BOE Unanimously Leaves Rates Unchanged

Good day… And a Wonderful Wednesday to you! Well… We had the Swiss National Bank (SNB) meet already this morning, and Bank of England (BOE) minutes released, so it’s been a busy morning overseas… Here on our trading desk, we’ve been swamped, but that’s all good, eh? I’m really busy and on top of that, have to step out this morning for a while… When it rains it pours, eh?

Front and center this morning… Gold is inching toward $1,800 again… Wonder what the “manipulators” have up their sleeves this time? The rally in gold this week has really played along well with my rant on Monday about how when all else has fails, investors put their money in gold… You know, I ran into a guy earlier this year on the speaking circuit who didn’t believe that gold was going higher, and instead chose to hold his money in dollars… Let’s see… That was the beginning of May… Since May, gold has gained $292.00… That’s not working out too well for him, but then, he can always hope for more manipulation…

OK… Yesterday, we saw the currencies trade in a tight range, with a slight bias to dollars, but that has turned around in the overnight markets… Early this morning we had a SNB meeting, and they didn’t have one mention whatsoever about a peg for the franc (CHF)… That news got the franc back in the rally gear, and the other currencies have followed along…

The BOE’s meeting minutes printed this morning, and to the surprise of the markets, two “hawks” have switched over to the “no rate change” side… That news took the wind out of the pound sterling’s (GBP) sails. I’m not a big fan of the pound and haven’t been for a couple of years now. The recent rally has been all about dollar weakness, folks… I doubt it has anything to do with strong pound fundamentals, because… THERE ARE NONE!

Yesterday, the leaders of Germany and France (Merkel and Sarkozy) came out of their “special meeting room” with yet another idea to protect the euro…their plan included a proposal to form a new Eurozone Council, which would govern Eurozone items… I cracked up at Sarkozy’s description of the new Council saying it was a “veritable Eurozone Economic Governance”… Ahhh, yes, the old “veritable Whitman’s Sampler” HA!

The two leaders also stated their absolute will to defend the euro… Then they announced that they will push the 17-Eurozone members to adopt a “golden rule” to balance their public finances, before next summer…

So, no “real meat” here, which was how the meeting was advertised… But, I think that the markets get a feeling of calm whenever the Eurozone’s two largest economies get together and sing from the same song sheet.

I had a reader send me a note yesterday regarding Frank Trotter’s thoughts on the 40-year anniversary of the removal of gold as a backing for the dollar… He thought we were being a little tough on Richard Nixon… That Nixon had no choice given what President Johnson had left him… And while that may have some truth to it (Johnson’s Great Society, and Vietnam War expenses had turned the country into a deficit spending machine), it doesn’t take the blame completely away from Nixon, who also ran up deficits and refused to balance the budget… I’ve just finished a book on this subject, by Richard Duncan called The Corruption of Capitalism… If you’re a history buff, and want to know the “root” of our problems today, this book will answer your question!

Did you see or hear that Texas Gov. Perry, who has thrown his hat in the Presidential campaign ring, took a swing at how the Fed has forced its power on the US economy… He also took a swing at Fed Chairman Bernanke… I can’t go there any longer, so I won’t… But… I can talk about how I feel that the Fed has too much freedom and power to exert their will on the economy and our monetary system. I would think that anyone who went through the paperwork that revealed how and to whom the Fed gave loans would be enough to come to that decision… But there’s more… There’s always been more, folks… And now, as we head for more quantitative easing or whatever the Fed chooses to call it, there’s never been a better time to question what their goals are…

I had a talk with a guy who told me that some “big time dudes” told him that there would be no more quantitative easing… Instead, there’ll just be the printing of money… What? Isn’t that the same thing? Well… QE is money printing, but… With QE you also get asset purchases… Which is what I told you yesterday that Fed Head Lockhart was talking about. So… Should this “guy” be correct, the economy will be flooded with dollars… The Fed has stated that they want more inflation in the economy, and if that’s their route, then, we’ll certainly have it, eh?

And then as long as I’m walking on a thin line here… A friend of mine sent me a note (thanks Brad!) that reported General Electric was going to move their X-ray division from Wisconsin to China and train 65 engineers… Hmmm… Isn’t GE Chairman Jeff Immelt the “job czar” for the president? Does anyone else see the complete craziness of this announcement? I shake my head in disgust, for sure!

OK… I’ve been off on one tangent leading to another here this morning… Focus, Chuck, Focus!

Let’s see here… Oh! This is interesting… The Royal Bank of Scotland (RBS) issued a new report on the dollar/euro, this morning, and they have backed off their previous call for the euro to be 1.32 at year’s end… They have raised that forecast to show the euro at 1.42 at year’s end. They also had this to say… “The prospects for a meaningful dollar rally over the next 4 quarters have been reduced sharply.”

I see that VP Biden is in China to assure the Chinese that the dollar and Treasuries are safe… Now, I’m no scholar, nor am I the sharpest tool in the shed, but I don’t think the Chinese are going to be swayed by anyone… But the timing of the visit is interesting, given that the Net TIC’s Flow that printed the other day showed another loss of foreign investment, and I already told you that the 30-year Auction of Treasuries was awful…  And it was awful because the Chinese didn’t show up…

I find this scary, folks… But once again let me attempt to get this message to the White House… Stop sending people to China, and wasting tax dollars… The Chinese will do what they feel best behooves their country and will not be swayed by visitors bearing gifts…

Speaking of China… I love it when they try to throw the markets off the scent of a rallying currency, by stopping the appreciation, and marking the renminbi (CNY) down… It’s like a Chinese speed bump, or circuit breaker just to remind everyone that was beginning to think that renminbi was a “one way street” that it isn’t!

In Australia overnight, their latest print of wage prices showed an increase of 0.9% in the second quarter versus the previous quarter… This was in line with expectations, but… In my mind, really proves the Reserve Bank of Australia (RBA) is not able to cut rates, as some analysts have called for… In fact, with wages rising, the RBA has to seriously consider raising rates again… And like I said yesterday, I’m still keeping the light on for another rate hike before year-end.

The price of oil is inching back baby step by baby step… After falling to $79.30 on August 9th, the price of oil has gained back to $87.63 this morning… That can’t make the deflation crowd very happen, but, it does put a shine on the Canadian dollar/loonie (CAD)…

US Industrial Production increased in July 0.9% versus June’s revised number of 0.4%… With the increase of Industrial Production, the Capacity Utilization rate rose slightly. So… The economy still has a pulse, folks… Which is what I believe we’ll experience for quite a few years… Muddling through, barely growing, with tons of unemployment…

Then there was this… Longtime friend, Bill Bonner, stopped by to say hi to me, when I was in Vancouver… Bill has been so right on so many things over the years that it makes one’s head spin thinking about it… Yesterday, in his essay “Saving the US Economy by Presidential Decree” he was talking about what he would do if he were president… Here’s a snippet…

My fellow Americans, I don’t know about you, but I’m tired of supporting all these zombies. Why are there so many zombies? Because there’s so much meat for them…

You wanted change… I’ll give you change…

Here’s how to get rid of zombies. I’m proposing to scrap the entire tax code. From now on, Americans will pay 10% of their income…no deductions…no nonsense. You’ll fill out your tax return on a postcard.

Serfs in the Dark Ages were only required to work one day in 10 for their lords and masters. You shouldn’t have to do more.

The federal government will have to get by on that. That’s all. I’m proposing a Balanced Budget Amendment…with a permanent 10% tax rate. No ifs. No buts. No zombies.

I don’t think the “super Rich” would like that too much… But, according to the President, they need to pay more anyway!

To recap… The currencies traded in a tight range yesterday with a bias to buy dollars, but that all changed this morning, as the SNB met and made mention of a peg or further intervention, giving the franc a boost, which led the other currencies higher. Merkel and Sarkozy came out of their magic room with another plan for the Eurozone. Nothing earth shattering, but gave the markets a warm and fuzzy. And the price of oil is rising again…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning