PIIGS Return to the Slaughter

Friday is finally here… The end of what has been an exhausting week here on the trade desk. The dollar continued to get beat down through most of the trading day but started to rally back a bit in the afternoon. Overnight the dollar actually gained with the highflying Nordic currencies falling almost 1% versus the greenback. The euro (EUR) and commodity-based currencies also sold off a bit, and the sharp rally in both gold and silver stalled. A break in all of the price action was to be expected, but it may not last long as we will get the October US jobs report later this morning.

The report due out at 7:30 CST is expected to show the unemployment rate stayed dangerously close to 10% during last month. If the jobless rate comes in at 9.6% as expected, it would be a record 15 straight months that the rate stayed above 9.5%. The FOMC has tied future QE bond purchases to the performance of the US economy, so a poor payroll number will probably lead to another dollar sell-off. On the other hand, if the employment numbers come in stronger than expected, we could see some traders shift to thinking the Fed won’t have to continue the stimulus for as long as they have announced. But this is wishful thinking, as we all know the Fed is like a 17 year-old teenager whose parents just gave them $100 to go to the mall; the $600 billion is all but spent already, and there will probably be more to follow!!

Chuck sent me a note regarding the weekly jobs numbers during a break in his busy schedule down in Los Cabos:

I participated on a panel discussion Thursday morning at 7:30 am! My colleagues on the panel were all complaining the night before, while I, being the early bird, was sitting there on the podium a half-hour early waiting for it to start!

What I want to talk to you about today is the news yesterday that caught my eye… Here’s the title: US initial jobless claims rise more than expected in latest week.

Now, some of you might recall that the week before was the exact opposite and jobs claims fell… So what gives with the back and forth? It’s all due to the manual way the US bureau of labor statistics receives the files… I’m sure there are “cut offs” and such, so that’s what causes one week up and the next week down… The best thing to do is look at the data on a monthly basis, or… The continuing claims… And don’t forget the 99er’s… those are the people that have received their 99 weeks of unemployment, and now are getting nothing… They’ve been dropped from the “unemployed ranks” by the BLS, and things just don’t look great for them… The Consumer Confidence survey would have a different number if they only surveyed the 99er’s…

So… I guess the point I’m making in the end, is that the labor picture is a mess, and will remain a mess until small businesses understand what kind of tax burden they are going to have to deal with in the coming years… Health Care, included… The stimulus was supposed to deal with creating jobs… Didn’t happen… QE was supposed to give cash to banks for them to lend… Didn’t happen… It’s one vicious circle, folks… And I’m reminded of the Nitty Gritty Dirt Band playing the song, Will the Circle be unbroken? It’s all sad, that the country has run off into a ditch, but at some point we need to stop attempting to dig out of this hole, as we’re only making the hole deeper!

Thanks Chuck, great stuff for a Friday morning…

Well, as I reported yesterday morning, the BOE decided not to follow the Fed, and the ECB also diverged from the FOMC’s path. The ECB signaled they would stick with their planned stimulus exit strategy in spite of the fresh round of stimulus announced by the Fed. ECB President Trichet announced that the bank intends to begin pulling back some of the liquidity it injected into its banking system as early as next month. Policymakers left Europe’s benchmark interest rate at 1% yesterday. “The non-standard measures are by definition temporary in nature,” Trichet said at the press conference following the rate announcement. The euro rallied yesterday on confirmation the ECB would not be pumping any additional stimulus into their economies.

The announcement would probably have had an even greater impact on the euro if not for a flurry of stories about the possibility of future debt problems among the PIIGS. Yes, as if on cue, stories on the PIIGS hit the newswires. Problems do still exist in the “peripheral” European countries, but it sure looks like the ECB is using the press to “jawbone” the value of the euro, capping any appreciation by reminding investors that Ireland, Portugal, and Spain still need to refinance some huge debt issues.

The most prominent story out of Europe this morning concerns the Irish government’s delay in announcing its 4-year plan to narrow their fiscal deficit. Ireland’s finance minister announced savings and tax increases for next year worth 6 billion euros or 3.6% of GDP. A further 9 billion euros will be cut in the following 3 years. But the government will push back its publication of the details of the plan until early December. There is a lot riding on the details, as Ireland needs to impress global investors with these austerity measures. Ireland’s budget shortfall will be reduced to between 9.25 and 9.5% of GDP next year. The deficit this year will be closer to 12%, and Ireland wants to put measures in place to cut this all the way down to 3% of GDP by the end of 2014.

But the bond markets are convinced the moves will be enough to keep Ireland from having to tap the European Financial Stability Fund, which is the last “backstop” for European economies not able to find appropriate financing alternatives. Spreads have widened dramatically over the past few weeks, with the Irish government debt following the same path taken by Greek bonds in the weeks prior to the EU bailout. It worries many that the bond dealers have begun to take Irish debt down a similar path to the debt of Greece, and it really doesn’t matter what the Irish government does or announces.

