Spain Successfully Auctions Off €4.94 Billion

Well… The stock jockeys used to talk about a Santa Rally… I don’t think they’ll get the chance to talk about that this year… Unless of course they are talking in the past tense! You see, the markets are really screwed up these days… Take gold, for instance… One would think that, with debt problems in the two largest economies in the world, investors would be flocking to gold… Unfortunately, though, the markets think like this… “We should flock to dollars and treasuries”… And that’s what I talked about last week when I said I finally figured out that, if investors are buying dollars, what do they need gold for?

Of course, in my opinion, these people that have sold gold to buy dollars and treasuries will rue the day they did that! Gold lost about $50 off its figure yesterday… I used that as an opportunity to buy more… I sure hope I never have to depend on my gold holdings… But, what do you think will happen when The New York Times and The Wall Street Journal report that foreigners have said “no mas” to US debt? Oh brother! Better find a bunker!

No… I’m not an “end of the world as we know it” kind of guy… But I am an “end of the debt cycle” kind of guy… But then I’ve been that way for over 10 years… And things just keep getting worse!

OK… Well, the euro (EUR) is attempting to get back to 1.32 this morning, but in reality that’s just rearranging the deck chairs on the Titanic… The euro is in dire straits, and the Eurozone leaders just don’t see that their inactions aren’t the tonic the euro needs. Eurozone leaders are talking about the penalties for future countries that get out of line with debt… But isn’t that putting the horse before the cart? I mean, what if there is no Eurozone in the future to follow these new debt rules? Eurozone leaders need to deal with the problems of how to finance debt…

And that’s the same problem that plagues the US as it lives from one auction to the next. But the markets, media, and other loudmouths don’t believe this to be a problem… Oh brother! They probably didn’t see the Tech Bubble… The Housing Bubble… And all the corporate scandal we’ve had here in the US and are still experiencing!

Anyway… Getting back to the problems of the Eurozone… I think the Eurozone leaders have a Big problem that they thought they could sweep under a rug… And that is the fact that the UK voted no to the treaty changes… And now Germany has voted no to the changes in the EFSF and ESM (remember I explained these two funds to you last week)… So back to the drawing board for the Eurozone leaders…

Speaking of the UK… I mentioned last week that I didn’t like what I was hearing from the Eurozone Summit, regarding what the UK was doing… Basically, the UK, in exchange for giving its agreement for the treaty change, asked for specific protocol on financial services. Special treatment for London… However, it has always been my thought that the UK is important to the Eurozone/European Union…

The thing that really gets me is this: The change in the treaty to introduce new fiscal discipline would have applied only to the Eurozone members, but…needed the approval of all 27 European Union members… And the UK pulled this act… I guess they know what I just said, that the EU needs them… So… Eventually, if the UK was to join the euro, these changes would affect them… But, face it… The UK is never going to join the euro, even if the euro wasn’t having these problems right now. The pound sterling (GBP) was never going to be converted to euros… So… With that in mind, what difference did it make to the UK whether the changes that were agreed upon by the other 26 members were changed?

The good news this morning from the Eurozone is that Spain was able to auction 4.94 billion euros worth of bills, which is more than the target amount, and the borrowing costs fell… Demand for the 12 month bills were 3.14 times the amount sold… That’s a very good auction, folks… Very good… And probably the reason the euro has now gone past 1.32 on the morning, and looking like it wants to rally today.

But, as we all know, those fortunes can turn on a dime… Sort of like what my dad used to tell me about being a middle class family… “Son, every time I seem to get ahead, and can back off from working 60 hours a week, something happens… It’s like someone says, ‘you think you’re not Middle Class? I’ll put you right back there!’”

Every time the euro gets wind in its sails, something happens… For instance, the euro’s rally today could be stamped out very quickly by a ratings agency announcing downgrades… You see, all these things that could happen to stamp out a rally are hanging over the euro like the Sword of Damocles!

Today, as I told you yesterday, the US will print the latest pulse on retail sales… And, like I said yesterday, the BHI (Butler Household Index) tells me to expect a strong retail sales report… The experts expect a 0.6% gain, I expect a 0.7% gain! Oh yeah, the US Monthly Budget Deficit printed yesterday at $137.3 billion… Boy, we sure are cutting our deficit spending, aren’t we? NOT!

You know… I’ve talked about David Rosenberg before… Well… My friends here at The Daily Reckoning included some thoughts from David Rosenberg yesterday that I think are important enough to repeat here… First, let me set this up… David Rosenberg thinks there will be areas of behavioral changes in the US next year… Here is his list of those changes…


1. Frugality on the part of the global consumer (living within our means; retirement with dignity)
2. Austerity on the part of sovereigns (spending cuts/tax reform)
3. Nationalism (an umbrella for protectionism and isolationism: mean reversion for globalization)
4. Political movement along the ideological and fiscal spectrum (from gridlock to change)
5. Geopolitical change (wars, elections and regime changes)
6. Changes in inflationary/deflationary expectations
7. Changes in growth expectations
8. Changes in asset allocation preference (fund-flows/de-risking)

I agree with this list… Which means 2012 is going to be very volatile… Maybe even more volatile than 2011, which has been the most volatile year I’ve ever witnessed in my 38 years of being in the markets…

The FOMC meeting is today… Here’s what I expect the Fed to say this afternoon… First, we all know that interest rates will remain unchanged… But then the Fed will say that they’re seeing stronger economic data in recent weeks, but they will water that down by saying that the problems in the Eurozone could hurt growth, and then there’s that little problem of unemployment… I say that facetiously, because unemployment IS a BIG problem here in the US… But you wouldn’t think that given the response of our leaders, including the central bank…

OK… Back to the markets… Well… With the euro attempting a rally, which is at least a good sign to the other currencies, the other currencies have put on their rally caps too… But for how long this time, is the question…

The Japanese yen (JPY) is stronger by a slim margin this morning, but what I really wanted to talk about here, is that the yen is flying under the radar these days… It’s all about the euro 24/7, and the country with debt up to their eyeballs and no yield to offer, continues to just move along unnoticed by the markets… I know it’s difficult to believe, but yen is still considered a safe haven currency… I wouldn’t touch Japan’s fundamentals with your ten-foot pole, but the markets don’t see it that way… It’s all a mystery to me, folks… Yen should be THE weakest currency… But instead it hovers around 78 to a dollar… When I began my career in the markets, yen was 280…

I had someone ask me the other day what was going on with Sing dollars (SGD)? Well… As I told them in my response… I personally think that the Sing dollar got ahead of itself… From this time last year to summer time 2011, the Sing dollar gained almost 10%… But, the Chinese renminbi (CNY) only gained 3%… So… While the Monetary Authority of Singapore (MAS) was willing to allow the Sing dollar to gain to help them with their fight against inflation, they got ahead of themselves, and allowed the Sing dollar to triple the renminbi’s gains… And that’s not a good thing for a country that competes with China for exports…

So… We’ve seen an “adjustment” in the Sing dollar to get it back in line with the renminbi… And that’s how I see it… But that doesn’t mean I don’t like Sing dollars! I like the Asian currencies (except yen) as insulation against the contagion problems in the Eurozone.

Then there was this… Things heard in 1955 (the year I was born!)

1. Have you seen the new cars coming out next year? It won’t be long before $2,000 will only buy a used one.
2. If things keep going the way they are, it’s going to be impossible to buy a week’s groceries for $10
3. If cigarettes keep going up in price, I’m going to quit, 20-cents a pack is ridiculous!
4. Did you hear the post office is thinking about charging 7-cents just to mail a letter?
5. If they raise the minimum wage to $1.00, nobody will be able to hire outside help at the store.

And the list goes on… I put these in just for fun, and to reminisce… But back then we were a republic… Not an Empire… When Benjamin Franklin was asked if we had a Republic or a Monarchy… Franklin responded… “A Republic, If You Can Keep It”…

To recap… The euro is attempting to rally this morning, but that rally is on tenterhooks, as there’s always something to knock it down. Gold lost $50 yesterday, as knuckleheads believe they don’t need gold if the dollar is rallying… Yen continues to fly under the radar, as it’s all about the euro these days…

Chuck Butler
for The Daily Reckoning