Chuck Butler

Well… Big Ben Bernanke Opened Pandora’s Box of stimulus yesterday, and he had some words for our fave lawmaker, Ron Paul…

But first, front and center today we have gold heading toward $1,600, trading at a new all-time high of $1,593! WOW! Silver has followed gold’s line, and is trading above $39… So, what’s got the precious metals all lathered up? Ahhh grasshopper, it’s all about words… Words, between the lines of age, as Neil Young sang back in the ‘70s…

Yesterday morning, I told you about the currency and metals rally that was triggered by the FOMC meeting minutes, where additional stimulus was discussed… I said that the market might be getting a little ahead of itself, thinking that the stimulus would come immediately, but I also reminded myself that there was smoke… And where there’s smoke, there’s fire…

Well… Big Ben Bernanke made the trek up to “The Hill” yesterday to give his testimony on the state of the economy… He’ll do it again today for the other side (Senate)… While talking yesterday, Big Ben told Congress the central bank is prepared to take additional action, including buying more government bonds, if the economy appears to be in danger of stalling. Here’s Big Ben’s own words… “The possibility remains that the recent economic weakness may prove more persistent than expected and that deflationary risks might reemerge, implying a need for additional policy support.”

Well… Being realists, sort of, that is… The markets have had their eye on the weakness in the US economy and are wondering what Big Ben means by “the possibility remains if the economy appears to be in danger of stalling.”… The markets are of the belief that the economy has already stalled, and therefore, more stimulus is on the way… Of course I told you all a long time ago that there would be more stimulus, because I didn’t see the strength that the Fed believes they saw in the economy. So, these words come as no surprise to me… The timing of them do, though… For I thought that we wouldn’t begin hearing this kind of talk until the leaves begin to turn colors, the morning air is crisp, and the daylight hours are shorter…

So… We’re beginning to hear them now? I truly believe that the Fed now sees the weakness, and is running scared… Well, maybe not scared, but confused… I have always said that we didn’t know what the “end affects” of two rounds of quantitative easing were going to be. And now the Fed is seeing what I was talking about months ago. I truly believe that they are confused by the signals, and therefore they need to keep all doors wide open… Wide open, folks, and that’s why Big Ben was already kicking the door wide open so early in the process…

OK… Enough of that! But I have to tell you that most of the dollar weakness all day yesterday and this morning is all about the markets’ perception that the Fed will need to do more QE… And dollar selling leads to big rallies for the currencies… The euro (EUR) has touched 1.42 this morning… And the Swiss franc (CHF), which yesterday I told you would cost you $1.21 to buy, flew past that figure yesterday, and today you would have to pay more than a $1.23 to buy francs…

Well… The dollar weakness today isn’t all about more QE… So… Just like a tag team wrestling match… Moody’s was tagged for their go at the dollar… Yesterday, I called out the ratings agencies for their lack of will regarding downgrading the US debt… Look folks, I don’t want to see the US debt downgraded… But, maybe if a ratings agency here in the US did the dirty deed it would “wake up” lawmakers… Well… Yesterday afternoon, Moody’s issued a warning to the US that the US government’s bond rating is on watch for possible downgrade, citing the “rising possibility that the statutory debt limit will not be raised on a timely basis,” which would lead to a default on US Treasury debt obligations.

So… Just like last week when the Eurozone was taking on water, and the ratings agencies “piled on”… The dollar got “piled on” yesterday…

And one more thing, albeit small, that’s adding to euro strength this morning, is the Italian debt auction last night that went pretty well considering the hype earlier this week that Italy was next in line to be downgraded…

Now, I don’t really believe that with all the problems in the Eurozone, that the euro needs to be rallying… But, as I’ve told you dear readers for years, now… The euro is the offset currency to the dollar, so if the dollar is getting sold, you’ll see euro strength. But, like the saying I’ve used for a while now, the euro, because of its status as the offset currency to the dollar, is the Big Dog… And all the other currencies are the Little Dogs… The little dogs don’t leave the porch to chase the dollar down the street, unless the Big Dog leaves first… And just like in real life, if that happened, the little dogs would run faster than the Big Dog…

And that’s what we saw this morning. I already mentioned the Swiss franc, but Japanese yen (JPY) is trading below 79, and so on… The Aussie dollar (AUD) which I had a long conversation about with some visitors yesterday, is back above $1.07 ….

The trading overnight is probably overdone… And we’ll see some clawing back of the dollar this morning, when the NY boys and girls arrive at their trading desks, and turn on their computers so they can read the Pfennig, and then trade… HA!

So… As I started off this morning talking about gold… There was a quick little debate in the Bernanke testimony yesterday between Big Ben and Ron Paul… Ron Paul asked Big Ben if he believed gold was money… Big Ben said “no”, it’s an asset… Ron Paul then asked him why did central banks own gold, and Big Ben said, “as reserves”… (Doesn’t that tell you it’s money?) Ron Paul then said, OK, why don’t you hold diamonds? Big Ben replied, “tradition”…

There was no way Big Ben was going to say that he believed that gold was money… But in my mind it is… And more “real money” than a US dollar bill! Think about that for a minute, folks… The dollar bill has become what we all agree is money, but it’s not really money… It is a Federal Reserve Note… And has the backing of the US government… But is it really money? Only in terms of what’s accepted for money these days… But like I said the other day, at some time in the near future, we won’t ask what the price of gold is any longer, instead we’ll ask what an item’s price in gold is…

If you’ve ever been lucky enough to sit down and talk to Doug Casey, like I have, you can have him give you his explanation of what money is. He can do it much better than I…

OK… The data cupboard here in the US gets reopened this morning, with the most important piece of data to come out of the cupboard being June retail sales, of which I’ve already told you earlier this week that the BHI (Butler household index) indicates that this report will be disappointing… And I continue to believe that… PPI will also print today, along with the usual fare of Weekly Initial Jobless Claims, which will remain above 400,000 for last week… Even though it was a holiday shortened week…

Then there was this… You know… All this talk by S&P, and now Moody’s about a possible downgrading of the US debt rating, is all smoke… And this time there’s no fire! Yes, it makes for good copy, and the markets get all lathered up by it… But, when I look closely at the wording, (again, words, between the lines of age) I don’t see them “downgrading the triple A rating”… I’ll betcha a dollar to a Krispy Kreme that if it comes down to the cheese that binds, they’ll just downgrade the “outlook” to negative…

To recap… the dollar got hit on two sides yesterday, as Big Ben Bernanke discussed how the Fed was prepared to implement more stimulus should the economy stall (I say it has already stalled!), and the announcement by Moody’s that they were putting the US on watch for a possible downgrade… Currencies have rallied, and gold is closing in on $1,600! And Ron Paul and Big Ben discuss whether gold is or isn’t money…

Chuck Butler
for The Daily Reckoning

Chuck Butler

Chuck Butler is President of EverBank

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