BOE Follows the ZIRP Road

Good day… And a Marvelous Monday to you! It’s Ground hog Day (what a great movie!) today… And what a Super Bowl Game last night! WOW! Almost as exciting as the year our Rams won by making a tackle on the one-yard line on the last play of the game, saving a touchdown… Seems like eons ago that the Rams won.

Well, front and center this morning, the euro (EUR ) and other currencies are still reeling from that shot to their mid-section by George Soros at the World Economic Forum, in Davos Switzerland. The dollar has flexed its muscles a bit more and taken the euro to just above 1.27. Not that euro holders want to hear this, but this IS what I was talking about all last month with the talk of an Obama bounce. The stock market hasn’t caught on yet, though.

Friday’s print of fourth quarter GDP didn’t, on the outside, look as bad as forecast, printing at a negative 3.8% (forecast was -5.5%). But, like I said, this is not a good number, folks. Here’s the skinny…

OK, first of all, the print of -3.8% was the worst print/performance in almost 27 years! And it could have been worse… Let me explain… You see, business inventories, the goods that retailers could not sell to consumers and manufacturers, goosed-up the GDP number. Inventories moved from a $30 billion reduction in the third quarter to a buildup of nearly $6 billion in the fourth quarter. In the strange computation that’s used for GDP, the growth numbers get credit for inventory buildup… However, that’s going to be a HUGE drain on the first quarter growth numbers for 2009. When inventories are subtracted from the equation, the negative growth falls to -5.1%, almost at the forecast number.

You have to wonder now, just how long this recession is going to last, as I’m already marking down a negative -5% GDP for the first quarter of 2009… If it lasts past May, and I would almost bet the farm that it will, this recession will turn out to be the longest and perhaps the deepest period of economic decline in the United States since the Great Depression.

I recall last year at the Orlando Money Show, telling the crowd that we were already in a recession, and hearing some of the snickers. I had a brief conversation with an old colleague – who’s a big shot now in other markets – telling him we had gone into a recession, and he laughed at me… Well…

So… If the trading theme remains in place during this quarter, the dollar is sure to be on an upswing. As you may recall… The trading theme rewards the dollar any time the economic data shows a deeper, darker, more dangerous economy/recession… And… Unfortunately, that’s what we now have!

We also have a recession going on in the European Union… But, folks, let me tell you something… This falls under “Chuck’s Reasons for a Positive Balance of Payments.”

When all this started going down, I mentioned that stimulus packages (or bailouts) come a little easier when a country is dealing from a position of strength, and by that, I mean if a country has a surplus. And isn’t adding to deficits that already exist.

One day, this will matter… I may not today, tomorrow, next week, or next month… But eventually, you have to pay the piper… And the only way the United States can pay the piper right now is by printing more dollars to pay for the debts… And so, they would love to pay for them with “cheaper dollars”.

Here’s another reason to strive for a surplus… On Friday, it was announced that Japan had made a loan of $100 billion to the IMF. Better to have that $100 billion in the checking account, eh? OH! And the IMF said it wasn’t in danger of running out of money… They said the needed the loan because they expect to be dealing with BIGGER problems in the future.

Now that gives you a nice warm and fuzzy, eh? NOT! I would rather the IMF say they needed the cash, because they’ve already helped everyone that needed help, rather than to say they EXPECT BIGGER PROBLEMS!

Down under in Australia, where it’s getting to late summer, it looks like the global slowdown is beginning to take its toll here. Kevin Rudd, the prime minister, said the slowing down of global growth was forcing the government into a budget deficit for the first time since 2001-02. The Reserve Bank of Australia (RBA) meets tonight, and will announce afterwards that they cut interest rates again… Probably by 1% or 100 BPS…

There are quite a few central banks meeting this week to discuss rates… Here’s a preview…

Sweden’s Riksbank meets on Wednesday and I’m looking for a 50 BPS cut. Thursday sees both the Bank of England (BOE) and European Central Bank (ECB) announce their decisions. ECB President, Trichet, was quite hawkish last week, and has me believing that that ECB will skip a rate cut this month. However, I fully expect the BOE to cut rates by 100 BPS. The “experts” are calling for 50 BPS cut… But as I’ve said all along, the BOE is following the Fed down the road to ZIRP (zero interest rate policy), so why wait? Go ahead and cut 100 BPS now, to 0.50%, and get it over with!

I understand that London was smacked by the worst snow storm in years this morning, and that the transport system is in disarray, causing many markets people to stay home, thus causing some real thin volume in the morning session.

But… Even as much as I would like to… I can’t blame the snow and lack of volume for the dollar’s strength this morning. No… As I said at the top of the page, I blame it on the pasting that George Soros laid on the euro, last week… And now the euro and other currencies have to pull themselves up by the bootstraps if they want to get back into “the game”.

Well… On Friday, (our little Christine’s birthday, I might add) I mentioned to the boys and girls on the trading desk that gold was outperforming just about everything! On Friday, gold ran up to $927… That level looked too good to some holders this morning, though, as profit taking has brought gold back to $914.

You know… My friend, Bill Bonner here at The Daily Reckoning has been telling people for almost 10 years now, that his “trade of the decade” is to sell the DOW and buy gold… Sure has been one heck of a trade, eh?

With all the countries in the world racing to zero, it makes even more sense to hold gold, as gold is a non-interest bearing investment… But then, neither is just about anything else these days! And while the news from China scared Treasury holders a bit, a couple of weeks ago, the fear is waning, and yields are on their way back down again. OH BOY! You can get about 2.5% for a 10-year Treasury! Like I said, gold compares with other holdings now that there’s a race to zero… And… There certainly isn’t the same amount of gold in the markets as there are Treasuries! HA!

Well… Last week, we had a data cupboard that was chock-full-o-data, and none of it was good! We follow up that week of bad data with one that starts off strong and then has an even stronger finish! That’s right, we finish this week up with the January Jobs Jamboree; and I’m afraid it will show that another half-million unemployed were added during the month. In between now and Friday, we’ll see Personal Income and Spending for December; ISM Manufacturing – which has fallen into the abyss in recent months, and with the dollar stronger, has no chance of improving; Pending Home Sales tomorrow, and Vehicle Sales on Wednesday.

With all the dollar strength, you have to make the assumption that the Risk Takers are no where to be found… And with no risk takers, guess what currency is also booking gains? That’s right, Japanese yen (JPY )… And the beat goes on…

Currencies today 2/2/09 (Groundhog Day): A$.6285, kiwi .50, C$ .8075, euro 1.2770, sterling 1.4110, Swiss .86, rand 10.225, krone 6.9920, SEK 8.3410, forint 233.15, zloty 3.4790, koruna 22.10, yen 89, sing 1.5140, HKD 7.7550, INR 48.93, China 6.8478, pesos 14.49, BRL 2.3575, dollar index 86.27, Oil $40.46, Silver $12.43, and Gold… $912

That’s it for today… Well… It’s Groundhog Day… So, what Super Bowl commercial did you like the best? I laughed at the Doritos Commercial until the second part of the commercial… And I laughed hard at the Bridgestone commercial with Mr. and Mrs. Potato Head… I didn’t think the commercials were as good this year. My little buddy, Alex, is still at home with his broken nose, although I think his mom is ready to kick him out the door and back to school! Little D, Delaney Grace, came to visit and watch the game with me yesterday… She is so darn cute! Well… Tomorrow afternoon, I head out, with Chris, to Orlando for the Money Show. I know it’s not hot there, but at least it will be (hopefully) a bit warmer than here! With the Money Show here, that means January is over and done with, and none too soon as far as I’m concerned! Well, Mike’s here, that means I better get this out the door! I hope you have a Marvelous Monday, and Wonderful Week!

The Daily Reckoning