It’s the Casino that will Suffer, not the Gambler

Yesterday, the non-dollar currencies looked like they were ready to break out of their funk against the dollar, led by the high yielders of Australia, and especially New Zealand… But, that flamed out as the day went on, as the data for the US was mixed, and did not give anyone a warm and fuzzy about the general direction of the economy.

The trade deficit printed weaker than expected, but still posted a $32.9 billion deficit, which isn’t anything to get excited about. The Weekly Initial Jobless Claims printed a larger number than the previous week, but let me ask something of the dolts out there who thought this was a HUGE victory for labor… The previous week only had three days (Thanksgiving) to file claims… So, did you really think that the claims would be as strong given there were only three days that week? Anyway… Last week’s claims printed at 474,000… Still below 500,000, though, so that’s a good thing… I think…

The monthly budget deficit printed at $120.3 billion… Not the $131 billion that was forecast. Maybe the White House had to cancel one of their weekly parties! HA! Still, $120 billion annualized is still $1.44 trillion! That certainly isn’t getting any better, is it now?

So, all that data, and no clear direction… Overnight, the bias was to take on risk again… The non-dollar currencies are ticking up, with the high yielders leading the way once again. But that was overnight… This morning in Europe, risk taking is not the bias, but risk aversion isn’t either! It’s almost as if the currencies are the red flag in the middle of the tug-of-war rope, being pulled one way and then the other, back and forth. So… Will it be “risk” or “risk aversion” that finds the big strong man to make the difference in this tug-of-war?

Gold has come back by $10 this morning… It looked yesterday as though it had weathered this latest correction, and was forming a bottom… I know, you’re saying, “Sure Chuck, that’s easy to say now!” But really, that’s my thought from yesterday! And think about it, I’ll sure have egg all over my face if gold turns around and heads lower!

The thing that kick-started the risk takers overnight was the news that China’s Industrial Production had grown more than forecast in November. Factory output rose 19.2% versus a year ago… This news was manna from heaven for Australia, as I’ve chronicled here many times over the years.

The bad news for China overnight came in the news that exports had fallen 1.2% in November… So, given the factory output and the fact that GDP was 8.9% in the third quarter, one has to believe that China has shifted to a domestic-driven economy, and not one dependent on exports to the US… Now, I know there are those of you who do not believe this could happen in China… But until proven otherwise, I’ll have to go with the data I’m given.

This could spell bad things for the US should China become a true domestic-driven economy and – along with the rest of Asia – grows without exports to the US… Why does that spell bad things for the US, I hear you asking? Ahhh grasshopper… Because, it would negate the Bretton Woods II that has existed between the US and China… The US buys their “stuff”, and they buy our Treasuries. If they don’t need to do something with all the dollars they accumulate, who is going to buy our debt?

The semi-return of risk taking this morning can be seen in the weakness of the Japanese yen (JPY), which has backed off its gains from earlier in the week.

Our colleague here in the office, and someone I’ve known for over 25 years, Joe Losos, brings us The Financial Times once he’s finished reading it, whenever he’s in the office. The other day he dropped it off, and I happened to notice a story about Brazil… Did you know that according to The Financial Times, Brazil is now the leading exporter of chicken and beef, orange juice, green coffee, sugar, ethanol, tobacco and the soya complex of beans, meal and oil? This is very impressive, don’t you think?

No wonder the Brazilian real (BRL) is up more than 30% versus the dollar this year! You know me… I like currencies from countries that have “stuff” to export… That gives their currency a wider acceptance, and allows the country to export their inflation!

Now… Brazilian real is an emerging market, and should be viewed as “speculative”, which means that nothing bad has to happen in Brazil for the real to get punished, because if another emerging market, say Turkey, has something bad happen to it, they are all connected and thrown into the barrel… But, when the stars align, and the karma is flowing, the real is in the catbird’s seat.

Another emerging market is India… And again this currency should be viewed as “speculative”… So, knowing that, Indian rupees (INR) continue to crawl to higher ground versus the dollar. I say “crawl” because the moves are very slow… +4.85% so far this year versus the dollar… I can’t wait for rupees to get up and begin to walk. Oh sure, they’ll fall down a few times, but before too long they should be running.

My colleague at the Currency Capitalist, Ashish, simply adores the rupee… And not just because he’s from India! He’s connected there, and believes that the information he’s getting is solid for the rupee going forward…

But again… With rupees being an emerging market currency, they get thrown in the same barrel as the other emerging markets, so just be prepared to weather storms when they black clouds gather!

Did you hear about the proposal in the UK to tax bank bonuses 50%? This is getting crazy, folks… The bankers did NOT cause the financial meltdown! Try 10 years or so of living beyond our means! Try excess liquidity… Try an explosion of money supply… Try the growing deficit… Try the borrowing behavior. Those things are all way ahead of the bankers when it comes to the blame game!

I’ll tell you this… Should this tax be approved, watch the global banks pick up their bags and leave the UK… Then who suffers? The UK that’s who! I read a story that talked about this and the analogy they gave made a lot of sense… It went like this… “Attacking the bonus payments at the London offices of Goldman Sachs, or UBS AG makes about as much sense as a Las Vegas croupier throwing the highest rolling player at his roulette table out of the casino. It’s the casino that will suffer, not the gambler.”

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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