Rate Cut Week Next Week?

OK… It’s a Jobs Jamboree Friday… (Doesn’t it seem like we just did this?) The experts are looking for the economy to have created 125,000 jobs in November… Hmmm… While that would be nice to see, I doubt it has legs to stand on… IF, we really count the jobs created correctly… Remember that in October the BLS (Bureau of Labor Statistics) told us the total jobs created for the month was 80,000? And then I told you that 102,000 jobs were added from the Birth/Death Model… Or as I like to call them…“ghost jobs”… So, that’s what I’m talking about when I say “count jobs created correctly.”

But, in the past few months, a good looking jobs number was bad for the dollar and good for risk assets… So, I’ll keep my eye on this to see the reaction by the markets…

And in the overnight and morning sessions, the currencies have held steady Eddie, and gold has gained back the ground it lost yesterday. Investors look to be bailing out of the so-called safe havens, like Treasuries and dollars, and yen (JPY)… You all know what I think of Treasuries… and the dollar, and I’ve also dissed the yen… But let’s stop and talk about Japanese yen for a minute here. With the pressure on the Eurozone easing up a bit this week, (no, it’s not solved, and it’s not going away) the Japanese yen has weakened versus the dollar. The yen is still overvalued at its current level of 77.90…

I remember a few years ago, when yen was 118 and I kept harping that the yen would gain to 100 and below, and nothing happened for months… I even had a nice young couple come up to me at one of the Money Shows, and ask me why yen was getting stronger, like I said it would… But then about the time everyone was about to throw in the towel, and point fingers at me, blaming me of their lack of profit in yen… The yen began to take off… It flew through the 100 handle, and then the 90 handle, and then the 80 handle… Talk about a moon shot! But it’s all fear driven buying, for the fundamentals, other than consumer savings and the trade surplus, have been in a multi-decade funk, and look to remain there! And therefore, I’ve said that yen is overvalued…

But just like when I said yen would gain, and it took a year or so for that to develop, the selling might just take some time to gain favor… So, I don’t say things like, “by next month” or “in six months”… I just know in my heart of hearts that yen is overvalued, based on fundamentals!

Besides yen losing ground, most of the other currencies are stronger this morning, or at least steady Eddie…

OK… As I suspected, the euphoria of the announcement of a cheap lending line from six central banks ended yesterday, even sooner than I thought! That’s because more and more people began to look under the hood at this thing… It’s nothing more than printing of money, the same as quantitative easing, but this is going to in the trillions before it’s all said and done. This will make QE look like chump change… Do you recall what the fears were for inflation when the first two rounds of QE were announced? Well… This newest call to print money will bring inflation to our shores, like we haven’t seen in a long time! OK… That’s my opinion, I don’t know any more than you do whether this will bring about inflation… But… Creation of the monetary base, which is what this will do, is in its roots…pure inflation…

And the printing of the money? Well… Central banks no longer “print” money when they implement a program like this… It’s simply entered into a computer by banging on the keyboard… Don’t you wish you could put money in your bank account, by just entering the amount you wish to add, via your keyboard, into your computer? Now that would be tre’ cool… But, we can leave that thought for now, because it’s not going to happen, unless you want to spend some time in the hoosegow…

I read a report yesterday (thanks Dale), where the guy talking about all this, said that the currencies that saw their central banks printing, were no longer fiat… They were “keyboard currencies”!

So… Keyboard dollar… Has a ring to it, don’t you think?

And here’s some news out of Switzerland that you may not have heard through the national media and cable news stations… Switzerland’s government said it may consider additional measures including negative interest rates to support the country’s central bank in its fight against the appreciation of the Swiss franc (CHF).

The government is willing to “examine the feasibility of supporting measures within the context of an overall consideration,” it said yesterday in response to a parliamentary inquiry by Green Party member Louis Schelbert.

Now that’s interesting… I mean Swiss rates have been near zero for a few years now, so investors haven’t received any interest. But now the Swiss want to charge interest on your franc holdings? Well… I believe they will do it… They’ve done it in the past… Yes, decades ago, it would cost you money to hold francs in a Swiss bank… So, don’t put it past the Swiss National Bank (SNB) to do this… I won’t… And neither should you!

The rest of Asia, I like… Can the rest of Asia move ahead without Japan? Only if China continues to push the envelope with economic growth…

Well… As we close this week, the Aussie dollar (AUD) and New Zealand dollar/kiwi (NZD), look to be putting the finishing touches on the first weekly gain in some time… And kiwi is set to have the biggest five consecutive day advance against the dollar since May 2009… Again, though… Without higher interest rates in New Zealand, there’s nothing to blind investors so they don’t see the awful state of New Zealand’s current account deficit.

So, we have the Jobs Jamboree today… Yesterday we saw the ISM Manufacturing Index increase from 51.8 to 52.7… A good show there! But let’s remember something here folks, that has given the Manufacturers in this county a boost… The weaker dollar… So, if you really want US manufacturing to keep getting stronger, you’ll need to foster the weaker dollar… Because of the cost of wages here in the US. Not a complaint; just a fact!

Next week should bring some pretty strong fire power around the globe… First and foremost, German Chancellor Angela Merkel and French President Sarkozy will announce their latest, greatest, new and improved, Solution to the Debt Crisis in the Eurozone… Hey, if you call now, operators are standing by, and you’ll not only get 1 Debt Crisis Solution, we’ll send you another one, but you have to pay separate shipping and handling! HA!

Unless Merkel and Sarkozy have a rabbit up their collective sleeves… I don’t see what they can do, since Merkel has put the kyboshes on a joint euro-bond…

Then later in the week we’ll have central bank meetings in England and the Eurozone… I expect the Bank of England (BOE) to keep its powder dry… But the European Central Bank (ECB) is now led by Mario Draghi, who cut rates in his first meeting, even though the Eurozone inflation rate was 1% higher than the target ceiling. I’m afraid he’ll cut rates again, folks… Yes, I look for Draghi to cut rates next week, thus wiping out the 2 rate hikes from 2010… It’s all about “borrowing costs” right now, folks…

Speaking of rate cuts… I’m afraid we’re going to see another one from the Reserve Bank of Australia (RBA) on Tuesday night… It obviously means nothing to have domestic demand and data printing strong… It’s all about borrowing costs…

So… Back to the Jobs Jamboree for a minute… As I said above, the experts are forecasting a gain of 125,000 jobs in November… However, given the BLS’s propensity to add jobs, that number could very well be higher… In fact, I would think that the markets are looking for a higher number, and if they don’t get it… The risk assets could be taken to the woodshed.

Then there was this… I had a reader send me something yesterday in response to my repeating something I’ve said over and over again for years… Here’s what I said, “And I’ve made myself crystal clear on this, folks… You don’t spend to get out of a deficit! And where are the lawmakers on this? Isn’t this something the lawmakers should be stomping their collective feet down, and saying no?”

Well, the reader sent me a cartoon… It has s sinking ship, with only the stern out of the water, but the boat is sinking for sure… The name of the boat is: “Gov’t Spending”, and the captain of the boat, standing in the stern (back of the boat for you non-boaters), is the President… And the caption reads… “It’s simple… taking on more water will actually help bail us out!”

I sent it to a friend of mine, and said… If it weren’t so sad, it would be funny…

To recap… The euphoria of the borrowing program that we talked about earlier this week, began to wear off yesterday, as the markets are beginning to see it like Chuck sees it… As nothing more than printing more dollars! The Swiss are thinking about charging interest on franc holdings… And three central banks will meet next week with rate cuts coming from two of them!

Chuck Butler
for The Daily Reckoning

The Daily Reckoning