US Dollar Gets Rewarded for Bad Economic Data

Good day. Whew! I’m glad yesterday finally ended for the risk assets, as they got shot down in cold blood yesterday. There we were, looking at the currencies having a decent day of trading, and then the trapdoor sprung, and there was blood in the streets. I’ve seen sell-offs before, but this one was in the top 10, for sure. So there I was looking for the reasons that not only currencies and metals were getting sold, but so too were stocks.

When you get right down to it, U.S. Treasuries weren’t exactly the main beneficiary of the risk asset sell-off; the 10-year lost (gained in price) four basis points. So let’s go to the tape and take a look at what I think triggered this massive sell-off yesterday.

First, we had some really awful economic prints here in the U.S., and if we were back “in the day” of fundamental trading, these reports would have triggered a dollar sell-off. Reports like the weekly initial jobless claims showed more claims filed than forecast, and the previous week’s number was revised upward. And the Philly Fed report on manufacturing in that region, which followed up May’s negative index number of -5.8, was an even worse negative index number of -16.6.

The thing about these regional manufacturing reports is that they contain an employment component, and with a negative index number of -16.6, you can only imagine how awful the employment component of the report was. Last week, we had the Empire (N.Y. region) index fall to -5.8, and next week, we’ll see the Chicago region report.

I would think you could expect to see that one hit the skids too. Manufacturing as a whole is about to take a ride on the slippery slope. And let’s not forget that one of the president’s mandates from his State of the Union address last winter was that manufacturing would double this year.

Ahem, I don’t think we’ll get there. But think about that for a minute. I tell this in presentations, so you get a taste of things I talk about in my presentations. If the president wanted manufacturing to double, he was also saying that he wanted the dollar to weaken, for you can put a graph of the manufacturing index on top of a graph of the dollar index, and you’ll see that manufacturing rebounds only when the dollar is weak. He didn’t say he wanted a weaker dollar, but I knew what he was saying, and now you do too!

And that’s not good for the risk assets, given the new way traders look at things. Ever since the financial meltdown of 2007-08, the trading pattern is to reward the dollar when things look bleak in the U.S. And when things look bleak in the eurozone, as they do now — although I’ve got a twist on that thought in a minute — the traders and hedge fund gurus all flock to dollars.

But should they? They do, and the markets are never wrong, right? That’s what I was taught by my bond trading mentor, Ed Bonawitz. 1981. That’s a long time ago, Ed. We were strapping young men back then, eh? I digress, and I apologize.

Seriously, think about this for a minute: The U.S. and the eurozone as a whole (17 nations) are basically the same size, economywise. The eurozone is actually a tad above, but for those of you keeping score at home, both contributed 20% of the world/global growth in 2011.

Viewed collectively, the 17 nations that make up the eurozone comprise one of the richest regions in the world, and on many other measures of economic success — like balance of trade, overall size of budget deficit and national debt relative to GDP — they beat the U.S. by a wide margin. They are like a baseball team that looks good on paper, but are dysfunctional and can’t play together, and eventually lose.

So you can understand why eurozone leaders get upset when U.S. leaders, or even U.K. leaders, talk about the need to fix the eurozone. The next time U.S. Treasury Secretary Tim Geithner talks about “helping the eurozone with their debt crisis,” the eurozone leaders should ask him why he’s talking to them, when the U.S. budget deficit is 8%, and the eurozone’s is about 3%.

But the cold, hard facts is that the 17 nations don’t have a blueprint, if you will, to how they intend to resolve this debt crisis they are experiencing, mostly from the Club Med countries. But maybe that all ends this weekend. Leaders of the four largest economies of the eurozone will meet in Rome, where I do believe that these leaders will come up with the blueprint that contains all the stopping points, bottlenecks and how they will address them. Then they can take that blueprint to the eurozone summit that takes place next weekend.

Of course, everyone and their brother wants a “eurozone bond.” But think about here in the U.S., we have Treasury issuance to deal with our unsustainable debt. But does that solve our issue of the debt in the first place? No. So just having a eurozone bond settles the markets, and the runs on the Greece and Italian bond yields will go away. That helps, BIG TIME, but without spending cuts, it doesn’t solve the debt problem altogether.

A week ago or so, I told you about a plan that I thought the eurozone leaders would agree to, including Germany, for it was Angela Merkel’s idea in the first place! And that is a European Redemption Fund.

But whatever the choice, the agreement must be solid; it must be presented as the blueprint for the future of the eurozone and the euro (EUR), and there had better not be any squabbling! Do all that, eurozone leaders, and you just might save the union. But you HAVE to have a blueprint, because this putting out fires one by one isn’t working!

Whew! I was really banging on the keys there! I had all these thoughts in my head and finally got them written down — well, not written, but typed! Think I’m crazy? Wouldn’t you like to see the U.S. come up with a blueprint on how they are going to deal with the debt servicing (paying bond interest) on their outstanding Treasuries in the future?

And what should we do about that ever-growing national debt, which stands at $15,803,300,000,000. That’s $15.8 tRILLION! Because as I’ve told you before, in just three short years, 2015, if we do nothing — and we won’t, for there is no political will to do so — the debt will be $20 trillion, and in 2016, it will be $22 trillion. You see, the longer you go without doing something to reduce the number, the larger the increases become.

OK, I’m switching gears here and going into overdrive. I saw this news story yesterday and wanted to crow a bit, but there was no one to crow to, except Mike Meyer, and he was busy!

After I spent the morning yesterday talking about how the auditors in Spain were taking longer than they said they would, they came out with their report yesterday! UGH! OK, as I said I thought would be the case, the auditors found that the troubled Spanish banks need 62 billion euros — which is far below the 100 billion euros that was allocated by the eurozone.

There were quite a few analysts and economists that said 100 billion euros wasn’t enough. They apparently were wrong, but let’s not get into that. The thing to take away from this is that the eurozone as a whole doesn’t have to go into debt by as much as previously thought.

When the price manipulators smell blood, they go for a huge bite, and that’s what happened in gold yesterday (silver too). The risk assets were getting sold, but not like hot cakes at a state fair — that was reserved for gold and silver. When I walked out of the door yesterday afternoon, gold was down $40 and silver was down $1.50. The euro lost 1.5 cents; the Australian dollar (AUD) lost 1.5 cents yesterday. But Gold lost $40! If that wasn’t a clear case of price manipulation, I’m a monkey’s uncle! (Sorry to all my nieces and nephews; it’s just an old saying.)

I saw this quote by my longtime favorite analyst and the godfather of newsletter writers, Richard Russell, on gold price manipulation and thought it would play well here. Here’s Richard: “It is clear that China intends to be the world center for buying and selling gold. The plus in all this for Americans is that the price of gold will be out of the grip and manipulations of the Federal Reserve and the Comex.”

But for anyone that wanted to buy gold or silver this week, we sure have cheaper prices this morning! Gold is up $4 this morning, but as we saw yesterday, that’s no protection from the price manipulators!

So the currencies and gold are attempting to heal a bit this morning, but the healing is nascent at best. I told you yesterday that the data cupboard would be empty today, so there will be no trapdoors sprung by weak U.S. data today.

Germany plays Greece today in the Euro 2012 tournament. I said earlier in the week that I found this matchup to be ironic in that the Greeks will be playing their main creditors.

Then There Was This… I saw this story on Reuters and thought it to play well with my call that we’re about to enter the backside of the financial storm that first hit us in 2007-08. The story is talking about how financial analysts are scaling back their summer vacations in fear that another summer of volatile markets is about to take place:

“While only a minority of financial advisers and mutual fund managers interviewed by Reuters are completely canceling their plans, many are scaling back. And those who are doing so say that since the 2008 financial crisis, their summer vacations have not been the same. Now they are hesitant to leave the office because of the potential for a third summer in a row of volatile markets.

“Markets have seen two volatile summers in a row. In August 2011, the Dow Jones Industrial Average swung more than 400 points four days in a row — a record — as worries about the European debt crisis and a credit rating downgrade in the U.S. roiled markets.

“Now, with concerns about Europe and a slowing U.S. economy back again, advisers and portfolio managers say that if the past two summers are a guide, even more clients will want to be able to quickly schedule face-to-face meetings.”

Chuck again. Don’t you feel sorry for these guys? HA! I’m not canceling or scaling back my summer vacation! Vacations are what make you stronger at your job!

To recap… Bad data here in the U.S. and more fears from the eurozone sprung the trapdoor on the risk assets yesterday. The euro lost 1.5 cents, gold lost $40 and stocks lost 250 points — the blood was in the streets. Probably a top 10 of sell-offs that I’ve seen in my days on a trading desk. Leaders from four of the largest eurozone economies will meet this week in Rome, ahead of the European summit next weekend. Chuck lays out his agenda and conclusion of the meeting, in order to save the union and the euro.

Chuck Butler
for The Daily Reckoning