Fed Heads at Jekyll Island

Chris was so kind to leave me notes about what happened in Friday’s trading, so let’s listen in to Chris first, and then I’ll pick it up with the overnight activity…

The dollar rallied throughout the day on Friday after the October jobs report showed a larger jump than expected and the previous month’s numbers were revised upward. It seems like we have made a shift from the “dollar safe haven” trades of earlier this year. Previously positive economic news for the US would lead to a sell-off in the US dollar as investors would be selling their safe haven investments to move the funds into higher yielding currencies. But today’s positive economic news for the US led to dollar buying as investors feel any positive news on the US economic front may lead to a decrease in the size of QE2. But this is just one month’s worth of data, and as Chuck pointed out in his email to me earlier today, the birth-death model was responsible for 61,000 of the 151,000 jobs added.

The Fed hasn’t even begun their second round of stimulus purchases, and traders are already betting on when they will pull the liquidity back in. None of us on the desk feel like the Fed will stop QE2 prior to spending all $600 billion (and it is likely they will have to spend even more!) QE2 simply adds another layer of volatility for the markets.

The euro (EUR) got hit, losing nearly 2 cents versus the US dollar today. The markets continue to be nervous about the sovereign debt refinancing which will need to occur in Spain, Ireland, and Portugal. Many traders feel the austerity measures put in place by these countries will not be enough to bring their deficits under control. And in today’s environment, their administrations are going to have trouble passing further cuts to social programs or increases to taxes. The euro also got sold after a report showed retail sales in the euro region fell for a second month in a row.

Thanks Chris! That always helps when I come back from being gone for a week to have that waiting for me!

Well… Overnight the dollar is still swinging the hammer it began to swing on Friday morning. The currencies, even the Chinese renminbi (CNY) are all weaker versus the dollar this morning. Gold is down $2, and silver is down 70-cents…

In the overnight news, China’s Vice Finance Minister Zhu, was expressing his distaste with the FOMC’s latest round of QE. Zhu, gave the FOMC a get out of jail free card, with the first round of QE that was implemented in March of 2009, as he felt the global economy lacked liquidity… But this time? He’s not so much a fan of the FOMC right now. Zhu feels as though “we have $10 trillion of hot money flowing around the world, more than $9 trillion in hot money at the beginning of the financial crisis. The US has not fully taken into consideration the shock of excessive capital flows to the financial stability of emerging markets.”

Zhu also went on to mention that this latest round of QE will be on the agenda at this week’s G-20 meeting in Seoul. I’m certain any discussion of this round of QE will fall on deaf ears, with US officials.

Hmmm… Do you know what “reunion” took place this past weekend? Fed heads new and old, met this past weekend on Jekyll Island, the Georgian island where a secret 1910 meeting led to the Federal Reserve, or cartel, as they should actually be called… Read the book, The Creature from Jekyll Island, and you’ll know why! Anyway, there was a lot of back slapping for the current Cartel for their “guidance” through the financial storm… But I side with former Cleveland Fed President Lee Hoskins who said at the conference that “the central bank is in a position of running a policy that has more risks than potential benefits.” He went on to say something that I hope all the Fed Heads heard clearly…

“In the early 1970s, there was an idea that they could buy a little more employment by running a little higher inflation rate, and people were really caught in that idea, that they could manipulate the unemployment rate through monetary policy. That turned out to be a grievous error.”

OK… Enough Fed Head talk… But wait… I did want to give kudos to Big Ben Bernanke for a statement he made last Friday… FED CHAIRMAN BERNANKE SAYS ONE EXCEPTION TO LOW INFLATION OBSERVATION IS GLOBALLY TRADED COMMODITIES RISING “PRETTY SHARPLY” but that… RISING COMMODITY PRICES WILL CONTRIBUTE TO US INFLATION. BUT FED RESEARCH SUGGESTS ECONOMIC SLACK WILL PREVENT PRODUCERS FROM FULLY PASSING ON COSTS TO CONSUMERS.

OK… He recognizes that commodity prices, that includes food and energy prices, are rising “pretty sharply”… But to suggest that the economic slack will prevent producers from fully passing on costs to consumers is ludicrous… That’s my thought and I’m sticking to it!

Well, the Irish bond sales are weighing heavily on the euro and other currencies this morning… I’m nodding my head, yes, as I recall telling you a few weeks ago, that it was about time for the media to shift its focus back to the European GIIPS again… I made a statement in Cabo last week during my presentation, that will shock a few of you… But I said that in the next decade we could see some, if not all, of the periphery countries of the Eurozone leave or get asked to leave, but it would not collapse the Union, nor would it collapse the euro, as it would be a case of what didn’t kill you makes you stronger!

But for now… The euro and thus other currencies have to deal with the periphery countries’ problems… But watch, I truly believe this will happen again… Things will look bleak for the Eurozone and then the media will shift its focus to the problems in the US again, and then we’ll start these shenanigans all over again.

Eventually this will all play out, and when the dust settles, we’ll still see the dollar in the underlying weak trend it’s been in since 2002…

So, that gives us all a chance to buy things that we wanted to buy, on the dips!

The euro has lost 1/4-of a cent since I came in this morning, and is looking like it will soon be trading below 1.39…

The Canadian dollar/loonie (CAD) traded above parity on Friday, after a strong (for them) employment report showed the jobless rate declining to 7.9%… The loonie has slipped back below parity this morning with the US dollar strength. Canadian loonies are still in my top ten of currencies even with it being so closely tied to the US. I truly believe that the commodity pull will win the tug-of-war here…

Then there was this… As reported in Reuters this morning…

Leading economies should consider readopting a modified global gold standard to guide currency movements, said World Bank president Robert Zoellick.

Writing in the Financial Times, Zoellick said a “Bretton Woods II” system of floating currencies is needed to replace the Bretton Woods fixed-exchange rate regime that broke down in the early 1970s.

Zoellick called for a system that “is likely to need to involve the dollar, the euro, the yen, the pound and (yuan) that moves toward internationalization and then an open capital account.”

He added: “The system should also consider employing gold as an international reference point of market expectations about inflation, deflation and future currency values.”

While it’s something to think about, I doubt Zoellick will get much traction for his idea… But, the reason I brought it up is that once again, we’re talking about something that could lead to a “world currency”…

To recap… The currencies and precious metals have sold off since the trumped up jobs jamboree on Friday showed that 151,000 new jobs were created in October. (We know that 61,000 were created out of thin air, but don’t let that get in the way of a “feel good story”) the dollar is even stronger this morning, as Irish bond sales are creating a real drag on the single unit.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning