What Manner of Quantitative Easing

Good day. Another night in a very quiet house — I guess I could go crazy and turn my stereo up really loud. Or get one of Alex’s electric guitars, plug it in and rock out. But I’m sort of like the 75-year-old fisherman who comes across a talking frog, which says if the fisherman kisses it, the frog will turn into a beautiful bride for him, but the 75-year-old fisherman decides that at his age, he’d rather have a talking frog! HA!

How about that? A little funny joke to start the day! I could have all that loud stuff, but at my age, I would rather have the quiet — sometimes! There’s a time to be loud.

Speaking of a time to be loud, did you see the story in The Wall Street Journal (WSJ) about the Fed considering more action amid new recovery doubts? Folks, that story spoke loudly to the markets, and once again, the focus has shifted to the U.S. problems.

Yes, it’s been like a tennis match, back and forth, but last night and this morning, the focus is on the U.S. and its disappointing economic data, or even like a newscast, in which one anchor is the U.S. and the other is the eurozone, and the eurozone says, “Now back to U.S.!”

I have to ask the question: “What happened to those bright and cheery forecasts for the economy that the Fed heads were talking about in their April meeting?” The Fed heads meet again this month, and maybe Big Ben Bernanke will give us a hint at this testimony on the economic outlook today and tomorrow, but I doubt it.

With the focus shifted squarely on the U.S. right now, and which flavor of quantitative easing (QE) might be implemented, thus throwing the dollar under the bus once again, the currencies and gold are kicking sand in the dollar’s face this morning. Gold is up $17, and the currencies are healing a bit, including the beleaguered euro (EUR).

The Australian dollar (AUD) has gained more than 1 cent overnight, first on the WSJ story and then a HUGE boost from a stronger-than-expected first quarter GDP report that showed the Aussie economy grew at 1.3%, versus 0.06% forecast. Interesting, though, that the Reserve Bank of Australia (RBA) cut rates just the night before.

I said going into the RBA meeting that I didn’t think the economy needed another rate cut, but the RBA thought otherwise. Of course, that’s like me calling balls and strikes from the stands, and arguing with the umpire who’s on top of the action! But as a follower of the Australian economy for almost 20 years now, I feel I have some say.

And when the RBA used the weak fourth-quarter GDP as their excuse to cut rates 50 basis points in May, only to see the fourth-quarter GDP get revised up — and then now seeing the first quarter blow the forecasts out of the water — I think I was right to say no rate cut was needed!

I liked seeing what Aussie Treasurer Wayne Swan told reporters after the GDP report printed: “Australia is outperforming the world, and it is an island of growth.” That sounds a lot like me talking, as I do call Australia the proxy for global growth. Hey, 1.3% is a good number for a country that has seen its share of rate cuts in recent months, but I don’t think we should all be getting in the conga line and doing the bunny hop on it. BUT it’s good that the Aussie dollar has responded.

Well the G-7 teleconference that was called yesterday gave us some insight into what the Japanese are thinking regarding the strong yen (JPY). I would have to say that Finance Minister Jun Azumi scared the currency boys and girls with his comments, and almost immediately, fearing intervention, traders began to blow out of yen. But it still held the so-called “safe haven” title.

But then overnight, with the WSJ article shifting the focus back on the U.S., the “safe haven” trades unwound, and yen lost one whole figure, to 79 and change. I’ll keep an eye on Japan for the next week or so, as I feel that this could be nothing more than a tempest in a teacup, with yen returning to the so-called “safe haven” chair soon. But if it doesn’t, this could be the beginning of what I’ve expected to see for some time with yen, and that is a general weakening of the currency.

Oh! And what did Azumi say to rile the markets? He said, “G-7 remained supportive of intervention to address extreme currency moves.” I know this is in the line of talking the talk, but Japan, over the years, has shown a willingness to intervene, so that has to be in the back of the minds of traders.

When I went to get the latest price on oil this morning, I said to myself, “Self, the price of oil sure has rebounded this week. I bet those petrol currencies are doing better.”

Yes, the price of oil has rebounded this week. After hitting a low of this week of around $81, it has rebounded to $85. You know, sometimes I think I sound like a broken record saying that the price of oil plays into the price values of the petrol currencies, which include Norway, Canada, Russia, Brazil, the U.K. and so on. When it goes down, it drags these currencies down, and when it goes up, it gives these currencies a boost.

For instance, the Russian ruble (RUB) is on a three-day rally, just as oil is. Now, this is not to say that oil is the only thing that makes up the value of these currencies. It’s just a boost or drag, that’s all.

There’s a lot of hope surrounding what actions the eurozone policy leaders might come up with, and that has stopped the bleeding of the euro for now. So add that hope for the eurozone and the WSJ story throwing the dollar under the bus and you’ve got the ingredients for a euro rally. But any euro rally is tempered, for sure! There is no one saying, “I’m going all in,” and they shouldn’t! Hope is good, but the eurozone needs more than hope.

The European Central Bank (ECB) meets tomorrow. I think a lot of that hope is for a rate cut from the ECB. And I do think ECB President Mario Draghi will deliver that tomorrow. I’m probably the only person thinking that. But that’s OK. I remember being the only person in 2001 saying that the dollar was going to go on a multiyear downtrend.

I have a slide that I show at presentations that shows the prices of things in 2001 and now, and then I list some other things from 2001 to now, but end with a note that in 2001, Chuck had more hair, less weight and few believers. People laugh, but it’s true. Back in 2001, I would walk into rooms to speak, and if it weren’t for some people left over from the previous talk in the room, and members of my and Frank’s families, there would be no one to speak to. Nobody believed then that the all-mighty dollar was ready to go into a multiyear downward trend. Why go listen to the short, fat, bald guy talk about something he didn’t believe in?

Things have changed over the years, but one thing that hasn’t: My conviction then and now that debt is bad.

The Bank of Canada (BOC) left rates unchanged yesterday. Once again disappointing all those — including me — that believed the BOC when they said that interest rates would have to be raised sooner, rather than later. Well, they’ve watered down that statement to: “some modest withdrawal of the present considerable monetary policy stimulus may become appropriate.”

That’s central bank parlance for we’re not doing a darned thing! You know I read a lot about Canada, as I’ve always held the Canadian economy in high regard, because they have “stuff” that other countries want and need. From what I read, the second-quarter economic growth has been very strong, as the impact of temporary shutdowns in the energy and nonenergy mining sectors were reversed in the second quarters. Therefore, what I’m saying is that I believe the BOC will rue the day that they didn’t react to this second-quarter growth when they could and be proactive I’ll say right here, right now, that second-quarter GDP will be 3%!

Yesterday, I received quite a few emails from readers thanking me for talking about the Bilderberg Group. And one or two that said I was crazy. Well, to those that thought me to be crazy for talking about this group, I have this ditty for you: No one could have said it better than David Rockefeller, founder of the Trilateral Commission, a Bilderberg member and board member of the Council on Foreign Relations in his Memoirs:

“Some even believe we are part of a secret cabal working against the best interests of the United States, characterizing my family and me as ‘internationalists’ and of conspiring with others around the world to build a more integrated global political and economic structure — one world, if you will. If that’s the charge, I stand guilty, and I am proud of it.”

Then There Was This: There I was eating my dinner last night and reading the paper when I came across this, and I turned around to yell at the wall! Serenity now! From McClatchy Newspapers:

“The federal General Service Administration (GSA) has handed out more than $1 million in taxpayer-funded bonuses since 2008 to dozens of employees who were under investigation for misconduct…

“The GSA which oversees the business of the federal government and is its landlord and contracting office, is still facing questions over the nearly $1 million Las Vegas event, which featured $7,000 worth of sushi rolls, a mind reader for entertainment and $20,000 worth of gifts iPods.”

There are a ton of things I would like to say here, but knowing my state of mind after reading this story, I had better not. I’ll leave that up to you, because I promised to not call government leaders or agencies names any longer.

To recap: The WSJ said that the Fed is considering more action amid new recovery doubts last night, and the focus shifted back to the U.S. problems, thus unwinding so-called safe haven trades. Gold is up $17 this morning, and the beleaguered euro has climbed back to 1.25. The A$ is up over 1 cent this morning after printing a better-than-expected first-quarter GDP of 1.3% (0.6% forecast), and oil has made a three-day rebound, which has lifted the spirits of the petrol currencies like Norway, Canada, Brazil and Russia.

Chuck Butler
for The Daily Reckoning