Credit swaps on Portugal debt climbed 9 points overnight, and contracts insuring against a Greek default jumped 13.5 points. Default swaps for Spain and Italy also rose double digits, increasing these countries’ costs of financing their debt. Bond dealers look to be forcing the hand of the EU again, and the euro will continue to have a cap placed on any appreciation until this Irish bond crisis passes.

One of our favorite investors, Jim Rogers, was on the news wires last evening sharing his opinions of this week’s QE2 announcement by the Fed. A story that appeared on Bloomberg contained some great quotes by Rogers regarding the Fed head, and round two of QE. “Dr. Bernanke unfortunately does not understand economics, he does not understand currencies, he does not understand finance,” Rogers said in a lecture at Oxford University yesterday. “All he understands is printing money.”

“His whole intellectual career has been based on the study of printing money,” said Rogers, who predicted the start of the global commodities rally in 1999. “Give the guy a printing press, he’s going to run it as fast as he can.”

Jim had lunch with all of us on the trading desk about 5 years ago, and was adamant at that time about the coming commodity boom. He has consistently been ahead of the curve, and unlike our current Fed head, Rogers has booked the profits to prove he knows what he is doing in the financial markets.

Mark Mobius, another big name successful investor, had a different look on QE2. Mobius was excited by the prospects of a rally for global stocks and commodities, which he believes will come after the FOMC announcement. Mobius, who oversees about $34 billion, said the cash inflow should push commodity prices higher. “Commodities are the big area for us. We are great believers in higher commodity prices and therefore are investing in commodity companies.” Mr. Mobius obviously focuses on stocks, but I’m sure if he were a currency investor he would suggest the currencies that are commodity-based, including the Aussie dollar (AUD), Canadian dollar (CAD), Brazilian real (BRL), South African rand (ZAR), Norwegian krone (NOK), and New Zealand dollar (NZD).

These currencies have all had a tremendous couple of weeks, as investors look at both higher yields and the possibility of higher commodity prices. We have had a number of callers to the desk asking whether it is the right time to buy, with all of the currencies and metals rallying so fast versus the US dollar. Chuck apparently has been fielding the same calls at the conference in Los Cabos:

I had a lot of people stop by to ask me my opinion on whether or not it was a good idea to buy currencies and gold at this point, with them being so high versus the dollar…

Well… Maybe there’s a pullback… But, come on, if there’s a pull back, it will be strictly technical in nature, and short-lived… The US has made its bed with the dollar, and now it has to lay in it! There are all kinds of resistance levels that the currencies are going through right now versus the dollar… And I would say, that it certainly seems risky to enter into these markets right now… But I think back, and I told a customer this today, and that’s that customers told me that $800 gold seemed to be too high to buy… Then $900 gold… Then $1,000 gold… And it goes on and on…

So, if you’re wanting to diversify out of the dollar right now, then to wait for a pullback that never comes, might not be the best plan…

And that’s all from me this week from Los Cabos, Mexico… It’s absolutely beautiful here, I had a massage therapist put my back right, and it’s warm, what else can I say? You know me, I always say… I’ve gotta go where it’s warm!

I hope you have a great weekend, good luck to my beloved Tigers who play down in Lubbock Texas on Saturday night!

Chuck has always told all of us, if you want to invest, go ahead and buy it!! Gold has moved back from the record-high that it hit in after hours trading last night. Yes, gold traded at $1,393.40 last night, just a hair away from $1,400. The Fed has basically given the green light for currency and metals investors. And silver has been outperforming, doubling gold’s performance this year. I think there are a few reasons for silver’s recent performance. First, silver had been lagging gold over the past few years, so it had some room to make up. Second, I believe there is a bit of psychology at work. Investors can either buy one ounce of gold, or 50 ounces of silver. I think they feel better making a 50-ounce purchase rather than just buying one. Finally, for those investors looking to protect against an “Armageddon,” one ounce of silver is much easier to barter with than one ounce of gold! Not that I believe it will come to this, but it does illustrate another reason silver has been out performing gold.

To recap: Jobless claims for October will dominate the markets today. Look for a positive number to possibly give the US dollar a bit of a break. Worries on the PIIGS debt crisis have been raised right on cue to cap the rapid ascent of the euro. Ireland definitely is swimming against the tide in trying to convince markets they will be able to get a handle on their debt issues. Jim Rogers gives his unabashed opinion on our Fed Head. And finally, Chuck suggests that it is always a good time to get invested.

Chris Gaffney
for The Daily Reckoning

The Daily Reckoning