Markets Shift Focus Back to Greece

Good day. A crazy day in the markets yesterday, but a very peaceful evening for me. With everyone gone, I treated myself to eating out and had a steak dinner. I reduced my intake of red meat after the cancer discovery five years ago, so believe me, this was a treat!

While I’m thinking of that, it was five years ago that I found out I had cancer. It had progressed to Stage 3 cancer, but I never told anyone that. I told them I would beat it, and every time I think I’m on the road to remission, I’m reminded that the wolf is always at the door.

The same is true for the euro (EUR). Just when it looks as if the green lights are synchronized for the drive home, someone reminds everyone of Greece. Ireland and Portugal got their bailouts and went about correcting things in their respective countries. But Greece — it’s the gift that keeps giving for the euro.

And there we were yesterday morning, watching the euro enjoy a day in the sun, after announcing a fiscal aid package to Spanish banks, when someone said, “Hey, don’t forget about the elections in Greece in a week.”

And away went the sunshine for the euro, and the wolf was at the door once again! Soon, the euro was trading below 1.25 again, and being a drag on the other currencies. For instance, the Australian dollar (AUD), as I told you yesterday, was sniffing at parity to the U.S. dollar again, but by the time the wolf was finished, the A$ was barely holding on to the 99-cent handle. And all the green on the currency screen, which tells you that the currency is positive on the day, turned to red.

So let’s talk about the elephant in the room. I bet you thought I was going to talk about Greece, but I’m not. The elephant in the room, as far as I’m concerned, is this using the events in the eurozone as if they are as important as the U.S. Fed quintupling their holdings of U.S. Treasuries. Or that the reason they’ve had to quintuple their holdings is that the Treasury has to issue so much, because of the massive budget deficits that are booked each year.

OK, here’s the skinny on the quintupling of the Fed’s holdings of Treasuries (thanks, Scott!). On Jan. 28, 2009, the Fed owned $302 billion in U.S. Treasuries. On April 25, 2012, the Fed owned $1.668 trillion. Folks, that’s 5 1/2 times the amount in 2009, or for those who love percentages, 452%! Oh, and during this time, the Fed has become the single largest owner of Treasuries. Remember when China moved ahead of Japan for that pole position a couple of years ago? And people thought that to be a bad thing? Having your central bank become your sugar daddy is worse! I went through that yesterday, so I won’t go there again, but come on, markets! Get your heads screwed on right, and quit being swayed by the media, who are directed by the government!

The sentiment, which I’ve told you many times, is the thing moving currencies these days is very negative euros right now. The IMM weekly positions showed a record number of euro short positions this past week. So the euro has that going for it — NOT! This morning, things seem to have quieted down a bit — most of the currencies are in the green, but not by much. For now, at least, the selling has stepped aside.

The recent price action in gold has been strange in that we’ll see days in which gold gains $20, $30 and even $66, and then those days are followed by consecutive days of selling. You know, I’ve told you over and over again that I do believe that we are about to witness the back side of the storm that began in 2008. I doubt seriously that we’ll see the major problems before the election this year, but they will begin to fester when the debt ceiling discussions begin at the end of summer.

This back side of the storm will be worse than the front side that came through in 2008. I know all too well that gold did not perform well in that period, and I truly dislike the saying that “this time will be different,” so I won’t say that. But I think that with this back side of the storm, it will be so bad that investors will feel that they need to have gold (and silver, of course!). And these prices we’re seeing in gold will look like blue-light specials. OK, I know I’ve gone too far here, so I’ll just add that this is my opinion, it’s not a solicitation and I could be dead wrong about all of this!

OK, there was more good news for the global growth/emerging nations from China last night. Lending by Chinese banks increased at a faster pace than was forecast for May. May’s total loans were $124 billion, versus April’s $107 billion. So one could very easily say that the government’s policies are working. As you all know, I do believe that China knows how to do this stuff, but then they get to cheat. They have a treasure chest of reserves from which to pull. Here in the U.S. or Europe or England, they have zip, zilch, zero from which to pull.

I see that the IMF agrees with me. I have to wonder what took them so long to see what I’ve seen for some time now. But who cares, I guess. The IMF says the yen (JPY) is overvalued. Of course, the IMF can’t do anything about it, so their comment carries but a grain of salt. But what it probably will do is give the Bank of Japan (BOJ) some starch in their shorts to go about their plan to make the yen weaker with intervention (selling yen). But truth be told, I think the BOJ would be making a HUGE mistake doing that now, while the irons are hot in Europe.

Of course, you know all too well that I don’t believe in central bank manipulation of a currency, but it has become so prevalent in the currencies that it’s almost accepted by many. But not me! I refuse to believe that “fee markets” can have central bank interference. Which is why I get so darn blown away by the markets letting the Fed go “Ollie, ollie, oxen free” — for the U.S. is the biggest currency manipulator there is. Think about that, and why I would say that.

Back to the eurozone: I need to make you are aware that the focus there, which had been on Spanish banks, is switching to Greece’s elections, and once those are completed, I would bet a dollar to a Krispy Kreme that the focus shifts to Italy. Might as well, right? I mean all the other “Club Med” countries have been attacked by the “focus.” We could even see this shift before the Greek elections, which would really be difficult for the euro to fight.

The New Zealand dollar/kiwi (NZD) has really recovered nicely overnight after yesterday’s sell-off. The kiwi has been following the A$ around ever since the 2008 financial meltdown. And Australia gets all the press regarding exports to China and their raw materials, but New Zealand needs to get some love too. And it received some last night, when the Real Estate Institute of N.Z. printed their index of home prices and the index showed that home prices in May climbed 1.7% in May from April. But remember this folks, the fortunes of the A$ and kiwi have been so eurozone-driven lately. So the good days can be wiped out in a heartbeat.

There’s an interesting story making the rounds this morning regarding Hong Kong. The man that helped introduce the Hong Kong dollar’s (HKD) (honkers) peg to the U.S. dollar in 1983 now believes that there is a need to address the question of whether the peg serves the public interest of Hong Kong.

Longtime readers my recall me saying years ago that I believed that eventually honkers would drop the peg, and China would use this drop of the more mature currency as a way to get their feet wet in the floating currency world, as a precursor to floating the renminbi… (CNY) Well, that may still happen, but I see the Chinese first simply changing the peg from the dollar to the renminbi…

We’ll see the color of the May U.S. budget statement today. We already know to expect a deficit, but by how wide? The tax season is over, so the deficit should widen out to about $125 billion for May. This deficit spending has got to stop, folks! But oh my! Lions and tigers and bears, oh my! The lawmakers are going to be as disappointing as the Wizard was to Dorothy.

Speaking of U.S. data, tomorrow, we’ll see retail sales for May. Right now the experts have forecast a negative 0.2% result. I have to say that I agree with the experts this time. As the BHI (Butler Household Index) indicates that there has been little spending going on. A negative retail sales print would just be added to the roster of the recent negative data reports on the economy.

Then There Was This: from CNN Money (again thanks, Scott!):

“The average American family’s net worth dropped almost 40% between 2007 and 2010, according to a triennial study released Monday by the Federal Reserve.

“The stunning drop in median net worth — from $126,400 in 2007 to $77,300 in 2010 — indicates that the recession wiped away 18 years of savings and investment by families…

“The results, though more than a year old, highlight the marked deterioration in household finances brought on by the financial crisis and ensuing recession.

“Much of the drop-off in net worth — to levels not seen since 1992 — was attributable to a sharp decline in housing values, the Fed said.

“In 2007, the median homeowner had a net worth of $246,000. Three years later, that number had fallen to $174,500, a loss of more than $70,000 on average.”

Yes, that’s the net worth number. Frank does a slide in his presentations that shows the median investable amount. It’s less than $10,000!

To recap: The currency rally that was in place yesterday morning faded as the day went along and as the media began to remind everyone that they shouldn’t forget Greece. Most of the currencies are back on the rally tracks this morning, but the wolf is always at the door, and the currencies seem to be looking over their shoulder for the next bad thing to come along. Chuck goes ballistic on the markets and media for not having their eyes on the ball, as the Fed’s holding of Treasuries has quintupled in the past four years!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning