Ireland Gets 85 Billion Euros!

Well… Friday I took off and I guess the currency traders did too, for the bloodshed in the currency and precious metals on Friday was akin to Custer’s Last Stand at Little Bighorn! I checked in late in the day, and had to turn the screen off, I couldn’t bear to watch it! I’ve always told you that those kinds of days can be very volatile with wild swings in prices due to the low volume and not everyone being on the trading desks… Well, Friday was one of those days… The selling began when there was discussion that, while Ireland looked as if it could get their aid package/bailout, Portugal or Spain could be next in line… And then the you-know-what hit the fan, and before you could say pass the stuffing one more time, the selling begot more selling…

On a sidebar… Some of you may recall what I was saying about the aid package to Greece eight months ago… I said that it opened Pandora’s Box of other periphery countries lining up for their aid package… It set a bad precedent, and now we see that coming to fruition…

So… You have some very weak currency prices compared to just 10 days ago… I started to say weak currencies…but that wouldn’t be true! Sure the euro (EUR) is hanging by a thread to 1.32, it is still 1/3-of-a-cent stronger than the dollar! But… The euro is about to fall through its 200-day moving average… And if that happens, it would be a strong indication that the move lower isn’t over.

This morning, the news is all about the size of the aid package for Ireland… 85 billion euros, ($113 billion dollars-worth)… There was some concern, which was part of the trigger on Friday to sell, that bondholders were going to get losses handed to them… But that has been worked out, and is no longer is hanging over the bailout like the Sword of Damocles… Basically, Germany was demanding a permanent system as of 2013 that would enable fiscally troubled countries to restructure their debts and cut the value of bond holdings… But, like I said, that plan caused some major selling, but didn’t get implemented in the end.

So… You take all that concern and consternation in the Eurozone, and it throws risk assets into the dumpster. In fact, the risk assets had a very bad week, starting with the news that North Korea was shooting missiles at South Korea, and it went downhill from there for the risk assets… Which, for those of you new to class, consist of currencies, commodities and equities…

In the many years of trading these three asset classes before the financial meltdown in 2008, they were never traded together, for they all had different price mechanisms and a low correlation to each other… But 2008 changed everything, folks… Fundamentally, these three asset classes will someday return to the way they were traded before 2008, but for now… We’re stuck with this trading pattern…

When the risk assets get going, they can go on long rallies, like March 2009 through December 2009, and June 2010 through October 2010… But when geopolitical issues or reminders of the financial meltdown occur, these risk assets get sold like funnel cakes at a state fair…

Well… A record number of Americans shopped during Thanksgiving weekend, and their average spending increased to $365, a 6% increase compared with last year… And to hear that, you would think that this spending was going to cure all that ails us! Spending… I’m sure the government officials and some dim-witted economists are happy to hear that spending had increased this year on Black Friday… But, like I use to tell you back in the day when spending was all the rage: consumption does not create wealth… And to have a strong, long lasting economy that doesn’t require debt buildup, you must create wealth…

I could go on for hours there, but I know that you have better things to do today… But believe me, this is the key… Creating wealth… Think about that for a minute…

Well… Australia will print their third quarter GDP Wednesday this week, and it is expected to be much softer than the record setting second quarter growth… Now… Isn’t this exactly what the Reserve Bank of Australia (RBA) had in mind when they began their rate hike cycle over a year ago?

Unfortunately, the Aussie dollar (AUD) will see some weakness because weak-kneed investors will panic and believe that a softer GDP is a collapsed GDP, just like they do every time China tries to put a governor on their economic growth. Remember this… Softer is not a collapse… And investors rewarded the Aussie dollar for hiking rates in the first place! And… They will again, I do believe… This softer GDP isn’t going to end the run for the Australian economy, and the RBA will be back to the rate hike table in 2011… That’s just how I see it… I could be wrong, of course!

Well, I see that Japan’s parliament adopted a supplementary $60 billion budget to stimulate the economy and prevent the nation from sliding into deflation. The government said the money would protect or create 450,000 to 500,000 jobs and add 0.6% to this year’s gross domestic product… I wish I had kept track of every time the Japanese government had announced one of these “stimulus” measures… They go back to 1995, for those of you who are wondering… Yes, that’s how long Japan has been stimulating their economy to “create jobs” and “get consumers spending”… And oh yes… Japan has used quantitative easing (QE) quite a few times in the past 15 years!

I’ve got to tell you that one of the better performing currencies of late has been the Swedish krona (SEK)… The krona has bested its kissin’ cousin Norway’s krone (NOK), by a large margin this year… And now… Sweden printed a very strong third quarter GDP (2.1%) pushing their year-on-year increase to 7% this year! WOW! I think more rate hikes will be coming from Sweden’s Riksbank. But for now, with all the fingernail-biting going on in the Eurozone, the Riksbank will probably sit on the sidelines, waiting for some peace and calm to prevail in the Eurozone before hiking rates again…

I saw on Friday that the Swiss franc (CHF) had given back ground to below parity with the dollar for the first time since September 21st… So, for nine weeks, the franc traded above parity to the dollar… But that’s gone now, and quite frankly I’m surprised, given the geopolitical stuff going around… But then, the franc’s small size and its location to the Eurozone was going to eventually catch up to it… I still like the franc, as a euro alternative, but it’s not at the top of my hit parade for currencies, that’s for sure!

Well… This week we’ll probably choke on the data coming from the data cupboard, as there is so much that will be printed, massaged, and adjusted… However, having said that, I see that no data is due today… But we get started tomorrow with the S&P/Case-Shiller Home Price Index, and end the week with the Jobs Jamboree… It will be quite the data week here in the US.

In the Eurozone, some GDP data will print, but the Big Kahuna will be the European Central Bank (ECB) meeting on Thursday…

Big Ben Bernanke will be speaking this week, Wednesday, I do believe… There is a video on YouTube going around – I’ve had it sent to me probably a dozen times or so, now – with two animated characters talking about quantitative easing… The funny thing is that the one animated character calls the Fed the “Bernank”…

I should have sent this around a couple of weeks ago, but… Time waits for no one, and it sure doesn’t wait for me!

OK… Then there was this… You know, I’ve gone on record as saying that I believe that the Chinese renminbi/yuan (CNY) will be the world’s reserve currency in probably 10-15 years… I’ve chronicled all the Chinese attempts to gain a wider distribution of their currency through currency swap agreements, and believe me that if they sign-on with the Arab states as rumored, they will have achieved their wider distribution for sure! Well… With all that, I see that the government of Shanghai has started supporting the development of its cross-border business for mergers and acquisitions, as a part of the city’s effort to become a major worldwide financial center by 2020… Build it… They will come…

To recap… The currencies were sold along with the other risk assets on Friday, and while there was a brief rally in the euro after the aid package to Ireland was announced, it was short-lived and the selling of risk assets is back in full force this morning, as now the attention shifts to Spain and Portugal… And Japan has announced yet another stimulus package to revive their economy… Wish I had kept a count on those attempts that began in 1995!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning