April 28, 2017

Pat Heller

The value of the euro had been somewhat weak in recent weeks, partly out of fear that the French elections on April 23 would winnow down the presidential runoff election on May 7 to two candidates who both advocated that the nation leave the European Union and stop using the euro currency.

Early this week many people are feeling relieved. The top vote getter was Emmanuel Macron, a centrist candidate who did not have a campaign platform of leaving the European Union or Eurozone. The far-right candidate, Marine Le Pen, will be the second candidate in the May 7 runoff but does not have any realistic prospects of winning the presidential election. Le Pen and Jean-Luc Melenchon, the candidate of the far left who came in fourth in the primary, were the two advocates for leaving the EU and the euro.

By Monday morning, the value of the euro jumped to a multi-month high. The U.S. Dollar Index dropped almost exactly 1 percent when trading resumed on Monday. The interest rate on 10-year U.S. Treasury debt rose slightly that day.

Monday’s decline may be the hardest hit to the U.S. dollar for the next few weeks. Theoretically, the federal government has a hard April 28 deadline to pass a budget or at least a short-term funding bill. Failing to do so would trigger a shutdown of the federal government’s “non-essential” operations. In addition, the former federal debt ceiling that was re-imposed in mid-March prevents the U.S. Treasury from issuing new debt to finance continuing deficit spending.

As scary as the prospect of a federal government shutdown may appear to some people, there are multiple reasons why it wouldn’t impact the U.S. dollar much if it does come to pass.

First, the shutdown only affects what are described as non-essential operations, which from past shutdowns have had much less impact than projected. Second, a shutdown looks bad for all politicians, not just those of the majority party. Therefore, there would be pressure to reach a fast solution to resume full activity. Third, Americans have seen from the 2015 shutdown that the overall impact was negligible. Thus, they are unlikely to panic this time around.

In sum, while I expect a lot of hot air over funding federal government operations, I don’t expect any major changes no matter whether a temporary reduction of activity comes to pass.

Friday next week will be the next Non-Farm Payroll and Unemployment Report. The data released in early April was the worst in several years. Because of this, I expect the Bureau of Labor Statistics will do everything it can to produce as positive a report as it can technically justify. In the past, the BLS has manipulated its pronouncements by omitting reports from certain regions and instead using “estimates” (that were corrected in later reports), including deliberately falsified data, or overstated the double-counting of new jobs with its Birth/Death Adjustment (this is a fudge factor where, after the BLS counts the number of people who have jobs, it then adds more simply because the nation’s population increased). So, I don’t expect the new jobs and unemployment report to negatively impact the U.S. dollar.

Many people may temporarily feel that, now that the key elections in the Netherlands and France have avoided victories by candidates threatening to take those countries off of the euro currency, the European Union has passed its toughest hurdles. If this were accurate, that could indicate that the euro should be stable near current levels.

Unfortunately, that is not true. The government of Greece is making little headway in negotiating with the European Central Bank and the International Monetary Fund to receive additional bailouts. So, there continues to be a risk of at least one nation either going bankrupt or leaving the Union. If Greece goes, Italy may be next.

Another concern for the European Union was the announcement late last week at the spring meetings of the World Bank and International Monetary Fund in Washington, D.C., of the three major risks that could spark global financial instability. One of the three fears was the massive quantity of bad loans (such as to the Greek government) held by European and other banks that are reported at 100 percent of face value on financial statements but have a fair market value much lower. The other major two risks of global financial instability named in the announcement were that China’s debt levels were soaring in relation to that country’s Gross Domestic Product and the stretched U.S. stock valuations.

Should the Greek government (among others) default on any loan repayments, that event would force European and other banks to quickly write down the value of such loans in their financial statements. Losses would be in the hundreds of billions of dollars and possibly in the trillions. Should this event come to pass, the euro would plummet and other currencies, including the U.S. dollar, would rise.

Thus, I think there is a fair chance that the value of the U.S. dollar is safe from falling further from now until around the beginning of August. In the middle of the summer, state and local government in the United States that have June 30, 2017, fiscal years will begin reporting their financial results. Although the amounts will not yet be required to be reported on the revenue and expense statements, for the first time ever the combined trillions of dollars that these jurisdictions owe for the present value of unfunded liabilities for employee pensions and retiree healthcare benefits will be required to be added to the balance sheets. As Americans finally realize that most of these governments are, for all practical purposes, insolvent and possibly bankrupt, that will be when the value of the U.S. dollar comes under major downward pressure.

Should the dollar fall significantly from current levels, that will almost certainly mean much higher gold and silver prices.

As of now, pretty much every form of bullion-priced precious metals coins and ingots are readily available for immediate or short term delivery. Retail premiums are at typical levels, with there being some opportunities to acquire pre-2017 dated coins at even lower than usual premiums.