More Stimulus?

Today has seen a return to risk aversion, after watching the currencies have their way with the dollar, yen (JPY), franc (CHF), and Treasuries on Friday. Remember on Friday when I told you that in the “old days” you could bet a dollar to a Krispy Kreme that if the Jobs Jamboree was bad, the dollar would get sold, and if it was good, the dollar would rally, but that had changed during the financial meltdown… And so it was on Friday… The labor report wasn’t as bad as it was thought to be, but the dollar got sold.

But, that’s all been reversed this morning. The euro (EUR) has lost over one cent on renewed fears of problems stemming from the deficit problems of the GIIPS (Greece, Italy, Ireland, Portugal, and Spain…one reader said I should call them the GIPSI’s… HA!). These renewed fears have all come down in the past 12 hours, according to my trusty currency screen! So… The “attention span” of traders lasted about three months, when the deficit problems first arose… Then it was on to the US’s economic recovery problems, and now it’s back to Eurozone periphery countries and their deficits.

That’s what you have going for you this morning, folks… Even the highflying Aussie dollar (AUD), which was 0.9150-cents on Friday and yesterday in thin markets, has lost 3/4’s of a cent overnight… In Australia, they may have put to bed their government election outcome, but at what cost? The fears here are that the Gillard coalition may have had to put the mining tax back on the table… And we all remember what the talk of a mining tax did to the Aussie dollar the last time, eh?

The new Aussie government needs to come out right away and talk about what they plan to do with the mining tax… Be it bad or good, it must be upfront and center, before the rumors begin to fly.

So… The “usual suspects” are rallying this morning, with the risk aversion firmly in place for today. Dollars, yen and francs… (Treasuries are finding the road to risk aversion a little rocky this morning…) The Swiss franc continues its attempt to get back to parity to the dollar… The problem for the franc is that every time it begins to mount a charge toward parity, the attention span of risk aversion traders comes to an end!

Well… The Jobs Jamboree on Friday went better than expected… The overall job loss, as reported by the BLS, was -54,000, and the “private payrolls” added 67,000 jobs in August… The one component of the report that is troubling is that manufacturing jobs saw -27,000 reported, which was expected to rise 10,000…

Long-time readers remember the days when I used to say, “It doesn’t matter how many jobs are added each month, for we don’t know what kind of jobs they represent. The real meat of the Jobs Jamboree comes with the Average Hourly Earnings, and Average Weekly Hours, for it is in these components that we’ll find indications of wage inflation. The good news is that Avg. Hourly Earnings year-to-date have risen only 1.7%… And the Weekly Hours remain flat at 34.2… So… To me… That was the good news of the Jobs Jamboree…

Of course a quick check of the Birth/Death model shows that 115,000 jobs were added by the BLS… Which means that the “private payrolls” would have been negative had the BLS not made their “adjustment.”

Here are some details of the report…

Manufacturing payrolls declined by 27,000.

Employment at service-providers fell by 54,000.

Retailers cut 4,900 workers.

State and local governments gave walking papers to 10,000 people.

The federal government cut 111,000 jobs (mostly temporary census workers).

The number of “underemployed” – people who want full-time work, but have given up and are now working part-time, increased again, from 16.5% to 16.7%.

The good news for the markets, (since they don’t pay attention to the details) was the fact that the report wasn’t as bad as feared, and the appetite for risk was strong almost from the get-go after the printing of the report. And like I said above, the currencies got to spend the day in the sun… But that has all been reversed this morning… UGH!

Game on, Garth! Game off, Wayne! Come on boys! Can’t have a direction here?

The currency of the day on Friday (the one we talked about the most) was the Chinese renminbi (CNY)… We’ve all noticed that ever since the Chinese officials said, back in July, that the renminbi would have greater flexibility, that the renminbi has actually gotten weaker versus the dollar, when everybody and their brother thought it would be the opposite with the renminbi rallying versus the dollar.

Look, folks… The Chinese know all too well, what direction the markets would attempt to push the renminbi… So… Chinese officials have made it clear to the markets that the renminbi would not be a “ONE WAY STREET”… Here’s the skinny on how the markets would attempt to push the renminbi… The currency is managed by the Chinese (they say it is measured against a basket of currencies), so the markets don’t have any say in the “spot price” of the renminbi… But where the markets get their legs under them is in the “forwards market.”

A spot trade is a two-day trade, with no “forward points”… Any trade that has a future value past two-days, is a “forward trade,” and the buyer or seller will have to pay forward points based on the days past spot, and… The interest rate differential of the two countries involved. That’s for a normal country… One with a free-floating currency that the markets set the value for… With a currency like renminbi, it is called a “non-deliverable forward,” (NDF) which means it has to be settled in dollars… In addition, it cannot be delivered, nor does the market set the value.

Here’s where the rubber meets the road with renminbi… With this (NDF) the markets set the “future” value of the currency by speculating the forward points, thus making renminbi very expensive to own… When the markets give up their attempt to “push renminbi” the forward points narrow, thus making it less expensive to own renminbi.

I hope that explains things for you… Clear as mud, right? Well… The forward points discussion has made quite a few, very intelligent people’s eyes cross through the years, so, if that’s you… You’re in good company… But, just the fact that you are Pfennig Readers, makes you super intelligent!

OK… The news on the TVs this morning, is that the President is calling for a $50 billion infrastructure spending bill… Come on folks, you know this to be what it is, and that is nothing but more stimulus… We’ve done this before haven’t we? Wasn’t the $787 billion supposed to create jobs? Whatever!

Another $200 billion would be used for businesses… Hmmm… While I truly believe that businesses, especially small businesses need for the government to get out of their way, they could probably use a tax cut… So… A note to the government… Give them the tax cut, and get out of their way!

I told you all many times in the past year, that the government would come out with more stimulus… We just can’t shake turning Japanese!

The European Union (EU) ministers are meeting in Brussels this week for their ECOFIN meetings… I doubt that they’ll have anything to say about the slide in the euro, so… There’s nothing to see here… Move along…

And… The data cupboard here in the US is basically empty today, with just a low tier report called the ABC Consumer Confidence report to print this morning… Tomorrow we get to see the Fed’s Beige Book, and Thursday will bring us the trade deficit for July…

Then there was this… 41.3 million people received food stamps in June… Now… That’s a number that this country and Congress, Fed, and Treasury can’t be very proud of… So, let’s go spend $50 billion more and get the government’s hands in there acting like they know what they’re doing, and doing nothing more than making a mess of things! Good Grief, Charlie Brown!

To recap… After spending Friday basking in the sun, the currencies have reversed their gains from Friday, as there are renewed fears of deficit problems in GIIPS, causing banks to hold bad bonds/debt from these countries… The Jobs Jamboree was not as bad as feared on Friday, that is as long as you go with the BLS’s version of it! And it looks like more stimulus for the US economy is being planned…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning