All Eyes on the New ECB President

Remember when I told you that Big Ben Bernanke changed this week’s FOMC meeting to a 2-day meeting from a 1-day meeting, in order for the Fed Heads to discuss all their options for stimulating the stagnate economy. Well, since the last FOMC meeting, we’ve seen job creation collapse, The manufacturing index heading toward contraction, retail sales during “back to school sales month” show no gain, and in something that seems that only I care about anymore, the TIC Net long term flows (foreign net purchases of treasuries) was only $9.5 billion…

Of course we saw the U. of Michigan Consumer Confidence rise, so maybe that will keep the Fed Heads from implementing more stimulus! I told you a couple of months ago, when the latest round of quantitative easing (QE2) ended in June, that by the time we were pulling out the sweaters and sweatshirts (or as they say in Australia, the woolies) and the leaves turned colors, we would see more stimulus… But then the trap door on the economy sprung open, and it looks like that timetable for more stimulus will be moved up a month or two…

OK… So that’s what’s on my mind this Marvelous Monday Morning… Now, lets’ get to the currencies and metals!

Well… The short-lived euro rally (EUR) toward the end of last week, reminded me of something I used to say about the dollar back in 2001 when it would have a short-term rally… That stars burn the brightest right before they burn out! The weakening of the Eurozone economy that’s been going on now for a couple of months is going to really weigh heavily on the European Central Bank’s (ECB) new incoming President, Draghi, come November… And I think he’ll have to swallow hard, and reverse the rate hikes that his predecessor made in the last year. The folks at the Bundesbank (Germany’s Central Bank) aren’t going to like that, and will point to the new ECB President, as an “outsider”… For, he isn’t from the “core” Eurozone countries of Germany, France, and Holland… Draghi is from Italy…

And I’ll tell you right now, even though it won’t have anything to do with where he’s from, the rate cuts will be seen by the markets as weakness…and associate them with the loose monetary policy Italy always had before joining the euro.

Now, long time readers, going back to the turn of the millennium, might recall me saying that the lack of credibility in the ECB was one of the reasons the euro got off on the wrong foot, and fell to the 80-cent range from its beginning price of $1.17… They were brand new, the ECB’s President was Wim Duisenberg, and with all of this “unknown” the euro dropped in value… But it didn’t take the markets long to realize that Duisenberg was going to be very “Bundesbank like” and the ECB’s credibility took off to the moon! Let’s hope that the new President of the ECB doesn’t lose that credibility…

But the thing really weighing on the euro is Greece… And it’s back on the front page this week… So… Get ready to hear all the same rhetoric about default, leaving, the euro collapsing, and so on…

OK… Enough of that! The rest of the currencies followed the euro’s path on Friday, and looks as though we’re right back to the dollar strength that was prevalent last week before the announcement that the Fed and other central banks were going to provide longer term loans to European Banks… The “other” currencies aren’t falling like rocks or anything like that… Just weaker, and looking like they are sheepish…

And I told you last week about how the Big Boys had all recently lowered their year-end forecasts for the euro… So… For now…The euro is hanging in there. Just like Greece, which was supposed to default a week ago, but is still hanging on…

What the euro needs to boost itself from this month-long funk, is some real decisive leadership. And the problem I have with the leadership that’s been at the helm right now (Merkel & Sarkozy) is that these leaders are elected officials, so while right now, they might want to fight for the euro, if their constituents are against any further bailouts, the leaders might decide that getting re-elected is more important; and where does that leave the euro? So… I’m waiting for a leader… And so are the markets…

Gold is stronger this morning by about $5… After slipping below $1,800 briefly last week, the shiny metal has put together a couple of strong trading days. I’ve been reading a ton about the alleged manipulation of gold (and silver) and it all just makes me sick… That this could be going on, and on, with the government allegedly knowing about it… Just makes me sick… But then, there’s nothing I can do about it, except report on it…and use the price drops as opportunities to buy more!

The Aussie (AUD) and New Zealand dollars (NZD) continue to be held hostage by the goings on across the globe in Europe. It’s all tied to the hit to global growth that’s responsible for this hostage-taking. So… The Aussie dollar’s direction used to be dictated by China’s contribution to global growth, but now, even with China still hitting on most of its cylinders, the Aussie dollar sees weakness because of the Eurozone problems… UGH!

I was asked last week to answer some questions for a blog, regarding Brazil’s decision to cut interest rates… I was asked if I thought Brazil had made a mistake in doing this… I don’t agree with the central bank’s decision to cut interest rates to promote growth, and throw their previous inflation target to the side of the road. Investors make decisions on a country’s outlook and the central bank’s mandate. When a central bank changes horses in the middle of the stream, investors get wet. This decision comes at a very strange time, given Brazil’s need to continue to attract investment into the country, to fund the World Cup and Olympics that will be held in Brazil in the coming years. So… In the end, I truly feel that the Brazilian government was so fixed on getting the currency level cheaper for exporters, that they cut rates, and announced that they would follow up with additional rate cuts, and I think they made a HUGE mistake.

The Big Boss Frank Trotter, helped me with that, so I don’t want to sound like I did it all by myself!

Well… I can tell you that for years now, I’ve told you that our tax rates were going to have to go higher to keep the deficit from exploding… Our debt servicing alone will overtake all tax receipts (current) in the next decade… I’ve told you over and over again that taxes were going to go higher, and continue to go higher to levels that will leave us shaking our heads, wondering just how we got here…

Well… I guess you could say that the tax increases are about to start… The president will announce his newest tax plan this morning, which apparently will generate $1.5 trillion in new revenues. It’s all being disguised as “Debt Reduction”… But it’s new taxes… Guess who’s going to pay for most of that? No… I haven’t seen the plan; it will be announced this morning… But, I’ll betcha a dollar to a Krispy Kreme that I’ll be paying more in taxes…

And yes, debt reduction is what will be announced this morning, and the president is expected to announce over $3 trillion of cuts spread over 10 years… Hey… It’s better than no cuts! But over 10 years? I’ll tell you what will happen right here, right now… Six years from now, no one is going to remember that they were supposed to cut out funding to the “book clubs”… And then we’ll have higher taxes but no debt reduction… Oh, I hate it when I’m so cynical!

I had better move on here before I lose my kinder, gentler self!

Then there was this… Remember a couple of weeks ago when I told you that the rumors were going around that the Fed would implement “Operation Twist” which would be their latest attempt to stimulate the economy, which is to sell the short term Treasuries and buy long term Treasuries… This was done in the ’60s and it failed miserably… There’s nothing that says it will work now either! But… This leads me to the story in Bloomberg this morning…

Wall Street’s biggest bond traders are stockpiling Treasuries at the fastest pace since 2007 on speculation the Federal Reserve will announce a plan this week to buy longer-term debt to spur the faltering economy.

The 20 primary dealers held $15.1 billion of Treasury securities due in more than one year as of Sept. 7, up from a $75 billion bet against the debt on May 6, Fed data show. The last time dealers bought bonds at such a rapid pace was between July 2007 and September 2007, as losses on subprime mortgages began to infect credit markets and the central bank unexpectedly cut interest rates.

Nothing like front-running the Fed, eh?

To recap… Greece is back on the front page this week, so the euro is left doing the heavy lifting. With the euro weaker, the rest of the currencies are also weaker. This week, the FOMC will hold a 2-day meeting and I truly expect them to announce their latest plan to stimulate the economy. Gold is stronger again this morning, after falling below $1,800 briefly last week, the shiny metal has been steadily moving higher…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning