OK, I Get Spain. What About The U.S.?
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In This Issue.

* EJR downgrades Spanish debt.

* Ands sends the currencies to the woodshed.

* China signs two new currency swap partners.

* The Little Book of the Shrinking Dollar.

And, Now, Today's Pfennig For Your Thoughts!

OK, I Get Spain. What About The U.S.?

Good day. And a Wonderful Wednesday! I got all my "home alone" chores done last night, of course after going home and taking a nap! It's still blazing hot here, but when you work inside all day, it doesn't matter much. But since I once had a job as a young man, in the hot Oklahoma sun, building in-ground swimming pools, I always worry about the people that work outside all the time in this heat. Like roofers, and a host of others of course!

Well. we almost had a 4-day healing session for the currencies, as things began to turn positive yesterday morning after I hit "send". Could it last? NOOOOOOOOOOO! The rating agency, Egan Jones downgraded Spain's debt, and that sent the risk assets of currencies, stocks, commodities, like Gold & Oil, reeling! This was akin to throwing a cat among the pigeons, folks. The euro plunged, taking the rest of the currencies with it. Oil, which was trading back above $92 got sent to the woodshed, and Gold, saw red numbers for the first time in nearly a week!

OK. I get it, about Spain. but what I don't get is that the markets paid attention to the Egan Jones (EJR) downgrade like nobodies' business! . But a month ago, when EJR downgraded the U.S. debt rating the markets decided that they were no Fitch or S&P, and therefore paid no attention to the downgrade. And this wasn't the first downgrade that EJR made to the U.S! What was once a pristine AAA rating for the U.S. has fallen first to AA+, and then last month to AA. So. I don't get this. I get Spain. I don't get the markets ignoring the U.S. downgrade..

It's been like death by a 1,000 knives for the euro. Every time the single unit gets a ray of sunshine, and some healing, the euro receives another stinging cut. It could be from a ratings agency, or a number of places. Every day brings us something new, and most days it's just not good for the euro, and therefore all the other currencies.

And with the euro falling out of bed yesterday, the cross to the Swiss franc was getting a little juicy (remember the floor was set at 1.20). And then right out of left field we saw the franc sliding on the slippery slope too. What could have caused that you ask? Ahhh, grasshopper. I would bet a dollar to a Krispy Kreme that the Swiss National Bank (SNB) entered the market and began selling francs. I mean, why else would the franc take a ride on the slippery slope? Isn't it a so-called safe haven like dollars and yen? Well, dollars gained yesterday, yen gained yesterday, but not francs. Central Bank intervention, one of my arch enemies!

Well. while the markets were getting all lathered up about the EJR downgrade for Spain, there were two very important announcements being made out of China. I tell you this, these Chinese are wily old veterans, right Jack? I'm reminded of what the Music Man said when he tried to warn the people about the pool hall. "Well, either you're closing your eyes To a situation you do now wish to acknowledge. Or you are not aware of the caliber of disaster indicated, By the presence of a pool table in your community."

The Pool Table that I'm talking about is China's continuing effort to remove the dollar as the reserve currency of the world, by first, removing its place as terms of trade, and gaining a wider distribution of their own currency. I've documented these over the past couple of years. Yesterday, China signed an agreement with Australia! And then they announced that they had signed a currency swap agreement with Japan. In both of these cases, the dollar will no longer be used as the clearing mechanism in the terms of trade between China and these two countries. Instead they will simply swap each other's currencies.

China's roster of currency swap agreement partners is growing by leaps and bounds folks. and just because the markets have their blinders on, and one day they will wake up and say, "Hey! How'd this get past us?" You don't have to! Yes, the dollar may be making a bear market rally right now, but its future is getting fuzzier with each currency swap agreement China signs.

Look, I'm not just saying this because I offer Chinese deposit accounts. I'm saying this because it's all out there for everyone to see, and no one sees it but me. Sort of like the UFO I spotted the other. no! I'm just kidding there. but the point is and this is serious. You have to take what the Chinese say seriously. and I called this: The dollar hears a Hu.. Chinese President, Hu, said over a year ago that the "dollar system is a product of the past". Up to that point, in time, the Chinese had signed quite a few currency swap agreements, so I do believe that he was firing a warning shot across the dollar's bow. But who paid attention? ME!

OK. let's talk about something else, because I'm getting a rash from all this stuff, that no one pays attention to! I do want to thank reader, Russ, for reminding me of what I was going to talk about this morning. China's swap agreements!

Well, in Australia, overnight, the Aussie dollar (A$), already reeling from the Spain downgrade, and euro weakness, received its own bad news in the form of a weak Retail Sales number. April Retail Sales fell .2% VS March. Construction work was stronger than expected, but just wasn't enough to help the sliding A$...

I had a reader / client send me an email and say that he had lost $750 on his A$ investment and he was done with it. Hmmm. The A$ had risen from 50-cents a decade ago, and last summer hit an all-time high of $1.10. At today's level of .9770, that's quite a loss from $1.10, but looking at it differently. you could say that at .9770 it has gained nearly 50% from 2002. But if we close that chart date down and go back to March of 2009, when QE was kicking and screaming, the A$ was .63-cents. to .9770, that's a 63% gain! So. I guess it's all about when you buy, and how long you hold it. I've always contended that currencies make long sweeping moves within trends, and the trend is NOT a ONE-WAY street, that there can be volatility within the trend, like we're seeing right now.

The Swedish krona has actually been a winner VS the dollar and euro overnight. Sweden printed a strong, for them, 1st QTR GDP overnight, which has given the krona a lift. Swedish 1st QTR GDP printed at +.8% VS the previous quarter. The "experts" were looking for +.2%, so this number was impressive indeed!

The Chinese are attempting to throw the markets off the scent of further stimulus for the Chinese economy, by stating that "China plans no large stimulus to counter slowdown". Of course, that counts for just now. You can bet your sweet bippie that China will do everything they can to counter a major slowdown in their economy. The Chinese leaders can't have the types of people in the streets that the Middle East had last year. And. as I've explained before. at least China has a treasure chest of reserves to use. They don't have to go into debt to stimulate their economy.

OK. Did you see where Consumer Confidence for May fell? And March's previous reading was revised downward? Of course I'm one of those that doesn't get it when Consumer Confidence rises in these times. And. the S&P/CaseShiller Home Price Index fell 2.57% in the first quarter VS a year ago. But. what I was talking about yesterday is illustrated here, or at least the first part of what I was talking about is. the fall in home prices in the 1st QTR was less than it was a year ago, so obviously there's been some healing going on here. and that's the first part of what I talked about. The second part is that I don't believe this can continue to get better, not with the unemployment problem in the U.S.

The U.S. data cupboard gets a break today, having only to deal with Pending Home Sales. So, the Spanish downgrade will be a bad taste in the mouths of currency traders today, as no data will offset that move from yesterday. I would think that yesterday's selling was overdone, but maybe the markets aren't of the same mind. (geez Louise! I sure hope they aren't! I always want to be the guy that doesn't think about stuff like the others do.)

Then There Was This. This section will be different today, as I talk about a new book that's available on Amazon and other places, written by my friend, Addison Wiggin, titled: The Little Book of the Shrinking Dollar. I contributed to the book, but that's not was is important. As Marc Faber said about the book. "The Little Book of the Shrinking Dollar is not an academic paper published by some ignorant economists. Not only does Addison convincingly and disturbingly argue that "every paper currency in the history of civilization has eventually lost its entire value, " but he also offers ways to protect our wealth."

Chuck again. I strongly recommend this book, and at 223 (small pages), it's a quick read. It's all spelled out for you. Things I've talked about for years, and now it's right here in a great book! Kudos to Addison Wiggin!

To recap. The nearly 4 day rally and healing for the currencies was wiped out in a NY minute by the EJR debt rating downgrade of Spain yesterday. The euro plunged and took most currencies with it. China announced two more currency swap partners, Australia and Japan, and the phasing out of the dollar as the reserve currency continues. Sweden saw a stronger than expected 1st GDP, and Australia saw a very weak Retail Sales figure which didn't help the A$.

Currencies today, 5/30/12. American Style: A$ .9775, kiwi .7590, C$ .9730, euro 1.2450, sterling 1.56, Swiss $1.0365, . European Style: rand 8.4650, krone 6.0405, SEK 7.2050, forint 240.10, zloty 3.5160, koruna 20.5680, yen 79.05, sing 1.2815, HKD 7.7630, INR 56.20, China 6.3576, pesos 13.96, BRL 1.9925, Dollar Index 82.67, Oil $89.51, 10-year 1.68%, Silver $27.75, and Gold. $1,554.15

That's it for today. I was really dragging the line this morning, until I heard, the song: Movin' On, by Missouri. talk about a get you up and moving song! They tell me that by Friday, instead of mid-90's, we'll be lucky to hit 70! That's going to feel like someone turned the outside air conditioning on! A very long day on the desk for me, makes two days in a row (with a 3-day weekend in between, thank goodness!). I hope that streak ends today! I don't travel again until the end of July, but it's not too early to be thinking about Vancouver in July. The Agora Vancouver Symposium is a must-go-to even each year. Go to: http://agorafinancial.com/vancouver-2012/ to get info. and with that, I'll get this out the door. I thank you for reading the Pfennig, and hope you have a Wonderful Wednesday!

Chuck Butler


EverBank World Markets



Posted 05-30-2012 11:19 AM by Chuck Butler
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