Hurricane Irene Overshadows Bernanke's Wyoming Speech

The big news this weekend was hurricane Irene which had folks up and down the east coast battening down the hatches. While the storm certainly did some damage, it weakened before slamming into NYC. I’m told our NY office will be open for business this morning, which is a bit of a surprise as it is located in the center of Long Island, directly in the track of Irene. The markets here in the US were already in a holding pattern, waiting for news from Jackson Hole, and it looks like most of the traders headed home early Friday as Mayor Bloomberg shut down the mass transit systems. By the time Bernanke made his much anticipated speech from Jackson Hole, the markets just yawned. Bernanke didn’t give the traders what they were looking for, and the Fed Chairman actually sounded a bit defeated.

Chuck is headed off to the oral surgeon this morning, but sent me his thoughts to share with all of you, so here’s Chuck:

Well, folks… Looks like everyone was wrong about what might be said by Big Ben Bernanke on Friday… You may recall, the markets early last week were thinking he would announce more QE… But, I thought that instead of announcing any policy change, that he would simply list the Fed’s options, and leave the markets wondering which one he was going to pick…

Well, he didn’t do either… He didn’t change policy, and he didn’t list options… He basically said that he would be putting off all discussion to next month’s FOMC meeting and changing it from a 1-day meeting to a 2-day meeting. I’m thinking that they’ll need 2-days to arm-wrestle any Fed members that don’t agree with any more stimulus… The currencies and gold proceeded to trade the rest of the day as if QE3 had been announced, like they did when the first two rounds of QE were announced (3/09, and 8/10).

The rally was strong, and lasted all day, neither pausing for the cause, or stopping to take profits. So, can you imagine what might happen when something is announced in September? I’ll tell you that before their meeting in September, the Fed Heads will have an opportunity to see the latest Jobs Jamboree report. So now, more than ever, the Jobs Jamboree carries with it a boat-load of importance, for, if the labor reports are disappointing, I think we’ll see the Fed announce another round of stimulus at their meeting… If the labor reports are not disappointing the Fed will sit still, and the dollar will rebound.

Being bored… I sat down to read the text of Big Ben’s speech the other day… No magic wand, is what I kept hearing him say…

You see… The Fed Heads, and Mr. Greenspan going back a ways, used to think that they did have a magic wand, and once waved over the economy, the economy would react accordingly.

What Mr. Bernanke was saying the other day, is simply that the Fed Heads don’t have a magic wand… Of course I could have saved him the trouble and told him that long ago… Credibility was at stake here, folks. The markets all over the world look up to the Fed, and had the Fed Heads keep walking around like 20-game winners, with all the answers, only to see the walls come crumbling down, then… Well, their credibility would have been ruined…

So… They laid the groundwork to let the markets down easy… That’s all it was, nothing more, nothing less… Now, I’ve been taught over the years that the “market is never wrong”… But I’ve got to say right here, right now, that the market reacted Friday as if Big Ben HAD waved a magic wand… For what reason? Because he said that he was optimistic on the economy going forward? Ahem… Hasn’t he said that before? Don’t get tricked here, folks… The game is still on… Get consumers feeling good about the economy…

I could go on and on here, but I’m sure Chris wants to say something today…

Thanks to Chuck for sharing his thoughts on Big Ben’s speech. The stock markets weren’t too excited about Bernanke’s speech, as they were wanting some additional stimulus, but as Chuck suggested, the currency markets sure liked what they heard. Currency traders started moving back into ‘risk’ trades, moving money into the higher yielding currencies of South Africa, New Zealand, Australia, and Mexico. It wasn’t a huge move, but enough to suggest that currency traders are desperately looking for any reason to move money away from the low yielding ‘safe havens’ of the US dollar, Japanese yen (JPY), and Swiss franc (CHF).

The data released Friday showed that the US economy expanded at a 1% rate in the second quarter, down from the previous estimate of 1.1%. So the US economy is still hanging on, and not slipping back into what can technically be called a double dip recession (two quarters of negative growth). But a growth rate of just 1% isn’t enough to create jobs, and our economy is in desperate need of a boost in employment. Another report showed the GDP price index in the US ticked slightly higher to 2.4% in the same quarter. Slow growth, no jobs, and rising prices. We continue to mirror our friends over in Japan, who have been stuck in a similar rut for several years.

Speaking of Japan, Yoshihiko Noda was elected head of Japan’s ruling party over the weekend, paving the way for the 54-year old finance minister to become the third prime minister since the party took power two years ago. Three prime ministers in the past two years; Japan’s poor economy just continues to chew up political leaders and spit them out. Mr. Noda will try to attack Japan’s problems with increased taxes. Leaders are also trying to convince Japanese businesses and consumers to accept a stronger yen, another sign that Japan may be throwing in the towel on their attempts to weaken their currency.

As I mentioned earlier, the risk trades began to be put back on over the weekend, with the Aussie dollar (AUD) advancing to a three-week high versus the US dollar. While Bernanke failed to give traders on Wall Street what they were looking for, his optimistic view of the economy going forward was all currency traders needed. Approvals to build homes in Australia rose 2% in July from the prior month, according to a Bloomberg survey before tomorrow’s bureau of statistics’ report. This news has eased concerns that the Reserve Bank of Australia will need to lower interest rates in order to stimulate the Aussie economy. Both Chuck and I never bought into the RBA easing story, and still believe the next move for rates ‘down under’ will be higher.

The trading week is going to be busy, with quite a bit of data hitting the markets and many of the senior traders heading out early Friday to enjoy the Labor Day weekend. Today we get the Personal income and spending numbers, along with pending home sales numbers. Tomorrow we will see some more data on the US housing market with the release of June’s Case-Shiller home price data. We will also see the minutes of the last FOMC meeting and the latest report of consumer confidence.

Wednesday will bring us the week’s first indications of the state of the US labor markets with the Challenger Job cuts and ADP Employment numbers. We also get July’s report on factory orders here in the US which is predicted to show a modest 1.9% increase. Thursday will bring the weekly jobs data along with ISM manufacturing and Total vehicle sales for August.

Finally, the Jobs Jamboree is this Friday. So before all the boys and girls in NY trading rooms head to the Hamptons, they’ll be sitting on the edge of their collective seats, waiting for 8:30 ET and the latest Jobs Jamboree. The unemployment rate is expected to have held steady at 9.1%, but the change in nonfarm payrolls is expected to be lower than the 117K increase we saw in July. Poor labor numbers will definitely cause the FOMC to reconsider their ‘stimulus efforts’.

And then there was this… I always enjoy reading The 5 Minute Forecast from our friends over at Agora, and part of it really hit home with me on Friday. I enjoy fishing, and apparently Porter Stansberry does also. He did an excellent job of bringing an offshore fishing analogy to the current state of gold, answering whether we are currently in a bubble. Here is an excerpt from Friday’s 5:

“I enjoy offshore fishing,” our friend Porter Stansberry wrote yesterday, drawing a useful Friday afternoon analogy…if, in fact, you’re trying to decide if gold is in a bubble or not.

“I have a relatively modest center console fishing boat,” Mr. Stansberry goes on. “I like it because it’s really fast and I can get across to the Bahamas quickly, which is my favorite place to fish. But to get there in a reasonable amount of time, I need calm water.

“My wife is always surprised that I can tell the surface conditions of the ocean just by looking at the sky. I know because the ocean is the mirror of the sky. While you might not be able to ‘see’ the waves in the sky, waves are caused by wind. You just can’t see the wind.

“The same thing is true about the price of gold and the stability of fiat currencies. Gold is the mirror of the world’s paper currency system. The price of gold doesn’t reflect the intrinsic value of the metal — which is almost unchanging over time. It reflects the relative value and volatility of paper currencies.

“The people who are arguing that gold is overvalued are not looking at the right numbers. They ought to be looking at Europe’s banks. They ought to be looking at the amount of short-term obligations that are sitting on the US Treasury’s books.

“The price of gold is reflecting the likelihood that the world’s sovereign nations decide to bail out Europe’s banks and paper over the US Treasury debt.”

To recap… Hurricane Irene slammed into the East coast, but the damage was thankfully less than expected. Bernanke failed to give the markets everything they were wanting, but the currency traders liked his optimistic views of the global recovery. Risk trades were put back on as investors moved back into higher yields. Lots of data this week will certainly give the markets something to trade on. And Porter Stansberry gives his views on gold’s ‘bubble’.

Chuck Butler
for The Daily Reckoning