Moody's Downgrades Greek Debt. Euro Sell-Off Short-Lived.

That risk assets rally that we were watching yesterday morning ran into a speed bump around noon… Yes, the euro (EUR) was nearing 1.23, Aussie (AUD) was looking as though it would touch 87-cents, and so on… But then along came Moody’s… Talk about bad timing! OK… Let me set this up for you…

Everybody and their brother is aware of the debt problems in Greece… But now that the cow is out of the barn, Moody’s decided to close the barn door! Moody’s downgraded Greece’s debt rating yesterday… Talk about a lack of foresight! I’ve only got one eye, and I would have seen to downgrade Greece’s debt months ago! But this is what I’ve talked about over and over again, regarding these rating agencies… They are about as useful as a pay toilet in a diarrhea ward! OK… I got a little carried away there, but you get the point…

So… Moody’s does their “late to the party” appearance, and the risk assets get taken back down again… Why? I have no idea! These assets have been punished enough for the Greek debacle, so why punish them again when Moody’s decides to pull this rabbit out of their hat? I just don’t get it, folks… But then, the good news is that the sell-off didn’t last too long, and the euro held 1.22 and so on… So, it’s not all bad news, eh?

I saw a blip on the TV in passing yesterday, and mentioned it to the boys and girls here… US taxpayers are on the hook for $1.3 trillion due to the Fannie and Freddie bailouts, payments, and other under the table money! These are losses that are secured by us, folks! Hey! Did you get the memo, asking you if it was okay to cover Fannie and Freddie’s losses? I didn’t get mine, or as I would normally do, ask my beautiful bride where she put it! HA! This is a HUGE hickey for us from Fannie and Freddie!

Hey! In a follow up to yesterday’s note about the Chinese responding to US Treasury Secretary Geithner’s calls that China is to blame for the financial imbalances of the world… The Chinese made a point to show that imports from the US in the first quarter increased 50% compared with the same period last year… So… They’re saying, why do we need to change our currency policy, when we’re buying more stuff from you at current levels than we ever did?

Well, Tim? What do you have to say for yourself, knowing this data?

OK… Switching gears here… In Canada, things continue to look so bright you’ve gotta wear shades! It now looks as though Canada will be the first G-7 country to reach pre-recession levels of GDP… They were the first G-7 country to raise interest rates, so they might as well be the first G-7 country to reach pre-recession levels of GDP!

I think that, should that happen (and I believe it will), the Bank of Canada (BOC) will have their hands full keeping the rate hike wolves away from the door! The calls for further rate hikes from the BOC, should GDP print as strong as suspected/forecast, will be strong, and the BOC should be ready to deal with them accordingly! Which is Chuck-speak for: Hike the darn rates!

This morning in Europe… German Investor Confidence, as measured by the think tank, ZEW, plummeted last month from an index reading of 45.8 to 28.7… OUCH! But, Shoot Rudy, you would have been quite suspicious and probably thought that ZEW had turned to the Consumer Confidence Board here in the US to do their survey, if German Investor Confidence had risen during a month when the sovereign debt problems of fellow Eurozone Countries came to a head… Wouldn’t you have? I know I sure would have!

The currency traders, though, are ignoring that data so far this morning, as the euro has gone up 1/4-cent since I came in and turned on the screens!

The Reserve Bank of Australia (RBA) printed their meeting minutes last night, and confirmed what I had told you for a couple of weeks now… That the RBA is on hold… Recall that I said they would probably return to the rate hike table at their meeting in August… Well, the meeting minutes mentioned that the RBA wanted to see the second quarter CPI (inflation) report that will print in late July… So… See there, my thoughts about the RBA being on hold until August are playing out right before us!

And the beat goes on… And the beat goes on… And no, I’m not “tripping” in the ’60s… I’m talking about Japan… The Bank of Japan (BOJ) met last night, and guess what? It was a real novel idea, I might add… The BOJ left rates unchanged, and…. Announced another 3 trillion yen loan to banks. The BOJ says that the money is to promote growth… But I could go back to the mid-1990s and show you Pfennigs that documented Japanese stimulus payment after stimulus payment that were to “promote growth”… Those all worked out well for Japan, didn’t they?

Oh… Have I told you lately that we’re turning Japanese? New readers might wonder what I’m talking about here, but put simply… The US is following Japan’s bad moves of the ’90s step for step… UGH! We’re turning Japanese, I really think so!

Yesterday, I talked at length about the awful display of retail sales for May… I mean, hey! The President told us his stimulus was working, right? Well, I knew I could count on my friend, Bill Bonner, to put his perspective on the retail sales figure… Here’s a snippet from Bill’s article, “Government Spending and the Façade of a Successful Economy” which was featured in yesterday’s issue of The Daily Reckoning

“On Friday we got word that consumer sales had fallen in May…from the month before. That is, they didn’t get better; they got worse.

“It was no big deal except that the there’s supposed to be a recovery. And May was important. Because the major stimulus efforts are coming to an end. Economists wanted to see how the economy would hold up without the government holding it up.

“Well, it didn’t hold up very well.

“If the government gives you money to buy a house or to trash your car, well…if there’s enough money in it you go along with the gag.

“But what kind of economy is it where the government gives you money to buy things? It’s a phony…a fraud…an imposter…

“…the government is impersonating a successful economy.

“And where do the feds get any money in the first place? One way or another they have to get it from you and other citizens/investors/taxpayers – the same people who didn’t want to buy the thing in the first place…”

Thanks Bill… You always have a way of hitting the nail square on the head!

Well… I told you yesterday that the data cupboard was being restocked for the week… Today we’ll see the color of the latest Net TIC Flows data… TIC stands for Treasury Investment Capital or… Put differently… What’s the net flow of investments in Treasuries that are used to finance our deficit… I suspect that the number will be quite high once again due to the so-called “flight to safety” that went on in May…

And if that happens, once again, we’ll get the “deficits don’t matter” dolts coming out of the woodwork, saying, “see, foreigners will finance our debt by buying our Treasuries”… Ahem… What happens when the so-called flight to safety ends? Uh-Oh! But don’t let that thought get in the way of some “deficits don’t matter” flag waving!

Yesterday morning I told you that gold was gaining on the day… But that was wiped out, until the Moody’s announcement… Gold sure has been quite volatile lately…

Then there was this… A research paper from the Federal Reserve Bank of San Francisco states that the central bank will likely keep interest rates at their level because of high unemployment and low inflation. The paper does not represent the Fed’s official position, and Fed governors have been reluctant to specify when a rate increase might take place… But this report says that rates won’t be raised until 2012! WOW!

To recap… Currencies rally overnight, after getting pushed back yesterday when Moody’s announced they were cutting Greece’s debt rating… German Investor Confidence plummets, and it looks like Canada will be the first G-7 country to reach pre-recession levels of GDP, this quarter!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning