Moody's Rates Portugal's Bonds As Junk!

What a difference a day makes… Only 24 hours… HA! Sad thing is that it wasn’t 24 hours; it was the span of about 5 hours that took risk out of the markets, brought back risk aversion, and at the end of the day, the dollar was mighty against the currencies, but not gold and silver…

Front and center this morning, Moody’s, the ratings agency, cut Portugal’s bonds rating to “junk” and just when it looked as though the euro (EUR) might escape in the dark of the night provided by a non-default in Greece, the single unit is back on the chopping block… I knew in my heart of hearts, and you probably did too, that it wouldn’t take long for focus to shift to another Eurozone peripheral country and their debt problems… And so it was with Moody’s… Next it will be Italy, and don’t forget Ireland… I still believe that Spain will deal with their problems internally and not require any assistance.

So… With this “renewed” focus on Portugal, the dollar went on a rampage against the euro, thus drawing the other currencies into the brawl between to the two most liquid currencies. The usual suspects of Japanese yen (JPY), and Swiss francs (CHF) also rallied… And of course, when this stuff comes to a head, US Treasuries rally… UGH! And then, we had a very strong rally in gold and silver, with gold adding $15 yesterday. So, it’s back to the “default watch” for the markets, and thus the “safe havens” are In like Flint… Of course, you, dear reader, know that I believe that the only true “safe havens” are gold and silver… But, in our world of fiat currencies that exists now… There are profits to be made, and portfolio allocations that need to be put in place!

Well… Did you hear that the HUD is going to be spending $1 billion to help struggling homeowners? That’s nice… Ahem, Chuck, are you going to just let that slide? Or are you going to tell it like it is? Aw, come on, leave me alone… I just want to be nice and leave that sit there like that… But if you insist, all I’ll say is that just because struggling homeowners may need assistance, I don’t believe it’s the government’s place to help them out… Besides, where did HUD get the money to give to these struggling homeowners? That’s right… As I’ve said many times before… The government doesn’t have any money unless the take it from us…

And… When the government is in the red by such a margin, I just wonder when it all stops… Because here’s the thing, folks… Have you ever read the book to a youngster titled: If You Give a Mouse a Cookie… The book teaches a great lesson that our lawmakers should read over and over again… One free item begets the claims of more, and more… And that plays well with my thought that our country has become addicted to stimulus for the economy…

But it is nice…

I know that I’ll tick off some readers that don’t believe in my opinion on this… But that’s OK… Just don’t send me emails telling me I’m wrong… It’s just an opinion… When you write your own letter, you can put your opinion in it!

OK… Gold and silver… Quite a two-day rally for the two metals that last week, looked like they were tired and worn out from their 10-year assault on the dollar. I said in yesterday’s Pfennig that gold looked to me as though it was forming a strong base around $1,500… Gold’s $15 gain yesterday made me look like a shear genius… HAHAHAHA! Now that’s the last thing I should be called!

And down south, in Brazil… The currency had reached its strongest level versus the dollar, since 1999, when the Brazilian government said, “enough is enough!” Brazilian Finance Minister Guido Mantega said he would take steps to control an appreciating real (BRL), after the currency reached a 12-year high against the US dollar… Yes, we’ve heard these cries before, and they have caused short-term blips in the real’s value making it weaker versus the dollar… But, obviously, they didn’t work, or else the real wouldn’t have been visiting its 12-year high, and the government wouldn’t be pounding its chest about new ways to stem the real’s appreciation…

So… With this chest-pounding going on, you can expect the real to “back off” its 12-year high… But will the government win this time? I doubt it… I doubt it any time a government gets involved in “managing” its currency… It’s not what is supposed to happen, and the markets don’t like it… Yes, they’ll play ball with the government at first, but then when the markets decide to go for the throat…

And the price of oil has really caught some strong wind in its sails this past week… The price of oil has risen steadily for a week now… Of course it has! It’s the summer driving time! Funny how that works out, eh? Well, not “funny”, but it’s pretty obvious!

With the price of oil climbing steadily the past week, the look of the Canadian dollar/loonie (CAD) has changed… 10 days ago the loonie got down to $1.0115… And yesterday, before the Moody’s announcement, the loonie was trading with at $1.04 handle! And some strong data has printed in Canada too… So, the loonie is cooking with gas this week, and for as long as the price of oil doesn’t have another mini-collapse like it had 10 days ago…

In Australia, the latest jobs data will print today, and could show a bit of consolidation… but that shouldn’t wipe out the thought that the Reserve Bank of Australia (RBA) showed their cards the other night, and the next rate hike shouldn’t be on hold for too long. It’s like holding the carrot in front of the horse… Traders and investors know the RBA is going to hike rates again, so they keep the Aussie dollar (AUD) well bid, and champing at the bit for that rate hike…

The IMF has a new director… Christine LaGarde… I really don’t care who runs the IMF, as I’m not a fan of the organization… But the new director was news… So there it is!

The rising price of oil hasn’t really helped the Norwegian krone (NOK) to offset the weakness in the euro… Yesterday morning, the krone looked to be on its way to 5.25, but here we are, 24 hours later, and the krone is 5.42… UGH! When a currency is moving in the right direction, as the krone was yesterday (given their fundamentals) it drives me crazy to see the applecart upset in such a short time period!

It just flashed across the screen that China had raised their interest rates once again… Another 25 basis points (1/4%) has been added to the internal rate, in yet another attempt to put a lid on Chinese inflation… I showed you last week that in the latest Manufacturing report that the “input prices paid” sector had shown a softening of inflation pressures… So that must mean that this rate hike is the one that slams the door shut on rising inflation for China… You know, the icing on the cake, the gravy for the biscuits, and all that! I’m proud of them for going this extra step…

Some central banks, no I take that back, MOST central banks would see the inflation slowing or softening, and quit… But that’s no time to quit! You have to keep on inflation, and once you get ahead of it, slam the door shut! Just like Paul Volker did here in the US in the early ’80s… Remember the “Saturday Night Special”? No, it wasn’t a special showing of Saturday Night Live, it was a rate hike from Paul Volker!

I saw this in the USA Today

For Small Businesses, Recession Isn’t Over

The owners of many small businesses say economic uncertainty and inflationary pressures have led them to delay hiring and capital expenditures. Seventy percent have no plans to expand their staffs over the next 12 months, according to a recent US Bancorp survey of 1,004 US companies with annual revenue of $10 million or less.

Yes, but that won’t stop the BLS from claiming that small businesses are hiring, thus adding jobs each month…

Then there was this… From an overview of a report by The Economist

A standoff over the US debt ceiling likely will damage the economy, even if the country doesn’t default on its debt, according to The Economist. “The Republican strategy will either lead Democrats to accept short-term cuts large enough to endanger recovery or will result in a short period of ‘prioritisation’, in which spending is suddenly and dramatically cut back to prevent a default,” according to the magazine’s Free Exchange blog. “America may make it through this episode with its credit rating intact and still sustain significant economic damage.”

Yes… Deficits didn’t matter did they? Well, they do now, because they’ve become part of our national debt… $14.3 trillion… And they are about to cause “significant economic damage”…

To recap… Moody’s cut Portugal’s bond rating to “junk”, and all hell broke loose with the dollar taking back the reins from the currencies. The dollar is in rally mode, as all “risk trading” has been taken off the board, with the exception being the strong rally in gold and silver. Brazil’s government is out to stem the real’s rise once again, so look for a short-term hit to the real. And the price of oil is on the rise again, underpinning the loonie.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning