by Chuck Butler
There’s a fly in the ointment, folks… The ointment being the bailouts of Greece, Ireland and Portugal… A German court is going to rule on the constitutionality, or legality, of Germany’s participation in the bailouts, and this ruling is expected tomorrow, September 7th!
This is like here in the US, where we just circumvent the Constitution and it takes a ruling by the Supreme Court to overrule something that should never have started… Well… Apparently, Germany’s participation in the bailouts is considered to be against the law of the land… Germany’s Chancellor, Angela Merkel, has tried to sneak the sun past the rooster here, and now, we’ll see if the German Court will look the other way or not…
If they declare the actions illegal, you can only imagine the problems for Greece, Ireland and Portugal… And if they declare the actions illegal you can only imagine the euro (EUR) getting taken to the woodshed for sure! I talked briefly about this on Friday, and it’s where I was supposed to paste this discussion that was all queued up… But, the euro has problems… The currency is only worth more than the dollar because the dollar’s problems are worse… But they will get to a more even playing field should the German Court declare the actions illegal… The ruling can always be appealed, and “daisy chain” this thing out for months… But I wanted to bring this to your attention now… I thank reader Tom for pointing me to this last week…
Well… Friday’s Jobs Jamboree was very disappointing, folks… The overall net number of jobs created was a big fat ZERO! And that included 87,000 jobs added by the birth/death model, where the BLS continues to believe — with 400,000+ people still filing for unemployment claims each week, and with a Fed that is discussing options for stimulating an economy — that there are still more new companies started each month than ones that closed their doors. Yes, there were 46,000 Verizon workers that were on strike, but even still… 46,000 (give or take, plus or minus, depending on who you believe) is not going to keep up with the population growth!
My friend, John Mauldin, did a great job of going through the prospects for job growth here in his letter last Friday… The part I found really interesting is the increase of workers that are 55 and older in the workforce… It means that either people want to work when they should be retiring or that they HAVE to work… Either way, those are jobs that would normally turn over to younger people… And they are not! Interesting stuff…
So… The Jobs Jamboree was absolutely awful… And it sent gold to the moon! At one point on Friday, gold was up $50 on the day… And then yesterday, with the US markets closed, gold soared past $1,900 once again, reaching for the stars at $1,921, before that turned around and the profit-taking began to pile up… And this morning the shiny metal sits within spitting distance of $1,900 at $1,898…
But with gold soaring, the rest of the risk assets were sold off… Thus, one more time, I’ll point out that gold has become more than just a commodity; it’s real money… And it’s money that doesn’t have creditors, or liens against it, and can’t be run through a printing press, and I could go on…but you’ve heard it all from me before…
OK… This morning something big has happened to the Swiss franc (CHF) in the overnight trading… The Swiss National Bank (SNB) has stepped into the currency markets BIG TIME, folks…and this time it’s not just intervention, which has shown to be non-effective to stem the franc’s rise… This time the SNB has stepped outside the lines… They have basically taken the franc off the “list of free floating currencies”… The SNB announced that they had set a maximum amount the franc would rise to, at 1.20 francs to euros… The franc immediately dropped 6.7% versus the euro… And over on the franc to dollars cross, it lost another 6%… You see, the SNB’s manipulation of the franc is mainly against the euro, but, because of all the crosses in currencies… If francs are getting sold against euros, they’ll also get sold against dollars, and yen, and every other currency cross.
Now… You may recall that a couple of years ago, the SNB said they wanted to defend the franc/euro cross at 1.50… And that was impossible for the SNB to defend, because at that point the franc was still considered weak… Now the SNB has picked a rate that still represents franc strength… And the SNB hopes this doesn’t upset the markets too much… The SNB has announced that they will defend the level by buying large quantities of other currencies, which in this case would be euros…
But there’s that fly in the ointment again… If the German court upsets the applecart tomorrow, will the SNB really want to be buying a sinking euro? They’ll have to, or admit defeat again…
Moving on… The Reserve Bank of Australia (RBA) met last night, and left their OCR (Official Cash Rate) unchanged, and then went on to deliver a balanced statement with a bias toward tightening rates, but leaning pretty much toward a neutral bias… That had to tick those guys off that were all screaming from the rooftops that the RBA would cut interest rates at this meeting… You were wrong! So go away… Don’t go away mad; just go away!
