Greeks Vote to Remain in the Euro Club

Good day. Front and center this morning, I want to thank everyone for all their thoughts and prayers for me last week. Although this surgery wasn’t nearly as invasive as the others I’ve had as I fight this battle, it was not fun. And for a couple of days, I really didn’t feel very well, but all’s well now. So thank you all, you are dear readers indeed!

The Greek elections took place this past weekend, and for now Drachmageddon was avoided. The party that wanted to tear up the bailout agreements didn’t gain enough votes to rule. In fact, no party did.

So some sort of coalition government needs to be formed in the next three days, or Greece could be governed by a wide coalition, which means nothing gets done! I find it very ironic that in the European soccer tournament (football to them), Greece is going to play Germany in the next round. And most likel,y Germany will bounce Greece from the tournament.

But in reality, nothing has changed the solvency problem in Greece — this vote simply means that for now, Greece is not going to leave the euro (EUR). I do expect them to ask to renegotiate the terms of the bailouts, and given what happened in Spain last week, the troika (European Commission, European Central Bank and IMF) just might be willing to back off the pressure a bit.

So how did the currencies like this Greek vote outcome? The currencies are in rally mode this morning. The Australian dollar (AUD) is back to parity with the green/peachback dollar, and the beleaguered euro is ticking higher this morning.

Let’s just go to the tape and see what I said about the A$ a week ago: “So let’s see, data from China over the weekend showed some stabilization and lower inflation, and the Greek election doesn’t take place until next week, so this could be the week that the A$ pushes and gets back to parity. But then I could be wrong, for only the Shadow knows what’s around the next corner for the currencies.”

“I love it when a plan comes together,” said John “Hannibal” Smith. That’s one of my favorite sayings, and it’s so appropriate this morning with the A$ back to parity!

But back to Greece and the eurozone for a minute. It’s all a smoke screen, folks. As I said, this election does nothing to satisfy the question of solvency for Greece. But everyone likes to kick the can down the road these days, and that’s exactly what they’ll end up doing in Greece.

A year from now, should Greece remain in the euro club, they will have to pull a balanced budget out of their hats, and I can hear the Greek leaders now, calling for huge cuts in the bailout terms and holding their membership in the euro club as bait. So we’re destined to revisit this all a year from now. And that’s assuming that a coalition government can be formed in the next three days.

But since kicking the can down the road seems to be a calming effect on the markets these days (strange, I know, and it will never be something that calms me down), I guess the Greek vote this weekend was good (in that the markets liked it) and we didn’t see Drachmageddon, which is the term I heard this past weekend and thought was clever.

You see, the Greek currency before joining the euro was the drachma, and that would be the currency they went back to, if they left the euro. But we don’t have to worry about that today — maybe tomorrow, but not today!

For a while last night, the euro traded as high as 1.2748, but those gains have evaporated. When I came in this morning, the euro was trading at 1.2620. But it has since gained back to 1.2655. So when I came in and saw the move up, I thought, “That looks good,” but when I peeled back a layer of the onion, I saw that the real rally was last night in Asia. But 1.2655 is better than what it could have been trading this morning, if the “tear up the bailout agreement” campers had won in Greece.

So now that problem for the euro has been kicked down the road, the focus has shifted to Spain, again! Spanish bond yields are rising again, and ticked up over 7% this morning (7.12%), and that’s probably the reason the euro’s gains evaporated in the European session this morning.

Duck and cover is what the euro feels it must do each day. Because just a week ago, eurozone leaders agreed to lend 100 billion euros to the troubled Spanish banks, and while some economists said it wasn’t enough, others like Niall Ferguson said it was more than enough, and that’s the mast I pinned my colors to.

But here we are, a week later, and it’s Spain again. UGH! No worries. No need to worry, folks, for G-20 leaders are meeting in Mexico, and they will come up with a plan to put the markets at ease. Of course, I say that with tongue firmly planted in cheek! G-20. Schmee 20! It’s a weekend and then a two-day boondoggle in Mexico! These G-20 leaders will issue a communique at the end of the boondoggle, and it will say nothing about any of the solutions to the problems!

Forgive me for being so negative here, but have you ever heard of a solution coming from the G-20 meetings? I don’t recall any, that’s for sure! And I’ll leave it at that!

In China this past weekend, an academic adviser at the People’s Bank of China (PBOC) said in an interview that “The Chinese economy will bottom out this quarter and rebound in the following three months as government measures to stabilize a slowdown take effect. Full-year growth should be able to hold up above 8%.”

