FOMC Decision Day

Good day. Another crazy day here, but after 6:09 CDT this evening, I’ll be able to talk about those hazy, lazy, crazy days of summer. I continue to see economists and corporations cutting their forecasts for the U.S. economy this year. But why would this year be any different than the past seven, in which we’ve started out the year wearing rose-colored glasses and spitting out glowing forecasts for the economy, only to be putting their tails between our legs by summer?

And that’s where we are today. The Fed heads will conclude their two-day FOMC (Federal Open Market Committee) meeting this afternoon, and we’ll hear the latest round of diminished expectations for the economy. But once again, I think the markets are going to be disappointed by the Fed heads. But then, they might pull a Bullwinkle and attempt to pull a rabbit out of their collective hats, with an announcement of some sort of stimulus.

Late last week, the primary dealers were 17 of 21, betting that the Fed announces stimulus this week, then by Monday, it had slipped to 14 of 21, and now has slipped further, with only 12 of the 21 believing the Fed heads will do something today.

The Fed is left to their own devices, and left to their own devices, they probably would implement stimulus, but there’s this election thing going on right now. I don’t think they want to be painted into a corner of having their decisions be accused of being political. All in all, I think the Fed heads will settle on an extension of Twist and Shout, but maybe not today.

You know, I used to be a Fed watcher, like a hawk, and pretty much had them figured out, as to what they would do. But the monetization of debt that first began in March 2009, also known as quantitative easing, threw me for a loop. While I’ve been able to figure out most of their steps before they announce them since March 2009, I’m still shaken by not seeing them following the Japanese style of monetization of debt implementation, especially since I had been saying that we were turning Japanese for years before that!

The risk rally that had legs yesterday continued to see those legs get a bit stronger. G-20 concluded with the leaders of the G-20, pledging to take all necessary policy measures to defend the currency union of the eurozone.

The euro (EUR) traded through the 1.27 handle, and the Australian dollar (AUD) saw the sunshine on the other side of $1.02. But a lot of these moves higher across the board for the currencies have seen some slippage this morning. Not because of anything that has happened overnight, but because of the “unknown” of what the Fed heads will say this afternoon.

One highflying currency that has really taken off to higher ground lately, the New Zealand dollar/kiwi (NZD), got a taste of comeuppance when they reported that their current account deficit had widened by a larger margin than forecast. New Zealand’s current account deficit widened to 4.8% of GDP in the first quarter of this year (verus the previous quarter).

Remember when New Zealand had the highest interest rate for industrialized nations? The currency traded up to 88 –cents, but I warned people then that once the interest rates went down, and they did, that people would notice this current account debt and bail on kiwi, and they did. So now, just when kiwi has taken steps higher and was ready to touch 80 cents again, this elephant in the room appears.

Of course, another island nation, Japan, continues to see their currency marked higher versus the dollar, and they have more debt than you can shake a stick at. But the sizes of the economies of these two island nations are at polar opposites. And the bond markets of New Zealand pale in comparison to Japanese bond markets. So there you go — there’s the difference. But does that mean Japan should continue to have this strong currency with all that debt? Probably not.

Something that began to happen a few months ago in Japan continues to happen, and eventually investors will begin to notice this. Japan began booking monthly trade deficits. That’s right: I said trade deficits, just as the U.S. does every month.

The nuclear accident last year really has thrown a spanner in the works for Japanese imports, because now they have to import more fossil fuels than they did before. Japan will print their May trade balance today.

Expect another deficit, and you can also expect, eventually, some weakening of the yen (JPY) based on the fact that they have turned from a surplus country to a deficit country, tradewise. Put that with their unsustainable national debt, and I can’t believe the yen hasn’t stumbled already, but then I told you, a couple of months ago, that I had given up on trying to figure out yen strength. So who knows? Maybe the Shadow does.

Going to the other end of the spectrum on countries with debt, we have Norway with no debt! The Norges Bank (Norway’s central bank) is meeting this morning, and I expect them to keep rates unchanged, as things have eased a bit in the eurozone this week after the Greek elections.

Just a month or so ago, Norway was considering implementing measures to keep the Norwegian krone (NOK) steady versus the euro a la the Swiss move last year. But in recent weeks, we’ve seen robust domestic growth coming from Norway. So could all the negativity of the spring turn to summer magic for the Norwegian krone?

There’s a whispering campaign going on right now, which thinks the Norges Bank could be opting for a rate hike, instead of a rate cut! So with all the questions, I think they’ll stay Steady Eddie on the rate controls this morning. But if the robust domestic growth continues, the Norges Bank will have to hike rates at the next meeting.

