The Big Dog Euro Gets Off The Porch!

Today’s Pfennig for your thoughts…

Good day. And a Happy Friday to one and all!

Well, that news hasn’t put a damper on the euro this morning, as the single unit continues to book gains vs. the dollar.

I was doing some reading yesterday here in the office, and I turned to see what was going on with the currencies and first noticed that gold was up $16 on the day, and then my eye went to the euro, and lo and behold the single unit was trading at $1.12. So, I clicked on the news wires and found that the euro had actually traded higher while I was reading and took out stop loss trades at 1.1215.

Leading index data in the U.S. was down, like I said it would be. (to be addressed later).   the euro couldn’t hold the level above 1.12 at first, but kept fighting back and eventually moved past 1.12 on the day.

And in the overnight markets the euro has added even more to the 1.12 it held yesterday as I left the office, and this morning the single unit is trading at 1.1280. WOW!  That’s an even better level than the euro reached in June, when at that time the euro was reacting to the 2nd disappointment from the Fed (first one was no rate hike in March, and the second one was no rate hike in June).

This time the euro is trading on its own merits. This morning the flash PMI’s (manufacturing indexes) were mixed among the member countries, with the usual strong ones like Germany leading the overall aggregate reading for the Eurozone to an increase to 54.3 vs. the 54 in July.

The PMI’s from China weren’t so favorable, with the index falling to 47.1 from 47.8 in July. Now, these are “flash” PMI’s so they could be adjust higher or lower when the final number prints, but for now, it is what it is, and that is, a number that’s going in the wrong direction from 50.

So, for newbies I had better explain all that. You see, these PMI’s or Manufacturing Indexes (in the U.S. they call it the ISM, just have to be different!) start with a number of 50. Any number above 50 represents expansion of the sector, and any number below 50 represents contraction of the sector.

I learned a very long time ago, that a reading of 45 or below for two consecutive months was an indicator that the economy was in recession.  So, China’s not there yet, but given the rot on their economy’s vine right now, we could very well see that in the months to come.

The dollar seems to be on the run this morning from the Big Dog, euro. We haven’t seen this in what seems to be a month of Sundays, but it’s here today, and for the most part, the currencies are all taking advantage of the Big Dog, euro, being off the porch and chasing the dollar down the street.

The dollar-bloc currencies from Australia, New Zealand and Canada, which yesterday were all getting sold like funnel cakes at a state fair, have turned that around this morning, so that’s good to see that they get to participate with the other currencies’ move vs. the dollar.

I notice a couple of currencies not taking advantage of the Big Dog being off the porch this morning, and that’s the Mexican peso, and the Russian ruble.  A strange couple, eh?

Well, Mexico had some weak prints yesterday, and traders have given up the thought that there could be a rate hike in Mexico this year, and with that the peso gets trashed. The ruble is continuing to have its problems with the price of oil, sanctions, and a recession.

There’s also another currency on the “no-fly list” this morning and that’s the Indian rupee. This marks the second consecutive week of losses for the rupee. Last week you could accept the losses given the Chinese depreciation/devaluation, but this week the rupee should be moving on, except there’s this rumor going around that the Indian government is mulling over a 5% tax on interest from overseas rupee bonds.

Taxes! Those dirty rotten taxes!

On a sidebar — back in my Mark Twain Bank days, I was the foreign bond & currency trader, and there was a country, and for the life of me I can’t remember who it was, that charged a tax on the interest that was earned on their bonds. And you can believe me when I say I steered clear of ever buying those bonds for customers!

For some reason, I keep thinking it was Swiss government bonds, and so we always bought the World Bank bonds denominated in francs. Oh well, I just thought I would give you an idea of why adding taxes to interest on bonds could hurt the rupee…

OK, back to our regularly scheduled programming.

The Chinese renminbi has appreciated again in the overnight trading, and this time the appreciation was of size, not just the 30 pips of a few days ago! I find this strange, given the claim that the renminbi’s price is now more market driven, and the Chinese PMI’s were weak. But I’m not going to stay on this for long with questions, for it will just make my head hurt. HA!

So, yesterday, I spent most of the morning talking about the Fed’s FOMC Meeting Minutes, and I still find it difficult to believe, given that the Fed members really didn’t say that much, that the markets have gone so far with selling dollars. But, like I always say — it is what it is.  That’s a phrase that I think gets overused, but it’s one I picked up a few years ago, when I found out that the abscess in my jaw was actually cancer.

And Treasury buying. I still can’t believe that’s still going on and on like the Energizer Bunny. And to that thought, I have a special treat for you today in the FWIW section. So, stay tuned right here and you’ll get there eventually!

So, even the Norwegian krone and Swedish krona are getting to participate with the other currencies chasing the dollar down the street this morning. The price of oil bumped up from the $40 low yesterday to $41, but I don’t think that’s had much bearing here. It’s more that the Big Dog, euro is moving so strongly, it’s the pull from the Big Dog.

