Moody's Downgrades Six Eurozone Nations

Yesterday, Chris told you about how the Greek Parliament had approved the latest round of budget cuts, which should have put the next bailout payment on the greased tracks. Chris also explained how this was causing a reversal of the short positions in the euro, which really had turned the “risk on” campers. Well, that euphoria in the currencies and metals was short-lived, because just as soon as the currencies were ready to tell the “shorts” to move over, the ratings agencies came swooping in to rain on the risk assets parade.

Yesterday evening, it was announced that Moody’s Investors Service had downgraded six European nations. While there was nothing new here, since S&P and Fitch had already gone through this exercise last month, Moody’s did grab the markets’ attention by being the first rating agency to warn the U.K. that their rating could be at risk.

So the happy days that Chris told you about yesterday are now a thing of the past… and we must pull ourselves up by the bootstraps and get back to work today! It is Valentine’s Day, and baring a Valentine’s Day massacre in the currencies today, maybe we’ll just see the profits taken out of the currency and metals this morning, and move along to the next drama that Greece will bring us.

I caught up with two of my favorite people in the world in Orlando last week… Mary Anne and Pamela Aden… or as many know them, the Aden sisters. We had a long talk about writing style. They kept telling me that I was their favorite writer, and I kept telling them that I was sure they had me mixed up with David Galland! Anyway, the reason I bring this up is that Mary Anne and Pam talked about “noise” in the markets, and how it has taken away the fundamentals of the markets. I totally agree, and this “noise” from the ratings agencies is a prime example.

I just finished reading Addison Wiggin’s latest draft for a book. I’m going to do a quick review for the book… There’s so much to learn about what happened to the dollar, and what is yet to happen here… When the book gets printed and issued, I’ll let you know, because I think that everyone that thinks they know all there is about the dollar will be surprised to find out they learned something new here…

One of the things that Addison talks about in the books is how gold isn’t in a bubble… I found this to be interesting because I, too, have said this over and over again about gold. My test for a bubble is to ask a group of regular people, like my FGB friends, if they own gold, and until all of them raise their hands, gold isn’t in bubble. It’s the best way to measure this!

And then there was a great lunch with friend Dennis Miller, and Steve Sjuggerud. I’ve known Dr. Steve for some time, and he knows how much I love guitars (he’s a collector of guitars), so we always have a great conversation about them. Dr. Steve said something, though, that really rang a bell with me… and that was he doesn’t let the reports of price manipulators in gold and silver bother him. For he believes that if the demand remains strong, it will eventually win out. So with that, I’m turning over a new leaf, and while I will continue to mention price manipulation when I see it, I’m not going to lose any more hair over it (not that I have any more to lose!). But you get the point… I was beginning to allow the manipulators to mess with my blood pressure and my outlook for a day… and no longer! Thanks, Dr. Steve!

I could on about the meetings I had at the Orlando MoneyShow, but those two were the best… So back to the news today… This morning, although it’s not helping the euro right now, both Spain and Italy auctioned bonds, and both saw their borrowing costs decline to their lowest levels in 11 months! Once again, bond buyers ignore the ratings agencies. But then, a very large chunk of any eurozone country bond auction is bought by the other members of the eurozone. So it’s like a “we’re all in this together” type of attitude.

And don’t forget that the eurozone debt is being underpinned by three-year loans made in December by the European Central Bank (ECB), which will offer a second round of financing, known as LTRO, at the end of this month. There’s still a spread between German and Italian or Spanish bonds, and that’s the way it should be. The way it was before the implementation of the euro, and the way it will be from here on out!

Longtime readers might recall me saying on more than a few occasions in the past that Greece, Italy and Spain were all rogue countries with debt before the euro, and that they should get down on their knees and thank their gold every night that they were included in the euro…

The Big Boss, Frank Trotter, was kind enough to join me in one of my presentations, which shows a chart of Greek bond rates that illustrates what I’m talking about here… Before 1999 (implementation of the euro), bond rates in Greece were 19-20%… but then after the eurozone was formed, the bond rates plunged and remained low until someone said, “Hey, with all this debt, these yields aren’t right”… and back to 16% Greek bond rates went…

Should Greece have gotten a free ride on their careless deficit spending and debt? No… but no one was paying attention. I wasn’t. I stopped trading foreign bonds in 1998, so I’ll use that as an excuse!

