Global Growth Questioned as Japan Raises Nuclear Severity

The lofty all-time record figures of the Aussie dollar (AUD), got a taste of the other side of the coin last night, and has backed off those lofty figures of the past few days. I don’t think profit taking was the key here; instead, it was probably the news that Japan had raised the severity rating for their nuclear power plant that was damaged in the Tsunami… The Japanese have raised the severity level to 7… The same as Chernobyl!

The markets’ participants believe that this time, global growth will get hurt… Of course we’ve seen earthquakes, floods, cyclones…and global growth didn’t flinch… But the “experts” believe that this will be the straw to break the global growth’s back. Hmmm… What if they’re wrong again? Then these weaker levels could be bargains, eh? But who knows? Only the Shadow knows! And… As I always say… Australia is the proxy for global growth… If global growth fails or succeeds, you’ll see it first in Australia!

I told you last week that it was about time that something happened, or was made up to happen, to stop the dollar’s fall, because in the past, that’s exactly what we would see… I call them “circuit breakers”… The problem with them is that it gets the dollar bugs all lathered up, and they begin waving the long-term trend strong dollar flag… And people that don’t know about trends, or deficit financing go along with the flag wavers, and the dollar rally lasts for a few months… Then you see the youngsters new to currencies begin to make calls that they’ll have to eat later… So, anyway… Maybe this is the “circuit breaker”… And then…maybe not!

The reason I say “maybe not” is that the Swiss franc (CHF) is still on the warpath against the dollar, as is the Canadian dollar/loonie (CAD)… The Bank of Canada (BOC) meets this morning to discuss rates… As I said yesterday, I don’t expect the BOC to hike rates this month, but in June… So, the statement following the unchanged rate announcement will be key for the loonie this morning, especially with the price of oil falling $2 overnight.

I saw a blurb by the researchers over at Morgan Stanley the other day, talking about the Brazilian real (BRL)… Those researchers say that because of considerable portfolio inflows the real could approach 1.40 in the “near-term”… WOW! Talk about going out on a limb! I sure hope these guys picked out a big fat limb, like I always have to do! For reference, the real is now trading around 1.58, so a trip to 1.40 would represent an 11% increase! Then add that to the 5% gain the real has garnered this year, and the 6% interest… Now, we’re talking about something, eh? Oh, but wait! The key to the Morgan Stanley’s call is that they said “could approach”… So, they’re not convinced it will happen, and I’m not either! The real still is considered as an “emerging markets” currency, so be careful out there…

This morning over in Germany… German inflation accelerated at its fastest pace in 2 ½ years during March! I bet the European Central Bank (ECB) is breathing a sigh of relief right now, given the rate hike they made a couple of weeks ago! So… ECB President, Trichet, had better get the “boys” together, and begin discussing another rate hike… I’m still not on board with the thought that the ECB could go back-to-back, instead, thinking that June would be the next hike… But, this latest report from the Eurozone’s largest economy (Germany) will turn some heads, folks… And begin to turn the burners up on the ECB ministers… The co-chief euro-area economist, Klaus Baader said that the inflation rate for Germany could reach 2.8% by summer!

Yesterday morning silver was trading above $41, and looked like a moon shot! But then the profit taking and chart trading began to knock it down, and by the end of my day, silver was down about $1… Was this the “sell off” that Sean Hyman talked about last week? Hmmm… It doesn’t look like it yet, as silver is rallying this morning. At this point, I find it important to see what the “silver man” Ted Butler (no relation that I know of), has to say… Here’s Ted…

I know we are over-bought in silver and in a normal market the price should correct sharply. But this is as far from a normal market as you can get. This is a manipulated market where the manipulation is in the process of ending and in which the manipulators appear to be in trouble. That means the charts and previous price patterns may not matter. It is very easy to imagine some important shorts throwing in the towel in their weakened financial state. In fact, it may be what we are witnessing now.

But keep in mind something that hangs over gold and silver like the Sword of Damocles… And that is that summer is usually not a good time for these two metals… The old stock saying of “sell in May and go away” tends to lend itself to the metals… Not always, though… For instance in 2010, gold lost ground in July, only to make it up and more in August and September… Same for silver, with it taking off in mid-August… So, it’s not always the case, but keep it in mind if we begin to see the metals slip as we head into summer…

One of the best performers in the past week (not last night though, UGH!) had been the Norwegian krone (NOK)… As one would expect it to be, when the keys for krone strength were all in alignment, those keys being: dollar weakness, euro strength, oil price… There was some good news in the oil exploration from Norway last week, and brother did they need that, as they had seen three recent drills come up dry… The latest drill was successful for Statoil… So, the Norwegian oil business is still strong.

Well… The big news over the weekend was about the government averting a shutdown here in the US… Now the fight goes to the debt limit… So, let me set it all up for you… The current debt ceiling is $14.3 trillion (as if that’s not enough!) and our current debt is $14.223 trillion… So, we’re getting close, and… With the way we deficit spend, that won’t take long to reach… OK… So the Republicans are telling the White House that they will not raise the ceiling unless the president agrees to trillions of dollars of spending cuts… And now the White House is saying that it will be Armageddon-like for the economy if the ceiling isn’t raised before reaching its limit…

I look at it like this… The debt ceiling isn’t really a ceiling, if we just keep raising it every time we hit the top… I also believe that spending cuts have to be made, and real spending cuts, not the kind that were done to reach a budget agreement… Oh? Didn’t hear about this? Many of the $38 billion in spending cuts agreed upon by Republicans and Democrats are nothing more than accounting tricks that have no impact on spending, officials said. The budget compromise that headed off a US government shutdown includes cutting $4.9 billion from the Justice Department Crime Victims Fund, which won’t be spent this year anyway. For many programs, money cut could be restored by Congress next year with no impact on spending.

Then there was this… From The LA Times

Two Federal Reserve governors said the US economy faces no serious threat from inflation and that it isn’t time to tighten monetary policy. Janet Yellen, the central bank’s vice chairwoman, said surging commodity prices are temporary and won’t have a prolonged effect. William Dudley, president of the Federal Reserve Bank of New York, said he isn’t enthusiastic about tightening because the labor market is expected to have “excess slack” through the end of 2012.

Remember last week, when I told you to keep a scorecard on the Fed Heads who called for an end to quantitative easing, versus the Fed Heads who call for continuing the stimulus? Well… That’s 3 for, and 3 against, so far… But, as I’ve said before, just like in the days of Big Al Greenspan… Whatever is on Big Ben Bernanke’s mind is what we’ll see for Fed Policy… Yes, the Fed Heads have a vote, but they don’t dare go against the Fed Chairman…

To recap… The Japanese have raised to 7, the severity level of their nuclear plant that was damaged in the Tsunami…the same level as Chernobyl. This has caused traders to think that global growth is going to take a hit, and therefore the proxy for global growth, the Aussie dollar, got sold overnight. That kind of news benefits the Swiss franc, and the franc is $1.11 this morning… Morgan Stanley waves the flag of currency rallies for the Brazilian real, and silver backed off $41 yesterday… Is this the selloff we talked about last week? Probably not yet…

Chuck Butler
forThe Daily Reckoning

The Daily Reckoning