Germany Weighs Possible Bailout of Greece

There are rumors going ’round that, 1. There is a secret central bank meeting going on, and 2. That Germany is weighing bailout possibilities for Greece…

The latter really lit a fire under the risk assets yesterday, allowing stocks, currencies and commodities to enjoy a day in the sun, away from the shade the dollar was casting on the risk assets. Stocks turned around and had a strong showing for the day, gold was up $15, and currencies, led by the Brazilian real (BRL) gained back some precious ground versus the dollar. I know that sounded a little strange saying, “led by the Brazilian real” as I normally associate the currencies being “led by the euro”…

But in this case, the real was the top dog, gaining back over 2.5% on the day! I told you yesterday that there had been talk by Brazilian bankers that the central bank would open Pandora’s Box of rate hikes for Brazil next month… And in case you’ve forgotten, traders and economists are in agreement that; and once Pandora’s Box of rate hikes gets opened, the rate hikes will continue coming, probably adding as much as 3% in rate hikes this year!

The euro (EUR) was also quite strong, although, it bounced around like a 5-year old on a sugar high! In fact, at one point in the day, the single unit has gone from 1.37 to 1.3765, and then turned around on a dime and went back to 1.37, making me as mad as a mosquito in a mannequin factory! But, that sell-off didn’t last long, and soon the euro was 1.3765 again, and moving higher… At one point in the day it hit 1.38, briefly.

OK… So there you have the price action of the currencies yesterday… Overnight, the currencies have been range bound, and have not moved much. The Aussie dollar (AUD) saw some selling when it had a confidence report print weaker than expected; but again, these moves are all range bound…

China reported that imports had weakened last month, and that is causing some concern on the global growth front, for China was depending on the domestic demand to help offset the reduction of exports to the US. This news, along with the news from Aussie confidence, has really cast a shadow on the Aussie dollar for now.

There’s a story out from a Swiss economist, saying that he believes that China could very well choose to reduce its trade surplus through increased wages for workers, rather than allowing the renminbi (CNY) to appreciate versus the dollar. Hmmm… I’m not buying that! While China has come a long way toward free markets, etc. they are still a Communist country! And, Communism is not in tune with higher wages for workers!

OK… The rumor about the secret bank meeting… Maybe this is nothing, but it seems to have some smoke, and where there is smoke… So… Here’s the skinny, from an Australian newspaper…

“The world’s top central bankers began arriving in Australia yesterday as renewed fears about the strength of the global economic recovery gripped world share markets.

“Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location…”

Hmmm… A secret central bankers meeting, eh? Well, I guess it’s not so secret anymore, eh? But… Doesn’t this all bring back bad memories of August 2007? Remember August 2007? I was home recovering from surgeries, and reading a ton… I came to the conclusion that the US economy was about to meltdown and that the Fed would be cutting interest rates immediately… I received a lot of flack on that call, but was vindicated just a month later when the Fed began their rate cuts that brought rates to near zero! Six months later, Bear Stearns went belly up and had to be brokered to rivals, and 7 months after that, Lehman Brothers collapsed… We had TARP, stimulus, and all sorts of voodoo economics… But it all began in August 2007, when liquidity became a problem in the markets…

So, what’s the problem this time? Could it be what appear to be “little fires” all around the globe, like Greece? Like Dubai? It sure would be nice to see the central bankers allow the markets to weed these things out, and not make a mess of things like they did in 2008… But, that’s not their nature!

Enough of that! There’s a big deal going on in Washington today… Big Ben Bernanke will be testifying before Congress about withdrawing stimulus.

The data cupboard today has just one piece of data to share with us… And that is the US December Trade Balance, which is expected to narrow just a bit from $36.4 billion to $35.8 billion… Cheaper oil prices during December would be the difference. But, still, even in the face of a recession that’s gone on now for some time, there’s a hangover in the trade deficit… The media will be drooling over the increase in exports by the US, which would be a good thing if it were ever going to get to a level that reduces the trade deficit by a rather large margin, instead of these marginal gains… But to reach that level, the dollar has to go back to its ways of 2002-2004, 2006-2008, and 9 months of 2009…

Last night, I was doing some reading and research, and came across a government official carrying on about the gains in employment that the stimulus has created… Hmmm… I have to beg to differ, here… I don’t see the gains… The government is claiming that we’re losing less jobs than before, so that’s a good thing… Well, that would be correct if that were all there was to it… But it’s not! Look, once an economy gets to the point that no more jobs could be cut, unless the business was going belly up, then the number of job losses drops.

The thing to keep a watch on is the number of people unemployed… Here’s a report from The Los Angeles Times that puts this in perspective…

“In December, the number of unemployed workers for every available position reached 6.1, up from 3.4 during the same month in 2008, the US Labor Department said. The agency’s Job Openings and Labor Turnover survey found that there were 2.5 million job openings at the end of December.”

I know… I don’t like having to “straighten these things out all the time” but, shoot Rudy, somebody has to do it, for you won’t get this info on your network or cable news!

Well… As I was writing this morning, the euro has inched back near 1.38, and fold, which was down $3 when I began writing, is now up $2!

I’ll tell you something for you to put in your files, and refer back to every now and then… These emerging markets, like India, China, Brazil, Turkey, Hungary, Poland, Czech Republic, South Korea, and others all get tied together… And when something triggers a run to “safe havens” all of these get burned, no matter what their individual fundamentals are… Of course strong fundamentals will keep the burning to a minimum, but burned even still… But when the man yells, “everyone back in the pool” they all begin to rise again… We saw this in full force yesterday when it was announced that Germany was weighing a bailout of Greece…

So… Taking that information and applying it to the Greece situation is a good test, because if Germany does bail out Greece, we would expect to see further gains by the emerging markets currencies… But if Germany backs away from the bailout table, then we would expect to see the emerging market currencies take a hit.

Then there was this… Hey! I see where the president doesn’t begrudge the bonuses that the head of Goldman Sachs received… Hmmm… There’s more there than I’m willing to talk about today… But I think you know what it all entails…

To recap… The news of a possible bailout of Greece by Germany really lit a fire under the risk assets yesterday, and although the trading range overnight was tight, the currencies and commodities have remained stronger versus the dollar… There are rumors of a secret central bankers meeting, and the trade deficit in the US is forecast to have narrowed in December.

The Daily Reckoning