09/23/11 St. Louis, Missouri – Yesterday morning I told you about how the currencies and metals had gotten ambushed by the dollar bulls overnight on Wednesday and in the Thursday European session. Remember that goofy movie young people loved, Dumb & Dumber? Well… That’s what I think of when I think of quantitative easing, followed by Twist and Shout…I mean Operation Twist… When will they ever learn? OK, I really went another direction there, so let’s steer back onto the update road, then we’ll take a detour to the “Chuck’s opinion” road…
Well, the finance ministers of the member countries that make up G-20 are doing what they can to smooth the markets this morning by saying, “G-20 policy makers are committed to a strong and coordinated international response to address the renewed challenges facing the global economy.” And the euro (EUR) led the currencies to a stronger level… But how long will just “words” satisfy the markets? Not long, folks… We need to see actual action taken by G-20, and they won’t do that… Not yet anyway, and then no one knows what it is they will or can do!
I can tell you that the first thing they will do is convince the European Central Bank (ECB) to cut interest rates… The recent data from the Eurozone hasn’t been anything to be all wired about, so, the pressure will be first on ECB President Trichet, and then Draghi, who takes over in November, to cut rates… And they will… And the euro will get trashed…
So… The brief uptick in the euro and other currencies this morning, probably won’t last long, and in fact, now that I glance over the currency trading screens, I see the euro already slipping… The markets know there’s nothing in the tank at G-20 but words…
OK… And the goings on in gold… Talk about losing ground… Well, yesterday I was reminded that the $1,735 level gold was trading at, had fallen back to the level it achieved just about 6 weeks ago! And then someone asked me if I thought the price manipulators were happy that gold was falling… And I said, are you kidding me? They’re probably selling too, they see an opportunity to pile on, without a flag, and that’s what they’re doing… I have a friend who follows this stuff very closely and he tells me that there was an inordinate amount of short contracts thrown at both gold and silver yesterday by the bullion banks…
A year ago… Gold was $1,285…
So… Can it fall further? Sure it can… And as long as the markets feel like the Fed’s Twist & Shout is going to work and the US economy will be saved, the dollar will hammer the currencies and metals. You know… Long time readers will recall that I’ve said that the Treasury Bubble was going to pop one day and the mess it will cause for Treasury bond holders will be greater than the NASDAQ bubble, and greater than the housing bubble… And now… I look pretty stupid, with the 10-year Treasury at an all-time low yield of 1.74%… But think about this… Didn’t the US government continue to inflate the NASDAQ and housing bubbles long after it appeared the bubble was about to burst?
Well… I look at Twist & Shout as the government inflating the Treasury Bubble… And think about the damage that will be caused when interest rates do rise in this country… The Fed Reserve told us all that they are going to go further out on the yield curve and buy longer dated bonds… Well, I for one don’t think interest rates are going higher in the next two years, but… I sure do think they’ll go higher again before those longer-dated bonds mature! The Fed’s balance sheet will be a disaster!
OK… I need to get away from this Twist & Shout stuff… It’s beginning to give me a rash!
Down under in Australia, we saw something strange happen… S&P reaffirmed Australia’s AAA rating with a stable outlook! Now, it’s been some time since we’ve seen S&P not downgrade a country’s rating, so… Things are looking good in Australia… In fact, the Reserve Bank of Australia (RBA) issued their Financial Stability Report last night and said that “the Aussie banking system is in good shape, relatively strong and better placed to cope with periods of market strain.”
But all that isn’t helping the Aussie dollar (AUD) right now, as the currencies across the board, except Chinese renminbi (CNY) and Japanese yen (JPY), are getting hammered as a whole by the dollar. Oh, and that “slipping” I saw earlier has turned into a rout on the currencies and metals again this morning… So much for G-20’s so-called “soothing words”!
And in a smart aleck tone, I’ll say… I told you so! To the Brazilian central bank! These guys have really made a mess of things… It wasn’t that long ago, that the Brazilian Central Bank (BCB) was ranting about how strong their currency, the real (BRL), was… They threw everything, including the kitchen sink at their currency in an attempt to stem the real’s rise… They even cut interest rates while inflation was still above their inflation target ceiling! Well… As Airplane’s Steve McCroskey said… “I picked the wrong week to… “
The BCB has to be feeling that they “picked the wrong week to cut interest rates”…
Yes, at first, the real did what the BCB wanted it to do… It lost ground… But now with the risk off meter turned all the way to past OFF… The real has lost 17% in just 4 weeks! The real hasn’t seen these soft levels in over 2 years… So guess what the BCB had to do yesterday?
They intervened in the market to support the currency… Now, isn’t that just great? Four weeks ago, they wanted their currency weaker, and now they want it stronger! I always say, and probably said it here when it happened, that when a central bank does things to debase their currency, and publicly admit that they want their currency weaker, they won’t like what the markets do to them… The markets will see that the central bank gets their wish… BIG TIME! So… Be careful what you wish for… For it might just come true!
To recap… The G-20 Finance Ministers met and tried to soothe the markets, and at first their words did have a soothing effect on the currencies… But that didn’t last long and the rout is back on the currencies and metals this morning. S&P reaffirms Australia’s AAA rating. And in a strange twist of fate… Brazil had to step in and support the real, which they have attempted to debase for the past year!
Chuck Butler
for The Daily Reckoning
Chuck Butler
Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.
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We all know the gold bugs love gold because when things really fall apart they can make necklaces to hang themselves with the pretty shinny stuff.
Well I know if the dollar goes by the way side as we know it is heading. I’ll happily be sitting in my house with the windows boarded up to keep the looters out and any one who tries to come in will not leave except in a trash bag. Silver and Gold are going to be the only currencies anyone will accept for payment of anything. I won’t be braiding any necklaces to hang myself. I’ll be sitting pretty while the rest of the people who did not buy gold and silver are standing in line to get what little savings they have. Mine will be out of the banks here and setting somewhere safe and sound in another stronger currency.
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