Good day… And a Happy Friday to one and all! So far so good this morning, so I’ve got that going for me! The first full week of the year, always seems to be long. Especially if you see a full year’s calendar! I turned on the iPod this morning, and Alvin Lee is playing: I’m Going Home. Did you ever see him perform that in the Woodstock movie? One of my all-time fave songs and performances.
Well. after I signed off yesterday, things began to heat up. By mid-morning, the euro was pushing toward 1.32 and taking the other “little dogs” along for the run to chase the dollar down the street. I saw a story title on the Bloomberg this morning that made me laugh. The title was: “Gold falls on stronger dollar” Hmmm. I wonder if the writer had seen the dollar’s performance this week before submitting that story! Yes, the dollar has started 2013, the way I would think it would given the problems that the U.S. faces between now and March 27th.
I outlined them for you last week, so I won’t go into that again, but you all know what I’m talking about. Oh, BTW. we breached the debt ceiling on December 31st. Right now, we’re operating on the “extraordinary measures” that outgoing Treasury Sec. Tim Geithner implanted. But, as I told you the other day, an independent company believes those “extraordinary measures” will run out sometime between mid-Feb and March 1st. We’ve already breached the debt limit by nearly $23 Billion dollars! And then the fun and games begin. I’ve got an interesting piece for you in the TTWS section of the Pfennig this morning, that relates to the debt ceiling. You’ll want to make sure you don’t miss that!
So. the currencies, led by the euro, (just like the “old days”) gained against the dollar yesterday. For what reason? Well. I told you that the European Central Bank (ECB) meeting would be no great shakes. I was wrong. Apparently, there was a great shake (probably from Crown Candy, yum!) in the ECB meeting. it came when ECB President Mario Draghi said that he saw positive signs in the Eurozone economy. I particularly liked this quote from Draghi, “We spoke a lot about contagion when things go poorly, but I believe there is a positive contagion when things go well. And I think that’s also what is in play now. There is a positive contagion.” – Mario Draghi
I don’t think the markets were ready for an upbeat ECB. Now, this in no way signals that the ECB is calling off the dogs, and that they believe that everything will be seashells and balloons from here on out! No. The ECB is quite aware that the wolf is always at the door in the Eurozone. but for now, the relative calm that I’ve talked about in recent months, is allowing the ECB to breathe easier. The relative calm has been the ECB’s “breathe-right strip”!
So. hearing this talk of stronger growth and better times from the ECB, the euro took off! Soon 1.32 was taken out, and the single unit pushed to 1.3270. The euro has given back a small piece this morning, but what was impressive was that move yesterday. It was the “perfect storm” for the euro, given the strong Chinese data in the early morning, the news that Spain’s bond auction was better than expected, and then the ECB comments later in the morning.
And the dollar wasn’t seeing anything to support it. The Weekly Initial Jobless Claims increased again moving to 371,000 last week. In addition, the job front isn’t getting any good news either. American Express announced that they would be cutting 8.5% of their work force, (5,400 jobs) and Morgan Stanley said they would cut 1,600 workers. In a separate report, an analyst forecast that 5,000 jobs would be gone from Morgan Stanley before June. It’s my experience in these times that leads me to believe that we’ll see more and more of these announcements. It’s like piling on without a penalty. you can hear these companies saying, “hey! Everyone else is making a job cut announcement, let’s get ours out there too, so no one notices”.
Last night, we had two Fed Heads, (Bullard and Kocherlakota) and each had their own agenda. Bullard was upset that the Fed has tied fed policy to economic data. And Kocherlakota believes that Fed policy is “too tight”. If you were the leader of a country, wouldn’t you be laughing right now? I mean what’s going on in the U.S. would have to be funny to someone on the outside. Unfortunately, we’re on the inside, and it’s not so funny inside here.
The U.S. data cupboard will print November’s Trade Deficit this morning. It should show a small narrowing from October’s $42.2 Billion deficit. Oil prices were cheaper in November, if you recall. BTW I’m still looking for the $40 oil that was promised me in May of 2011. I also heard about it April of 2012. I’m not poking fun at anyone for making that call. I’m simply saying that I’m still waiting!
The Aussie dollar (A$) really reached for the stars yesterday, and as a result, traders are betting that the gains were excessive, and thus a bout of profit taking for the A$… As I’ve said quite a few times in the past year. I truly believe that a $1.04 -1.05 range for the A$ is a fair value for the currency, given its fundamentals, and China’s recovery. I think that any time the A$ gets some wind in its sails and heads higher it will be met with resistance and profit taking.
The Japanese yen continued to move in the opposite direction as most of the other currencies, and reached its weakest level VS the dollar since June 2010! The yen did touch 89 overnight, but has since gained back a bit, but remains offered. So, how far will this weakness go with the yen? Good question, Chuck! Well. no one knows for sure. but I think it depends on what happens to the dollar. if the dollar goes for a ride on the slippery slope and begins to lose value against the euro even more, it will be difficult for the yen to continue to weaken, for the crosses will catch up with it.
But, should the dollar rally, then yen could get back to the weakening, and it could take it easily past 90. and higher. (remember, yen is a European priced currency, which means the higher the price, the lower the value VS dollars) The new Japanese Gov’t is all about yen weakness, folks. they want 2% inflation, and it looks like the Bank of Japan (BOJ) has signed on to that idea. So, look for more drive from the Japanese Gov’t to weaken the yen.
In the tale of two currencies. (yen and renminbi), the Chinese renminbi/ yuan reached a 19-year high this week, and looks to continue to gain VS the dollar given the recovery in China. Remember though, at this point, the renminbi/ yuan is a controlled currency, so after reaching its 19-year high earlier this week, we’ve seen the currency weaken a bit. That’s just the Chinese Gov’t making sure that traders and investors don’t begin to trade the renminbi /yuan as if it were on a One-Way Street. I think the renminbi/ yuan will get back to the small doses of appreciation soon.
China overtook Japan as the largest foreign holder of U.S. Treasuries last year. I have to wonder if that’s a prize or not. Anyway. what I’m saying is that China has passed Japan in many ways in recent years, with the two exchanging places. China is on the way up, and Japan on the way down. Can you dig it? HA! I have no idea why that came out. but I must have had a 60′s flashback!
Well.. the price of Gold soared by $20 yesterday, as the dollar was getting sold like tie-dye T-shirts at a Grateful Dead Concert. The shiny metal is giving back $5 of that move yesterday in the morning trading, as traders and investors take profits in the currencies and metals. I want to bring something to your attention regarding the U.S. Gold Holdings. there’s a petition at the White House Internet site calling upon the U.S. Gov’t to audit the U.S. Gold reserve – and to account for any surreptitious ownership claims to the gold. Really! I’m not kidding you! If 25,000 people electronically sign the petition, the White House is obliged to forward it to policy experts for review and to make a public statement about it.
Now, we all know that an “audit” isn’t going to take place, but wouldn’t you like to see the Gov’t squirm around as they tell the public that an “audit” isn’t necessary? I know I would pay to see that! Here’s the link to the site: https://petitions.whitehouse.gov/petition/perform-assayed-public-audit-a…
Then There Was This. OK. have you all been following the story going around about how the President is thinking about using a law that was probably intended for use on something else, and implementing it now, to avert the debt ceiling and the threat of a Gov’t shutdown? I’m talking about the $1 Trillion platinum coin that would be minted by the Gov’t and deposited at the Fed Reserve. The White House Press Sec. didn’t deny that this was happening, when asked yesterday, and that is leading many observers to believe that the President will indeed use this way to circumvent the debt ceiling.
I came across this response by Lawrence Williams in response to this news. “It would have to constitute the most gigantic fraud ever perpetuated by a government and probably make the U.S. dollar and the U.S. economy the laughing stock of the world. If anything, it would trigger a huge investment surge into gold and silver as all faith in government-created money would evaporate!
Firstly – why platinum? It is based on a legal technicality allowing the U.S. to mint platinum coins of any face value. However, given that $1 trillion dollars worth of platinum at current prices represents around 8 or 9 times the amount of platinum ever mined throughout history, a trillion dollar face value coin would have to bring any kind of money creation into even more disrepute than it already is.”
Chuck again. let me repeat this. $1 Trillion dollars worth of platinum at current prices represents 8 or 9 times the amount of platinum EVER MINED THROUGHOUT HISTORY! So, if you issue/ mint a coin that’s worth $1 Trillion in platinum, and there’s not enough platinum to back it up, then you have created money out of thin air. How the dollar would survive something like this is beyond my gray matter’s ability to reason.
To recap. A perfect storm was created for the currencies and metals yesterday, when ECB President Draghi talked upbeat about the Eurozone economy. his comments added to the news that Spain’s bond auction was a very good one, and that China had printed a very strong exports data overnight. Gold soared $20, but has given back $5 this morning on profit taking in both the currencies and metals.
Currencies today 1/11/13. American Style: A$ $1.0560, kiwi .84, C$ $1.0165, euro 1.3255, sterling 1.6110, Swiss $1.0905, . European Style: rand 8.6855, krone 5.5435, SEK 6.5055, forint 223.75, zloty 3.09, koruna 19.3350, RUB 30.30, yen 88.90, sing 1.2255, HKD 7.7520, INR 54.75, China 6.2150, pesos 12.65, BRL 2.0355, Dollar Index 79.82, Oil $93.18, 10-year 1.88%, Silver $30.66, and Gold. $1,668.00 and it’s Friday, so let’s take a peek at the U.S. Debt Clock. Click here: http://www.usdebtclock.org/index.html
That’s it for today. A Big Happy Birthday ( tomorrow) to my oldest son, Andrew. 31 years ago (tomorrow) we had 9 inches of snow fall on the day he was born. I remember taking darling daughter Dawn who was 2 ½ to the florist shop and letting her pick out a gift to take to her mom and new brother. She was so cute, and talked to the salesperson, about how proud she was to be a Big Sister. Funny how that seems to have happened last week, but I can’t remember what I had for dinner last night! HA! So. Happy Birthday, Andrew! My beloved Missouri Tigers travel to Ole Miss to play basketball tomorrow night. their first SEC road game. And this is it for me, for the next week. I’ll be gone, and like I said earlier in the week, Hopefully Chris and Mike will work out taking the conn on the Pfennig next week. Alright, now dig this baby. I thank you for reading the Pfennig. now go out and make this a Fantastico Friday!
Chuck Butler
President
EverBank World Markets
1-800-926-4922
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Comments
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” , and there’s not enough platinum to back it up, then you have created money out of thin air. How the dollar would survive something like this is beyond my gray matters ability- – - ”
whats the difference if the Mint gives the FED a piece of platinum stamped “1 trillion”
or
the treasurey gives the FED a piece of paper stamped “1 trillion”
Ahhhh Master I see
“Money for nothing, writing checks for free”
gold silver oil -moron
Dolts are Dolts, whatelse can you say, and legal begals may be Dolts too? well – - pooches at the least.
Chuck, i enjoy reading your work and i hope the best for you and your family and America too.
Well, that didn’t take long. Tried to sign the “audit the gold” petition on the White House website and it’s already been taken down. So much for listening to the people
Well surprise, surprise, I tried to go to the Whitehouse website to add my name to the Gold audit petition and whaddya know a 404 page not found error. So either there’s a typo in the link or our friends at the White House took it down? Either way, Harumph!
Chuck, you’re awesome!
https://petitions.whitehouse.gov/petition/perform-assayed-public-audit-all-treasurys-claimed-8100-tons-gold-and-net-swaps-loans-sales/rGyFTLwD
The Gold petition is still there. The Administration must have caused Chuck to have a fat finger……
BTW your CAPTCHA codes are impossible.
