Additional Stimulus Remains on the Table

It’s turning out to be a real awful week for Greek Prime Minister, Papandreou… As you know, Papandreou decided to let the Greek people vote on the Eurozone’s Grand Plan… Well… When the Prime Minister (PM) showed up in Cannes ahead of the G-20 meeting he found himself surrounded by Eurozone leaders that have bent over backwards for him and his country, and now feel as though they’ve been thrown under a bus…

So… Let’s talk about that, and other things as we sip on our hot coffee, and think…

We had two major items yesterday that the markets had to deal with… First we had Greek PM Papandreou taken to the woodshed by German Chancellor Angela Merkel, and French President Sarkozy… They told him that: All aid to Greece was frozen until referendum. That a no vote in referendum will result in Greek bankruptcy. That he is to hold the referendum by December 18th, and that Greeks must “stop testing patience of creditors”…

WOW! He also had his car keys taken away, and was grounded for the next two weeks! Seriously, though… This has gone too far! And at this point, I would have to think that even if the Greeks vote yes on the Grand Plan referendum, that the damage has been done, and the Greeks will want out of the euro after all… But, here’s where I think things in Greece will take a U-Turn… I’m going to crawl out on the limb and say that the referendum will be cancelled! Hey, they might not even have the confidence vote in Parliament… I think the Eurozone leaders got to Papandreou…

The euro (EUR) didn’t take too kindly to these harsh words between Eurozone leaders and the Greek PM. I’ve explained to you all for years now that the markets like to “look ahead”… Well, in this case, they are looking ahead, and not liking what they see, with regards to the referendum vote in Greece, and that has the markets playing out what will happen, and none of it is good, folks… Let’s hope they are all wrong!

The other major item yesterday was the FOMC meeting, and the Big Ben Bernanke press conference after the rate announcement, where the Fed Heads left rates unchanged… First the Fed heads confirmed that rates will remain near zero until at least mid-2013 (and they think that will inspire people to invest here!) That Operation Twist has been a success and will continue with the Fed Heads selling short-dated Treasuries and buying long-dated ones. Of course, their interpretation of the word “success” is questionable… For they too thought that the quantitative easing (QE) was so successful, that they did it twice! Oh… And the jobs market is still a mess, housing is still searching for a bottom, and the economy is in Nowheresville without government spending… But… In their eyes, QE 1&2 worked! Hey… According to Fed St. Louis President, James Bullard… QE was successful because the dollar weakened…

The Fed Heads also said that they would continue to buy mortgage debt, and current mortgage debt matures…

Ahhh… The games people play now… Every night and every day now… Never meaning what they say now, never saying what then mean…

But… There was no mention of more QE… But… Big Ben Bernanke did mention that “additional stimulus was still on the table”… Well, as I’ve said since before the end of QE2… We’ll see QE3… I said then that it would come in the fourth quarter… Well, we may have to wait until early 2012, but I hear that QE train a-comin’, it’s rolling ’round the bend, and I ain’t seen the sunshine since I don’t know when…

The markets want more QE… I have no idea why… Considering the lack of success that they would clamor for such a thing… But, the stock market sure was helped by QE… So, maybe it’s the stock jockeys…

And one more thing… Remember earlier this year, when the Fed Heads would continually repeat that the economy would rebound and pick up steam in the second half of 2011? Funny… The Fed Heads didn’t mention any of that yesterday… About how they were wrong, and… In fact, they are now projecting little acceleration in the growth for the last quarter.

I just don’t get it… Why don’t US lawmakers (Congress) hold the Fed’s feet to the fire? Oh, that’s right, I forgot for a minute that there’s nothing “Federal” in Federal Reserve, and there are no Reserves either! Ahhh… But we do have an ever-expanding balance sheet at the central bank… I’m sure the founders of this republic never saw a central bank like this…

Anyway… The Eurozone/Greek debacle put pressure on the euro, and the words from Big Ben took that pressure off, and applied it to the dollar. But after the dust settled on the Big Ben Bernanke press conference yesterday, we’re back to square one… No real direction because… As bad as the markets want to take the euro to the woodshed, they have the threat of additional stimulus/QE3 hanging over them like the Sword of Damocles, and so… They have no clear direction.

Well… Today will be Mario Draghi’s first European Central Bank (ECB) meeting where he will be the leader… El Presidente, and so on… Remember what I’ve told you a couple of times now regarding this meeting… I fully expect Draghi to be a loose cannon, and not cut from the same cloth as his predecessors, Duisenberg and Trichet… So, I expect him to put down the groundwork for a rate cut at the next meeting in December by sounding very dovish…

If that happens, the euro will have to fight to hold the 1.37 handle, because the markets will finally see what I’ve seen since it was announced that the Bank of Italy’s Governor (Draghi) was going to take the reins of the ECB. Hopefully, the boys over at Germany’s Bundesbank, will get ahold of Draghi and toughen him up… Teach him about providing price stability, which is the mandate of the ECB!

The reason I say this is simply because the inflation rate in the Eurozone is currently 3%… The inflation ceiling target for the Eurozone is 2%… So, to cut rates in that environment is not providing price stability…

The other currencies are following the Greek saga up and down… And the one currency I would think would be soaring in the face of all this uncertainty, gold, is being held back… That’s OK… It just gives more investors the ability to buy it before it takes off again… Like I said yesterday that’s just my opinion, and I could be wrong. Gold did gain about $20 yesterday, and is up about $8 this morning… But, that’s chicken feed to what should be happening with the price of gold, given what’s going on… And it’s not just the Eurozone… Big Ben threw a cat among the pigeons yesterday with his comment about how “additional stimulus is still on the table”…

OK… I guess you all have been following the adventures of MF Global… Another corporate scandal… I understand from reading about this, that the investment firm did the Big NO-NO, in comingling the deposits of customers with their own… I think the reports say that around $700 million is missing from the firm… It’s a shame… A real shame, to not only cause investors to have to deal with trying to get their money out of the firm now, but to shake investors’ confidence like that…a real shame…

Yesterday I told you about the student loans and how it’s thought that they could be the next bubble to pop… And then later in the day, I read that the average loan that a graduate leaves the school with is more than $25,000… Imagine that… You don’t have a job, but you are already $25,000 in the red… And that’s just the average! Hmmm… I have some thoughts on that, but will leave that right there…

OK… Did you see that China reaped a record corn crop this year? This is the seventh record corn crop in the past eight years, but still won’t be enough to meet demand…. This will require imports, and that’s not good for a country that has been attempting to lower inflation… Thus even more reason to allow the renminbi (CNY) to gain in value at a faster pace!

And did you see that a Greek note that was auctioned yielded 100%? WOW! Oh, but that has this added feature to the bond… It’s called “default” which means, fat chance you get your money back! But hey! You earned 100% on it!

Then there was this… From my fave read of the day… The 5-Minute Forecast

Once again a record number of Americans are getting by on food stamps — 45.8 million, according to the latest monthly numbers from the Agriculture Department.

That’s nearly 15% of the country. In five states, the figure is over 20% — Louisiana, Mississippi, New Mexico, Oregon and Tennessee.

The number of food stamp recipients is up 8.1% year over year. Look for it to go up: The latest figures are for August, so they haven’t accounted for the knock-on effects from Hurricane Irene.

To recap… Eurozone leaders met with Greek PM Papandreou yesterday, and laid down the rules… He has to be thinking he can’t win! Chuck thinks that the referendum in Greece will be cancelled now… The Fed Heads met, and left rates unchanged, and Big Ben Bernanke said that additional stimulus is still on the table, which put pressure on the dollar. But the markets have no clear direction to take with all this back and forth… Gold has gained over $25 the past two days, but should be kicking tail and taking names later while all this back and forth, and uncertainty is going on…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning