The ECB Clashes Over Policy

Once again yesterday, the currencies traded in a very tight range, with a bias to buy dollars… Something quite opposite to what we’ve seen in recent trading sessions. Earlier this morning, the Weekly Initial Jobless Claims printed at 637,000 (forecast at 610,000), so once again the euphoria that was in the markets last week with the thought that the U.S. was coming out of the recession is turning into hogwash… Oh, and the continuing claims, which to me are just as important as the new claims, rose much more than expected too at 6,560,000…

And, we’ve already seen the color of the PPI data this morning. (Not that it accounts for a hill of beans! In my opinion, that is!) PPI rose a bit in April, but there’s nothing (according to the government) to be worried about, with regards to pipeline inflation. Yeah, right… The government also probably believes we are all dumb enough that we would have to be told what the answer to what 2 + 2 is!

So… Regarding the Thunder in the Eurozone this morning… Reuters is reporting this morning that the: “ECB HAS REJECTED C.EUROPEAN CBANKS’ REQUEST TO ACCEPT LOCAL CURRENCY BONDS AS COLLATERAL – HUNGARIAN CBANKER KIRALY”

Recall that the European Central Bank (ECB) adopted quantitative easing two weeks ago, but that there were some very important and powerful dissenting votes. For instance, the Bundesbank – Germany’s Central Bank, and the most influential central bank in the ECB – was totally against quantitative easing.

So… Now today, apparently, the ECB’s quantitative easing has drawn a line in the sand… And it’s for “members only”… ECB President, who just a week ago engineered a truce among Eurozone Central Bankers, will need to polish up his negotiating tools once again… While this is happening, the euro, gets hung out on a line.

Recall that I told you that the Swiss National Bank (SNB) was watching for currency appreciation, as they did not want the Swiss franc (CHF) to gain. Because… The Swiss are fighting deflation, and a strong currency would fight inflation The SNB has said they would intervene if the franc got too strong… Well, this morning, an SNB official told the markets once again that he’s concerned with the franc’s recent strength… HEY! SNB! GET OVER IT! You should never, ever, not in a million years, want a weak currency. You should be careful what you wish for!

A reader sent me a story that is very interesting… Here’s the skinny, from the BBC… Japan’s opposition party said that it would refuse to buy U.S. Treasuries denominated in dollars, if elected. Whoa there partner! What’s this again?

The chief finance spokesman of the Democratic Party of Japan, Masaharu Nakagawa, told the BBC he was worried about the future value of the dollar.

“Japan has been a major buyer of US government bonds, helping the US finance its Federal budget deficits. But, he added, it would continue to buy bonds only if they were denominated in yen – the so-called samurai bonds. If it’s [in] yen, it’s going to be all right. We propose that we would buy [the US bonds], but it’s yen, not dollar.”

OK… Before everyone begins to panic… Observers say that it is unlikely that Mr. Nakagawa’s party will win the forthcoming election in Japan. But… What happens if they get enough attention to this position? Could it be adopted by the winning party too? I don’t know… I tend to think no, as this would be a large reversal of current policy, and the Japanese aren’t known for major policy shifts!

So… The main point of this exercise was to point out that it’s not just the Chinese who are running scared of the U.S. deficit spending.

Meanwhile, back at the ranch… This week’s data, so far, has really put the risk takers off balance, and risk aversion seems to be sneaking back into the markets… If that’s so – and we need a couple more days of this type of trading to tell for sure – then stocks will take a hit, and so will the currencies… Again… This is why I want this link to break… I’ve never seen it before and would hope to never see it again! Fundamentals! That’s what I want to see!

I’ve talked so much about gold here in Las Vegas, and haven’t really touched on it much in the Pfennig lately, so… I’m here to change all that! With the stocks wobbling again, gold gets some McLovin’… The shiny metal pushed higher yesterday and overnight to settle in this morning at $924. While the stocks were getting bought, gold had to take a back seat to the proceedings… But now that we’ve seen a few days of stock weakness… Gold gets to move to the front of the car!

A lot of people here at the Las Vegas Money Show are interested in buying gold… But… They are all convinced that the U.S. is going to confiscate it again like they did in the ’30s… If I’ve told one of these people, I’ve told 100…

1.) in the ’30s, gold was a part of our money. Dollars were backed by gold, and with the problems of the depression, the government needed to print more dollars, and thus needed more gold to do so. That’s certainly not the case today… The dollar is no longer backed by gold, and the government sure doesn’t have any governor to hold back their printing of dollars!

And 2.) Confiscation doesn’t do the government any good, unless they want to see thousands of people storming the White House with pitchforks and rakes!

The Daily Reckoning