Bernanke Backtracks Stimulus Talk

The dollar fights back… Yes… Back and forth from a “buy dollars” bias to a “sell dollars: bias. Billy Preston (the 5th Beatle) sang about this… Will it go round in circles… Will it fly high like a bird up in the sky… But, hey! That’s OK, because what this kind of trading does, is keep campers on both sides of the river…and that’s what makes a good liquid market, for when all the campers decide to get on one side of the river, it gets too darn crowded! And the campgrounds get overused, and run down…

Gold ran into a speed bump yesterday and in the overnight markets, I guess the air was way too thin up there around $1,600 and gold had to take a step back to collect more air, before going into the thin air of $1,600… With gold falling back over $13, silver had to give back more than a $1 of its gains too…

So… Seriously, what moved the markets back to a buy dollars bias? Hmmm… Good question… It’s not as if the debt ceiling deadlock was resolved… It’s not as if… Oh, wait! I know what it was… Words… Again with the words, I hear you saying… But that’s all it was… Big Ben Bernanke gave another testimony to the other side of the “hill”, on the economy yesterday, and having seen what happened to the dollar and the price of gold, when he mentioned the previous day that the Fed was “prepared to provide more stimulus should the economy stall”… He backed off those statements yesterday… This time he said that the “Fed was not prepared at this time”…

Retail sales in the US were disappointing, as I suggested they would be, but not as disappointing as the experts had forecast… Retail sales in June rose 0.1%, thus reversing last month’s -0.1% print… So, for two months, retail sales were flat… That’s no sign of a strong economy, folks… And then in a “Hello, McFly, is someone home?” moment… The cable news guys were all over the 22,000 less folks filing for unemployment claims last week… Hello, McFly… Did they stop to look at the calendar? Wasn’t last week a Holiday shortened week? McFly? These guys crack me up… They read the news, they have no idea what it all means or whether or not they should stop and ask somebody a question about the stuff they have been given to read… Oh well… No reason to start an inquiry! Weekly Jobless Claims still remained above 400,000, each and every week for 3 months now…

We’ll talk more about what’s in the data cupboard today, later… But first I want to talk about the stress tests results that the Eurozone banks will submit today… The markets are criticizing the tests for lacking enough bite to them… But since when does a bank stress test do that? Look at the stress tests that were done two years ago here in the US. What have we seen since then, about oh, geez, the list is so long, who has time to count them? The point here is that unless everyone wants to play by the same set of rules, you have chaos… So, if the markets don’t believe the stress tests lacked bite, then they will make the Eurozone pay for that, by demanding higher yields…

And here in the US, the debt ceiling deadlock will most likely get worked out… Both sides of the aisle will have to make concessions, and the Chicken Littles that keep going around screaming that the sky is going to fall if the debt ceiling isn’t raised, can crawl back into the hen house… The thing that I pointed out a week or so ago, is that it’s a no-win situation for us… If the debt ceiling gets raised, that just means that more debt is going to be added, and in the end, isn’t that the thing that the Chicken Littles should be squawking about?

But, let me remind you that in August, there will be about $500 billion in Treasuries come due… And with those maturities come interest payments that are due… So, let’s just say that the whole enchilada $500 billion gets “rolled”, new issues get sold to pay off the maturing bonds… Where does the money come from to pay that “interest”? Ahhh grasshopper… Well, it either comes from the taxes that we pay, or it gets added to the debt…and that’s why the debt ceiling will get raised before those bonds come due!

I loved the lawmaker the other day with his chart that showed a line for spending going through the roof, and a line for revenues (tax receipts) going in the opposite direction (down!) , and then him explaining to his brothers in lawmaking, that it’s not just a “spending problem”… Geez Louise, I wish I had been there to point out to the chart man that it IS A SPENDING PROBLEM! When your revenue goes down, you have to cut your spending, if you don’t, well…you end up with his chart!

Not a spending problem… I shake my head in disgust… When will they ever learn? When will they ever learn?

