US Manufacturing Plunges!

Good day. I’m very sorry for all the time I’ve been missing lately due to being “under the weather.” I am staying home again today, but more of a rest and recover than anything else. I had planned on being gone the rest of the week before all of this, so one more day will be fine. I spent the day, yesterday, seeing three different doctors. So at least I was having fun while away from the office! Since I missed the first day of July… Welcome to July.

I did not look at the markets at all yesterday, as I tried to nap whenever I could. So this morning, I had to dive deep into the research available to me at home. But one thing I did see yesterday was the awful print on the U.S. manufacturing index (ISM). I’ll get to that in a minute, but first I want to say that as far as I can see this morning, the dollar is weaker going into the Fourth of July holiday, but the weakness is pretty much muted with all the goings-on in Europe still lingering on the markets minds.

OK, I saw a headline yesterday that said, “Markets Are Surprised by Weak Manufacturing Data.” What? At least you, dear readers, weren’t surprised to see the manufacturing index hit its lowest point since mid-2009. For those of you keeping score at home, the ISM manufacturing index fell to 49.7 from 53.5 (in May). Remember, any number below 50 represents contraction in manufacturing.

You, dear readers, had been alerted to this potential weakness in manufacturing by me, as we tracked the regional data, which showed weakness all around. And then we have the other thing hanging over manufacturing like the Sword of Damocles, and that is the dollar.

Now, in one of the presentations, I highlight this because in January, the president said we were going to “double manufacturing” this year. I point out that if that’s the way it was going to be, then the president just signaled major weakness for the dollar. For manufacturing needs that weaker dollar to make their exports more competitive overseas.

We didn’t really get that weaker dollar, did we? The goings-on in Europe really threw a spanner in the works for the “plan” — the dollar has been relatively stronger, and the manufacturing sector circles the bowl. So we knew about the regional weakness, we knew about the relative strength of the dollar and, in our back pocket, we know that Chuck has called for the U.S. economy to be hit by the back side of the financial storm that hit us first in 2008. So surprised that manufacturing was weak? Hardly! Not us!

Moving on, these are not the droids we’re looking for. HA! In Australia today, the Reserve Bank of Australia (RBA) will meet, but I doubt they will move rates either way. Australia did see some very strong housing data last night — the number of building permits granted to build or renovate houses and apartments in Australia jumped a record 27.3% in May from April’s number. So the Australian dollar (AUD) is stronger this morning, and knocking on the door to $1.03.

I see that gold has moved past $1,600 this morning. The big rally in the metals last week, especially gold and silver, was a direct reaction of the results of the European summit.

I told you last week that the markets were pricing in disappointment for the summit, and quite frankly, they were so negative toward what might come or not come from the meeting that anything positive would have kicked off a rally. I mean the markets were THAT negative. I even thought there would be disappointment. So the fact that there was some real traction, with more coming (as promised), was real reason to reverse the shorts that had been put on in gold and silver.

I still don’t believe for one iota that the eurozone is out of the woods, folks. The eurozone leaders have taken a step, but there are many more that need to be taken. On Thursday this week, the European Central Bank (ECB) will meet, and unfortunately, I believe — and believed this last month, too, but was wrong then — that ECB President Mario Draghi is going to feel as though he needs to cut rates to promote growth. He resisted last month, but the pressure on him now is double what it was last month. So I’m going to go out on the limb again, and say the ECB will cut rates on Thursday.

One wild and crazy currency lately has been the Brazilian real (BRL) — beaten and battered for some time now, as the government does everything they can to weaken the currency. The latest move by the real has been one of recovery. And this morning, it rallied to a level below two for the first time in what seems like a month of Sundays! (Remember, real is a European-priced currency, so the lower the number, the greater return in dollars.)

I read this morning that the Brazilian government has been reversing the dollar swaps they did to weaken the currency — in the swaps they were selling real and buying dollars. This is very strange, but not a surprise, for you longtime readers will recall me telling you that the government will realize sooner or later that they need foreign investment in their country to help finance the infrastructure needed for the upcoming World Cup and Olympics. If this reversing of the dollar swaps continues, then the Brazilian government realized their dilemma sooner.

So the currency rally this morning isn’t a one for all and all for one kind of rally, in that there are a few currencies being left behind. Like the Japanese yen (JPY) and the U.K. pound sterling (GBP).

In the U.K. this morning, there are a ton of rumors swirling around about the Bank of England (BOE) and their involvement in the LIBOR fixing scandal. There are also rumors going around that the BOE is going to implement another round of quantitative easing. We might hear about that as soon as Thursday, when the BOE meets.

And you know what I’ve said for about five years now: What happens in the U.K. normally hits our shores a few months later.

Then There Was This… I did read The Daily Reckoning (DR) yesterday afternoon, and there was an article written by Dan Amoss titled “The Path to $10,000-an-Ounce Gold” about how countries will re-price gold to put their books in order.

You know, the talk that has been going around for years now about how if the U.S. re-priced its gold, their problems would be solved —  remember when I gave you the math and showed you the total ounces of gold that the U.S. supposedly owns, and that re-pricing it to $10,000 still didn’t ease our problems. Here’s a snippet of what Dan has to say regarding all this :

“There’s a plausible path to $10,000-an-ounce gold. And it doesn’t require a breakdown in civil society…

“Speculators see central bankers as modern-day superheroes, able to push markets around with a single phrase. In the minds of most investors, Ben Bernanke, Mario Draghi and Masaaki Shirakawa might as well be wearing tights, masks and capes. These superhero central bankers continuously swoop down into the financial markets to defend them from downticks… and to insure that they always deliver capital gains.

“The reality, of course, is that these superheroes are frauds. They have no superpowers… other than the power of mass delusion. The powers of Mario Draghi and the other central bankers in Europe are waning. Excess debt is like kryptonite: Each new wave of printing has less impact on markets. As the popular phrase goes: ‘This is a solvency problem, not a liquidity problem.’

“Right now, central bankers are diluting the value of debt very slowly by pushing interest rates below the rate of inflation. Some call this ‘financial repression.’ It’s an unspoken policy that has many negative consequences. What is an alternative, since all attempts to ‘fix’ the current system with more borrowing and printing are failing?

“How about the classical gold standard, which stands out as the least flawed of all the systems we’ve tried. Each nation could choose to peg its local currency to gold at a price that allows for enough growth in bank reserves to greatly reduce the burden of public- and private-sector debts”

Chuck again. The number for the U.S. would have been greater than $10,000, folks, but isn’t that pie in the sky for gold holders? You bet it is!

To recap… the currencies, for the most part, are stronger today, as dollar weakness is the call going into the July Fourth holiday here in the U.S. The U.S. manufacturing index plunged below 50 in June — no surprise to us, but a surprise to the markets. The RBA meets today and will keep rates unchanged, which will help support the rise in the A$.

Chuck Butler
for The Daily Reckoning