Muni Bond Defaults

The big news this morning comes from Canada, but it’s about the eurozone. I told you the other day that German Chancellor Angela Merkel was in Canada saying great things about Canada. When asked if she supported the European Central Bank (ECB) proposal to buy bonds to help lower borrowing costs in countries such as Spain and Italy, with strict conditions, and only if the governments act first by buying debt through Europe’s bailout funds, and the audience and markets held their collective breath for an answer from the German chancellor…

She said yes! Well, actually, she said Germany is “in line” with the ECB plan to defend the euro (EUR). To me and the markets, that’s a YES! And by saying those words, the euro rallied versus the dollar. Not a HUGE rally, but a rally, nonetheless!

The other big news from the overnight sessions came in the form of a comments from the Australian Treasury, which is not happy about the Australian dollar’s (AUD) strength, and was out to jawbone it down. The treasury did say outright that they reject any idea of intervening to weaken the A$, but then went on to say, “If the high exchange rate is judged to be inconsistent with keeping the economy close to non-inflationary full employment, we could expect that the monetary policy would be eased in response.”

They had better be careful here. You see, what the treasury was saying was that if the strength in the A$ is providing them a noninflationary economy, then they believe they have room to cut rates. But by cutting rates, it would put downward pressure on the A$, right? I just shake my head in disgust here, because, IF the strong A$ is providing a noninflationary economy, then why would they want to mess with that? Just LEAVE IT ALONE! I tell you, I see these moves by the mental giants that run treasuries around the world and have to go yell at the walls!

So the A$ is down half a cent this morning on the treasury statements. You see, the problem with these statements about one’s base currency is that if you say them enough, the markets will oblige you with a weaker currency — probably weaker than you would prefer, but you asked for it!

Take the Brazilian real (BRL). A couple of years ago, the real was on the rally tracks and had put in two straight years of being the best-performing currency versus the dollar. And then along came the new leader, Dilma Rousseff, who did her best to weaken the real. She kept telling anyone that would stop to listen to her that the real needed to be weaker, and then she went about adding taxes and every roadblock she could find to stop the flow of investment into Brazil. The markets defied her for some period of time, and then decided that if you want the real weaker, that’s what you’ll get.

But now Rousseff just finished watching the London Olympics and did the V8 slap to the forehead and said, OMG, the Rio Olympics are only four years away! We need infrastructure, we need the flow of funds into Brazil! But what did I do? I stopped that flow of funds and scared everyone away, but I need them back now! Oh, the seeds we sow.

Here’s my bet on what will begin to happen. Brazil will begin to raise interest rates again in the next year, and probably remove the taxation of foreign funds. Just my opinion — I could be wrong, but that’s how it looks to me!

So yesterday, I told you that the dollar had a big rally in Asia overnight, but that the currencies looked as though they were healing, but waited for the New York open to see what the New York boys and girls had in mind for the dollar. Well, about that time, the weekly initial jobless claims printed and showed the recent trend of claims dropping had ended. The increase was only 1,000, but it didn’t drop. And then housing starts showed a drop of -1.1% from June, and the Philly Fed index (manufacturing) added to the Empire State report the previous day (big negative) and does not paint a pretty picture for manufacturing here in the U.S.

So given that data, the New York markets didn’t build on the dollar buying and the currencies healed throughout the day, with the euro at one point in the day reaching 1.24. And gold was stronger again. Yesterday morning, I said to our metals trader, Tim Smith: “Hey Tim, look at gold up $13. Keep an eye on it at the closing, as I’ll be gone, I’m sure it will get taken down again at the close.” Well… it didn’t happen yesterday! Or at least as much as I can tell.

So this morning, the euro is strong on the Merkel comments, the A$ is weak on the Aussie treasury comments and the rest of the currencies fall into place somewhere in between. The Canadian dollar/loonie (CAD) has added to its gains this week. Canada will print its July retail sales report next week and will go a long way toward the loonie’s ability to remain above parity, although the price of Oil is acting as a real underpin for the loonie. Oil has gained again overnight and has a $95 handle on it this morning.

Speaking of oil, did you see the story going around that the U.S. is more dependent on Saudi Oil now with the sanctions in Iran. Hmmm, and tell me again just why we are dependent on Saudi Oil? Didn’t we create a Department of Energy decades ago to get us to be energy independent? How’s that working? Of course, the oil people say that energy independence for the U.S. could be achieved if they could drill where they wanted and how they wanted (fracking). The EPA has different ideas on that.

I was researching and writing commentaries on the currencies for the EverBank website yesterday, which is always good for me to do, as it gets me back in the “research” frame of mind on some currencies that I don’t talk about a lot. Like the “euro-wannabes,” which is the name I coined in 2002 for Poland, Hungary and the Czech Republic. These currencies have had a tough row to hoe for a few years now and they still aren’t ready for prime time/joining the euro. But as I said in one of the commentaries, “With the problems in the eurozone right now, maybe not joining the euro isn’t such a bad thing.” Ten years ago, these three currencies were considered to be on the “fast track” to joining the euro. In 2012, they aren’t on any tracks. And that’s a shame. But it is what it is.

Gold is up a couple of bucks this morning, to $1,617. I told an interviewer from the Street.com yesterday that $1,620 seems to have been a strong line of resistance for gold, and that with it being summer, which is normally a slower period for investment, we could see it trade in a tight range. Of course, I would love to see it blow past that strong line of resistance once and for all, but you can’t have everything!

Silver is also higher this morning, trading to $28 and change. $28 seems to be silver’s line of resistance. So we could either see a push through these levels or both gold and silver back off and live for another day to run at the levels. I’ve talked a lot this past year about the manipulation that people like Ted Butler believes is so strong, that it would take a blind man to not see what’s going on. I read what Ted Butler has to say every week, and once you realize that he has the facts and numbers, you want to read more!

Speaking of things that go bump in the night, did you see the story in The Washington Post about how since 1970, Moody’s Investors Service reported 71 municipal bond defaults. But when the New York Fed started the counting, the number of defaults rose to 2,521! WHAT? Maybe it was a case of “We didn’t consider that to be a default” or “We didn’t back that bond, so we didn’t report it as defaulted.” But in any case, this is awful! The article went on to say, “Muni bonds often act as an investment haven for ordinary Americans, and the new findings reveal they may be more risky than previously thought.”

You think so? Just may be more risky than previously thought? They obviously are, if since 1970 there were 2,521 muni bond defaults! Crazy stuff!

The Bank of England (BOE) minutes of their last meeting came out on Wednesday. Normally, I don’t get too lathered up about the BOE meeting minutes, but since I’ve observed that what happens in the U.K. usually hits our shores about six months later, it was interesting to see that the BOE voted for more quantitative easing at their last meeting. In fact, some members voted for more than the 50 billion pounds that were added in July. Quantitative easing is still up in the air here in the U.S. just about the time you think the Fed heads are ready to pull the dust covers off of QE, a rogue economic data report gives them a warm and fuzzy, and they decide to leave the covers on.

You know me: I do not like deficit spending, nor do I like the debt situation the U.S. has gotten itself into. I began warning about this growing debt in 2001. Back then, the national debt was $5.7 trillion. I would go out to conferences to talk to people about this growing debt and the pressure it would put on the dollar. I could easily count the people in the room, so it’s obvious I didn’t have many believers then. I also had more hair and less weight!

I’ve spent a lot of time writing in three different articles the past week about the upcoming discussion of raising the debt ceiling. It’s going to happen, folks, probably in the next month or right before the election. Longtime readers know that I truly believe that we’ve gone too far with our spending money that we don’t have. Remember last year we finally had discussions about the exploding debt, and from that, besides all the drama, we gained $1.2 trillion in discretionary spending cuts over 10 years — which doesn’t amount to much, folks, and will probably not go into effect because the lawmakers are having second thoughts about implementing them in January.

So knowing that the lawmakers will eventually opt to raise the debt ceiling yet again, I came across this thought that explains the debt ceiling debate pretty well…

Let’s say you come home from work and you find that there has been a sewer backup in your neighborhood. So you call around to the adjacent neighborhoods and find that they don’t want to allow you use their drains. What do you think you should do? Raise the ceilings of your house, or pump out the cr**?

Now, that would be funny if it weren’t so real to us here in the U.S.!

Then There Was This: I read a great article by the godfather of newsletter analysts, the great Richard Russell. Here are his thoughts on quantitative easing:

“There’s nowhere to hide. Governments will opt for their favorite remedy — inflation. Inflate away the debt. Problem here is that a little QE3 won’t help. If the Fed really wants to jazz up the economy, it will have to be a massive QE3. It’s gold’s turn to move to the forefront. If gold starts to move, and it is moving a bit, then the beaten-down gold mining stocks should start heading north. We’re facing a world slowdown. Even China, our ‘savior,’ is slowing down quarter after quarter. We’re nearing the fiscal cliff. U.S. exports are slowing down. And unemployment in the U.S. is still over 8%. There’s only one answer I see, and it’s combined money creation on the part of the Fed and the European Central Bank. It’s coming — big-time, along with massive inflation.”

That’s Richard Russell at his best, telling it like it is!

Oh, and one more thing. For those of you who go to the Pfennig’s website, you’ve noticed that the website is now the Pfennig blog. And after the first couple of days, there were some suggestions from the readers on how to make it better.. Well, we listened and made many changes already, with more to come. The No. 1 request has been to return my picture to the letter. I never realized how much people liked having that picture there. So we’re working on that too! If you haven’t been to the site yet, click the link and check it out. It’s pretty cool!

To recap: The healing in the currencies yesterday morning held steady throughout the day, with the euro briefly reaching 1.24 (it’s weaker from profit taking this morning). The big news this morning is that German Chancellor Angela Merkel agrees with the ECB proposal to buy bonds to keep borrow rates down for Spain and Italy. The Australian Treasury was jawboning the A$ weaker. And Chuck says be careful what you ask for.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning