German Business Confidence Remains Strong

Well… There was some healing going on in the currencies yesterday that carried through to the overnight markets, as I heard the Big Boy Brokerage firm Goldman Sachs talking about how they believed the dollar would continue to depreciate. I found this interesting because, as you know, the boys and girls at GS carry a lot of clout in the markets… I have to laugh a bit, though, because it reminds me of a guy who called me one day, and told me that he thought I had “moved the markets” with my comments… HA! Yeah, right!

Seeing how they had reversed the direction of the currencies with their comments, they tried a different asset class… This time they made favorable comments about commodities, saying that they were “turning more bullish on raw material”…and voila! Commodities rebounded! Of course, last month, GS suggested to its clients that they sell commodities… So… If I were discussing this with my drinking buddies on the patio, I would say that one time they were short and needed to cover with a cheaper price, and the other time they were long and needed prices to rise to sell at a profit… But I could never say that in this letter, because people would think that I was calling them out… But, Chuck… You just did talk about this! Oh my! How did that happen? Look… I’m not going to go back and erase all that I just wrote, because it’s good reading! HA! Besides, that was just a conversation between me and my drinking buddies who NEVER listen to what I say! HA! And furthermore, I’m sure that it just looks like that, and would never happen…

So… We’ve got that going for the two asset classes today… Currencies are looking healthier, and commodities are rebounding. Gold and silver are included as they have posted some green numbers this morning.

I guess I should get to the actual facts, and not some random thoughts on the patio! Facts like, German Business Confidence, as measured by the think tank IFO, printed unchanged at the previous record level in May… This should kick-start the thought that the European Central Bank (ECB) will be hiking interest rates again, even in the face of the debt crisis…

I find this to be quite amazing, folks… But in reality, it’s just like I was explaining yesterday… The dollar is just plain uglier than the euro (EUR), even with the likes of Greece, Portugal, and Ireland… The dollar has its own warts of California – which by the way is still in the top ten for economies in the world – Illinois, Michigan, New York, and the list could go on… And that’s just a list of the rogue states… I would be remiss if I didn’t mention the total national debt that hangs over the dollar like the Sword of Damocles…

One currency that just can’t seem to find a bid recently is the Brazilian real (BRL)… I told you all a few weeks ago that traders were now speculating with the forward price of the real, and that it had really put the kyboshes on the interest rate that could be paid for reals… Well, that has knocked the stuffing out of the demand for reals… And quite frankly, maybe that’s a good thing, and the real can shake the speculation, and remain strong, without government intervention, and speculation…

The past couple of years we’ve seen these short-lived selloffs of reals, which are usually tied to government intervention… I’m not saying that this will be yet another short-lived sell off, I’m simply saying that we’ve seen this before…

So… Overnight, the euro traded to 1.4117 (recall yesterday morning it was 1.40) but its move higher, at that time, was halted by comments from a Greek policymaker rejecting austerity plans… (Sounds like he wants to get reelected!) but the brief backing off of the euro has seen an end, and it is moving back toward 1.41 again as my fat fingers type away…

The British pound sterling (GBP) got its knees chopped off by the ratings agency, Moody’s… Let’s see what Moody’s is up to now! Moody’s announced it is putting most of the UK banks, building societies and credit unions it covers on review for possible downgrade…

And the Swiss are going to the back of the closet to pull out last year’s spring collection of clothes, as a Swiss National Bank (SNB) Governor dusted off that old line about the SNB intervening to stem the franc’s rise if, “deflationary risks were to emerge”… I don’t know why he wasted his breath! The markets are not scared of the SNB, as the last 18 months have shown… For those of you new to class, you might have missed all the fun with Swiss francs (CHF)… You see, the franc was getting very strong as it neared parity to the dollar, and the SNB began shouting from the rooftops, or better yet the top of the Alps, that they had deflation, and a strong franc was not good… They wanted some inflation… So they began to spend money on selling the franc (intervention)… The markets took this as a challenge, and fought back, buying francs by the truckload, and when it was all over… The franc was $1.15, and the SNB had wasted tons of money…

A lesson that you might think that the Brazilian government would have learned… But didn’t… And speaking of government intervention… How about that coordinated effort by central banks around the world to weaken yen (JPY) after the Tsunami hit in March? Yen weakened at first, then the markets fought back and before you knew it, the yen was right back to where it traded before the intervention began…

Then there was this… St. Louis Fed Head, Bullard, was speaking last night, and here are some of his thoughts… Bullard said that a pause after the end of QE2 in June would allow “more time to assess the strength of the economy.” He noted first half US growth had been weaker than expected but that the recent softness was likely to dissipate, predicting “reasonably robust” growth in the second half of the year.

“Reasonably robust”? From what? Just what is going to drive the economy to robust growth? I’m afraid that this Fed Head has fallen into the trap… Yes, the trap where they want something to happen so bad (strong economy) because of what they prescribed for it (two rounds of QE)… QE was a bust, folks… I saw something yesterday that was quite interesting… At $600 billion, the number of jobs created was equal to $850,000 spent for each job… That’s quite a “cost of acquisition”, eh? Unemployment is still a real problem, and housing is worse now than when they began QE… But that won’t stop them from another round of it… Coming to a theatre near you, later this year…

To recap… The currencies (for the most part) and commodities are seeing a rebound this morning as not only has GS issued favorable calls for both asset classes… In addition, German Business Confidence (IFO) saw the previous month’s (April) record high level maintained in May, which should kick-start the thought that the ECB is going to hike rates again.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning