Subprime II? When Do We Ever Learn?

The currencies and metals added to their gains yesterday as the day went along. The euro (EUR) traded briefly at 1.32, and the Aussie dollar (AUD) traded through $1.04. There were more Fed heads speaking, and Fed Head William Dudley agreed with Fed Head Janet Yellen, who had said the previous day that keeping interest rates near zero through 2014 was needed. Dudley said, “I haven’t seen any set of information that should suggest to me we should change that view.”

That got the ball rolling with gold, for as I’ve explained many times in the past four years since interest rates around the world headed to zero, gold competes with deposit rates. If there are no deposit rates, gold is the chief beneficiary. And now, knowing that two Fed heads agree with Fed Chairman Big Ben Bernanke — that rates need to remain near zero through 2014 — really got the ball rolling for gold, and as I left the office, with my tail dragging, and totally exhausted, gold was up $17 on the day.

But all the euphoria in the risk assets got some cold water thrown on them by the latest GDP data from China overnight. China’s first-quarter GDP grew at the slowest pace in 11 quarters, but was still a robust 8.1%-plus. If you keep with what I told you years ago, that you should believe one-half of what the Chinese report, then that puts first-quarter GDP at 4%-plus, which is still far greater than most countries around the world.

So the moderation of the Chinese economy continues. But that really takes a bite out of the commodity countries’ currencies. Australia, South Africa, New Zealand — all felt the bite of slower Chinese economic growth.

I think this slower GDP report might spur that reserve requirement reduction we were looking for last weekend, even with inflation bumping higher last month. A move to reduce reserve requirements would be like a rate cut, and even though in the old days, that was viewed as debasing a currency, these days, the markets rewards countries that promote growth. And the global growth countries would be jumping up and clicking their heels together!

I’ve spent a couple of days this week talking about Singapore and the Singapore dollar (SGD). As I explained the other day, the Monetary Authority of Singapore (MAS) met last night, and I was quite pleased with its decision. The MAS decided to maintain its currency’s appreciation and increase the slope of its trading band. Apparently, the MAS is very concerned about rising inflation in Singapore, and as I’ve explained in the past, the MAS uses the S$ to combat inflation.

They do this by adjusting the trade-weighted band of currencies by changing the slope, width and center of the band. A flatter slope allows slower appreciation — or even depreciation — over time, but that’s not what the MAS has decided it will do going forward. It will increase the slope, which means it will allow additional currency appreciation!

Heading over the North Pole from China, we land in Canada, and the Canadian dollar/loonie (CAD) finally got back to parity to the US dollar yesterday, as the price of oil rebounded from a dip this week. The price of oil rebounded to $103, and I’ve told you many times that a higher oil price is needed to move the loonie higher, as the Bank of Canada (BOC) refuses to hike rates.

You know, I like the Canadian dollar/loonie for a number of reasons, but what I don’t like is the BOC sitting and watching a housing bubble and doing nothing. Finance Minister James Michael Flaherty said that he “prefers to allow the housing market to correct itself.” (Vancouver and Toronto are the locations of the biggest housing problems.) But to sit there and do nothing is not prudent, in my opinion.

Speaking of oil, I read a report last night that made a lot of sense to me. The researcher pointed toward the growth in US M3 money supply as a strong reason for the elevated oil prices. In the report, they showed that M3 had grown more than 150% since 1998, while global oil reserves had grown 33% — which means more dollars in circulation chasing a certain amount of oil reserves, and you get inflated oil prices.

But remember, the price of getting Oil out of the ground continues to rise, too. And don’t forget what I told you a month or so ago, about how the Saudis need to keep the price of oil high to keep the money flowing, and prevent riots like those seen all over the Middle East last year.

And don’t forget that there’s a strong correlation between oil prices and the US dollar, which began around 2004 and is now at a 82% historic average. Years ago, there was no such correlation, but as time has gone on, and investors have learned that they can hedge against dollar weakness with commodities like oil, the correlation has come about.

Buying gold is another investment that hedges against dollar weakness. But it’s also a commodity… it’s a currency… it’s an uncertainty hedge. No, it’s Superman! Just having some fun. I know a lot of people think that gold’s shiny days are over. But I’m not one of them. And apparently, longtime acquaintance Frank Holmes, the CEO of US Global Investors, isn’t one of them, either. Frank was interviewed for and he said that “buying the dips in gold has been the right move for a decade.”

If you’re interested in reading what else Frank had to say about why buying gold on the dips continues to be the right move, you can click here.

The pressure on the euro and the ECB coming from Spain continues to be strong — I read a report that called the problems in Spain the return of the Spanish Flu. I’m not sure that associating a debt problem with a pandemic that killed between 50-100 million people is a good thing. In fact, I’m sure it isn’t!

As I said earlier this week, the European Central Bank (ECB) is becoming the Fed of Europe. And with that title, the ECB will look to buy Spanish debt, and not continue the three-year loans they’ve been making. We’ll have to wait and see what the markets think of that. But judging from the performance of the euro this morning, it looks like the markets don’t really care, as the euro is up from where it was when I came in and turned on the screens this morning.

There’s a story out this morning that says that Japan’s top pension fund is going to begin to invest in emerging market stocks as early as this quarter. The pension fund oversees $1.3 trillion and will begin to focus on markets including Brazil, Russia, India, China, South Korea, Taiwan and South Africa. This is good news for these countries and their stock markets, and vis-a-vis each respective currency, for the currency of each country has to be bought to buy stock in that country.

Speaking of South Korea, things are brighter there this morning after the North Korea rocket launch failed.

There was another earthquake, this time hitting in Mexico. That’s two big earthquakes this week around the world.

The data cupboard told us yesterday that the US trade deficit for February narrowed to $46 billion, from $52.5 Billion. Remember that February has fewer days before you go out and buy something that was imported to make up for the difference! Ha! PPI (wholesale inflation) showed a 0.3% increase month on month, and an annualized figure of 2.8%.

The initial jobless claims gained 13,000 last week, moving to 380,000 from 367,000. Today, we’ll see the stupid CPI (consumer inflation) and the U. of Michigan consumer confidence report.

Then I meant to talk about this yesterday but completely forgot until I heard it mentioned again in a TV interview that I saw. (Thanks, JMR Doug!) There are reports out that say the big banks are once again beginning to give loans to bad credit people. OMG! More subprime? Have we not learned anything? I shake my head in disgust here, folks, because this will all end up in the crying pool. I’m not someone that doesn’t believe in giving people a chance, but at the same time, I’m someone that believes in once bitten, twice shy. More subprime. Again, it’s an election year, right?

To recap: Dudley agrees with Yellen that rates will remain near zero through 2014. That pushes gold higher on the day. Oil rebounds to $103. Chinese GDP weakens to 8.1%, thus proving that the moderation is in, not the collapse that many economists called for. Subprime II? When do we ever learn? And Frank Holmes tells us about buying gold on the dips!

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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