The recent data from Sweden isn’t exactly giving me a warm and fuzzy feeling about more rate hikes from the Riksbank… Most recently, Consumer and Industrial Confidence were down sharply… So… Unless the euro is going to push higher, the krona (SEK) will have a difficult time finding terra firma, going forward… Things have turned on a dime here… Pretty amazing…
Next door, Norway continues to be the best fiscal/monetary balance sheet country in the world… They’ve recently discovered a new source of oil, so their future looks so bright they have to wear shades… The krone (NOK), though, continues to get tarred with the same brush as the euro… One of these days that will break, when the markets figure out that the krone isn’t anything like the euro, but is instead what I’ve always called it — the euro alternative! But for now… That’s not what goes on…
The changes the Brazilian Central Bank made last week, have really thrown a spanner in the real’s (BRL) rise… In case you forgot, the BCB, cut rates by 1/2% and sent out a message that more cuts were on the way… The real has lost about 4% since then… This may be the thing the government has been looking for, folks, as they have long wanted to stem the real’s rise… But, has the government forgotten the reason their interest rates were so high? Inflation was so darn high! And it still is! So… The government has torn a page out of the Fed’s book on promoting growth while ignoring the inflation risks… We’ll have to see if it works… I doubt it will!
On Friday, were waiting for the Chinese Manufacturing report to print… And it finally did over the weekend… The Chinese manufacturing index slipped a bit from July, but August’s number was still a healthy 57.6… (Remember, anything above 50 represents expansion) So… The global growth campers do have a pulse, folks… But I do believe that it all resides in Asia and the South Pacific… Can they continue to grow without the US and Europe? Don’t forget that China has done a magnificent job of turning their economy toward domestic driven instead of export driven… Exports still rule, but not by as large a margin…
Then there was this… From the WSJ…
The government on Friday sued 17 financial firms, including the largest US banks, for selling Fannie Mae and Freddie Mac billions of dollars-worth of mortgage-backed securities that turned toxic when the housing market collapsed.
The lawsuits were filed by the Federal Housing Finance Agency. It oversees Fannie and Freddie, the two agencies that buy mortgages loans and mortgage securities issued by the lenders.
The total price tag for the mortgage-backed securities sold to Fannie and Freddie by the firms named in the lawsuits: $196 billion.
The government didn’t say how much it is seeking in damages. It said it wants to have the securities sales canceled and wants to be compensated for lost principal, interest payments as well as for attorney fees.
The government action is a big blow to the banks, many of which have seen their stock prices fall to levels not seen since the financial crisis in 2008 and 2009. Until now, the stocks have been undermined mostly by unrelated worries about the US and European economies.
I removed the names of the banks mentioned in the story, because I don’t want it to look as if I’m picking on a particular bank or banks… But you can read the story on the WSJ if you have subscription.
To recap… The Jobs Jamboree was absolutely awful, and propelled gold to a $50 gain on Friday, with more gains yesterday, while we enjoyed the Holiday. Gold soared past $1,900 yesterday, but then saw profit taking… The SNB announced a floor for the franc versus the euro, and will not allow it to be stronger than 1.20 (like 1.19 would be stronger given the way it is priced in European terms)… As I get ready to close the letter, gold has slipped back $15… I guess the NY boys and girls are arriving at their desks… And then a BIG story for tomorrow, as a German court is going to decide if the bailouts given to Greece, Ireland and Portugal were legal… The repercussions of a negative decision here run very deep…
Chuck Butler
for The Daily Reckoning
US Dollar Rallies as Swiss Franc Loses Its Ability to Float originally appeared in the Daily Reckoning. The Daily Reckoning provides 400,000+ readers economic news, market analysis, and contrarian investment ideas. The 5 Best Ways to Invest in Gold was previously featured in the Daily Reckoning.
Ed. note – For more on Chuck’s favorite, the Norwegian krone, check out these recent stories:
- Norway’s CDS lower than even Switzerland’s – another plus for the krone
- Norwegian krone: The forgotten safe haven?
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