Count Down to Quantitative Easing Removal

Front and center this morning, Sweden’s Riksbank did raise interest rates as expected by 25 Basis Points (1/4%) to an internal rate of 1.5%… As you would expect, the Swedish krona (SEK) has taken off versus the dollar. You know, Norway may have been the first European Country to raise rates, but Sweden has caught up in a hurry, while Norway’s Norges Bank dilly dallies around, the Riksbank catches up… And that’s one of the BIG reasons why the Swedish krona is the best performing (major currency) the last three months, six months, and second best performing currency for 12 months…

And you have to like the Riksbank Governor who said that he “sees a stronger krona”… Glad he sees what we’ve seen for some time now. Guess he doesn’t need to get his eyes checked, eh?

In fact, as I look at the currency returns (for major currencies) for the past 12 months… Most are green, which means they are up versus the dollar, and even the poor, beaten, beleaguered, and downtrodden, euro (EUR) is basically flat versus the dollar in the past 12 months… And as I explained to the audience last week when talking about diversification, as long as you view diversification as something that an investment portfolio demands, then your diversification outside of the dollar should be viewed as “insurance” against the potential of a further declining dollar. It doesn’t mean the currency will soar to the moon (unless the dollar falls through the trap door)… And as long as your diversification remains steady, it is doing what it’s supposed to.

OK… I just checked the last 24 hours of trading for the euro, and it looks like a roller coaster ride that my son, Alex, would enjoy. The single unit has pushed higher to 1.3540, and fallen to 1.3460, and then back up and back down…all night. Pretty strange moves within those two figures, and all points in between!

Gold and silver healed a bit yesterday, and the price action overnight is picking up some steam. This would be about the first two-day, back-to-back rally in these two precious metals, in about a month of Sundays! Or, at least that’s what it feels like, eh? I put our monthly newsletter, The Review & Focus, to bed yesterday… And in it I talk a bit about how I feel gold and silver have had a nice correction, and are forming a new base from which to launch… It’s all my opinion, of course, but fundamentally speaking, I don’t see how it could be any other way!

So… Did you see that China’s GDP last year was 10.3%… Now, I ask this question without a smirk on my face, but would very much like to… Where are all those writers, analysts, and economists who said that China’s economy was going to collapse in 2010? OK… I’m not going to rub their collective noses in China’s 10.3% GDP in 2010… Last night, China reported their latest inflation data, which showed a slight decline in consumer prices, which indicates that the rate hikes, rise of reserve requirements, and other steps the Chinese have made to moderate their economy, and stem inflation, just might be working!

Which would be unlike the quantitative easing that the CABAL (Fed) have been subjecting our economy to… The CABAL chairman told us when he implemented QE1 and Q2, that it was for the good of the economy, to spur economic growth, job creation, and keep interest rates down… Well… That’s strike one, two and three… Go grab some bench, Mr. CABAL Chairman! And that’s all I can say about that right here, right now, as this is the kinder, gentler me! HAHAHAHAHAHA!

Since the CABAL introduced quantitative easing in March of 2009, inflation has taken off, just as I told you back almost two years ago that it would… No, we’re not seeing wage inflation, or housing inflation… But get a load of these things that have increased phenomenally since March 2009.

The average price of gas is up 69%… The price of oil is up 135%… Corn is up 78%… Sugar is up 164%… And I could go on, but I think you get the picture. Now, on the other side of the employment that was supposed to improve with QE, the number of unemployed people is up 25%… The number of food stamps recipients is up 35%… The national debt is up 32%… And then the last thing they told us would improve or remain steady was interest rates… Hmmm… Well, the 10-year Treasury is up 100 basis points in the past three months alone! Sorry to be the one that had to tell you these things, but if you only watched cable media, you wouldn’t know about these things, and when the Conference Board called to survey you about how confident you were about the economy, you would be singing the praises of the CABAL for all they had done for you!

Should I go on? I don’t think so… Like I said, it’s a kinder, gentler me!

Well… Getting back to China for a minute… 10.3% GDP growth, and falling consumer prices means it’s “GAME ON” , Wayne and Garth-style, for the commodities, and commodity currencies… And the currency best suited to benefit from China is Australia… Remember last week, when I sent a note to Mike about what I was seeing with regard to the possible return of the carry trade? Well… It’s happening, folks… The Aussie dollar (AUD) is gaining versus the yen (JPY) to the strongest level since last May! So… Like the old traditional carry trade style… Investors sell yen, and buy Aussie dollars… You see the yen get weaker, and the Aussie dollar get stronger… Talk about a two-pronged fork with one tine dedicated to commodity growth, and the other dedicated to the carry trade… It should be all good for the Aussie dollar… But again, that’s just how I see it, folks…

OK… Back to the euro for a minute… We’re climbing higher again on the roller coaster, and this time the euro is getting a boost from the latest report from the German think tank, ZEW on German Investor Confidence, which rose for the 4th consecutive month.

You know… I gave a presentation last week illustrating that for each of the past three years, we’ve seen the year begin with dollar strength, and all the rosy forecasts for the US economy, only to see it all fade by late spring… This year is beginning to take on that same pattern, as we all know the forecasts for 2011 are even more enthusiastic for this year than ever! But let me remind you of a little deadline that’s approaching… It’s the deadline that the CABAL put on itself, to end quantitative easing… June… After June, who’s going to buy all the Treasuries we need to finance the ever-increasing deficit spending? A customer, reader, and friend, attended a presentation in Florida at the Money Show, and told me that the presenter was a “true bond guy” who told the crowd that they had until June to unload their Treasuries… Sounds like this guy has been reading the Pfennig and Currency Capitalist!

But you don’t have to listen to me or the “true bond guy”… How about Bill Gross, who heads the largest bond fund in the world? Well… Pacific Investment Management, managed by Bill Gross, reduced its holdings of US government debt from 22% of assets in December to 12% in January. Gross said investors should sell debt issued by the US and the UK and buy higher-yielding securities issued by emerging nations.

Then there was this… In yesterday’s essay “Aussie and Canadian Dollars Remain Above Parity” I said, “The new budget proposal includes tax hikes, which if I were a real mathematician I would probably figure out that the tax hikes are probably where the $100 billion comes from each year, so that, in reality, there are no spending cuts at all!”

Well… According to the Americans For Tax Reform (AFTR)…there are 15 taxes in the budget that were part of the plan to cut spending by $1.1 trillion over the next 10 years… The people at AFTR believe that this budget is as much about tax cuts as it is spending cuts…

Here are a couple of the tax increases in the plan…

  • Raising the top marginal income tax rate (at which a majority of small business profits face taxation) from 35% to 39.6%. This is a $709 billion/10 year tax hike
  • Raising the capital gains and dividends rate from 15% to 20%
  • Raising the death tax rate from 35% to 45% and lowering the death tax exemption amount from $5 million ($10 million for couples) to $3.5 million. This is a $98 billion/ten year tax hike

I told you yesterday that this was going to be the case, just like I told the audiences at the Orlando Money Show last week… And then… Whoomp There It Is!

To recap… The Riksbank hiked rates 25 BPS to 1.50% this morning, pushing the best performing currency (krona) for the past six months even higher. The euro has been on a roller coaster ride, up, down, and all points in between, but mostly up versus the dollar, overnight and this morning. ZEW German Investor Confidence printed stronger for the fourth consecutive month, giving the euro a boost this morning. It’s looking more and more like the carry trade is returning with yen weakening and Aussie dollars gaining… And Chuck goes postal on QE once again…

Chuck Butler
for The Daily Reckoning