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Weldon's Money Monitor


Italian Welfare Minister Roberto Maroni has gone and DONE IT ... as we shine the spotlight on comments he made late yesterday, published in this morning's Repubblica Daily. Maroni stated that Italy should hold a referendum on whether or not to ABANDON the EURO ... and RETURN to the LIRA as the national currency.

Note the quotes:

... "The euro has proved inadequate in the face of economic slowdown, the loss of competitiveness, and the job crisis."

He went on to say that France's no-vote on the new EU Constitution represents ...

... "a disaster for the euro."

As such, and echoing a view held by higher ranking, more influential politicians in Italy, such as Prime Minister Berlusconi and Economics Minister Siniscalco ... Maroni went on to say ...

... "In this situation the answer is to give the governments (individual 'state' governments) greater power to defend national industry from foreign competition, and to give control over the exchange rate back to the governments."

Moreover, the paper reports that an emergency meeting was convened in Germany yesterday to discuss the situation, a meeting attended by FinMin Eichel, Bundesbank President Weber ... and ... foreign economists.

And ... we note comments from Luxembourg Prime Minister Jean-Claude Juncker, related to the upcoming July-10 Luxembourg referendum on the EU Constitution ...

... "I am worried."

Apparently, so too are ASIAN countries, who have, over the last two years, shifted their reserve allocation models to incorporate an increasing share of EUR holdings, at the expense of USD holdings.

Now, according to our sources in Singapore and Taiwan, China's, Japan's, Korea's, and Singapore's monetary authorities are discussing re-allocating AWAY from the EUR, and more into hard assets and raw materials.

INDEED, despite what might be construed as BEARISH supply news in the energy complex, crude oil, gasoline, kerosene, fuel oil, and heating oil have SOARED this week ... ... as have silver and some of the industrial metals ...

... as rumors circulate in Asian solons to suggest a shift into higher gear in terms of ACCUMULATION of these materials by Asian officialdom, specifically as relates to talk of expanding strategic reserve holdings of crude oil by both China and Japan.

MMMmmmmm ... it seems ALL paper money is coming under intensified scrutiny by those that hold the largest EXCESS SUPPLY ...

... causing a SECULAR SHIFT towards holding 'stuff' that can actually be used for something other than stuffing a proverbial mattress.

In fact, this has been THE ESSENCE of our major macro-musings for many years, the paper-burning theme ... and the secular debasement of paper money by Central Banks.

GEE, did anyone notice the HUGE increases in Fed Treasury Holdings, Fed credit, and Custody Holdings this week ???

GEE, did anyone notice the PLUNGE in Spanish yields at this week's auction of 3-Year paper, with the 3% coupon fetching an average yield of just 2.13% ... compared to the average yield the SAME COUPON garnered during the last auction, in January, pegged at 2.57% ...

... making for a decline of (-) 43 basis points, or (-) 16.7%.

Moreover, a THREE-YEAR yield of 2.13% ... leaves a razor thin spread of just 13 basis points over the current ECB-set repo-rate of 2%, implying a MAJOR shift in sentiment surrounding the next monetary move to be expected from the European Central Bank.

Still, our recent focus has been DIRECTLY placed on Italy, hence the poetic justice provided by this morning's EUR-Lira bombshell, especially since it comes in line with the WORST Italian Service PMI reading in SEVEN YEARS. Note the details of the survey results, released this morning:

• Headline Activity ... 47.3 ... down from 48.4, and the LOWEST since January of 1998.

• New Business ... 47.2 ... down from 48.0, and ALSO the LOWEST since January of 1998

In fact, today's Money Monitor Special Focus was NOT 'planned', but is a spontaneous reaction to Maroni's earth-shaking comments. We are currently working on several other pieces, including a details breakdown of the macro-scene developing in the UK, where the CIPS Surveys specifically point to a slowdown in demand from the EU, as part of the reason for multi-year lows in New Orders and Output indexes.

With that in mind, along with a seven-year low in Italian service industry new orders, we note more data released this morning:

• EU Retail Sales ... down (-) 1.2% during the month of April, taking the year-year rate into negative territory, at minus (-) 0.9%, FAR wide of the results expected, anticipated to show +0.4% yr-yr growth, and DOWN BIG from March's growth rate of +1.4% yr-yr

INDEED, a (-) 230 basis point DUMP in the year-year rate of retail sales growth, into an OUTRIGHT CONTRACTION of nearly one percent.

No wonder then, that on Thursday the European Central Bank CUT their macro-forecast for 2005 EU GDP growth, including dramatic cuts in the forecasts for Export and Import growth relative to their March forecast. Note the changes, in just two months time:

• Export growth ... 3.1% ... down from (lower band) 4.0% previously

• Import growth ... 2.6% ... down from 4.7%

Intensified competition, and slowing final demand ...

... and suddenly, Italy would rather have the LIRA back, than the EUR.

Indeed, as we stated earlier this week, the RISK point in Europe is individual state-government debt, since there is NO 'official', 'legal', safety-net in place to overt a 'run' ... a dynamic that is becoming more and more tense and tangible amid the parabolic rise in debt-GDP ratios, specifically in Italy.

INDEED, this OMINOUS thought process comes through LOUD and CLEAR in the final commentary issued by the Italian Welfare Minister, when he says ...

... "We are already heading towards Argentina, that is why we have to change direction."

The EUR ... like the PESO ???

Food for thought, and reason to remain bearish the EUR, bullish US fixed-income ...

... and ... reason to buy Silver, as a cheap option on the Fed, a cheap option related to the debt-distress-dynamic in Europe, and a cheap option on Asian accumulation of USD based raw materials.

Observe the upside breakout taking place in Silver this week.

Of GREAT interest, is the apparent continuation of the 'secular' upside push in Silver, relative to Gold, as noted in the long-term weekly chart on display below, revealing the plot of the Gold-Silver Ratio ... inverted, to reflect a Silver 'basis'.

Also we note how historically CHEAP Silver is, relative to Crude Oil, as noted in the long-term weekly ratio spread chart on display below. Indeed, on the rare occasion that Silver slips below a 20:1 dollar-for-dollar ratio level ... it might appear CHEAP, relative to crude.

But MOST 'impressive' of ALL ... we note the SPECTACULAR breakout that NO ONE is watching, except readers of Weldon's Money Monitor, as highlighted in the long-term monthly chart on display below. Indeed, note the plot of our 'Bond Yield Adjusted Silver Price' (Silver's price divided by the yield on the US 30-Year Bond) ...

... revealing an upside breakout this week, to a NEW SECULAR HIGH, and, the highest level since Silver was trading near $50 per ounce, which, thanks to PARABOLICALLY HIGH Bond yields in the early eighties, appears on this chart as a high in the $32.50 area, 'adjusted' for yield.

Subsequently, our yield-adjusted Silver price ... is headed towards $20 per ounce, and is hitting a level at which it has closed a month on ONLY FIVE other occasions in the past THREE DECADES.

Indeed, Silver HAS BEEN ... and continues to be ... a CHEAP option on the Fed, and now, appears to have become a cheap option on the disintegration of the Eurocurrency.

Indeed, in aggregate, Silver appears to be a CHEAP OPTION on ... paper burning, and currency debasement by global officialdom.
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