By Chuck Butler, EverBank
Good day. The end of a very long week for me. It seems like a month of Sundays since just last Friday! But that’s OK; the weekend is here, and I have plans! I hope my plans don’t get squashed like the hopes that the markets had yesterday that Big Ben Bernanke would announce additional stimulus.
Of course, had these market participants, which ran the risk assets up in price ahead of Big Ben’s testimony on the economic outlook to Congress, read the Pfennig earlier in the week, they would have known better than to get all dressed up for a party that wasn’t to come.
Recall me saying earlier in the week that I didn’t expect Big Ben to announce QE3 at the testimony, unless he wanted to get grilled from Ron Paul! But everybody wants to be first! They want to be able to say that they were either “in” or “out” before everyone else!
So Big Ben left the markets holding the bag yesterday, and quickly, all the good stuff that had pushed the risk assets higher this week was erased. Poof! Just like that! And then it didn’t help that the ratings agency Fitch downgraded Spain’s debt rating. But come on, traders! You mean this announcement by Fitch caught you by surprise? Geez, Louise! You guys are denser than I previously thought!
The ball has been forcibly volleyed back to the eurozone’s problems, and we’re back to sorting out what’s really important and not important. Spain getting a downgrade, in the long run of things, is nothing more than a tempest in a teacup. Everyone and their brother knows that Spain’s banks are in trouble. I understand that the eurozone leaders are going to meet this weekend to discuss aid for those Spanish banks.
And you should have seen the price manipulators going after gold yesterday. When they smell blood, they go on a feeding frenzy, folks. And the price of gold is down again this morning, making the price fall of the past two days a total of -$43. So price manipulators, are you finished playing your games with real investors’ money?
There was big news out of China yesterday that I’m sure you didn’t see, because our media doesn’t seem to want to report stuff like this. Even the business stations — zip! OK, enough complaining — here’s what I wanted to point out.
China has approved $23 billion of steel projects in an attempt to sustain growth, and has approved two new steel mills in the past two weeks. OK, some people may not see what I see from this brief news clip, but here’s the skinny.
Once again, China, with their treasure chest of reserves, is pinpointing where money should be spent to support a sector. And if they are going to support the production of steel, iron ore should be prime for a boost off its bottom, and where does China get its iron ore for steel production? Ahhh, grasshopper, you have learned well. Of course, it’s Australia!
So the China Iron and Steel Association now believes that steel production in China will climb to more than 700 million tons this year! So whether or not you believe that China should be supporting a sector like this shouldn’t come in to play. The whole idea is that China will do what it has to in order to keep the economic ship out to sea, and everything they do benefits Australia’s exports of raw materials.
Speaking of Australia, three times this week, Australia was presented with stronger-than-expected economic data, but the Australian dollar (AUD) is so caught up in the Risk risk-on, risk-off trading that once again fundamentals didn’t matter this week with the A$.
Yes, yesterday morning, the A$ actually hit parity to the U.S. dollar again. But then the rug was pulled from under the risk assets by Big Ben’s reluctance to say nothing more about additional stimulus than the same old line about how the Fed remains ready to implement additional stimulus, should the economy worsen.
Look, let’s get this straight, right here, right now. I’m no fan of money printing, which is what happens when the Fed implements additional stimulus, as opposed to China, which simply spends its reserves. And the Fed started this need for stimulus back in 2009.
But I would have to say that Big Ben just doesn’t see the economy crying out for additional stimulus as I do. It’s as if he knows the economy is addicted to stimulus and he’s trying to make the economy go cold turkey. So on one hand, I’m fine with that, but on the other hand, he’s the one who keeps the door open to additional stimulus, and he keeps saying “if the economy worsens.” It has worsened already, Big Ben.
And one more thing — Big Ben could pull the old “it’s someone else’s fault that we have to implement additional stimulus rabbit out of the hat.” Blame it on Europe’s problems. That seems to be the call of order these days — the blame finger for what ails the U.S. is now pointed at Europe. Remember, it used to be China?
Yesterday, I mentioned that China had cut rates. At the time, I hadn’t realized that the last time China cut rates was three years ago. But remember, they had to keep rates higher than they really wanted them to be, to combat the housing boom they were experiencing. Now that domestic demand has weakened, and inflation has fallen, the rate cut makes sense. And as I said above, China will do what they need to do to keep the economic ship out to sea.
When I saw that it had been three years since the Chinese lowered rates, I thought about the rate structure here. Did you know that our rates have been between zero and 25 basis points (1/4%) since December 2008? WOW! The Fed has said that they will keep rates at this near-zero level until late 2014. The director of global economics at JPMorgan Chase said that he believes the Fed will keep them at these levels into 2015! So we’ve got that going for us!
Of course, Japan has had near zero rates for a LOOOOOOOOOONNNNNNNGGGGG time! And look how well they are doing! NOT! The only reason the yen is so strong is that investors believe it to be a safe haven destination because of the size of Japan’s bond market and the savings of the Japanese people. I just don’t get it though, folks. Not that I’m complaining. Hey, if the markets want to take yen to 50, I don’t care, That just means yen holders coming out smelling like roses!
But to me, Japan has squandered away their future, and it started nearly two decades ago when they first began quantitative easing and stimulus programs. And now, as I’ve reported in the past six months, Japan’s trade surplus, which was always a given, has turned to a deficit each month. The Japanese current account is shrinking, folks. And before we know it, the debt burden of Japan will be so great that they will begin to have problems selling debt/bonds. The population is getting older, and the younger people will be hesitant to buy that debt. Then the uh-oh affect hits.
And about 10 years after that happens in Japan, it will happen here in the U.S., or maybe even sooner.
And just when it appeared that U.S. Treasuries were going to go on a ride on the slippery slope, risk aversion returns, and just like a clown car, everyone climbs back into Treasuries. And the yields on Treasuries fall again. Hey! Who has the bottle of seltzer?
Did you see that the ratings agency Fitch warned the U.S. yesterday that they will lower the triple-A rating for the U.S. unless the government seriously tackles its looming financial predicament? Yes, they did. You may recall that S&P lowered the U.S. AAA rating last summer. And the ratings agency EJR has cut the U.S. rating twice this year. But here’s my memo to the folks over at Fitch: You might as well go ahead and cut the rate now, because there’s NO political will to seriously tackle our debt problem. So you had better not be bluffing here, because if you are, you will lose all credibility.
Canada will print their latest labor report for May today. Talk about volatile reports! We started the year with two consecutive months of negative job creation in Canada and then two months with huge gains. January and February were a total negative, -19,000, and March and April were positive, +60,000. So I’m going to say that the number will be positive, but not as strong as last month’s +50K. But I doubt it will help the Canadian dollar/loonie today, as the risk-off meter is really on the risk aversion trading side.
Today’s U.S. data cupboard has only the April trade balance to report. And the trade deficit that prints each month just doesn’t get its due. People have all become comfortably numb about these deficits in the U.S. I’ll give you the link to the U.S. Debt Clock at the end, as usual, today. Maybe a peek at that will shake that numbness! But you know, I speak to only a small group of people when you consider the population of the U.S. It’s your job to get the word out, or least get your friends and family signed up to the Pfennig!
But really, the size of these numbers are just beginning to get all hazy when people look at them because they print only in red to represent a deficit, and they are so LARGE that people all lose their thought because they make no sense to them. If the deficit number was $57,000, that would be understood. But when you add a few zeroes to $57,000, you get our national debt.
Then There Was This: Did you like the James Rickards thing yesterday? I thought I would give you some more of this interview with the author of Currency Wars.
When asked if the U.S. government was pursuing a policy that favored big business, to help them grow their exports and to make the middle class struggle, James Rickards responded:
“That’s a very fair characterization. Who are the big exporters? We know who they are — it’s Boeing, General Electric, Caterpillar to some extent, Hollywood, Microsoft. These are companies that sell massive amounts of goods overseas, so the cheap dollar policy helps those big corporations, but it is devastating to everyday Americans, because of the inflation that follows. People with savings, with insurance policies, with annuities, with retirement, with any kind of fixed income — these are the losers in the currency wars. These are the people who basically see their savings depleted.
“Estimates show that, basically, the Fed’s zero-rate policy, compared with a normalized interest rate policy, if you had rates at a level that would be normal historically for this stage of recovery and this amount of economic growth, the difference between where they normally are and where they actually are, at zero, is taking $400 billion a year out of the pockets of savers and sticking it into the banks, who are benefiting from this low cost of funds. So this is theft. This is Madoff on steroids.
“The Treasury and the Fed are basically robbing savers in the United States and handing the money over to banks and corporations in the form of a cheaper currency or a cheaper cost of funds. Cumulatively, this is over $1 trillion. The Fed’s trying to prop up the banks — that’s sort of what they were designed to do — but it is coming at the expense of everyday Americans. So it’s a form of wealth transfer, or, as I call it, theft.”
Remember this follows the piece yesterday, in which Mr. Rickards talks about how the U.S. government, Treasury and Fed all want a cheaper dollar and will continue in their attempt to get the dollar weaker. I got a chance to meet James Rickards while on the panel with him in Florida at the Casey Summit last month. A very smart guy. And nice, too! At least from my one-minute introduction to him I could tell that!
To recap: The currency and metals rally was wiped out in a heartbeat yesterday, after Big Ben Bernanke left the market holding the “we want more stimulus” bag. But gold’s move was more than unwinding of trades, folks. This move down was ugly. More like manipulation. So today is a risk-off day, after a couple of days of risk on. And investors are piling back into the clown car/Treasuries. The eurozone leaders will hold a meeting this weekend to discuss how to rescue Spanish banks. And the trade deficits (who cares?) print today.
If you’re interesting in diversifying out of US dollars, check out the new Chinese renminbi account offering from Chuck’s company, Everbank.