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Could U.S. Bonds Face EU Competition?

jhaddock (February 23, 2009)

Also In Today’s Letter…

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By Chuck Butler It sure seems as though I went from Friday to Monday, this past weekend. I went out of town this past weekend, and before I knew it, I was driving to work this morning! UGH!

On Friday, the euro finally caught some wind in its sails after being pummeled mercilessly all week. We can blame the euro’s losses on the news that broke during Valentine’s Day weekend. The news revealed that the Eastern European loan losses had grown to a point that they were causing major problems for the Western European Banks that had extended the loans.

Also, last week, you may recall me saying that Germany’s Chancellor Merkel, was all “show and no go” in her press conference, and that all left the euro without a bid.

There was a story on Friday mid-day, that a “Eurozone bond” could be used to ease the turmoil on the financial institutions.

Could There Soon Be a Eurozone Equivalent?

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Here’s a snippet from Reuters…

“‘The Chairman of Eurozone finance ministers Jean-Claude Juncker has proposed that the common Eurozone bond should cover the first 40% of the overall Eurozone government debt,’ sources familiar with the work of the Eurogroup said.

“This would be senior debt, guaranteed by the whole euro area, which now has 16 members. Anything above the 40% would be junior debt that would be issued by the individual governments.

“The junior debt would most likely be more costly for the government to issue, therefore encouraging a reduction ofImage debt towards the common Eurozone level of 40%, sources said.

“If agreed on, common Eurozone bonds would in a matter of a few years create a highly liquid bond market of some 4 trillion euros which could successfully compete with a similar size U.S. treasuries market for large investors like China.”

The One Thing Standing in Eurozone Bonds’ Way

That’s HUGE folks! However, before we all go out to celebrate, Germany is showing some opposition to this plan. That’s not surprising, considering Germany already has about one Trillion euros worth of German bonds issued. And if Germany balks, this plan will not get off the floor. But, for now, it has put some wind in the euro’s sails.

You have to give the Eurozone ministers some credit for creating something that countries could use as an “alternative” to Treasuries. For a long time, Treasuries have been the only game in town for countries like China and Japan that have tons of cash to invest.

There was another story out this past weekend that reported Asian countries are pooling together reserves to back their currencies against speculators. The report called for Asian countries to pool around US$30 billion.

Now, that may or may not be true, but the point here is that this kind of smoke comes from the fire of protectionism. These are baby steps to a full-blown protectionism plan. And you know me, there’s no smoke without a fire, there’s no heat without a flame.

Citigroup Is Under Water: Government to the Rescue?

The BIG news this morning though is the one that’s going around about Citigroup. Let’s see what the Wall Street Journal has to say about this.

“Citigroup is in talks with federal officials that could result in the U.S. government substantially expanding its ownership of the struggling bank, according to people familiar with the situation.

“While the discussions could fall apart, the government could wind up holding as much as 40% of Citigroup’s common stock. Bank executives hope the stake will be closer to 25%, these people said. Any such move would give federal officials far greater influence over one of the world’s largest financial institutions. The proposal was made by Citigroup to its regulators.”

Oh great, I can hear the dolts on Capitol Hill all screaming about how this is proof that the U.S. needs to nationalize banks. Well, let’s see…

Maybe If Those Dolts Had NOT Bailed Out Banks,
They Wouldn’t Be Talking “Nationalization”

If they hadn’t already put tens of billions into this bank, maybe they wouldn’t be so ready to try and save it! See? This is what I was talking about months ago, when I said that the government bailing out banks was a very bad thing.

But, do you think these guys on Capitol Hill cared to listen then? No! And they’re still not listening.

When former Treasury Secretary Paulson, came to them and said he needed US$750 billion to make things right, these lawmakers didn’t bat an eye. They didn’t question where he got the US$750 billion figure.

They didn’t ask him how he would account for the spending, or how it would be paid back and when. No, they just followed him like ducklings crossing the road behind their mother.

Okay, this week, we get a double dose of Big Ben Bernanke speaking on Capitol Hill tomorrow and Wednesday. This is the semi-annual testimony on the economy. This testimony used to be a requirement by the Humphrey-Hawkins bill that expired some time ago. However, Fed Chairmen still follow it.

What’s going on nowadays makes a joke out of Humphrey-Hawkins. You may recall the Humphrey-Hawkins Full Employment and Balanced Budget Act, which was put in place in 1978. I’d say the Fed has to some ‘xplainin’ to do!

The Top Four Indicators To Watch This Week

Tomorrow, we will see the S&P/Case-Shiller Home Price Index, which I’m sure will show that the home prices continue to fall here in the United States.

Tuesday also brings us Consumer Confidence. Wednesday will bring us Existing Home Sales followed by New Home Sales on Thursday, and we finish the week and month with a revision to the preliminary 4th quarter GDP, and the Chicago Purchasing Managers Index (manufacturing).

So, we’ve got a boatload of data to go through this week, but the big items are…

  1. Is the Eurozone going to issue a bond to rival Treasuries?
  2. Is Citigroup going to seek additional bailout funds from the Gov.?
  3. Big Ben’s testimony this week.
  4. An Asian currency fund?

That’s it for today… Yesterday morning, my beautiful bride and I had breakfast outside next to the ocean with a bright sun beaming warmth down on us. Four hours later we were back in St. Louis, and 20 degrees!

I made the trek to Jacksonville for the memorial service of our EverBank colleague John Kimsey, who would have celebrated a birthday today. I met John’s wife, who said to me…”you must be Chuck, I read your letter every day.”

I was also stopped in the hallway by a fellow that said, “Are you Chuck Butler?, I read your newsletter every day.” So John must have converted quite a few people to be my readers! But really, I must be easy to spot, as how many bald, overweight guys are there walking around with a cane, and a beautiful bride?

I hope your Monday is Marvelous!

Chuck

EDITOR’S NOTE: Even with the prospect of new Eurozone Treasuries, the euro is still in for a rough ride for the next few months. Next month, our monthly currency newsletter, Currency Capitalist is telling you exactly how to cash in on the falling euro, with an incredibly easy-to-buy investment play that gives twice the returns as the euro drops. Click here for details.

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