Bernanke defends QEII...
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In This Issue.

* Bernanke defends QEII.

* The silver lining of the debt crisis...

* Commodity currencies are set to rally.

* Gold isn't just another metal.

And, Now, Today's Pfennig For Your Thoughts!

Bernanke defends QEII...

Good day... It was a fairly quiet day in the currency markets yesterday, which was certainly welcomed by the desk. Chuck was pointing out the other day that the markets have been as volatile as he has ever seen them in his 30 plus years of trading. So a pause was overdue, but we all know this calm won't last. Overnight we saw the dollar drop a bit, but if the recent pattern holds true the NY desks will take the dollar stronger after the opening bell before letting it slide back down through the course of the day.

Thursday morning started off with the weekly jobs numbers which were largely unchanged from last weeks numbers. But the press spun this as a positive, as the number of claims is no longer climbing. The news stories pointed to these weekly jobs numbers and the volatile Philly Fed index as proof the US economic expansion is accelerating. The Conference Board's leading indicators climbed .5% which was expected, and Septembers number was increased to .5% from .3% which was originally reported. So all of the data came in right on target, with no real surprises for the markets.

Ben Bernanke was front and center on the newswires this morning, defending the Fed's policy to pour $600 billion into the markets. Bernanke has received a ton of criticism regarding QEII (deservedly so!) from both here in the US and especially from overseas. Chuck sent me the following on Bernanke's defense of his new stimulus:

"Federal Reserve Chairman Ben Bernanke is firing back amid criticism of the Fed's easy-money policies at home and abroad, arguing in remarks prepared for delivery Friday in Frankfurt that China and other emerging markets are causing problems for themselves and the world by preventing their currencies from strengthening as their economies grow.

Here's my main thought... If Big Ben really thinks this way, then I don't want to ever hear from him again that he believes in a strong dollar policy, for what he's saying is that China and other emerging markets need to allow their currencies to get stronger VS the dollar...

Now he won't come right out and say that... he leaves it all to our imaginations as to what currency he needs China and other Emerging markets' currencies to get stronger VS... But we all know, eh?"

Yes Chuck, I think all the readers know just what Bernanke is trying to do. He is trying to have it both ways! A weaker US$ to stimulate the economy but at the same time blaming China and other emerging markets for keeping their currencies weak. Sure looks like he is talking out of both sides of his mouth!!

An alert reader pointed out a mistake in yesterday's Pfennig regarding the beginning of QEII. I had told readers that ' the bond purchases haven't begun yet, but the ship has left the port!'. In fact, without fanfare, the New York Fed published the schedule for the purchases on their webpage and they also list the exact details of the already finished transactions. They obviously started QEII in the middle of the biggest market turmoil last Friday, Nov. 12th and are continuing it on a daily basis since that day. Here is the direct link:

Thanks to Guenther for sharing this with me and allowing me to pass it along to all of you!

Philly's Federal Reserve President Charles Plosser is telling the markets not to expect all of the $600 billion will be used. "It's premature to presume the answer to that one way or another," Plosser said yesterday in an interview on Bloomberg TV. "A lot will depend on how the data begin to unfold over the next several months as to whether or not we think it is necessary, whether the efficacy of the policy is doing what we thought it would do, whether we continue to think it's necessary." So I guess there is still some hope the damage of QEII can be contained, but both Chuck and I think they will end up spending $600 billion plus!

The Irish debt crisis has calmed a bit, contributing to the decrease in volatility in the markets. Irish banks will definitely need a bailout, and ECB President Trichet has said the central bank has reminded the markets that they are the lender of LAST RESORT. Trichet is being cautious, as he knows there are looming problems in Portugal and Spain, so he doesn't want the banks to begin to feel they will automatically be bailed out by the ECB at the first signs of trouble. Without help from the ECB, Irish banks will most likely turn to the EU and IMF fund as I wrote in yesterday's Pfennig.

This week's Economist has quite a few stories on the Irish debt crisis, but one in particular caught my eye. It spoke about how the debt crisis may be just what Ireland needs to get back on a more sustainable growth path. Ireland's economic and financial challenges are formidable, but the nation is dealing with them and moving toward a return to lasting growth, according to The Economist. Ireland's big exporters are making money, and foreign direct investment is holding up. Industrial output has grown 11.5% this year. Ireland's workforce is young and flexible. "Painful decisions now will lay the groundwork for an eventual return to growth -- with luck, at a sprightly pace rather than a giddy one," the magazine notes. I guess the old saying 'what doesn't kill you only makes you stronger' applies here. I have written about this idea in past Pfennigs, that the sovereign debt crisis in Europe is making it easier for the affected countries to make the cuts in social programs and increases in taxes which are necessary in order to return to a sustainable level of growth. During the boom years, countries (like companies) get fat and happy, becoming inefficient and less productive. High global growth rates can mask a lot of inefficiencies. But with the global down turn, these countries have had to re-evaluate their policies. The debt crisis provides their governments the perfect cover to enact the austerity measures which are necessary, but would never be able to be pushed through their governments in a less critical period.

The US had a perfect opportunity to take similar measures, but instead decided to 'kick the can down the road'. Instead of taking the hard choices of spending cuts and tax increases our government has decided to borrow more and spend more in order to try and keep old failed policies in place. I guess our crisis just wasn't big enough; but don't worry, with all of the new QE spending we will certainly have another opportunity to deal with an even larger US debt crisis sometime in the near future.

The euro has settled into a range of $1.36 - $1.37 but the technical traders think the next break out will be on the upside. The euro will rally to $1.40 if it breaks through resistance levels at $1.3685 according to technical analysts following the 'ichimoku cloud analysis'. Long time readers know neither Chuck nor I are big technical traders, and I honestly have never heard of the ichimoku cloud, but there are many who swear by technical analysis, so I figured I would share this with you.

The Nordic currencies advanced with the quieting of the Irish bank crisis. Sweden's krona advanced the most in two weeks against the dollar, and the Danish krone was just behind. Swedish unemployment fell last month at a faster pace than economists expected, helping to boost growth prospects. The Norwegian krone also rallied on the combination of Ireland's bank bailout and more stable commodity prices.

With a calm spreading across the globe, the higher yielding currencies of Brazil, Australia, South Africa, and New Zealand reversed their recent declines vs. the US$. The New Zealand dollar was the best performer vs. the dollar yesterday, gaining over 1%. Reserve Bank of New Zealand Governor Alan Bollard said the nation is continuing on its recovery, but warned that it may not be as quick as some expect. "The aftershocks identified so far, and other aftershocks yet to come, mean that this recovery could yet be a prolonged process." Bollard's comments would seem to indicate he will try to keep interest rates on hold for longer than the markets now predict. But I see this as more jawboning, and Bollard's attempt to keep the appreciation of the kiwi from accelerating too quickly. New Zealand interest rates will have to adjust to commodity inflation, which I believe will continue to run higher than his comfort level.

The price of Gold rose slightly yesterday, but Silver was the big mover appreciating more than 5%. Since the dollar was edging lower, a move higher in the precious metals was expected. I heard a story during the drive into work this morning on Chuck's favorite radio station, NPR. The story concerned precious metals, and why the ancient world settled on Gold as the metal of choice for commerce. I can't recall his name, but I the interview was with the Chairman of Columbia's Chemical Engineering department who analyzed all 115 plus elements in the periodic table in relation to which metal makes the best currency. He first eliminated all gases, and also eliminated all elements which are highly reactive (you wouldn't want your currency bursting into flame). Next he eliminated all the radioactive elements (don't want to die from a pocket full of change). He also eliminated all the elements which are common, and also eliminated those which are very rare. That leaves Gold, Silver, Palladium, and Platinum which together are commonly referred to as 'precious metals'. Palladium was eliminated because it was just recently discovered and Platinum was eliminated because it's melting point is too high to allow ancient societies to fabricate it into coins. So the two remaining metals are the logical choice for bartering; Silver and Gold. A common argument used against buying precious metals as a store of wealth is that they are 'just hunks of metal'. But there are real reasons these particular metals are termed precious. That will give everyone something to talk about at your cocktail parties this weekend.

To recap, data released in the US is mostly unchanged, Bernanke defends his QEII program overseas, Irish banks will probably turn to the EU and IMF. There is a possible silver lining in the Irish debt crisis, the commodity currencies continue to rally. And Gold isn't just another metal.

Currencies today 11/19/10: American Style: A$ .9857, kiwi .7779, C$ .9808, euro 1.3707, sterling 1.6028, Swiss $1.0096, . European Style: rand 6.9614, krone 5.9660, SEK 6.8408, forint 200.27, zloty 2.8742, koruna 18.0105, RUB 31.0165, yen 83.38, sing 1.2961, HKD 7.7540, INR 45.29, China 6.6393, pesos 12.2804, BRL 1.7147, dollar index 78.30, Oil $81.88, 10-year 2.89%, Silver $26.98, and Gold $1,354.72.

That's it for today. Jennifer stopped by yesterday, and I got to hold her new baby girl Katherine Eden. Jenn looks great for just having a baby, and her daughter is beautiful! When I got home I got more of a baby fix as my 5 month old niece was at my house. My wife, Tina, watches my niece every Thursday, which she absolutely loves. I know Chuck always shares how happy he is when he gets home and Delaney Grace is there waiting for him; and I can absolutely confirm that there is nothing more calming and comforting than holding a baby in your arms (especially when they are smiling!). We are having a company happy hour this evening to celebrate an early Thanksgiving, so I'm sure it will be a Fantastic Friday and a wonderful weekend!!

Chris Gaffney, CFA

Vice President

EverBank World Markets



Posted 11-19-2010 9:47 AM by Chuck Butler
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