The Markets Don't Like Income!

Well… Another day has been put to bed without a Greek default… Apparently there was a conference call this morning between the leaders of Greece, Germany and France… I wonder if French President, Sarkozy, was a little cynical with the Greek leader… I mean French giant bank Soc. Gen. had its debt rating downgraded by Moody’s overnight… Sarkozy could be putting the blame on the Greeks… Could be, I didn’t say he was! But isn’t that the nature of everyone today? It’s always somebody else’s fault…

Well… We saw the currencies and metals have a mini-rally yesterday. Everything was turned around and heading higher versus the dollar, so I packed up and headed home, thinking that for one day, at least, all the problems of the Eurozone, and US were forgotten about, and fundamentals had slipped its toe in the door…

But… That thought only lasted until I arrived this morning, and turned on the currency screens… The euro (EUR) is holding on, although yesterday the single unit traded above the 1.37 figure (it’s 1.3660 this morning), and yen (JPY) is stronger, along with renminbi (CNY)… But the high yielders… OMG! They are getting taken to the woodshed today! Apparently, everyone awoke from their collective daydream, and realized that the problems in the Eurozone and the US have not gone away… And in their awakening, they decided to take it out on the high yielders…

Of course, when I say high yielders, these current rates are not “high”… But they are “high” versus the zero-rate regimes of the US and Japan… Australia, New Zealand, Norway, Brazil, and Sweden are all getting whacked and whacked good… Reminds me of how my grandma would tell me to go find a switch to whack me with when I was bad… That’s how bad their collective performances have been overnight!

Apparently, the market mentality is to sell practically the only assets that pay them income, when things get hairy in the markets… Oooh… Sign me up for some zero interest rate assets! NOT! I just don’t get it… I see it happening, and I can read what the pundits are saying about it, but it just doesn’t register as prudent in my head… When things are getting hairy, I would rather be getting paid some income, wouldn’t you?

But… I learned long ago, when I first began trading short term instruments, like T-Bills, Commercial Paper, Bank CD’s and Bankers Acceptances (now there’s a good one! ) that, it’s suicide to say the market is wrong on this and I’m going to prove it by going long XXXX… Since those days in the early ’80s, I have come to trust that I just need to bide my time, and eventually, the market comes around to Chuck’s way of thinking… At least that’s my story and I’m sticking to it!

I’m seeing a lot of financial institutions lowering their previously strong forecasts for the euro… Hey! You’ve got to go with the times, right? These guys have no mantra of, “that’s my story and I’m sticking to it”… It’s more of a “what have you done for me lately”… Not that there’s anything wrong with that!

But I tell you this simply to bring to your attention that the BIG BOYS are lowering their forecast for the euro… But not as much as you would think! Not like the John Mauldin forecast of parity for the euro!

I mentioned to you yesterday that Italy was in talks with China in an effort to obtain Chinese financing of Italian debt… Better to have your financing all lined up when you go to the market, eh? I also read last night that Italy has more debt than Spain, Greece, Ireland and Portugal combined! WOW! I didn’t know that! So… I think it would behoove Italy to be sending flowers and chocolates to the Chinese leaders… They might even think about offering to mow and landscape their lawns!

I would think that the Chinese have a vested interest in keeping Europe afloat, for not only exports but their previous investments too.

Do you find it interesting that Italy went to China, instead of the US for financing? I mean, didn’t the title of “World’s Financier” belong to the US? Not anymore… China has taken that title away from the US and that’s another reason I believe that China is taking steps to remove the dollar as the reserve currency of the world…

OK… A couple of data prints yesterday were really revealing for the US… First… The Monthly Budget Deficit printed at $134 billion! In one month! If that were annualized, our budget deficit would be $1.6 trillion! Hey… I thought we were going to begin cutting our spending?

The other thing that hit me square between the eyes was a report that showed that 1 in 6 Americans live below the poverty level. Yes, about 46.2 million people, up from 43.6 million in 2009, live below the poverty level… That’s a 15.1% rate, which is a 17-year high, folks… In case you’re wondering… The poverty line for a family of four is $22,314… 2010 marked the 4th consecutive year that the poverty level has increased…

OK… That’s scary, folks… And I just don’t see how, with 23% unemployment, we can turn that around any time soon… And the other thing that scares me for our future here in this country is that we need to invest to create wealth… And those investable funds are shrinking…

The Big Boss, Frank Trotter, does this thing in one of his presentations about the investable funds available in the US… Let’s do the math… This will really open your eyes to what I’m talking about here…

Total Investable Assets in the US    $26 Trillion (pretty good, eh?)
Population                $300 million
Households                $124 million
Average Investable Assets         $209,000 (still pretty good, eh? )
Median (remember from statistics?)     $6,000 (not so good now!)

So… The Average Investable Assets are $209,000 but, that includes the “Bill Gates” and “Warren Buffets”… So, when you calculate the Median amount that’s available per household to invest, it drops to $6,000…

OK… As I was typing this morning, the currencies are fighting back… Could this just be short-lived? Well, I would think so, given the black cloud hanging over the Eurozone like the Sword of Damocles…

And gold is fighting back too, having spent the morning (for me, not everyone else!) in the red the shiny metal has now crossed into the green! I read a real scary piece from friend and former colleague, David Galland yesterday regarding the dollar-based monetary system and the cracks in the system… All the time I was reading the article I was thinking, “man am I glad I own gold and silver, and I should probably buy some more!” David’s thoughts are always at the top of my list of people that I read…

OK… You know me… I’m not a fan of a lot of the people who have put our country in this debt mess we’re in… And I used to call them dolts and stuff, but got my wrists slapped with the ruler for that, so I became kinder and gentler… But this story just cracked me up, and reminded me of another story that cracked me up… You can file this under the heading “The Kettle Calling the Pot Black”…

US Treasury Secretary Geithner will be heading to Europe soon, to encourage them to work out their debt mess… As long as he just encourages them, and doesn’t give them any “hints” on how to work out their debt… HA!

And then this… I came across this in my inbox, which got completely out of control, after my trips to Vancouver, personal vacation, and San Francisco last month…

Former Fed Chairman Greenspan, and economist and former US Treasury Secretary Summers, were dissing Big Ben Bernanke’s quantitative easing implementations… Greenspan didn’t think too much of all the stimulus…

Then there was this… I came across this quote by Benjamin Franklin… Pretty cool… “This Currency, as we manage it, is a wonderful machine. It performs its Office when we issue it; it pays and clothes Troops, and provides Victuals and Ammunition; and when we are obliged to issue a Quantity excessive, it pays itself off by Depreciation”. — Benjamin Franklin…

To recap… The currencies and metals enjoyed a mini-rally yesterday, only to see most of it wiped out in overnight trading. The high yielders were taken to the woodshed, as the market mentality is to sell what pays you income… ? Yes, sad, but true… However, as the morning progresses today, the currencies are fighting back! One in six Americans live below the poverty level, a 17-year high, and the fourth consecutive year of increases. And the Monthly Budget deficit printed at a mere $134 billion last month… OUCH! Hey… I thought we were going to begin to cut deficit spending, not add to it!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning