“The county ‘discovered’ this fleet of no-mileage vehicles after reading about them in a Spanish-language newspaper there (see the source for more images). Most of the misplaced motorcade is made up of Toyota Prius hybrids, whose warranties either expired with very few miles on the odometer or will very soon.

“Looking to save some face, the county has rushed at least 123 of the hybrids into service. The Toyota warranty covered the hybrid bits for eight years or 100,000 miles, but we’re not sure if that covers cars parked for five of those eight. We’re also not sure what that much time in Miami heat and humidity does to an unused hybrid powertrain, but it can’t be good.

“The county, as you probably guessed, is looking into how it lost so many cars. The leading theory is that they might be part of Carlos Alvarez’s time as mayor. He was the mayor during the period the Toyotas were purchased, but a 2011 recall election successfully removed him from office. Apparently, the voters ‘felt, among other reasons, that he had been behind multiple acts of misappropriation of funds.’”

Chuck again. Holy Cow, As Harry Caray used to say! Crazy! And not the Patsy Cline type of crazy!

To recap… The Fed heads are going Twisting again, and the disappointment they gave the markets caused slippage in the risk rally that had gone on for a couple of days. There seems to be some sort of agreement in the eurozone to allow Italy and Spain to use the EFSF to keep them from having to go to the markets to obtain rates on their debt sales. But eurozone manufacturing remaining weak more than offset the EFSF news. Doug Casey gives us a quick thought on government debt, and have you ever wondered what happened to hundreds of cars that were purchased?

Chuck Butler
for The Daily Reckoning