Hedge Funds Bail On Euro Now

Good day. I’m writing from home, as I’m headed to the doctor right out of the starting blocks this morning. So since I’m writing from home, this will be short and sweet for sure, especially since I overslept on top of it all! You would think that the “West Coast” time would be out of my system by now! UGH!

Thanks to Chris and Mike for picking up the conn on the Pfennig while I was gone. The crowds that came to listen to me in Las Vegas were HUGE! And the group of EverBankers at the booth was great! Mike H., Dina, Luis, Mike B, Diane, Lauren and Jason! If you came to our booth, you we had you covered!

The old saying that they had on the desk about when I was gone, that the currencies would rally, came to a screeching halt. And that “perfect storm” for the dollar that I talked about at the end of last year is really flexing its muscles now.

I read this weekend that while the euro (EUR) has been quite resilient through all the bailouts of Greece, Portugal and Ireland, hedge funds don’t believe the euro can withstand the exit of Greece, so these hedge funds are blowing out of the euro at warp speed.

And when the euro is getting sold like funnel cakes at a state fair, the rest of the currencies’ chances of rallying are slim and none. Even the Japanese yen (JPY) can’t seem to find terra firma, although it remains strong.

Old faithful, the Chinese renminbi (CNY), is really wishy-washy these days. But remember what I told you a couple of weeks ago about the renminbi: In 2008-09, during the financial meltdown, when investors flocked to the dollar and Treasuries, the Chinese kept the renminbi steady Eddie versus the dollar, I wouldn’t be surprised to see them take that approach now, again.

A reader sent a note and asked me to explain why the Swedish krona (SEK) was performing worse than the euro. It’s unwinding the gains it made when the Riksbank (Sweden’s central bank) was in a rate-hike mood. As I’ve explained in the past, the euro is the Big Dog on the porch. All the other currencies are the little dogs. The little dogs can out run the Big Dog, (outperform) but not unless the Big Dog gets off the porch to chase the dollar down the street — the same holds true for when the dollar chases the Big Dog back to the porch!

I’ve talked about Norway and Sweden being tarred with the same brush as the euro, and that hopefully, one day — and hopefully soon and not far away — traders will realize that Norway and Sweden are not Greece! But until that day, we have this scenario to deal with.

G-8 world leaders met this past weekend, and they have all decided that the best course of action is to promote growth. Hmmm, sounds great! Global growth all around, eh? Ahem, how did they say they would promote this growth? Oh, they didn’t?

Hmmm. Now, that sounds about right for G-8. But to come out and make all these statements about promoting growth without a plan, unless you count more stimulus — that has been about as helpful long term as a broken crutch.

In China, Premier Wen Jiabao, said that more stimulus for his economy was coming, and when Wen speaks, investors listen. You see, China can dictate where the stimulus goes, and this gives them an advantage. We saw this in 2009, how the Chinese economy quickly reacted to the stimulus measures applied by the government and was the first to gain ground, while the rest of the world’s economies were still stuck in the mud and yuck of the financial meltdown.

Wen said that his government will give “more priority to maintaining growth” while continuing “to implement a proactive fiscal policy and a prudent monetary policy.” Sounds like central bank parlance for get ready for a truckload of stimulus.

At least China has the treasure chest from which they can dig into to get this stimulus. What’s the rest of the world going to do? Go deeper into debt? Spend to get out of debt? That’s been the mantra of the U.S., and they’ve finally gotten their message across to the rest of the world!

How many times have we heard U.S. Treasury Secretary Geithner tell the Chinese that they need to be more like the U.S.? Too many is the answer.

How about those U.S. Treasury yields? I bet you didn’t think, like I didn’t think, that they could go lower, but they did! Let’s see how well those low yields hold up this week when the U.S. Treasury has to auction about $99 billion of new bonds/debt this week, starting tomorrow.

And I had quite a few people last week ask me about gold (and silver, of course!). I told them that it was my opinion that gold’s rise from $250 to $1,200 was all about people realizing that gold was a store of wealth, etc. The rise from $1,200 to $1,900 was all about the “anti-dollar trade,” since the dollar has become the darling of investors again. As we saw in 2005, 2008 and 2010, the need for the anti-dollar gets reduced, and thus the price of gold gets reduced.

Sure, a lot of it has been “paper trades.” The price manipulators must be smiling like Cheshire cats. But that’s not all of it, folks. People are hopping off the gold and silver bandwagon as if they just found snakes on it! But I personally will not sell! It’s my personal opinion that these people jumping off the bandwagon are going to be sorry for doing so.

Today we have Fed head Lockhart speaking, and he’s been a proponent of more stimulus for the U.S. economy. Any kind of talk like that should be dollar negative today. But only slightly, as he’s just one voice.

It’s a pretty light week datawise here in the U.S. so the markets will really get to focus on the $99 billion of new Treasuries that will hit the street!

Then last week, Chris was talking about economic reports and how they had all looked a bit better than recent data reports here in the U.S. And I got to thinking: I wonder what John Williams over at Shadowstats.com would say about the economic reports. For years now, I’ve talked about John Williams and Shadowstats.com, but thought that new readers might get a kick out of going to the website and seeing what John Williams says about how the U.S. accounts and reports its data. It’s all lies and videotape!

To recap: The G-8 meeting called for growth… calling all growth, calling all growth! The dollar is in the driver’s seat these days, and that means the currencies and metals are getting sold like funnel cakes at a state fair.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning