Greece to Receive Concessions in Terms

Front and center this morning, the currencies are on the rally tracks versus the dollar. We had two things move the currencies higher overnight. First came the Reserve Bank of Australia’s (RBA) meeting minutes. You will recall me telling you yesterday that the markets were looking for signs that the RBA felt the Australian dollar (AUD) was overvalued and they needed to cut rates to weaken it. Well, there were no such words in the minutes, and the A$ took off for higher ground. Right now, the A$ is up ¾ cent (0.75), which is a very strong move!

Then came the news that concessions are possible for Greece so long as Prime Minister Samaras shows a willingness to meet the main targets set out in his country’s bailout program. That news came courtesy of a senior lawmaker with German Chancellor Angela Merkel’s party. The markets like hearing this news, for it gives Greece a little breathing room, which they didn’t have before, and almost guaranteed that Greece would fail the inspection. And maybe they will still fail it, but for now, the markets have breathed a sigh of relief, and that has the euro (EUR) trading above 1.24.

Yesterday, I actually stepped away from the trading desk and worked in my office! A rare thing for me, as I usually like to be around the trading and camaraderie. But I had a ton of writing and reading to do, so I stepped away. The reading I did made me realize that we are in for a ton of fun in September. OK, maybe not exactly fun, but it will seem like just about every day has something in store for us.

For instance, we end this month with the annual Fed head boondoggle called Jackson Hole. Of course, it was at Jackson Hole that Big Ben Bernanke announced round two of quantitative easing a couple of years ago. So the markets will be quite interested to see what he has to say this time around.

Germany’s Constitutional Court will on Sept. 12 make their decision known on the legality of using the ESM to recapitalize the troubled Spanish banks and go around the Spanish government. We will also in September see what the Troika has to say about Greece’s plans to cut debt.

And then are a ton of other things like central bank meetings including the ECB and Fed, elections and… drumroll, please… most likely the request from the White House to raise the debt ceiling as we grow closer and closer to the current ceiling of $16.4 trillion.

But before we get to the end of the month and Jackson Hole, we’ll have two weeks of waiting, and a lot of sawdust being left on the floor from meetings between heads of state. That leaves the currencies and metals with no place to really go. So I’m taking off the next two weeks, see ya… HA! Just kidding! Although I will be missing some time coming up soon (not sure yet when), as I have to have more surgery on my mouth (this time it will be major, and not outpatient stuff, UGH!). You know my mother used to tell me that my potty mouth was going to get me into trouble someday… I wonder if this is what she meant!

Remember yesterday I told you about the Bundesbank and how powerful they once were and how they had criticized the European Central Bank (ECB) and their plan to buy bonds in “unlimited amounts” to keep bond yields at “fair levels.” I also mentioned that I hoped that the ECB wouldn’t announce the details. Apparently, the Bundesbank still carries a big stick — at least a stick big enough to make the markets sit up and pay attention! You see, after I hit “send” yesterday, the euro dropped like a rock, and all the signs pointed to the Bundesbank’s criticism of the ECB as the reason. That selling didn’t last too long, as the euro had gained back lost ground and more by lunchtime.

Did you see the news on yet another investment scandal here in the U.S. yesterday? This from Bloomberg: “Whitman Capital LLC’s Doug Whitman was convicted of insider trading following a trial in which he spent more than two days on the stand telling jurors he was innocent.” How many of these have there been since 2000? Remember all the Internet stock scandals, the corporate scandals and then the investment scandals? And people still want to invest in equities here? WOW!

My friends over at The 5 Min. Forecast talked a bit about the scandals yesterday. Let’s listen in:

“‘I hear more and more people say the market is rigged against them,’ writes Chris Mayer. ‘They say it is a game for insiders to fleece gullible outsiders.

“‘Wall Street has not helped this image at all. There seems to be no end to lurid scandals or crises of confidence in the system.’

“We chronicle many of them here in The 5 — Knight Capital’s ‘trading glitch,’ or the ‘disappearance’ of customer money from MF Global. ‘The Facebook IPO may have been the last straw,’ ventures Big Picture blogger and Vancouver favorite Barry Ritholtz in his latest Washington Post column.”

Spain issued some Treasury bills this morning and the auction was successful, as the full allotment of 4.5 billion euros of 1-year bills were sold, and the yield fell by quite a bit. Today’s auction saw the average of 3.07%, versus the previous auction of 1-year bills, which came in at 3.92% on July 17. And this news has helped the euro, in addition to the news about Greece getting some concessions.

And back to the A$ and the RBA last night, now that I’ve let the RBA meeting minutes sink in. I liked what the RBA DID say. They did say that the Australian domestic economy could weather a fragile global economy, and that the expansion rate for the economy will over the “medium term” be at around the economy’s trend pace. That’s central bank parlance for our economy will not weaken anytime soon. And when a central bank says something like that, you can bet your sweet bippy that they won’t be cutting rates any time soon!

For the past two weeks, I’ve told you how the U.S. dollar long positions in the futures contracts had been reduced. It happened again last week, with dollar long positions reduced by 27,000 contracts. The three currencies that saw the bulk of the buying were A$, Canadian dollars/loonies (CAD) and — believe it or don’t — Mexican pesos (MXN). So for the past three weeks, U.S. dollar long positions have been greatly reduced. These are indications, folks, that we’re about to see the dollar slip back into the underlying weak dollar trend. Of course, things can always change on a dime, but the trend is definitely your friend here as long as you are use foreign currencies to diversify your investment portfolio so that you don’t have 100% of your investments denominated in dollars.

I was talking with Chris Gaffney yesterday — briefly, I must add, for Chris is off here and being stretched like inspector gadget these days. But I gave him my PowerPoint from my Vancouver presentation, and he wanted to know what the slide was that had a picture of a guy looking very frustrated with his head on his desk. I said, that’s Chuck at the desk each morning writing the Pfennig and being very frustrated because he called for the Treasury bubble to pop two years ago. Of course, back then, I had no idea that the Fed was going to become the largest owner of Treasuries and take down 61% of the Treasury auction supply last year!

I still think that the Treasury bubble will be the worst bubble we’ve ever experienced, but as long as the global community allows the Fed to print money and buy Treasury supply, the bubble will avoid the pin in the room. But it won’t last forever, and when it finds the pin, we’ll experience a Minsky moment.

I’ve told you all about my association with the great economist Hy Minsky before, so I won’t bore you with those details again, but just mentioning a Minsky moment brings back some great memories for me. I was a young man, strong as an ox, and a pretty fair country athlete. I played ball almost every night of the week and tournaments on weekends. In the winter, I would play any pickup basketball game at any time. And then I got into volleyball. I didn’t have two nickels to rub together, but things were good. I thought I was invincible.

Now that I’ve taken that journey down memory lane, let’s talk about the data from yesterday here in the U.S. Existing home sales were strong in July. Buoyed by cheaper prices for existing homes, and record-low mortgage rates, existing home sales increased to 4.89 million annually, from 4.72 million annually in June. Notice I said that the sales were buoyed by “cheaper prices”? Without these cheaper prices, existing home sales would be floundering. Prices in some areas of the country have stabilized, but in others, they continue to fall.

And then commodities, specifically agriculture. It’s not just corn crops suffering from the drought this year, folks. Soybeans, too, are suffering, and anything else that grows out of the ground and needs water. The S&P GSCI Spot Index of 24 raw materials rose 0.7% this morning alone, to 673.82, the highest level since May 3. This gauge has jumped 20% since its low on June 21. But not to worry, the Fed doesn’t count food and energy in their inflation calculations. So there’s no inflation, folks. Move along, these aren’t the droids you’re looking for! HA!

Then There Was This, from CNBC:

“There’s a different sort of drought plaguing California, the nation’s largest farm state. Its $38 billion agricultural sector is facing a scarcity of labor.

“‘This year is the worst it’s been, ever,’ said Craig Underwood, who farms everything from strawberries to lemons to peppers, carrots and turnips in Ventura County.

“Some crops aren’t get picked this season, due to a lack of workers.

“‘We just left them in the field,’ he said.

“The Western Growers Association told CNBC its members are reporting a 20% drop in laborers this year. Stronger border controls are keeping workers from crossing into the U.S. illegally, and the current guest worker program is not providing enough bodies.”

If crops are being left in the field, that’s going to push prices higher. But there’s no inflation here. Of course, I hope you all are with me on this, that I’m being facetious or a smart a** like my wife calls me all the time. Of course this is inflationary!

To recap: The currencies were influenced by the Bundesbank criticism of the ECB plan to buy bonds at first yesterday morning, but soon forgotten, as the currencies got back on the rally tracks by noon. The RBA didn’t mention the need to weaken the A$ in their meeting minutes, and instead talked about the strength of the domestic economy being able to weather the fragile global slowdown. And Greece received some concessions, and that’s good news for the euro, as the markets were pricing in a failure of the Greeks to pass the inspection of their debt-cutting programs. The Greeks may still fail the inspection, but at least for now, the markets are breathing easier.

Chuck Butler
for The Daily Reckoning