Desperately Seeking Yield

Well… What a volatile week it has been in the currencies! Up, down, all around, and settling back to levels that we saw before the Fed’s FOMC meeting earlier this week. Suddenly, investors are looking for yield again… Looks like they are “Desperately Seeking Yield (Not Susan)! And why not? The Fed, and the Bank of Canada (BOC) have come out and said that there will be no interest rate hikes until we’ve turned quite a few pages on the 2010 calendar.

So, with investors clamoring for yield, the dollar gets taken to the woodshed… As I said earlier this week, one of these probes above 1.40, needs to take hold of the figure and build on it, otherwise we’re doomed to remain in the 1.35-1.40 range, and range trading is for the birds! Talk about counting flowers on the wall, and watching paint dry! UGH!

I was shocked yesterday to see but a few emails asking me more about the SDRs story that I talked about… Men, women, boys and girls, all… This is important stuff! Don’t take it lightly! There’s a movement underway that could end up costing you dearly, if you do not take the diversification steps.

I think it is important to know that the BRIC countries (Brazil, Russia, India, and China) are serious about replacing the dollar with a “global currency” (i.e. the IMF’s SDRs)… And… That the BRIC’s want more power on the world’s stage… And why not? These countries currently have almost three trillion in foreign reserves… And… A very large piece of the world’s population… (Thanks for that fodder, Kevin!)

OH! And guess who was banging the drum for a “super-sovereign” currency overnight? China, that’s who! So… They’re Baaaaaaaaccccckkkkk! OK… This was the People’s Bank of China (the Central Bank), that made this statement, along with a call for the IMF to manage part of member’s foreign exchange reserves… Hmmm… OK, I just said that China wants more power on the world stage, and here they are saying that their puppet will be the IMF! OK, I took some liberty with that, but it’s the way I see it!

OK… Back to what’s going on in the currencies today… Hmmm… The dollar is getting taken to the woodshed to end the week, that’s what’s happening! And the currency leading the pack with regards to performance versus the dollar… Drum roll please…. The Brazilian real (BRL). A 3 day “winning streak” has the real back to levels it saw before the Brazilian Central Bank (BCB) cut rates about 10 days ago.

The way I see it, and long time readers know this will be interesting in the least, is that investors want to invest in the BRIC countries, but there’s very little liquidity there in each of those currencies, along with very little yield, except… In Brazil… Liquidity isn’t what the majors enjoy, in fact it’s still traded on what’s called a “non-deliverable forward”, which means it can only settle in dollars, with no deliverability, but… It’s traded easier and less costly than the other BRIC’s and… It has the highest interest rate available. So… You can see why investors are buying reals.

Having said that though… You must know about the volatility… Look at what happened this week… On Monday, we started the week with the real at 1.9750, only to see it rocket to 2.0326 in one day’s trading, a near 3% move/loss in one day! Then we saw it rally back to 1.9795 the next day, and after three days of gains the real sits at 1.9420 this morning, thus generating a “gain” for the week! And… The other thing, is that Brazil is considered an emerging market… And long time readers have learned over the years that when one emerging market gets slammed, they all get taken to the woodshed… So… Be careful out there!

A high yield currency that’s far removed from the early days of trading like Brazil, but offers yield, is the New Zealand dollar/kiwi (NZD)… And kiwi has been held back, although still posting a gain versus the dollar overnight, as first quarter GDP printed at a negative 1%, thus marking the fifth consecutive quarter of negative growth in New Zealand.

I’m probably out there on the big fat limb (to hold me up, of course!) by myself on this one, but… I personally believe that both the Reserve Bank of New Zealand (RBNZ) and the Reserve Bank of Australia (RBA) have seen the lows in their interest rates, and no further rate cuts will come from these respective central banks. I know that last week we were all hyped up about future rate hikes from the RBA in 2010, and we probably got a little ahead of ourselves with that thought. I’m probably ahead of the curve on the “end of rate cuts” talk… But that’s where I like to be!

So… When the world’s investors are looking for yield, they don’t have to go to Brazil, or India (INR)… They can go to the old reliables… Australia (AUD) and New Zealand, with a reduced fear of further rate cuts… At least that’s they way I see it! And yes, I could be wrong.

And how about gold and silver this week? What a week on Mr. Toad’s Wild Ride for precious metals… The main thing though is that they are finishing the week with a rally, and gold, which was trading at $922 on Monday, is now at $944.85!

And how about that grilling that Big Ben Bernanke received yesterday by legislators over the Fed’s conduct in the Bank of America (BOA) takeover of Merrill Lynch… You may recall that BOA’s CEO, Ken Lewis said he was “bullied” into taking over Merrill and not disclosing to his shareholders all of Merrill’s losses that were on the books. Big Ben denies that he participated in any bullying… (Doesn’t that lead to Paulson then? Did Big Ben just throw Paulson under the bus?)… Anyway… Big Ben did little to convince the legislators that the Fed didn’t keep their hands out of the cookie jar… And that, my friends, may be the foot in the door that we’ve been looking for… Maybe, just maybe, because you never know, but with the legislators having questions about the Fed and Big Ben, they probably aren’t in any mood to hand over the regulatory powers that the President wants to give them.

And… My old fave central banker (NOT!) Big Al Greenspan was back in the news last night… I’m trying to figure out how he and I got on the same side of the ship… But, here was Big Al – my nemesis for years – talking about inflation being a concern… Let’s listen in to Big Al… Alan Greenspan, former chairman of the Federal Reserve, said the threat of inflation needs to be confronted because it poses a threat to economic recovery. “Excess capacity is temporarily suppressing global prices. But I see inflation as the greater future challenge,” Greenspan said. “If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012.”

Of course, I think inflation will be showing its ugly face next year, not three years from now!

And on the data front… The Weekly Initial Jobless Claims “surprised” economists by moving back up, after falling last week… 627,000 unemployed Americans filed for unemployment claims last week. No “green shoots” here! In fact… We need to see if we can use these so-called green shoots that the President and Big Ben keep talking about, for ethanol… They’ve got to be good for something! HAHAHAHAHAHAHAHA! I must say that a reader gave me that line!

And here’s Warren Buffett on green shoots… “I had a cataract operation on my left eye about a month ago and I thought maybe now I’ll be able to see green shoots. We’re not seeing them. Whether it’s retailing, manufacturing, wherever. We have a big utility operation. Industrial demand is down like we’ve never seen it for a simple thing like electricity. So it hasn’t happened yet. It will happen. I want to emphasize that. But it hasn’t happened yet.”

And… Then… There was this… A good story to end the week and head to the Big Finish with…

Barclays Capital Inc. (Barclays) the world’s third largest currency trader, have lowered their one-year forecast for the dollar, saying foreign investors will reduce their purchases of U.S. assets… Barclays referred to the dollar’s status as “safe-haven paradise lost”, due to the ballooning fiscal deficit and the printing of money by the central bank… Barclays believes that the euro will be trading at 1.50 in a year.

Hmmm… Nothing new there for Pfennig readers, but, I always find it to be good to see others with their BIG research divisions, that finally come around to what little old me has been saying for months now…

And one more thing… Oil is back to $71 this morning, as there have been more problems in Nigeria… Let’s hope these problems go away!

The Daily Reckoning