Euro Rally Falls On Its Face

By May 11, 2010, 11:12 AM Author's Blog  

It’s rainy and cold here in St. Louis… Not exactly “May weather”… But then, you’ve got to experience this kind of weather, to enjoy the blue umbrella skies, and sunshine, warm days!

Well… The sunshine for the euro (EUR) only lasted about 12 hours. Yesterday, when I signed off, I said that the euro had come back from 1.3094 to 1.30, and we would need to see what the NY boys and girls thought of the aid package to get a clear direction for the euro… Well, the NY boys and girls didn’t think much of the aid package, and their feelings were soon to show up in the currency trading. Almost all of the euro’s gains, and those of the other currencies affected by the Eurozone problems, were wiped out… Completely! The euro is now trading lower than it was when we left for happy hour on Friday afternoon! UGH! But… Shoot Rudy, I said yesterday, that while I liked the package for its calming affect on the markets, I didn’t like it for the debt… Well, the calming affect is gone, so we’re left with debt.

Yesterday, I said that the aid package was “holding off the wolves”… It looks like a case of “the wolves are always at the door”…

A few people wrote me yesterday and said I was all wrong about the difference between the US bailout and the Eurozone bailout… Maybe I didn’t make myself more clear… It’s one thing to monetize debt to counter a liquidity trap and rapid drop in the velocity of money. It’s entirely another thing to expand the central bank’s balance sheet to buy debt that cannot otherwise be sold (or at least not at an affordable rate).

Obviously, the US has bloated its balance sheet with debt that it cannot sell without taking on HUGE losses… The ECB announced yesterday that they would walk in the same circles as the Fed… But, as I said yesterday, I feel that this is just window dressing, curb appeal, and so on for the markets… I just don’t see the Bundesbank (Germany’s Central Bank and the Wizard of Oz, behind the ECB’s curtain) having any appetite for buying debt it cannot sell… In fact, the Bundesbank President, Axel Weber, said that he just didn’t see the need for buying debt… So… If the Bundesbank doesn’t want to buy debt, folks… The ECB is going to buy debt…

But, the markets can’t see through that thick ash that keeps covering Europe to see what’s behind the ECB here… And… The euro gets daily trips to the woodshed…

I also got an email the other day from a reader that said something like this… “Hey Chuck, your darling euro is getting beaten down”…

Hmmm… “My darling euro”? Look… The euro is the offset currency to the dollar; it’s that simple… So when you need to talk about dollar strength or weakness, the offset is the euro… That’s why I talk about it all the time… Shoot Rudy, the dollar index weightings have the euro as like 40% of the total! So… Yes… When the dollar was getting driven like a rental down the slippery slope… The Big Winner was the euro… Because it’s the offset currency! And that’s why I coined the phrase the euro was the Big Dog… And all the other currencies were the little dogs…

OK… Enough of that! The euro looks very sickly, folks… So, we can 1. Batten down the hatches and ride this out… Or 2. Catch a falling knife, and sell into this weakness…

For those that are “true diversification investors” that’s an easy choice…

The thing I was going to get to here, is that here in the land of the dollar, we have our own debt problems that are completely on a different level than those in the Eurozone… And by that, I mean much worse! Here’s something that came across my desk yesterday… UGH!

Well… In a case of: “You knew this would follow that”…

Last week I told you of how Freddie Mac was going to request another $10 billion, bringing their total taken from taxpayers to over $60 billion… Well, this week, Fannie Mae, announced that they would be requesting another $8.4 billion, brining their total to $84.6 billion! I’m telling you, folks… I’m screaming at the walls so loudly that the paint is beginning to peal!

But… The markets are pounding on the euro? Let me get this straight… The Eurozone announces a $1 trillion package to aid the runaway budget deficits in Greece, Spain, Portugal, Italy, and Ireland, and the euro gets pounded…

But… The US will have a $1.6 trillion budget deficit this year alone… And the dollar gets bought? Somebody please wake me from this nightmare!

Should the euro get sold for these debts… YES! Should the dollar be bought… NO! Should US Treasuries be bought as “save haven” trades… DOUBLE NO!

Fundamentals, folks… One of these days, Alice… To the moon! Fundamentals will return…

Hey! You’ve got to love it… Last week, I bang on the ratings agencies… Yesterday, I see that the SEC had announced that they would be looking into Moody’s… And then a reader sent me a letter that the famous and well respected analyst, Martin Weiss, had sent to his readers… I can’t give you a link because it’s a “paid for” subscription letter… But the whole idea is that Martin Weiss wrote a letter to the Moody’s and S&P and told them to stop leading investors on with the AAA ratings of US Treasuries… He told them to downgrade them now, instead of later when it will be too late for investors.

So… It’s not just me banging the drum, and crying wolf regarding US Treasuries…

And… Look at Moody’s out there warning Germany and France that this aid package to the Eurozone might hurt their AAA ratings… Quick on the draw with Germany and France, but as scared a bunny in a foxhole, when it comes to the US Debt… I shake my head in disgust!

OK… Enough of that! With the Big Dog getting sent to the doghouse, the little dogs, like Norwegian krone (NOK), Swiss francs (CHF), Aussie (AUD) and New Zealand dollars (NZD), are all following the Big Dog… Hey! That’s the way it works! When the Big Dog was leaving the porch to chase the dollar down the road, the little dogs got to follow… Yes, some little dogs were faster than the Big Dog, but, they would never get off the porch unless the Big Dog left first.

Could this be the end of the weak dollar trend? Are the fundamentals that pushed the dollar into the weak trend in 2002, corrected? Not hardly… In fact, they are worse! So… This has to be a bear market rally for the dollar… Fundamentally speaking…

And if it’s not… Then I will raise the white flag, and take my laptop and go home… For everything that I’ve ever learned along the way regarding fundamentals will have failed me.

Well, the big winners yesterday and overnight are dollars, yen (JPY), and gold… I found it interesting yesterday that US stocks were up big time, and the euro sold off… That hasn’t been the case in a month of Sundays! But gold… I liked its move upward…

And… I completely forgot again, about the Jobs Jamboree from last Friday… Here’s the skinny, folks… The Bureau of Labor Statistics (BLS) said that 290,000 jobs were created in April… Well, let’s break this down… Of the 290,000, 180,000 were created out of thin air by the birth/death model (I’ve explained how that works many times before) and… About 120,000 were government census workers… Using my new math skills that totals 300,000, which if we didn’t report funny numbers, 10,000 full-time jobs were lost in April… But you won’t see that reported on the cable news.

Then there was this… You know how I always tell you that the government lies to us to make us feel good, to get us to go out and buy flat screen TVs, luxury cars, McMansion houses, and so on? And… You know how I always tell you that the government’s CPI (consumer inflation) is stupid? Well… Check this story out…

US food prices jumped by 2.4% in March 2010 in the largest monthly leap in more than 26 years, and the sixth consecutive monthly increase.

Here are some of the most startling year-over-year price increases in the US markets:

  • Fresh and dry vegetables up 56.1%
  • Fresh fruits and melons up 28.8%
  • Eggs for fresh use up 33.6%
  • Beef and veal up 10.7%
  • Dairy products up 9.7%

But, don’t you worry, there’s no inflation in our economy… Big Ben Bernanke as Alfred E. Newman… “What, me worry?”

To recap… Yesterday… The euro lost all the ground it had gained after the aid package was announced on Sunday. The NY traders didn’t like the smell of the aid package, and took the euro to the dog house, along with the other currencies… The dollar, yen, and gold were the winners…

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