Great weekend commentary describing Canada’s efforts in excercising prudent, fiscal responsibility. Truly appreciate the facts and figures – it becomes a no-brainer as to whose currency has the dynamics in place to support future economic growth. We, in small business live in absolute terror now of our political regime and their determination to anniliate this once great nation with ever increasing rates of taxation at every level, attacks on successful individual efforts and outrageous regulatory nonsense in their battle for power and control. You have to wonder if they will stop when they achieve their redistribution objectives and if anything worth saving will remain. Thankyou for attempting to make sense of the massive destruction of our fiat currency and economic structures – still looking for the WHY????
Hi,
Is there a Pfennig monitored inbox where I can ask questions regarding the Pfennig, without having them posted on the blog?
Thanks,
Abhishek.
Hi, Sharemarkets have been rising globally and there are commentators saying that this is the start of another bull market, if the world manages to avoid a major catastrophe.
Obviously, I disagree, however one cannot ignore the fact that sharemarkets have been rising. The Dow Jones index is trading just under its GFC highs. Pretty amazing stuff.
By now, most of you have already heard my various explanations about how central banks are printing money etc… Still, what we would all really like to know is when sharemarkets will finally turn given all the money printing that is going on.
Afterall, we can be right and still be waiting for sharemarkets to dip 12 or even 24 months from now. In the meantime, there could be this nagging feeling that we’re missing out on a bull market run.
Well, today I’m going to cut through this bull market nonsense.
Global trade and the global economy are slowing. The World Bank recently slashed its global growth projections for 2013. This is not a surprise. We knew this would happen and we expect a further decline in global growth, to the “surprise” of mainstream economists.
In simple terms, central banks have already pressed the “nuclear button” and fired their final salvos in their battle against economic contraction and ensuing deflation – central banks are printing money with reckless abandon, especially the Federal Reserve.
What isn’t really well understood is that central bank cash injections do NOT reach the economy directly. Half of the printed money is spent by the US government via fiscal deficits and the other half is injected into financial companies that are struggling to lend money to US households.
To understand this properly, we need to appreciate the following facts:
The US Federal government has spent $5.1 trillion in borrowed money between 2009 and 2012 ($5.3 trillion in today’s money).
The US government has “force fed credit” into the US economy by getting people to take out automobile loans (around 0% to 3% finance) and student loans. In relation to student loans, almost $1 trillion in student are outstanding from around $600 billion in 2007. Most of these student loans are provided by the US Federal government directly. Total non-revolving loans (comprising mainly of automobile and student loans) have increased from $1.5 trillion in 2009 to $1.9 trillion in 2012. US households are adding about $100 billion per year, in non-revolving debt, over the last four years.
In effect, the US government has engineered a recovery from the GFC (and the collapse in private credit) by increasing other forms of credit to replace the collapse in private household borrowing. How much credit has the US government created over the last four years? The US government has created $5.3 trillion in new credit by spending money it doesn’t have and getting households to borrow $400 billion extra in student and automobile loans.
These are the two pillars of the US economic recovery, plus the Federal Reserve reducing interest rates to almost zero. The combined effect of all these measures allowed the US economy to grow at roughly 1.7% per year on average over the last four years. i.e. It’s a whole lot of money pumped into the US economy to offset the collapse of private debt and to create an anaemic economic recovery.
Cutting through the bull
Now, the reason why I’m not bullish on the US economy is as follows:
The problem now is that loads of Americans have already taken out automobile loans to buy cars. In relation to student loans, Americans are defaulting on their student loan debt in record numbers (about $76 billion in official defaults so far) because they simply can’t get the jobs to pay off those loans. Therefore, it is expected that the growth of non-revolving credit is coming to an end. If the growth in non-revolving debt stalls, this will remove about $100 billion per year in new credit in 2013.
The US government itself is under pressure to restrain deficit spending. In 2012, the US government overspent by $1.2 trillion or 8% of GDP. The most recent fiscal cliff negotiations in January helped to increase taxes and reduce overspending by around 1% of US GDP, or $157 billion in 2013. The upcoming debt ceiling debate will determine whether spending cuts of about $120 billion will take place. In 2013, the baseline scenario is a cut of roughly $277 billion to the fiscal deficit. Therefore, the US will be on target to overspend by about $900 billion or 6% of GDP by the end of 2013, assuming everything works out.
Overall, it’s probably realistic to expect a reduction of credit in the order of around $300 billion or 2% of GDP in 2013. So, please understand that the money being printed by the US Federal Reserve does not end up in the US economy, until someone in the economy borrows money and spends it. Now, the US government and private households are cutting back on borrowings relative to 2012 levels.
This is why further money printing will not help the US economy expand further. The Fed Reserve is printing money that ends up in the financial system as unused cash. Some of that cash has leaked into global sharemarkets, pushing up share valuations in the process. However, these are all short term effects of money printing because it is inevitable that the US economy will enter a period of economic stagnation and probable recession.
The latest hope of the US government and the Fed Reserve is to replace automobile and student loans with housing loans. They are trying to engineer a US economic recovery by force feeding US households with more housing credit – yes madness, because it was excessive debt that led to the GFC in the first place. The Fed Reserve has dropped mortgage interest rates to around 3.5%, exerted pressure on banks and Wall Street to lend to the housing sector and promised to keep interest rates low until at least 2015.
We shall see the results of this experiment by the end of 2013. I suspect the US economy will be in recession by mid-2013, assuming no large increases of new credit growth in housing or other areas (unlikely in my view).
Reason two
Almost every economic forecast nowadays comes with a proviso that it is subject to the Eurozone staying intact and that China continues to expand.
On the subject of China’s economy expanding – I don’t see that as likely given the fact that the big banks have stopped issuing wealth management products to clients in Beijing and are clamping down in other cities:
“Last week, several Chinese-language media reported the big four state banks had stopped selling trust company products to clients in Beijing and were scaling back in Guangzhou. “The official clampdown on the trusts might already have begun,” wrote Week in China.”
This is a very big deal because wealth management products are/were the conduit of finance used by medium sized businesses as well as local government entities. The Chinese government is concerned about risk and rightly so because a lot of the finance raised has been injected into companies producing marginal profits. i.e. Steelmakers have been borrowing money via wealth management products and they are making virtually zero profits based on current iron ore and steel prices.
If finance has indeed been cut-off then watch out below because the Chinese economy will have to find other avenues of finance to keep their debt laden corporate sector going. See this graphic of corporate debt as a percentage of GDP:
Moving to the secondary proviso of the Eurozone staying intact, I have no doubt the Eurozone have the will and money to keep supporting peripheral Europe. That has never been the issue. The real issue has always been whether peripheral Europe possesses the political resolve to remain within the Eurozone. I think on this point, sooner or later we will be proven right, and the social pressures exerted will cause the governments of these democratically elected nations to collapse. It is but a matter of time. It is improbable that Greek society will be able to endure further spending cuts and tax increases.
In summary
The reason for not being bullish despite central bank money printing is that the US government must cut spending in 2013. The money printed by the Fed Reserve cannot reach the US economy unless the US government spends that borrowed money. Sure the US government will still be overspending by at least 6% of US GDP, but the point is that compared to 2012, the US government will be cutting spending by 2% of GDP, which will have a final GDP impact of around 3% in my view. This will be enough to send the US economy into recession, assuming the US government does not find some other way of injecting credit into the US economy.
Secondly, we cannot bullish in light of the fact that the Chinese central government has banned local government from wealth management product activities and the big four State banks have stopped selling wealth management products to their clients in Beijing, effective last week.
Further, the situation in the Eurozone only appears calm for now due to central bank guarantees to monetise debt. However, the impact on Greek, Spanish, Portuguese, Cypriot, Italian and French societies is very, very real.The pain within Eurozone economies is not improving, it is in fact increasing. And we are expecting that someone somewhere will find it completely intolerable to remain within the Eurozone. It is only a matter of time before the current Greek government collapses under the weight of widespread protests.