Those are some very interesting thoughts. The best forecast I had seen for growth had China’s economic growth slipping from 8.1% to 7.7%, and some forecasts had it slipping even further. But I have to think this guy knows was he’s talking about, for he’s the same guy that wrote the report on the internationalization of the renminbi/yuan (CNY).

And that’s exactly what China is doing: promoting a wider distribution and use of their currency in international investment and trade settlement, in order to reduce the U.S. dollar’s global dominance and reduce their holdings of dollars. This shouldn’t come as new to you or a surprise, because I’ve been telling you all about what China’s been doing for over two years now. But for new Pfennig readers, this may come as a surprise to you that China wants to remove the dollar’s dominance. Just be assured that this is number one on the minds of Chinese leaders.

You see, the Chinese see the writing on the wall for the dollar. They see that the U.S. government, Treasury and Fed all want a much weaker dollar, in order to pay the debt servicing (bond interest) on the outstanding Treasuries. So if the U.S. wants a weaker dollar, that doesn’t mean the Chinese have to accept it!

I see that 12 of the 21 primary dealers that trade with the Fed and Treasury believe that the Fed is going to introduce another round of stimulus for the economy. But that’s not really a convincing number of primary dealers, so the markets go back and forth on whether or not the Fed will introduce another round of stimulus. Longtime readers know my take on this. I believe the stimulus has never ended, and won’t end, for the economy has become addicted to stimulus.

And I never saw the effect that the $2.3 trillion in quantitative easing, and $400 billion in Operation Twist, had on the economy, other than the stock market increases. So while I believe more stimulus is coming, I’m also with the nine primary dealers that don’t believe any stimulus will have a positive effect on the economy. So why do it?

The U.S. 10-year Treasury has a current yield of 1.58%. Let’s see now, even using the cooked books for CPI (consumer inflation, which is a joke) the government said last week that CPI was only 1.7% year over year. (What a crock!) But even using that number, owning a 10-year Treasury, you are the proud owner of “negative interest.” The yield is lower than inflation! But when we use “real numbers” that John Williams over at Shadowstats.com uses, we see that inflation in the U.S. is really about 5.8%. OK, now a Treasury owner really has a problem. But they will get their principal back in 10 years. Of course, by then, the dollar’s losses will represent a reduction in their purchasing power. In other words, they’ll get their principal, but it won’t be worth nearly what is was when they bought the Treasury. They received negative interest for 10 years! WOW! Sign me up!

Here are the results from the U.S. Mint’s latest sales records. The Mint reported selling 3,500 ounces of Gold Eagles, 1,000 1-ounce 24K Gold Buffaloes, along with 200,000 Silver Eagles. Month to date, the Mint has sold 22,000 ounces of Gold Eagles, 4,500 1-ounce 24K Gold Buffaloes and 1,361,500 Silver Eagles. Now, does that sound like the demand for gold and silver is falling off? Not to me!

The price of gold is down this morning, right now about $7. I guess the investors that saw the need to own gold in case Greece voted to leave the euro fade away. There are more problems in the world than Greece. In fact, Greece is very small compared with the other problems. So I wouldn’t be so Quick Draw McGraw with gold. But then that’s just me, my opinion, which could be wrong.

In France, President Hollande won an absolute majority in the parliamentary election, giving the Socialists a broad power base. As I said when Hollande won the election, the French now have a socialist government going for them. I hope it works out for them..

Then There Was This: A recent interview at CNBC with longtime friend Jim Rogers brought up the bankruptcy thing and Jim had these thoughts on that:

“Eurozone finance ministers shouldn’t have rushed to arrange a $125 billion bailout fund for Spain to recapitalize its banks, says international investor Jim Rogers.

“The loan will help prop up Spain’s banking sector, but letting banks or any other organizations go bankrupt isn’t always a bad thing, Rogers says.

“History, meanwhile, is full of examples of economies that went bankrupt but never went under.

“‘New York City went bankrupt, the world didn’t come to an end. Mississippi went bankrupt once, the world hasn’t come to an end. Detroit’s bankrupt, the world hasn’t ended,’ says Rogers, according to CNBC.”

As usual, Jim has a unique angle to things, and he’s right! But that won’t stop the banks and governments from making every attempt to do the wrong thing first.

To recap: The Greeks voted, but no clear-cut party won enough seats to govern, so a coalition government must be formed in three days. The good news, I guess, is that the two parties that were for austerity will most likely form the government. But all this does is allow Greece to kick the can down the road, which apparently, the markets like. The euro rallied, but the gains have evaporated this morning and the A$ is back to parity.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning