Tags: Thatcher | correction | gold | dollar

Only Real 'Safe-Haven' Play Remains the US Dollar

Tuesday, 09 April 2013 12:13 PM Current | Bio | Archive

On Monday, former U.K. Prime Minister Margaret Thatcher died at the age of 87.

It’s interesting to remember she got her nickname of “Iron Lady” in 1976 from a Soviet Captain by the name of Yuri Gavrilov writing in the Soviet newspaper Red Star because of her steadfast opposition to the Soviet Union and socialism.

It must be said she undoubtedly helped the free world win the Cold War, and to me it is clear that without the extraordinary political power of this extraordinary woman, the resurgence of the United Kingdom would not have happened.

In context to the creation of the European Union and the single currency in a postwar Europe, she openly broke with the belief in the European idea and was downright negative about the birth of the European “superstate.” At best, she saw something in the idea of Europe being some kind of a large free-trade zone.

When she discovered that Britain paid “net” to Europe, she demanded, to the dismay of most other European leaders at the European Union summit in Dublin in1980: “I want my money back.”

I don’t think it’s an overstatement to say that since Margaret Thatcher it never really worked out between the United Kingdom and Europe.

Thatcher was also very critical on the euro and the European Monetary Union. In 2012, she published her memoires in the book titled “Statecraft: Strategies for a Changing World” wherein she wrote: “The European single currency is bound to fail, economically, politically and indeed socially, though the timing, occasion and full consequences are all necessarily still unclear.”

I must say at that point in time I didn’t agree at all with Thatcher’s view on the euro, but I also must admit that today my view on the euro project has lost a lot of its initial enthusiasm. My belief in the euro, in its actual composition, is no more “irreversible.”

Markets don’t seem to pay sufficient attention to the fact the construction of a full European Union federation remains far from completion and, bit by bit, real danger is growing that, because of the austerity policy that is inflicted upon the eurozone countries, may finally destroy the European Union itself. If that were to happen, that would really be a tragedy of historical proportions.

Unfortunately, the eurozone still remains by far the most important trouble spot in the global financial system today, with no improvement in sight anytime soon. It’s amazing to see how “austerity first” remains the dominating mantra of the European Union even though the Markit Group’s European Purchasing Managers Indexes for March of all important countries was below the 50 “make or break” line and where they have been for most of the past two years.

In this context, it’s certainly worth taking note of the European Union’s myopia in its handling of the financial crisis while it faces continuous growing unemployment that now stands at a record rate of 12 percent. The Cyprus case is a good example of shooting themselves in the foot and where the bail-in/bailout, as it was imposed by the Troika, is well on its way of no-return for causing a 20 to 30percent collapse in the Cypriot gross domestic product.

By the way, we learned this week that 22.5 percent of uninsured deposits at the Bank of Cyprus would remain “frozen” until September. No, a euro in Cyprus doesn’t have the same spot value as a euro in Brussels or let’s say in Frankfurt.

In Portugal, the Constitutional Court rejected four of the nine measures of the recently accepted austerity budget. The rejected measures represent 900 million euros of the 5 billion euros budget, which represents a troubling 18 percent cut. Talking about a eurozone precedent, this is also one to take notice of.

On the North Korean front, Russian President Vladimir Putin said in relation to the probability of a conflict: “And if, God forbid, something happens, Chernobyl which we all know a lot about, may seem like a child's fairy tale. Is there such a threat or not? I think there is. … I would urge everyone to calm down.” As a long-term investor, I still consider the situation on the Korean Peninsula as highly dangerous because an error or miscalculation always could happen at any time.

Tuesday, U.N. Secretary General Ban Ki-moon warned that the North Korean situation could become uncontrollable.

Speaking on Monday in China, Christine Lagarde, managing director of the International Monetary Fund, said global economic recovery remains at a moderate level, while growth and jobs are still major challenges. Interestingly, she also said growth momentum was picking up in the United States, but at the same time warned of fiscal risks associated with spending cuts that will weigh on growth in the United States.

She also reiterated that monetary policies have limits in their effectiveness and may have unintended consequences. Nevertheless, she praised the recent expanded stimulus package from the Bank of Japan. In fact, by doing so, she joins Federal Reserve Chairman Ben Bernanke, who said: “Most of the world’s major industrial economies are engaged in expansionary monetary policy and on net, I think that’s mutually constructive.”

At the same occasion, he also said: “The U.S. economy is significantly stronger than it was four years ago, although conditions are clearly still far from where we would all like them to be.”

Last Friday, we got disappointing weak growth of U.S. payroll numbers, which came in at only 88,000 in March, underlining the fact that we remain, at least for now, in a slow employment growth environment. Total unemployed, plus all marginally attached workers plus total employed part time for economic reasons, or the “U-6 rate,” came down to 13.8 percent from 14.3 percent in February, but still an amazing 5 percent higher than the 8.8 percent where it stood when the Great Recession started in December 2007.

Maybe the U-6 rate was down for the wrong reason, because when we look at the whole Civilian Labor Force Participation Rate, that rate dropped to 63.3 percent (lower numbers indicate worsening employment situation), well below the 66 percent where it stood when the Great Recession started, and which was now at the lowest participation rate since May 1979.

The just released March National Federation of Independent Business Index of Small Business Optimism declined 1.3 points and came at 89.5, which is below the average of 90.7 we have had during the 44 months of economic expansion since the beginning of the recovery in July 2009.

Please allow me to repeat myself, while the United States remains without any doubt the best home in a not-so-good neighborhood, the country is not out of the woods yet.

Keep in mind that the only real "safe-haven" play in town remains the U.S. dollar even though it may weaken somewhat if U.S. economic numbers and earnings show weakness in the coming weeks.

Also, I would only start considering buying gold at prices a couple $100 lower. Keep in mind we face deflationary pressures and not inflation, at least that’s the situation today in most of the developed economies. That’s not necessarily the same in developing economies like Brazil. Please don’t get me wrong, I think the decade-long uptrend in the gold price is still intact, but hasty conclusions should be avoided.

That said, I still expect a correction in the markets.

In case you have the intention to buy or invest in the markets these days, maybe it would not be such a bad idea of questioning yourself on what you could win or what you could lose by taking that action one of these days.

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In case you have the intention to buy or invest in the markets these days, maybe it would not be such a bad idea of questioning yourself on what you could win or what you could lose by taking that action one of these days.
Tuesday, 09 April 2013 12:13 PM
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