France and Germany Agree to Increase in EFSF

Front and center this morning… Spain may have seen a 2-notch credit rating drop yesterday, but it didn’t matter, as it was announced that France and Germany were ready to agree to a 2 trillion euro rescue fund… Now they’re talking about a rescue fund, and not just the 500 billion euros they had previously agreed to. And the markets went hog-wild over this announcement. The dollar rally was quickly reversed and the euro (EUR) was on its way to 1.39, where it sat this morning until a few minutes ago… The Eurozone leaders, thus raised the ante… Who’s going to call?

So… At one point yesterday, things were looking pretty bleak, and even gold was down $40… But that turned around after the Eurozone announcement. I had a guy leave me a message yesterday, asking me the $69,000 question, which was… “If yesterday morning was all about risk aversion, then why was gold getting sold?” Well… This plays into what I’ve been talking about for the past three years, and that the markets aren’t trading on fundamentals… Take the retail sales numbers last week (I’ve got some debunking for you in the “Then There Was This” portion of the letter today)… At first glance, they looked strong, which fundamentally would mean the dollar would be a buy… But instead it was a sell…

My two older kids used to watch a kids show, where it was “opposite day”… The trading since the financial meltdown reminds of that! Yes… When things look bleak, investors should be running, no sprinting to gold… And the Mom and Pop investors are… The demand for gold and silver, for that matter, remains very strong… It’s the institutional buying and selling that muddies everything up, folks… Those darn institutions!

And the “afterhours trading”… Well… The CFTC met yesterday, and voted 3-2 to enact position limits on 28 commodities, including gold and silver… I’m sure that this announcement had a lot to do with the reversal in gold and silver yesterday… However, just because there’s a new rule for the bullion banks to follow, who’s to say that they actually follow it? Sort of like in Greece, where the austerity measures weren’t being followed, until the Eurozone told them to shape up or there would be no bailout payment. Now, a team of auditors go into Greece every three months and review the austerity measures…

Don’t know what carrot can be dangled in front of the institutions with large short positions to close them out or else… But, I sure hope one can be found… For if one is… Think about the confident feeling moms & pops can have when they want to buy a commodity, knowing what the fundamentals are, would finally play into the commodities value, and not speculative shorting…

I just looked up at Bloomberg TV, and there’s a guy being interviewed who says the “euro should have never been created” and that “it will remain in crisis mode from here on”… Hmmm… Now, if I were the one doing the interview, I would ask him this… If the euro is so bad… Why is it still 1/3 of a cent stronger than the dollar? That’s because we’re in crisis mode, and have been since 2002… And it’s not going to go away any time soon!

I had to laugh at my friends over at The 5 Minute Forecast yesterday, for they said something that was right out of Chuck’s book of sarcasm… They said, “Somebody failed to inform the US wholesalers that we’re supposed to be experiencing another bout of deflation right now.” The reason they said that? Well… PPI, (the producer price index, which tracks wholesale inflation) rose 0.8% in September, moving the year over year wholesale inflation at 6.9%…

The Norges Bank (Norway’s Central Bank) is meeting as I type away with my fat fingers… I don’t see them doing anything here today… It’s an interesting meeting, though, because they could give indications as to what they see in the future for the Norwegian economy… At their last meeting they mentioned that the krone (NOK) strength was doing the work for them to combat inflation, and therefore no rate increase was needed… It will be interesting to see if the Norges Bank mentions krone strength again, because all-in-all, the krone is weaker now versus then…

And on the day after the Japanese government increased their intervention fund (thus signaling to the markets that they are about to attempt to weaken the yen (JPY)), Mr. Yen, former Japanese Finance Minister, Eisuke Sakakibara told a crowd at a Bloomberg conference in Tokyo that he’s “not worried about Japanese debt for about 5 or 6 years,” and that “the yen may gain versus the euro and dollar, because plans to intervene will only work if coordinated with other nations.”

Well… I don’t like doing this… But I just talked to our tech people, and they can’t tell me when I’ll have service again to the outside world, other than email… So… I’ll cut the Pfennig off, short-n-sweet this morning and pick it back up tomorrow… But first, I’ve got this killer look under the hood of the retail sales figures that printed last week…

Then there was this… First let’s review the report… The US Census Bureau announced today that advance estimates of US retail and food services sales for September, adjusted for seasonal variation and holiday and trading-day differences, but not for price changes, were $395.5 billion, an increase of 1.1 percent (±0.5%) from the previous month and 7.9 percent (±0.7%) above September 2010.

Price changes is equal to inflation… And is not counted in the numbers… But seasonal adjustments are… Do you see where I’m going here?

A quick check on the components tells us that none of them were actually up!

Motor vehicle sales, electronics, building materials, food & beverages, health, gasoline, clothing, sporting goods, general merchandise, and so on… were all down!

That leaves us retail sales at bars… I mean, come on, drinking must be up given the problems in the world today… No…

“The truth? The entire gain was ‘seasonal adjustment.’ All of it. In other words, in actual dollars there was not only no increase, there was a net decrease in sales of approximately five percent — not annualized either, month-over-month!” — Market Trader…

I knew there was something fishy about that number last week… OK… If I were The Mogambo Guru, he would say “Ok junior Mogambo Guru rangers go out and get the media to talk about this”…

To recap… The dollar rally was reversed yesterday afternoon, after it was announced that France and Germany would agree to a 2 trillion euro rescue fund… This took some heavy weight off of the euro, and allowed the Big Dog to rally, all the way to 1.39 where it sits this morning, or the best I can tell, anyway! The CFTC voted 3-2 to limit commodity positions, which includes the large short positions in gold and silver that the bullion banks hold. And the supposedly strong retail sales figures from last week, were a farce!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning