Greece Heads Toward Austerity?

It’s a semi-Risk Off Day today, so far that is… The Greek Confidence Vote went as thought… The budget that included austerity measures was passed, and also as expected, the Greek people protested… Just another day in the Eurozone “South”… One would think that this would be a cause to rally for the euro, being a “relief” and all… But I think that rally was already priced in yesterday, when the single unit rose to 1.44, then fell to 1.4346, and then back to 1.44, and now 1.4375…

I know, that’s all a tight range, and that’s true… It looks like traders wanted to take the euro higher after the budget passed in Greece, but the protesting really threw cold water on the euro’s rally at that point, and so we sit here this morning, in a semi-Risk Off Day… With the Big Dog euro range trading, the rest of the currencies (little dogs) can’t get off the porch, and that’s that!

So… Greek PM Papandreou wins the confidence vote in Parliament… I don’t know if “Mr. P” is good for Greece or not… The thing that’s important now is to keep the ship pointed in the same direction, and not change captains of the ship! Currency traders don’t like changes in government, especially from these crazy Parliament governments…

The thing that really bothers me about the Greek austerity measures is this… Has anyone verified that they actually carried through on the previous austerity measures? Who’s going to verify they carry through with these austerity measures? Or… Will the Eurozone authorities, just “look the other way” and give Greece their next tranche of bailout money? Unfortunately, I’m afraid that’s what’s going to happen…

With the Confidence Vote out of the way, and the austerity measures passed, the markets can now look to this afternoon, when the Fed Reserve’s FOMC will end their two-day meeting… The “no-change” in interest rates is a given… The wild card is the Fed Chairman, Big Ben Bernanke’s press conference following the rate decision. I have to wonder, what’s on Big Ben’s mind right now, and I guess that, maybe, we’ll find out this afternoon!

You know… Since the FOMC met in April, the economic data has soured… In fact it’s gotten pretty bad, showing the rot on the economy’s vine. Since April, private sector economists have revised down their 2011 GDP forecast from 2.9% to 2.5%, which should be in the back of Big Ben’s mind as he sounds the all-clear horn on the economy, as QE2 ends… Or… Maybe he doesn’t sound the all-clear horn…

What are you talking about, Chuck? For months now, you’ve said that Big Ben would sound the all-clear horn in June… Ahhh grasshopper… Yes, I have… As long time readers, you might recall me saying back in November that the Fed had backed themselves into a corner by announcing the amount and end date of their latest round of quantitative easing… I said that the institutional momentum would drive the Fed to this date, and hold their feet to the fire, if they decided they needed more stimulus…

I was thinking that with all the stimulus the economy would be showing better signs of recovery at this point, thus allowing Big Ben to sound the all-clear horn… I also said that the economy would then falter again without stimulus, and the Fed would be back to the stimulus table by late fall… Well… The problem with that scenario is that the US economy isn’t showing better signs of recovery. In fact, the signs are going the wrong way! So now what?

Well… I think the chances of Big Ben sounding the all-clear horn remain high… But, maybe he’s seen the rot on the economy’s vine, and realizes that if he sounds the all-clear horn now, and has to come back in a few months to “save the economy” again, he’s going to look pretty bad… But that’s all a “maybe”… I doubt it happens, but it could, so keep your eyes focused on the press conference this afternoon.

OK… Enough of all that! Earlier this week, I told you I couldn’t find any central bank meetings this week… But I missed one! Norway’s Norges Bank will meet today, and after lifting rates in May, I doubt they will do a back-to-back rate hike… So the thing to look for is any mention that they are raising their inflation projections… If they do that, the markets will begin to focus on another rate hike here. And IF they do raise their inflation projections, I then would look for the Norges Bank of lift rates one more time before year-end…

So, the reasons to own Norwegian krone (NOK) continue to mount… But remember, if the euro (EUR) implodes (like my beloved Cardinals’ bullpen last night) then the krone will weaken in sympathy to the euro. But… Isn’t it great that all European countries aren’t euro members? Yes, it’s nice to have “alternatives” to the euro in the same region…

Currencies continue to weaken as I type away here this morning. So, it has turned into a full-fledged Risk-Off day… Gold and silver have turned south in trading, and the dollar is being bought…

Can’t these traders see the writing on the wall? I mean, Paul Simon said it in song years ago, when he said that he didn’t have a college education but he could read the writing on the wall..

The Russians see the writing on the wall for the dollar… The WSJ reported the other day that, “Russia will likely continue lowering its US debt holdings as Washington struggles to contain a budget deficit and bolster a tepid economic recovery, a top aide to President Dmitry Medvedev said Saturday.”

And the Chinese continue to lower their holdings and be less of a Big Swinger at the Treasury Auctions…

And it’s not just foreigners that read the writing on the wall… Standard & Poor’s, has issued yet another warning on the US credit rating, saying that the risks to downgrading the US credit rating have increased, with the lack of political consensus toward the debt limit.

OK, Chuck… Go on to something else here; your blood pressure is rising again!

Let’s talk about gold and silver… Especially the silver price, for gold price has held its own against the dollar the last two months… Silver is the metal that’s taken a devastating body blow in price. I’ve gone through all the things that I thought was more responsible for silver’s decline, a few times, so I won’t go there again… Instead, let me tell you why I continue to believe that silver will outperform gold again. I had already told you about the San Francisco mint pulling the dust covers off their presses, as the demand for silver coins had gotten to be too much for the mint in Annapolis to handle… Well…

The Perth Mint in Australia is reporting the same kind of demand for silver coins… Silver coin sales at the Perth Mint surged to a record 10.7 million 1-ounce silver coins in the past year! That’s 10-fold the volume of just 5 years ago!

So… Industrial metal, investment metal, and in huge demand… So… How’s the supply? Ahhh grasshopper, that’s a key question here, for if there’s ample supply to meet the demand, the price will remain stagnate… Well… First, I’ve heard it said that there is 5 times more gold on earth than silver… But gold sells for more than 42 times silver?

And while the amount of silver mined each year goes higher, it hasn’t been able to keep up with the demand… So… While there are all these geopolitical events going on in the world, holding a store of wealth is becoming an idea that I always hoped would take hold with investors…

OK… Over in the UK, the latest Bank of England (BOE) meeting minutes reveal that a couple of BOE members are talking about the need for more bond buying… Hmmm… If I’ve said this once, I’ve said it a couple of dozen times… In the past three years, what happens in the UK usually shows up here a few months later… And that times well with my thought that the Fed will be back to the stimulus table by late fall…

Then there was this… OK… Lots of people have followed the Birth/Death model that the Bureau of Labor Statistics (BLS) uses to “adjust” the Labor reports each month… But for those of you new to class, the Birth/Death Model basically says that small business is the generator of jobs in the country, and that it takes them a month or two to report the start of a new business and the new jobs… So, the BLS makes an “assumption” that so many new businesses have been created, and the number of jobs they added… For instance… Last month the BLS added 217,000 jobs… The total jobs created in the US in May was 54,000, so that means without the BLS’s “adjustment” job creation would have been negative.

Well, that’s all fine and dandy when the economy is soaring and new businesses are staring up by the boatload… But we’ve been in a depression for three years now… So, do we really believe these jobs that are being added by the BLS with their Birth/Death Model? I mean, has there always been more new businesses started then closed down? According to the BLS, yes…

Well… So far this year… The rate of new business creation has dropped 23% since 2007. And yet, the BLS has added a total of 271,000 jobs… Now, maybe you see why I call them “ghost jobs”…

To recap… The Confidence Vote and passing of austerity measures went as thought, and so did the protesting in Greece to spending cuts. The euro rallied at first, but has since fallen back on the news of the protesting. That makes this a semi-Risk Off Day, with even gold and silver getting sold, and traders buying dollars. Can’t they see the writing on the wall? Everyone else does!

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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