And the Japanese yen gained a full figure last night going from 123.95 yesterday to 122.70 this morning. Remember, yen is a European priced currency so as the number in the price goes down, it returns more value vs. the dollar.

Here in the U.S. we just keep adding debt. I came across some data on debt yesterday, and pulled one thing from all the numbers the data contained. But first — last year, when I spoke in Vancouver I told the audience then that including government debt, business debt, mortgage debt, and consumer debt, that the total in the U.S. had reached $60 trillion dollars.

This was just current debt, and doesn’t take into consideration the Unfunded Liabilities that Professor Lawrence Kotlikoff says are more than $200 Trillion dollars.

I then told them this so they could put the $60 trillion dollars into perspective.  If you were around in year 0, and had spent $80 million dollars EVERY SINGLE DAY since then, you would not have spent $60 Trillion by now.

Now I give you this history, so I can tell you this. Household debt (consumer debt) in 1989 was $888 per household.  In 2013,  the amount had risen to $5,791 per household.  Crazy, eh? And since this has all happened in the past 20 years, I would have to say that people just don’t look at debt the way they used to.

I remember how my mom had a Sears Roebuck credit card, that she would only use to buy us back to school clothes, (yes, we dressed like Eastern European orphans to go to school)  and my dad would make certain that he paid it off in a couple of months. Only mortgage debt at our house.  And every now and then a new car loan.

But that’s all changed. Would you say “for the better?”

The U.S. Data Cupboard yesterday was another bag-o-mixed-nuts, with Initial Jobless Claims remaining above 275,000 for the week, Existing Home Sales printing at a 2% gain for July, the Philly Fed Index popping higher, but the Leading Index going negative in July. And this data, leading index, was probably the straw that broke the dollar’s back.

The July Leading Index was a negative -0.2%…  and that’s not a good thing folks. The markets were quick to jump on the data and push the dollar down, and support bonds.

Today’s Data Cupboard only has the Markit U.S. Manufacturing Index (PMI). I would think that give the regionals, that this data would be unchanged around 53.8.  But it wouldn’t matter to the markets unless it printed a real rogue number!

And gold — first it was the Chinese move last week that got gold moving in the right direction, and this week it’s been the continuation of the fear that the Chinese might cause an avalanche to come down on global growth, and that the FOMC Minutes told of the Fed’s focus on the lack of inflation, and that’s got gold pushing the appreciation envelope this week.

Each of the past few days this week, we’ve started out with a small gain in the early morning trading, but as the day has gone on, the small gains have turned into larger, and much nicer gains. I don’t know if this is all the start of the next bull run for gold.

But if it is, are you glad that you bought at the cheaper levels that I kept pointing out?

I’m somewhat off kilter this morning though, as I look at the screens I see gold up a couple of bucks and silver down 13-cents. Hmmm…  Oh, well, don’t spend all morning trying to figure it out, Chuck. It is, what it is.  And it just means silver gets to play catch-up! HA!

Recall last week when I told you about me using a Power Point picture of a guy at a school desk looking like he was banging his head on the desktop and said it was me, because I had said there was a Treasury Bubble and it would soon pop? Well, guess who’ll be the next guy to sit at that desk and bang his head on the desktop because he said there was a Treasury Bubble and it would soon pop?

Drum roll please….

None other than the former Fed Chairman who once said that he couldn’t spot a bubble. Alan Greenspan!  Or Big Al as I used to call him.

Yes, Big Al, said that, “it was appropriate to be very afraid of the bubble, as the bond market price-to-earnings ratio was at an extraordinary unstable position”.      So, do you want some more from the former Fed Chairman this morning? I found this here in case you want to read the whole article.

The former Fed chairman says the current situation in the bond market is comparable to what happens in the stock market during an equity bubble.

Noting that stock-market bubbles are typically characterized by extreme price-to-earnings ratios, Greenspan said extremely low yields are telling a similar tale for bonds.

“If you turn the bond market around and you look at the price of bonds relative to the interest received by those bonds, that looks very much like the usual spread which would concern us if it were equities, and we should be concerned.” – Alan Greenspan

Chuck again. Well, maybe Big Al got the memo from his former colleagues at the Fed, that they were no longer going to manipulate interest rates lower, and therefore would no longer need to buy bonds and artificially hold yields down, because that would certainly bode well for his timing on making this call of a Treasury Bond Bubble now.

But in the end, I think he’ll be sitting next to me at the school desk banging his head on the desktop, and wondering why he made that call.

Well, I guess it’s time to get off this bus today, and send you on your way to a fantastico Friday!

Regards,

Chuck Butler
for The Daily Reckoning

P.S. The Daily Pfennig is first published everyday, right here.

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