Quantitative Easing: How Much is Enough?

Well, not only is the giddiness of the weekend over, but the giddiness of the recent currency and precious metals rally is looking very tired. What’s strange about the dollar rebound is the weakness in Treasuries. The yields on Treasuries are rising again… And if you’re a fan of silver, you won’t want to miss the “Then there was this” today… So, we’ll talk about the dollar rally, and the Treasury weakness, along with other things this morning. Are you ready? Yes, I’m ready…

Front and center this morning, we have more saber rattling going on between the US and China… Yesterday, Chinese Commerce Minister, Chen Deming said, “the US Federal Reserve’s UNCONTROLLED issuance of dollars is adding to inflation risks in China, and creating difficulties for the nation’s businesses. Increases in commodity prices are bringing China the shock of imported inflation.”

I’ve long wondered when this idea would surface, and the Chinese would bring it to light. And since we’re talking about the UNCONTROLLED issuance of dollars by the Fed/Cartel, this note from Goldman Sachs plays well with the idea… Economists at Goldman Sachs estimate the Federal Reserve may need to buy a staggering $4 trillion worth of assets such as Treasury securities to get the economy rolling again.

Hey! $4 trillion is a whole hell-of-a-lot more than the $1 trillion the markets are talking about, eh? But… here’s the difference, folks… Goldman is talking about “how much Quantitative Easing (QE) needs to be done.” Whereas the markets are talking about what they think the Cartel will do…

Oh! And I truly believe that this “disconnect” is what’s fueling the dollar rally right now. Recall I told you that we might be seeing a “buy the rumor, sell the fact” with the pending QE, in that the currencies were bought in reaction to the news of possibly more QE, but as the day draws near (next week at the FOMC meeting), the currencies are getting sold, because now there are rumors of no QE, and smaller amounts of QE, and more…

Here’s what I think will happen next week, as I view all this from the cheap seats… The FOMC/Cartel will announce additional QE, but it will be a small amount compared to what the markets are looking for. And this will cause a dollar rally, with a sell-off of currencies and precious metals… But what we won’t know, is that the FOMC is going to administer several of these “smaller amounts” as we go along, in their attempt to pull the wool over the markets’ eyes… It will be like the death by a thousand cuts type of thing…

But once the markets figure out what’s up the FOMC’s sleeve, the dollar selling will return…

OK… That’s just how I see it playing out… I could be wrong, and probably will be, for no one can figure these Fed Heads out!

Asian leaders head to Hanoi this week for talks that may center on calls for China to accelerate yuan (CNY) gains to protect the region’s export-dependent economies. I saw that headline late last night as I was doing some reading/research. It caught my eye…

Basically, it is thought that China will be more amenable to listening to Asian leaders than to leaders from the US and Europe, and don’t forget that Japan had also joined in on the barking at China. I read that China is very sensitive about being perceived as a big bully! Hmmm… Interesting…

So… All in all, I think what we’re going to witness going forward is a concerted effort by China to push their currency higher versus the dollar… In fact, I pretty much see China returning to the appreciation pace they had from July 2005 (when they dropped the peg to the dollar) until August 2008 (the financial meltdown), which was 22%…

OK… So… 22% isn’t good enough for you, eh? Well, let me remind you that diversifying into currencies and precious metals is a hedge for your investment portfolio to protect you from the potential of further dollar weakness. And when your hedge is making money for you, well, as the old saying goes, it doesn’t get any better than that! Besides, as I’ve been reminding people since 2008… It’s far more important to have a return OF Capital, than a return ON capital these days…

In Australia overnight, the Aussie dollar (AUD) really took one to the chin, after the latest print of Consumer Inflation. Here’s the skinny… Third quarter Consumer Inflation rose 2.8%. The consensus was for a rise of 2.9%… So… it missed the mark by 0.1%, and the Aussie dollar gets tossed to the alligators? I don’t get it… Doesn’t a weaker inflation rate mean that the Reserve Bank of Australia’s (RBA) previous rate hikes have worked? But, the key that the markets are playing off of here is the next rate hike, and does this “weaker” inflation number wash out the next rate hike, that could come as soon as next week?

I don’t think so… As the Beatles said, “I may not have a lot to give, but what I’ve got I’ll give to you”… And that’s how I fell about this information and the viewpoints I give you each day… Most readers “get it”… And I thank you!

OK… Back to the news… Norway’s Norges Bank meets today, and while I would love to see them not be so picky and raise rates again, I doubt we’ll see a rate hike from this meeting. The Norges Bank is still trying to see how their previous rate hike filtered through the economy…

The Reserve Bank of New Zealand (RBNZ) meets tonight to discuss rates, and at one time a month or so ago, I really thought the RBNZ would be getting their powder wet at this meeting… But not now… Too much “soft data” has flown under the bridge, and now I’ve set my sights on the first quarter of 2011… UGH!

And the Swiss franc (CHF) has really backed off its lofty level of $1.05 last week, losing more than 3-cents this week… The latest weakness of the franc was a result of the Swiss National Bank (SNB) shaking the dust off their warnings of intervention… Yes, the SNB warned the markets last night that they would intervene to stem the franc’s strength… I can’t believe currency traders ran like scared little schoolgirls away from francs. Memo to currency traders… Remember, the SNB has no teeth… They are just like the Abominable Snowman in the animated “Rudolph the Red Nosed Reindeer”!

Well… Once again, the 10-year yields are rising… And this reflects the thought in the markets we talked about earlier, that the FOMC/Cartel’s QE could be put on hold, or watered down. Hmmm… But, you can see reasons why the markets are leaning toward the watered down QE… Yesterday, consumer confidence printed much stronger than expected, and today durable goods orders are “expected” to be stronger than the previous five months…

So, I don’t think that this rise in Treasury yields is the popping of the Treasury bubble just yet, for I think the markets will be disappointed by the FOMC/Cartel next week, it’s what they do best!

Gold and silver are weaker this morning too… Pretty amazing considering the tear they went on yesterday afternoon after news leaked about the CFTC’s comments…

And then there was this… A member of the Commodity Futures Trading Commission (CFTC) (Bart Chilton) said yesterday that, “There have been repeated attempts to influence prices. There have been fraudulent efforts to persuade and deviously control that price. Any such violation of the law in this regard should be prosecuted.”

WOW! Are you kidding me? Someone besides Ted Butler (no relation), GATA, or even me, saying these things? Double WOW!

OK… So who, and when are you going to prosecute them? Don’t just leave that bombshell on the ground there! And don’t just propose new rules against manipulation and disruptive trading practices… Go AFTER THE PEOPLE THAT ARE BEHIND THE FRAUDULENT EFFORTS TO PERSUADE AND DEVIOUSLY CONTROL PRICES! You said it! I’m just repeating it!

Then we had some guy named Leonard Kaplan, the president of Prospector Asset Management, saying… “I don’t believe there is any long-term conspiracy to control prices.” As I always say, everyone is entitled to their own opinion… so, here’s mine!

I don’t know about you… But it is my true belief that there has been a long-term conspiracy to control prices… And that’s all I’ll say about that…today!

To recap… The currencies and precious metals are being subjected to dollar strength that’s derived from watered down thoughts now about next week’s FOMC QE… Goldman Sachs says that the FOMC needs to deliver $4 trillion of QE to get the economy moving again… Of course Chuck says, no amount of QE is good! Just ask the Japanese! The Norges Bank meets today, and the RBNZ meets tonight to discuss rates. I suspect both of them to keep their powder dry. And the Big News yesterday was the CFTC’s Bart Chilton admitting there have been improprieties taken with silver prices! Now, the question is… Who did it, and why aren’t they in jail?

Chuck Butler
for The Daily Reckoning

The Daily Reckoning