I think the thing to take from this comes back to the U.S. Should we be able to continue to add to our debt by 1 trillion dollars every year with historically low bond rates? No… But until someone stops and says, “Hey, this debt is too high for bond yields this low,” the Treasury bubble will just keep building and will take a lot of investors down when it pops… it will be a Minsky moment…

For those of you new to class or Hy Minsky… A Minsky moment is an idea that the great economist, Hy Minsky, originated… When a market fails or falls into crisis after an extended period of market speculation, or unsustainable growth. A Minsky moment is based on the idea that periods of speculation, if they last long enough, will eventually lead to crises; the longer speculation occurs, the worse the crisis will be…

Hy Minsky is responsible for much of my economics education, even though my time with him was brief…

And 10-year Treasury yields remain below 2%…

Speaking of debt… no wait, I wasn’t speaking of debt, I was talking about the Treasury bubble… but wait… Treasuries are issuances of debt, so technically, I was speaking of debt! (Don’t question yourself, Chuck!)

Did you see that the president presented his 2012 budget, with a $1.333 trillion deficit. And that’s only if the ducks all get in a row. I saw this tide bit (thanks, Dennis), and it really hit home… From July 31, 2011-Jan. 31, 2012 (six months), the U.S. national debt grew from $14.5 trillion to $15.4 trillion, an increase of $1.1 trillion… In the first 206 years of our country’s history (through August ‘82), the U.S. accumulated a national debt of $1.1 trillion. And now we do it every year? Just what the heck is going on here? Our government is spending us into the point of no return!

And that will continue to weigh heavily on the dollar, folks… I told an audience last week that I know it seems a little strange taking dollars out of your dollar-denominated portfolio to buy currencies and metals… But diversification is one of the ways to beat the awful things our government and central bank are doing to our kids’ and grandkids’ futures. But then that’s just me… I could end up being wrong…

The U.S. data cupboard is chock-full of data today. But the Big Kahuna data print comes in the form of January retail sales… Which — when I look back at the Butler Household Index (BHI), I see that there were tons of shopping bags brought into our house IN January, so look for a better-than-average bear print here today…

Then there was this from the U.K. Telegraph… Before I post this, I want you to know that I don’t condone what Iran is doing… I’m just continuing to point out how countries all over the world are tired of the U.S. debt destruction of the dollar, and are now working out ways to get around dollar use… So here the snippet of the article…

“Last week, the Tehran Times noted that the Iranian Oil Bourse will start trading oil in currencies other than the dollar from March 20. This long-planned move is part of President Mahmoud Ahmadinejad’s vision of economic war with the West.

“‘The dispute over Iran’s nuclear program is nothing more than a convenient excuse for the U.S. to use threats to protect the “reserve currency” status of the dollar,’ the newspaper, which calls itself the voice of the Islamic Revolution, said.

“‘Recall that Saddam [Hussein] announced that Iraq would no longer accept dollars for oil purchases in November 2000 and the U.S.-Anglo invasion occurred in March 2003,’ the Times continued. ‘Similarly, Iran opened its oil bourse in 2008, so it is a credit to Iranian negotiating ability that the “crisis” has not come to a head long before now.’”

India is now going to pay for their oil from Iran with a 45% allocation of gold. China has been signing currency swap agreements with other countries for two years now. So it’s going on all over… countries want out of having to hold large dollar reserve to facilitate the terms of trade with their partners.

To recap… The currency and metals rally that lasted all day yesterday ended last night with a thud, as Moody’s downgraded six eurozone nations and warned the U.K. that their credit rating could be cut. The euro has lost the 1.32 handle, and the rest of the currencies have given back the gains they made yesterday. And retail sales headlines the data prints today…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning