Greek Spending Cuts Lead to Civil Unrest

What a day the currencies had yesterday! The euro (EUR) gained ground all the way back to 1.3730 (but saw some profit taking at the end of the day) and all the other currencies followed in step… Now… There’s two ways to look at this… Either the euro is like a star that’s getting ready to burn out… (It always shines brightest before it burns out), or… It’s like a star that had been covered up by another planet, and is coming back into view!

I tend to think it’s the latter of the two… But, the euro is not out of the woods, with regards to Greece, and any thoughts to that end will be quickly met with disappointment, I’m sure!

The news overnight was quite damaging to the euphoria that the aid package of 34 billion euros provided the other day. German Chancellor, Angela Merkel, whom I’ve quoted many times in the past and believe she “gets it”, put a dagger in the heart of the aid package when she said that a planned meeting with the Greek Prime Minister, “won’t be about aid commitments”… Uh-Oh! What’s Ms. Merkel telling us? That the 34 billion euro package to Greece that the media reported on last Saturday is not going to materialize? That stinks!

Look, as I said the other day, I’m NOT for bailouts, and in the Eurozone, one bailout of Greece would probably beget another bailout of the next sister state of the poor; the needy would be lined up at Germany’s doorstep looking for a handout… However, it looked the other day when it was announced like this bailout was what the markets wanted to see, to provide calm to the region. So, in that vein I’m all for it… But… Now Ms. Merkel has thrown a cat among the pigeons.

The French finance Minister seemed to be singing from the same song sheet as Ms Merkel, as she said, “if there is a need for assistance, there will be a way to do it, but there is no need at this time.”

I guess the results from today’s auction of a 10-year Greek syndicated bond offering will dictate whether there is “need” or not, eh? I mean, if Greece can’t get bonds sold, that’s pretty telling, right there! More on Greece in the “then there was this section”…

I guess we’ll have to tip toe through the tulips with the currencies right now, it’s just not out of the question…

The news on the day brought us information on how the US service sector ramped up, which reminds me of the status of the US economy before the financial meltdown. We had become a service sector economy (and our service was horrible!), which is not exactly what good economies are made of. You need to make things… Manufacture things… Grow things… And so on… Not just service someone else’s products that are shipped to your country and made elsewhere! This makes us big on consumption… And I used to say this over and over again back in the day, that consumption does not build wealth! In fact… The Big Boss, Frank Trotter, tells a story about consumption… He says that he was walking through an old cemetery and most of the long perished people had recorded that they had died from consumption… So, even back then it was not a good thing!

But with 21% unemployment, I can’t imagine that consumption would get to the levels it got to before the financial meltdown…

Oh! And add one more state to the list of states here in the US that have basically gone into default, failing to pay this, that or the other thing… Massachusetts, went into the red on their pension payments last month, and had to borrow from the government to make the payments… Recall a couple of weeks ago, when 49 of the 50 states had snow on the ground? I’m afraid we’re headed toward that same kind of roll call when it comes to defaulting states here in the US.

One of the best performing currencies of the past week has been the Brazilian real (BRL)… Recall when the Brazilian Sovereign Wealth Fund (BSWF) first came on the scene promising to buy dollars and make the real weak… I said, “it would only work temporarily, and only as long as the BSWF has an appetite for dollars”… Well, from the looks of it, the BSWF’s appetite for dollars was satisfied… Or… They are setting a trap… I’ll say to tread carefully here, for a while; do not go “all in”.

More good news from Australia last night… Australia’s trade deficit narrowed more than expected in January… Exports of raw materials increased and imports for fuel decreased… Now that’s a winning formula! The Aussie dollar (AUD) was over 90-cents most of yesterday, then succumbed to profit-taking and fell below the 90-cent figure briefly overnight… But it has rallied back to the figure early this morning… It seems that 90-cents has been a real big hurdle for the Aussie dollar to get past since falling below it in January. So… Without a chart, I would say that it looks like a line of resistance… Or… Traders just don’t want to get behind it above 90-cents until the problems in the Eurozone fade. I personally like the latter of the two!

Oh! And the trade deficit narrowed by A$1.18 billion in January to A$2.17 billion! WOW! A couple of good months and that could be wiped out completely!

My friend, Ashish Advani, will be very happy this morning, as the Indian rupee (INR) has gone below the 46 figure with a huge leap! Unfortunately, this is where the Indian Central Bank normally steps in to stop the rally of the rupee. But, hey! We can hope the central bank doesn’t act, and that the rupee can continue on its own happy path higher… Just wishin’, and hopin’, and thinkin’ and prayin’.

Over on this continent… Canada will be seeing the color of the budget for the first time today. I would think that Canadian officials would be quick to get the budget passed as to not upset the applecart of what’s positive in Canada right now. Speaking of what’s right… The economy… The latest report of manufacturing will print today, and is expected to reflect the manufacturing index to surge higher. If so, that’s another notch in the belt of the rate hike campers!

The European Central Bank (ECB) and the Bank of England (BOE) both meet this morning, but both are meeting with handcuffs on, for they couldn’t raise rates if they wanted badly to do so! In the ECB, I’m sure the official statement by ECB President, Trichet, will center around when further stimulus may be removed. And in the BOE, I’m sure they will be discussing the continuance of quantitative easing, as things in the UK economy remain pretty dire.

It’s Thursday, and that means…. Drum roll please… That means we’ll see the latest Weekly Initial Jobless Claims report! We’ll also see a factory orders report, and the stupid non-farm productivity report… So… The Jobless Claims carry the BIG STICK today, data wise!

Carrying the big stick tomorrow will be the Jobs Jamboree! More on that tomorrow…

And… It appears that there’s yet another smoking gun in US Treasury Secretary Geithner’s office… This time it centers on his participation in the AIG bailout, on a different angle than previously discussed… I can’t believe that the Treasury Secretary is still around, quite frankly. It seems that he could have been sacrificed to save face for the government by now… Maybe as this story unfolds, that will be the case… Not that I want to see him lose his job, mind you… I just think this whole thing while he was President of the NY Fed stinks!

Then there was this… It seems that the Greeks didn’t like the 6 billion euro spending cut that the Greek government put together yesterday to calm the markets. Greece’s federation of civil servants unions decided on a work stoppage tomorrow beginning from midday, and a protest rally in Athens to oppose the government’s austerity measures… There was also a report that the Finance Minister’s building was blocked by protesters.

I see the same kind of insurrection in this country if our government were to make “real spending cuts”… But for now, we don’t have to worry about that, for, our government, bless their hearts, is not making “real spending cuts”, instead, they are spending more money we don’t have, and will never be able to repay!

To recap… The currencies really had a nice performance yesterday, but that was wiped out, first by profit taking, and then the putting of the Greece bailout on hold for now… Has the Brazilian Sovereign Wealth Fund’s appetite faded for dollars? It appears likely… And the best performers on the day appear to be Canadian loonies, and Indian rupees…

Chuck Butler
for The Daily Reckoning