French President Francois Hollande is backing a proposal that Italy made at the G-20 meeting yesterday, whcih would allow the EFSF (European Financial Stability Facility) to buy government bonds in the secondary market. Currently, the EFSF mandate is for buying bonds of countries that have been bailed out.

Italy wants the proposal to include Italy and Spain, which haven’t officially been bailed out — yet. This isn’t as simple as Simon might think it to be, folks. Bonds have a pecking order of which ones get paid first — seniority and subordinate issues. So all that will have to be worked out, and then there’s Germany. What will they think about this?

Here in the U.S. the labor market continues to circle the bowl, folks. I was reading again late last night — couldn’t sleep again — and came across some data that just caught my eye! The extended unemployment benefits are now running out at a pace of 100,000-plus per week. Uh-oh!

I have to say that I’m glad to not hear any calls for more extensions to the benefits (99 weeks is the current benefit.) I’m going to get myself into hot water with some people here, but I would think that after 99 weeks, nearly two years, if you haven’t found a job, you’ll not find one now. And that’s a sad thing for our country and economy, folks.

One more thing — did you see the bill that was passed by a large margin in New York yesterday? The bill will restrict the spending of the tax-funded benefits — no more cigarettes, alcohol, gambling and strip clubs. Are you kidding me? Taxpayers have been paying — no wait, I’m not going to go there! I’ll let you scream at the walls for me!

The Then There Was This section today is a bit long, but I wanted to get you most of the article because it’s the stuff I tell people all the time. Just like my kids, if they hear it, or you hear it from someone else, it will carry more weight. So here are snippets of an article by Dominic Frisby over at MoneyWeek, responding to someone saying, “Gold pays no interest, has no use, and no fundamental value.” Dominic has a problem with that statement, and here are his thoughts:

“First, gold pays no interest. True. But then, nor does cash — unless you lend it to people. The world needs to realize that by putting cash in the bank, you are lending it. But in this environment of negative real rates (in which the central bank rate of interest is below the rate of inflation), who gives a hoot about interest, anyway? 1 or 2% interest. Whoopee-do.”

“Next, there’s this idea that ‘gold has no use.’ Really?

“Gold has very little industrial application, yes. It’s too expensive. But no use?

“Gold, unlike bubbles and government bonds, lasts forever. This makes it a highly effective form of money, as I’m about to explain.

“But how can gold be money, runs the next argument, when you can’t go into a shop and buy stuff with it? Absolutely. You can’t. Err… actually, you can. The gold sovereign is still legal tender. As a day-to-day medium of exchange, gold has never found much use. A piece of gold the size of a penny (about £125 or $200 in today’s money) contains too much value for anything other than expensive transactions. Copper, nickel, silver, paper and now digital money have all found far more prolific use.

“But to assert that you can’t buy stuff with it — and therefore it isn’t money — is a facile and ignorant argument. Money is more than just a medium of exchange. Indeed, this is just one of the three essential functions of money: It also has to act as a store of wealth and as a unit of account.

“Governments can’t print gold, they can’t ‘quantitatively ease’ it, they can’t loan it into existence. They can’t debase it the way they do their own currencies. It just stays there, unconsumed, forever. Which all means that gold is constant — and therefore an excellent unit of account, far better than government money.

“Demand for a store of wealth tends to fall during times of economic expansion — such as in the ’80s and ’90s — so the gold price falls. People are looking for opportunities to grow their wealth, not simply hang on to it.

“On the other hand, demand for gold increases during periods of economic contraction and monetary stress — such as we have experienced, on and off, since the turn of the century. These are times when people are more concerned — as the oft-quoted saying goes — about the return of their capital, rather than the return on their capital.

“Gold’s fundamental use is to be money.”

Chuck again. I know that’s pretty long, but it’s all something that has to be said every now and then just to remind and reinforce what I’ve been saying about gold for a long time now. I remember Pfennig readers, years ago, sending me notes saying that I was the only “banker” that talked about gold. Of course, I thanked them and then told them I’m not a banker!

To recap… G-20 ended with a statement about taking necessary steps to defend the eurozone. Italy proposed a change to the EFSF to help them and Spain. The Fed’s FOMC meeting ends today. Will they or won’t they announce more stimulus? If they do, I believe it will be the watered-down extension of Operation Twist. The currency/risk rally continued yesterday, but has seen some slippage this morning ahead of the FOMC announcement this afternoon.

Chuck Butler
for The Daily Reckoning

The Daily Reckoning