I have to find something else to talk about here, as I’m beginning to pound on the keyboard! Speaking of weak revenues (or income, if you will)… I read a story last night that talked about how the number of US consumers who foresee a drop in wages over the next 6 months, increased by 2.6% in June… That’s scary… So, those are weak income expectations that will have to be overcome, before US consumers begin spending again, like they did earlier this year… Yes, January & February saw good spending figures, but since the weather warmed, the spending has cooled. Again, this is not good for an economy that depends so heavily on consumer spending…

OK… The currencies are mixed this morning, with the “soft” bias to buy dollars in place… Currencies like the Swiss franc (CHF), and Canadian dollar (CAD) have held their ground, while currencies like euros (EUR), Aussie (AUD), and kiwi (NZD), have lost ground to the green/peachback this morning. Yesterday, I pointed out that the New Zealand dollar/kiwi had hit a post-float high… And while it looked pretty impressive sitting there at 0.8440, it just didn’t have the legs under it to remain above 84-cents. This time that is… As the New Zealand GDP for the second quarter was +0.8% (versus 0.3% expected)… Looks like the New Zealand economy is rebounding from the earthquakes, like I said it would…

And while we’re in the South Pacific… I told you yesterday that the previous day I had a long conversation about the Aussie dollar with some visitors… The conversation centered on whether the Aussie dollar was overvalued at $1.07… My visitors told me that their research guys say it is headed to more than $1.20! WOW! I told them that as long as China continues to grow, the Aussie dollar will be underpinned and do well overall with its interest…

And then a reader from Australia sent me a story from the Sydney Morning Herald, titled “As Mighty Dragon Roars, So Will Aussie”… So, since this story’s title sounded like I had written the story, I just had to read it! I did find this snippet that plays well with the story title… When asked about the Aussie dollar strength…

Richard Franulovich, director and chief currency strategist at Westpac Institutional Bank, says it is a boost spurred by commodities.

“The real question is whether the rise of China is a bubble, because if its spectacular rise of the last decade is running out of legs then the Aussie dollar’s ascendancy is also on borrowed time,” he said. “We, for what it is worth, think that China’s rise has many years, if not decades, to play out.”

But… Overnight, an Aussie bank came out with a call that the Reserve Bank of Australia (RBA) would cut rates in December by 25 basis points (0.25%), and by 100 basis points (1%) in 2012… Whoa there, partner! Where the heck did that come from? Doesn’t make any sense to me… And I’m still expecting the RBA to hike rates by year-end…

OK… The data cupboard today here in the US will yield, the stupid CPI, which is expected, among all things that don’t make sense, to fall… Yes, consumer inflation according to the government is going to have fallen by -0.1%… In June… And now there are calls to change the way CPI is computed… Change it back to pre-1990 methodology? I hardly think so! I’m sure they’ll find some new way to keep CPI under control…

We’ll also get two of my fave pieces of data, this morning… Industrial production and capacity utilization… And then the U. of Michigan consumer confidence reading for the first two weeks of July… And here’s something else that doesn’t makes sense… Given the debt ceiling deadlock, this confidence report is expected to rise…

Then there was this… Well S&P decided that they weren’t going to let Moody’s steal the thunder with their announcement on Wednesday, so S&P did one too, and decided to “one-up” Moody’s… S&P’s announcement was way-more negative than Moody’s was… The S&P announcement said that there is “an increasing risk of a substantial policy stalemate enduring beyond any near-term agreement to raise the debt ceiling.” If, within the next three months, they conclude the US has “not achieved a credible solution to the rising US government debt burden and are not likely to achieve one in the foreseeable future”, S&P may cut the US rating. S&P put the odds of this at “at least one in two”.

That certainly does sound way-more negative! And scary!

To recap… The dollar bites back, and rebounds against most currencies overnight, as Big Ben Bernanke, seeing the damage he did the day before, backed off the comment about the Fed being prepared to provide more stimulus should the economy stall, by saying the Fed is “not prepared at this time”… The Aussie dollar and kiwi have backed off their lofty levels of yesterday, mainly due to a call by an Aussie bank that the RBA is going to cut rates…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning