Will The CFTC Have Teeth?

The currency rally late last week and Sunday night is over… I think the two comments I told you about yesterday from a German official and then from the German Finance Minister (about the prospects of a “solution for the Eurozone debt crisis” being put to bed by next Monday) have really scared the markets into believing they went too far last week and Sunday night…

They believe that they pushed the envelope too far on the currency rally…to prove that, in numbers, the only major currencies in the black this morning are dollars and yen (JPY)… No, not even the Chinese renminbi (CNY), which normally bucks the trend, is in the black this morning. I even thought (and said so in yesterday’s Pfennig) that I didn’t believe the euro (EUR) was on terra firma… And so it isn’t…

On a sidebar… A couple of years ago, I actually had a reader that truly believed that whatever I said caused the markets to move… In other words, he thought the Pfennig (and me of course) could move the markets… HAHAHAHAHA! Look, there are a good number of people that read the Pfennig each day, but nothing like the market letters that my friends, John Mauldin and David Galland put out… And even with their subscription levels, I doubt they could move the markets with their suggestions… So…  Now we are all on the same page, right?

Well… Even gold is getting sold alongside the euro this morning. The shiny metal is down $15 as I type my fat fingers away here. So, the risk takers have cowered once again to the risk aversion campers… And the flight to “safe haven” is back… The 10-year Treasury, which yesterday morning saw its yield rise to 2.28%, has rallied back to 2.12% yield, which means, investors are selling their risk assets again this morning, and once again filing back into line to buy Treasuries… Apparently, enough time has passed for them to have forgotten the pain! The pain of losses…

The stock jockeys weren’t spared either… So it was a true risk reversal day… And has been carried over to today’s European session. So, if it’s all tied to whether Eurozone leaders can put forth a plan to deal with the debt crisis by next Monday, we might as well review where the Eurozone leaders stand this morning…

And here’s where I can understand why the markets are reversing their trades made after the end of the G-20 meeting, where Eurozone leaders pledged that a plan would be presented by next Monday. It’s the same-o, same-o, situation, it’s the same-o ball and chain… National interests, political saber rattling, egos, are a few of the roadblocks preventing the Eurozone leaders from really sitting down and ironing this out. And then throw on top of that, the news that Moody’s warned last night that France’s AAA rating is under pressure…

The Canadian Finance Minister, Jim Flaherty, threw a dart at the Eurozone leaders, in a speech he made in Dublin yesterday… Let’s listen to Mr. Flaherty… “Quite frankly, Europe’s response over the past year has been disappointing.” He then went on to say, “This is the world’s most immediate and pressing problem, and is threatening to bring the world to the verge of another recession.”

Of course, he’s just like most people in power… He can sit there and throw darts, but not offer up any solution… He should try it, he might like it! Besides, he could use the practice, for when the same thing hits his closest neighbor to the south…

Speaking of US debt… Yesterday, I told you that, well, let’s just repeat what was in the Pfennig yesterday… “The Federal Reserve said its holdings of US government debt on behalf of central bankers and institutional investors outside America has plunged $76.5 billion in the last seven weeks, the most since 2007…” And then I also told you that the US closed the books on 2011 and the final tally was a $1.3 trillion deficit…

OK… Do you know Bud Conrad? I met Bud a few years ago in New Orleans. He’s the economist for the Casey Research people… Doug Casey, David Galland, and more… Bud is usually very thorough with his research, so when I see something that he’s written that ties into what I’m talking about, I pull it to give credence to what I’m saying!

And yesterday Bud was talking about the plunge in US government debt held for foreign central banks… “What could be the cause of all this? The Senate passed a controversial bill that threatens to punish China for ‘currency manipulation’ which will bring mandatory tariffs. China’s opposition to the Senate action could be the power behind the big shift in direction of these custody holdings. In an election year, government action against Chinese imports may be seen as supportive for US jobs, thus garnering votes. But unintended consequences of decreasing liquidity in the credit markets will put pressure on financial markets. The movement shown in these charts could be the result of China’s reaction to some of those anticipated policies. We can’t tell what country is doing the selling until two months have gone by and the TIC data are published. In some senses, it doesn’t matter which country is behind the shift. If rates begin to rise rapidly, even in the face of continued Fed manipulation, it could call into question confidence in the Fed’s ability to keep supporting the economy. The rate on the ten-year Treasuries jumped from 1.8% to 2.2% in the last week. Foreign selling of this magnitude is dangerous for the dollar, and it could be very bad for US interest rates.”

Now… Bud doesn’t say it here… But to keep interest rates from soaring when foreign buying of US debt wanes, the Fed is going to have to step in and buy what the foreigners don’t. Can you say “quantitative easing”? I thought you could!

OK… Yesterday I told you that I thought that the Chinese 3rd quarter GDP would come in greater than 9%, and it did… Printing this morning at 9.1%… And guess what all the media is going gaga over? The fact that this is the slowest pace for China’s economy since 2009… I say yeah, yeah, yeah, wooo! Look folks… I’ve said this for over two years, while everyone else was calling for a collapse of the Chinese economy… With all the things the Chinese government did to slow down inflation, it was bound to slow down the economy… Moderation…

Well… All this crying by the media and markets that the sky is falling once again in China, has the Aussie dollar (AUD) in a tizzy this morning… Yesterday the Aussie dollar traded past $1.03, and this morning, it’s around $1.0170! The Reserve Bank of Australia (RBA) printed their meeting notes last night, and really didn’t say much, but did leave open the option to cut rates “if needed” and they have “an improved inflation outlook.” Hmmm… Well, a quick look at the Aussie econ calendar shows me that next Tuesday, Australia will print 3rd quarter CPI… Which previously printed at 3.6%, and was much higher than the ceiling target that the RBA uses… In which case, if CPI prints anywhere near the previous 3.6%, I don’t see how the RBA could justify a rate cut… So, maybe by the middle of next week, we can finally put this rate cut talk to bed, which would be a relief for the Aussie dollar…

China did print a very strong Industrial Production number showing an increase of 13.8% in September from a year earlier… So, there’s still a strong economy going on in China… I just don’t see what the Chicken Littles are crying about this morning…

However, in Germany… Investor confidence, as measured by the think tank ZEW, fell to the lowest level in almost three years this month. For those of you keeping score at home, the confidence index number fell from 48.3 to 43.3… OUCH!

I’m watching Bloomberg TV this morning, and Bart Chilton is talking about the CFTC meeting, where the position limits will be voted on. He just said, “We’re dealing with historic changes in the markets”… WOW! Are there really going to be historic changes made? Because if there are going to historic changes made, you might want to think about buying some gold and silver before the price goes up because the bullion banks can’t hold such large short positions any longer… But then, if he’s just lathering us all up… I mean you have to learn what your failures have taught you or you’ll have to learn them all over again… Lessons learned are like bridges burned, you only need to cross them but once…

And by that I mean that we’ve been told before that this all was going to change, and it wasn’t… So, what’s it going to be, CFTC?

Then there was this… I know this might tick a few people off, and that’s not my goal here, but you can’t always make everyone happy! This is from The Wall Street Journal this morning…

State and federal officials are pushing a plan that could help some “underwater” borrowers get refinancing assistance in the latest government bid to break a legal impasse with big banks over alleged foreclosure abuses and ease problems in the housing market.

The proposal was raised in a meeting last week between government negotiators and giant lenders as part of an effort to settle allegations of questionable foreclosure practices. Discussions are still fluid and any final outcome is uncertain. Talks between government officials and the banks are expected to continue this week.

The proposal would be part of a settlement with major lenders. The plan under consideration would make refinancing available to some borrowers whose houses are worth less than their loans, so long as they are current on mortgage payments, according to people familiar with the matter. Such borrowers typically aren’t able to refinance because they lack equity in their homes. The plan would apply only to mortgages owned by the banks. It isn’t clear how many of those borrowers would qualify for help. Around 20% of all US mortgages are owned by US-chartered commercial banks; the majority are held by investors in mortgage-backed securities.

Hmmm… Remember when you were in school, and you got caught chewing gum? The teacher would say, “Do you have enough to share with the rest of the class?” In other words, if it wasn’t good for everyone, then no one or two or three could have the gum… I’m reminded of this here…

OK… Chuck, you got a little carried away there… maybe you should apologize to anyone that you offended… OK… I’m sorry… I didn’t mean to offend anyone… Now, does the government have enough gum to go around?

To recap… The words by German officials that doubted the ability of Eurozone leaders to put forth a real solution to the debt crisis by next Monday was taken to heart by the markets yesterday and last night, causing the risk takers to back off and allow the risk aversion crowd to take over the markets once again. Dollars and yen are the only currencies in the black this morning. The CFTC will vote on the changes to the positions limits today… I sure hope they have some teeth in that vote! And China’s economy slowed in the 3rd quarter but remained above 9% growth… The Chicken Littles are out in force crying about the sky falling in China once again…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning