The Risk-On Rally Continues

Front and center this morning, Chris told you all about the new lines and lower borrowing rates that six central banks from around the world, have coordinated. And he told you that the markets liked the move… And the markets continued to like the move all day yesterday, overnight and this morning… But, does this sound like something that can outweigh the debt problems of the Eurozone? To me… The simple answer is no… The longer version of the answer is…

To me, looking at this away from the euphoria of the markets, I don’t understand how this move calms the markets… Instead, one would think that with six central banks coordinating a lending line and lowering rates would indicate that these central banks have the bejeebers scared out of them right now. And once again, I have to say that I’m very disappointed in any central bank that believes that creating money out of thin air is going to fix anything… The printing of money out of thin air is the major reason we’re in the mess we’re in!

And I’ve made myself crystal clear on this, folks… You don’t spend to get out of a deficit! And where are the lawmakers on this? Isn’t this something the lawmakers should be stomping their collective feet down on, and saying “no”?

I’ll tell you what this will all do… The Fed should stop and close the agreement to a specific dollar amount, instead of leaving it open-ended… I see an open-ended lending line getting the envelope pushed on it… The next thing we hear is that the Fed created trillions out of thin air, and what happens when you create money supply by the trillions? Inflation… pure and simple!

But… For now, the markets have not looked under the hood, and instead are marking up the risk assets… The euro (EUR) is spittin’ distance from 1.35, and gold is back to $1,750… Which reminds me of something I said a week ago or so, when gold was in danger of slipping back below $1,700… I said that such a move should be looked at as a “dip”, and that we should all take advantages of dips… Of course I could have been wrong… For it was just my opinion…

OK… Onto other things… Both France and Spain auctioned bonds this morning, and both had good covers, and France even saw the yield on their bonds fall… And Spain sold every bond they intended to sell. So, all-in-all, two good auction results… This news has helped the euro extend its gains from yesterday.

This auction news outweighed the news that the Eurozone’s manufacturing industry index contracted in November to 46.4 from 47.1… This is going the wrong way, folks… And now we have something to watch for. I told you all back in 2001 and have repeated it several times since, but a couple of months of consecutive prints below 45 in the Manufacturing index is an indication to me that a recession is in place…

But… A recession in the Eurozone doesn’t necessarily mean euro weakness… Remember, the euro is the offset currency of the dollar… So, if we go back a few years, to the last recession that fell on the Eurozone, we’ll see that the euro performed nicely, because… Eurozone fundamentals take a back seat to US fundamentals, and so it was that the US economy was also in dire straits…

In contrast to the euro this morning, the Aussie dollar (AUD), which gained a huge chunk of ground yesterday, is experiencing some selling this morning, after the Aussie Statistics Bureau, reported that retail sales slowed, rising just 0.2% in November (+0.4% was expected) , along with building permits… So… The euphoria in Aussie-land, has backed off, and that is being reflected in the Aussie dollar… But the Aussie dollar still holds a $1.02 handle, and that’s far better than what was going on in the currency last week!

Of course, the Aussie dollar, pushed higher yesterday on news of the lending program in the Eurozone, and… The news that China had reduced the reserve requirement, thus allowing more movement in the economy… And movement in the Chinese economy is like manna from heaven for the Aussie dollar…

OK… I’m seeking some slippage from all the currencies right now, as opposed to where the currencies were when I turned on the screens this morning… The Bank of England (BOE) Governor King, was talking when I came in this morning, and he was talking about “systemic failure” in banks… UGH! I see these things, and hear these things, and wonder out loud… “We already knew that, so why would these currencies get sold again, on the same old news?”

And the Central Bank of Brazil, was at it again yesterday, announcing that they had cut the internal rate 50 basis points (1/2%) to 11%… And the Bank also said that they will continue to cut rates at their 1/2% level. The central bank noted that they are doing this to offset the slowdown in the Eurozone… I doubt that is the real reason, folks… It’s all about a weaker currency with the Brazilian government…

Of course I still believe that they are going down the wrong road here… Their inflation ceiling target continues to be merely a suggestion to the Brazilian government and central bank… So, why even have one? As Forest Gump famously said… Stupid is as stupid does… (A note for the legal beagles, I didn’t call anyone stupid. I simply believe that these rate cuts are stupid, and questionable…)

I had to laugh this morning at a news headline that flashed across my screen… It was a story on Bloomberg that was titled: “Dollar proves best bet as investors reject stocks for safety of Treasuries”… I guess that story was written before US stocks soared to a +490 point gain yesterday… And Treasuries lost about 9 Basis points… Those results don’t coincide with the story, do they?

Could all this be simply a “dead cat bounce” for the risk assets? Could very well be, given my take on the lending program… So, be careful out there!

And the Swiss franc (CHF)… Geez Louise, I just can’t see the franc as the safe haven destination that investors around the world do… Switzerland’s problems are with a slowing economy, and a central bank that will fight to the end to keep the franc from getting stronger… Swiss manufacturing for November fell to 44.8 from 46.9 in October… I would steer clear of a currency that has the central bank and economy going against any increases of the currency’s value…

And a quick trip up to Norway seems appropriate, since I don’t talk about them much… Norway’s central bank, the Riksbank, has been adamant about keeping interest rates “steady as she goes”, as long as the Eurozone debt problems exist. But it may have to re-think that, for Norwegian House prices reported an annualized gain of 8.5% last month… But, until the Riksbank re-thinks that stance, the krone (NOK) will continue to get tarred with the same brush as the euro… This doesn’t take into consideration the strong monetary fundamentals of Norway… We can only cross our fingers and be patient for those fundamentals to return to currencies…

The Fed’s Beige Book printed yesterday… And the Beige Book’s assessment of the US economy remains frustrated with the low-key pace of expansion. They are frustrated with the subdued hiring activity, and the fact that housing is only seeing limited improvement… There was nothing in this report that would indicate to me that interest rates are going anywhere here in the US for some time… The Fed has said the middle of 2013, but should this kind of subdued activity continue (which I believe it will) could push that out further…

And the data cupboard is chock-full-o-data again this morning… The ISM Manufacturing Index for November will be important, as will domestic vehicle sales, and Chain Store sales, and then finally the Initial Jobless Claims for last week… I think the markets should not pay too much attention to this weekly report on jobless claims from last week, because of the shortened Holiday week. So, when the lawmakers are jumping up and clicking their heels together because the jobless claims fell last week, you’ll know better!

Then there was this… Well… There’s no other way to look at the lending program coordinated by six Central Banks, as nothing more than a bailout for the Eurozone… Hey! Did a Fed official call you and ask you if you wanted to bail out Europe? I didn’t think so. I also find this coordinated effort suspicious… Last week before the Thanksgiving holiday began, I told you how a German bund auction failed… So… Wasn’t Germany the lender of last resort for the Eurozone? And now their bund auction failed… That’s akin to the lender of last resort running out of money! And then the Fed and others step in, and say, that the line was created in case it was needed…. I would say that’s stretching the truth a bit, wouldn’t you? For the Eurozone needs this cash now!

To recap… The lending program and lower rates that was coordinated by six central banks, including our Fed, continued to push the risk assets of stocks, metals and currencies higher all day yesterday, through the night, and into the morning European session. Some slow data in Australia has caused the Aussie dollar to slip from yesterday’s levels. And ISM and jobs reports print today here in the US…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning