Veteran's Day Sell-Off

So… It seems that most of this selling of the currencies and precious metals happened yesterday, while I was out observing Veteran’s Day… It was like a scene from September 2008, with all the risk assets of stocks, currencies, and commodities all being thrown into the same barrel and shot full of holes! With the US banks closed, the volume was limited here in the US and I think that played into the nastiness of the sell-off of the risk assets.

Even gold, which when I signed off yesterday was up $14, lost a ton! Gold sold off $21, but the real sell-off was $35, given it WAS up $14 at one time! I received a request from an interviewer to answer a question yesterday about gold… The question was whether gold is in a bubble… I fired off an answer, well, as fast as my fingers can tap out a message on my phone! Basically, I said this… No… I do not feel gold is in a bubble… Here’s the test I use… I was in a restaurant with a buddy… I said that I could stand up and ask who in the restaurant owned gold, and I bet there would be no one, or maybe a smattering of hands in the air… Until that changes, I don’t see gold in a bubble…

So, a $21 or $35 sell-off provides cheaper levels to buy this morning, now doesn’t it? It certainly does, Ollie!

I was asked on a panel I participated with last week in Cabo, what could bring gold down?

My friend and colleague at the Sovereign Society, Eric Roseman, answered first, and said interest rates… But not the first or second or even the third 25 basis point rate hike that the Fed is likely to do… Real interest rate spreads over other countries…

I then took the microphone, and talked for the next 10 minutes it seemed like… I’m sure it wasn’t, or else the moderator, Mr. Van Simmons, would have cut me off! But what I said was that yes, big interest rates could cut off gold, but I wouldn’t be so quick with that, as in 1981 when gold was climbing to near $900, interest rates in the US were around 18%… But, that was a different time…

What I think could cut gold off at the knees is another financial meltdown… Or… the opposite… In other words, it could very well be that we go in a straight line to the moon from here, and our unemployment problem reverses, no more QE, deficit spending stops, and so on…

So… Basically… I don’t see any of those three happening for some time, and that should be a good thing for gold, eh?

The G-20 meeting concluded without any major agreements to do much of anything… G-20, Schmee 20! Just a big boondoggle! Here’s what the final communiqué said… The G20 agreed “to move toward more market-determined exchange rates and shun competitive devaluation”, but at the same time endorsed “macro prudential steps to fight capital inflows by emerging market economies with overvalued FX rates”.

In G-20 parlance, that last statement simply means that the G-20 would endorse Capital Controls, which, in my feeble gray matter tells me that the two thoughts are contrasting… But what else would be new for these guys at G-20?

The US proposal to limit or set targets for Current Account levels got watered down, big time to no more than a line to, “develop indicative guidelines to spot big current account imbalances”…

While in Seoul, our President took a swing at the Chinese once again, and accused them of “intentionally undervaluing the yuan” (CNY)… Hmmm, let’s look at the scorecard, should we? The Chinese renminbi has gained 28% verus the dollar since dropping the peg in July of 2005… The dollar index has dropped 14% since that same time… So, in reality, the renminbi has done more to correct imbalances than the dollar has!

But that doesn’t play well with the administration or lawmakers here… For it’s far easier to point blame at someone else than to own up to your problems and tackle them… So… we continue to point at China, when in reality we should be sending them fruit baskets every month, for buying as much of our debt as they do! Sure, it was an such easy game to play, now they need a place to hide away, they sell us their low cost things, and then take the money and buy Treasuries… But… That’s all changing right before our eyes, folks… The US recession saw to that!

So… We have all that going for us this morning… NOT!

The Irish bond problems continue to weigh heavily on the euro (EUR) this morning as spreads have really widened… Let’s use Ireland as an example as what will happen here eventually… Ireland runs their deficit spending up to levels that begin to scare the bejeebers out of bond buyers, and the bond buyers balk at buying any more Irish bonds (debt)… So what does Ireland do? Well, they have to widen the spread versus German and US bonds… This makes the Irish bonds more attractive… But you know me… I’ve said this for years. You can put lipstick on a pig, but you’ve still got a pig!

There was a back room deal at the G-20 meeting between France, Germany, Italy, Spain and the UK (and others) on the Irish debt problem… Afterward, a joint statement was issued that pledged support for Ireland… This statement immediately brought Irish bond spreads in by 40 basis points! WOW!

When I turned on the screens this morning, the euro was trading 1.3685, and as I was typing my fat fingers to the bone, I watched the euro rise to 1.3725, and I thought to myself… We could have a “healing Friday” for the currencies… But, then just as quickly as the single unite moved to 1.3725, it fell right back to 1.3685! So much for that healing Friday, eh?

There’s only one piece of data in the data cupboard this morning, and it’s the U. of Michigan Consumer Confidence for the first two weeks of November… The index is expected to jump 2 figures to 69… Hmmm, I’ve got a thought on that… I guess the election results last week probably played into this jump to 69… But I guess the trumped up gains in jobs probably will carry the ball here…

I saw yesterday that China had printed their latest report on Consumer Inflation, which showed a rise of more than 4%… Now, there are reports that maybe adjustments are being made to hide the true rate of inflation. A think tank, the Chinese Academy of Social Sciences, published an article saying that for the past five years the inflation rate had been understated by more than 7%…

See… I told you China was becoming more like a capitalist country! They are now hiding their true inflation rate, just like we do here in the US! It’s all about making people “feel good”… Here, there and everywhere!

Well… The news from Wednesday about Mexico allowing (maybe) their pension plans to buy commodities only lasted about 24 hours, as the commodities were sold off big time all day and all night… And that means the commodity currencies also got sold off! Both the Aussie dollar (AUD) and Canadian loonie (CAD) lost the parity handle respectively, and don’t look very strong going into the last trading day of the week. (Of course, when I say they don’t look very strong, it’s all relative, right? I mean, if I told you 6 months ago that both the Aussie dollar and loonie were going to be trading at 99-cents on November 12, 2010, you would have been fitting me for a white suit!)

German growth slowed in the third quarter, after posting record growth in the second quarter… Exports cooled in the third quarter… Guess what? Well, in the third quarter, the euro went from 1.18 to 1.40… I guess that would have a lot to do with exports cooling down, eh? I have further thoughts on this in the “Then there was this…” portion of the letter in a bit…

I see the President was telling people in Seoul that “deflation is a huge danger to the US”… I shake my head in disgust, as our officials keep harping about deflation, when we have food prices and commodities going higher and higher! And… This love affair our central bank has with growing inflation… Folks, two years ago I told you all to start a journal to record all the historic things that were happening, so that one day, you could sit down with your grandkids, and tell them exactly what happened, and why it is that they now have tax burdens, less freedoms, and no purchasing power… And this deflation talk is another entry to your journal… Sure we saw deflationary asset prices, but except for housing, those asset prices have recovered… If the government would go back to pre-1990 methodology for calculating consumer inflation, they wouldn’t be talking about deflation!

OK… I’ve got to stop right there with that discussion, as I could feel my blood pressure rising…

Then there was this…

German Chancellor Angela Merkel said a US proposal for the Group of 20 nations to limit national trade surpluses has been rejected. Major exporting nations, including Germany and China, opposed the measure, which was backed by US President Barack Obama. “The competitiveness of individual market players should not be undermined by political limitations,” Merkel said.

Limit trade surpluses? What kind of nonsense is that? Once our republic was the largest creditor nation in the world, and that was all from trade surpluses! (That, and the fact that our government was limited!) I’m a trade surplus junkie, and so should this country be!

To recap… The risk assets traded September 2008 style yesterday and overnight with all three, currencies, commodities and stocks getting sold like funnel cakes at a state fair. Ireland’s bond/debt problems are weighing heavily on the euro, although a pledge to support Ireland from some G-20 members have removed some of the weight. German third quarter growth weakened from the second quarter’s record pace. The commodity currencies also got sold with both the Aussie dollar and loonie losing a full cent…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning