Riksbank Gov. Talks Big!
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In This Issue.

* Currencies rally led by euro.

* Gold & Silver don't participate.

* Carry Trade thoughts.

* Chuck's thoughts on the future of taxes.

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

Riksbank Gov. Talks Big!

Good day. And a Marvelous Monday to you! The last day of February! WOW. that went fast! The month began with the "epic storm" that wasn't, and ends with a whimper. Hopefully, March will be warmer, not hot, just warmer as spring will begin, and all that. My Home Alone weekend went just fine. And I'll be here today and tomorrow, and then out the door the rest of the week. So. I've got a few things on my mind this morning, there's no reason to keep them to myself, eh?

Well, I turned on the currency screens this morning, and noticed that the currencies, led by the Big Dog euro, are once again taking liberties with the dollar. The euro has climbed above the 1.38 handle this morning, and rest of the currencies are following. The other day, I mentioned that it looked strange, seeing Gold & Silver not rally along with the euro. But then, it came to me this weekend, that a lot of Gold & Silver's run higher, had been receiving a lot of love, because of the debt problems in the Eurozone. Those problems have subsided a bit, they have not gone away or been resolved, just put on the back burner for now. And so, some of the love Gold & Silver received, has been taken back.

So. does anyone else see this as a short-lived thing? I mean, the Eurozone has until the end of March to resolve the debt problems of Greece, Italy, Ireland, Portugal, and Spain. So, like Frank Sinatra says, Fly me to the moon, let me play among the stars, let me see what spring is like on Jupiter and Mars. The euro will get to play among the stars, and see what spring is like on Jupiter and Mars. But then come back to earth, IF, no resolution to the debt problems has been hashed out. So, in other words. Look for Gold & Silver to come back strong, should the resolution not come to fruition.

You know how I told you a couple of weeks ago, that I saw the Carry Trade returning? Well, this morning, I see a story on the Bloomie, talking about how the Carry Trade is most attractive since Leman's collapse. Hmmm. I guess I was bang on with that thought a couple of weeks ago, eh? It's nice to see "the crowd" coming along to my way of thinking! HA! But. the thing to think about here is that the low yielding currencies, and we all know too well, that there are a ton of low yielding currencies, will get sold, and the high yielding currencies, of which there aren't many, will get bought. But here's something else to think about. just because a currency is low yielding, won't automatically qualify it for the funding currency of the Carry Trade, for if that country is kicking around the idea of a rate hike (like the Eurozone and U.K.), then investors will steer clear for fear of a loss, if that country did hike rates.

That leaves, the dollar, the yen, and Swiss franc, as the best draft choices left. and I doubt the Swiss franc will be used, because of the geopolitical stress in the world right now. That leaves the dollar and yen, the two old stalwarts for the funding currency of the Carry Trade.

Speaking of countries sniffing around the rate hike table. Sweden's Riksbank printed their latest meeting minutes, and in the minutes you can read where the Riksbank Gov. Ingves, said that the "chance of monetary policy tightening at every meeting this year has risen and signaled individual interest rate increases may be bigger than those executed so far."

OK.. that's pretty good talk from the Central Bank Gov. , but let's be realistic here. Sweden is not Australia or Brazil, with commodity price inflation soaring. So. let's water this down a bit, and say that Sweden's internal rate, which stands now at 1.5%, will be 2.5% at the end of the year. not the stuff that the Central Bank Gov. was talking about, I know, but still, rates will be rising, and the differential to the dollar, and yen, and even the euro, will be wider, thus underpinning the krona.

Speaking of Commodity prices soaring. I told you that on Friday, that the price of Oil had backed off of $100, but still remains quite high at $97, which is really pushing the Canadian dollar / loonie, higher. I looked at the loonie this morning as thought, WOW! I bet this is a new multi-month high, and low and behold a story comes across the screens titled: "Canadian dollar rises to highest level since March 2008 on weekly Oil gain". So, that's good, I wasn't just imagining that the loonie was quite strong!

Well. This week, will be interesting regarding the euro and dollar. First we have Big Ben Bernanke speaking tomorrow to the Senate Banking Committee tomorrow. If Big Ben, stays steady Eddie, and tells the Committee, that the Fed intends to keep rates near zero, that will be the first step.. Then later this week, the European Central Bank (ECB) will meet, and while I don't expect a rate hike from the ECB at this meeting, what we might, just might hear from ECB President, Trichet, is that the ECB is ready to hike rates. If those two things happen folks, you could very well see the euro trading around 1.40 by week's end. For. the interest rate differentials, as I explained above, will be getting wider, and those differentials will move against the dollar, no two ways about it!

OK. if neither of those things happen, then you can say I was wrong. No wait, you can say that my thought was wrong. But, can you really imagine Big Ben Bernanke telling the Senate Banking Committee that the Fed is considering hiking interest rates? OMG! If that were to happen, the housing industry which is teetering now, will fall off the cliff! I think the question is with Trichet. I'm going out on a big fat limb here, saying that I think he might tell the press that the ECB is ready to hike rates.. But with the inflation rate well above the ceiling target of 2% that the ECB uses, they might as well, throw the ceiling target out the window, if they aren't going to abide by it.

Speaking of Central Bank meetings. The Reserve Bank of Australia (RBA) meets tonight. And the Bank of Canada (BOC) meets tomorrow. I don't expect any rate movements from either of these two at the meetings this week. But, as always, we'll need to keep our eye (eyes for you) on the ball here, and look for any clues in the press conference statements that follow the meetings.

Well. I know that the news wires, and cable news stations didn't tell you this, but, I will. 4th QTR GDP for the U.S. was revised downward. Yes, remember that lofty 3.2% that was first reported a month ago for the U.S. 4th QTR GDP? And the President, and Treasury Sec, and Big Ben, were all thumping their chests, and saying how the economy had rebounded thanks to stimulus. Well. unfortunately, the first revision of that 3.2% level, saw a downward revision to 2.8% (and I'm thinking that the final revision could be even lower!). So. these guys that are steering the U.S. economic ship, are probably now asking themselves if they overstated the economy's performance. Probably not. because that's not who they project themselves to be. But they should be! And they should be shaking in their boots, no wait, these guys don't wear boots. They should be shaking in their "Tanino Crisci" shoes. (I cheated, and looked up the most expensive men's shoes, which these aren't the "most expensive, but at $1,350 a pair, they are up there, eh? ) Oh! Chuck! You do this all the time, you have a great thought, and then you go off on some tangent. let's get back to the thought. OK. sorry, I was gone for awhile, but I'm back now! The shaking in their Tanino Crisci shoes would be about if they've figure out yet that their intervention in the economy isn't working. And they might get exposed as the, you fill in the blank, that they are. I can't say it, because it's the "new gentler and kinder me".

Well. I paid $3.50 for gas today. Not that it was fun. but, I thought for a minute, back to the days when I was a young man, and didn't have two nickels to rub together. What would $3.50 gas have done to me then? Well, I guess I would have been forced to take public transportation. No wait! That's what I did! Geez Louise, I can't even imagine what that would have been like! But I guess youngsters now know. and it will be the same way with soaring taxes in the future. The youngsters will find out what that's all about too! Oh! I haven't gone through the soaring taxes thought with you yet? I'm sorry, I'm sure I have, but I write so many pieces, and do so many presentations that I forget from time to time where I am with a thought. But, if I haven't done so, then I apologize.

Basically, I tell people all the time that in just a few short years, the debt servicing on the Treasuries that we've issued (that's the interest rates on the bonds) will be so great in size that it will eat up all of our tax revenues, leaving the Gov't no money to do anything else. So, guess where they will get it? Higher taxes. soaring taxes. coming to your pockets in the coming years. And the other "tax" will be the falling / reduced purchasing power that your dollar gets. What will you do to offset that hit to your finances? Hmmm. I wonder.. I think I heard about a Bank that allows individual investors the ability to diversify their dollar denominated portfolio with currencies and metals. HA!

But. HEY! The U of Michigan Confidence index jumped to 77.5 from 75.5 in February! So. we've got that going for us!

Today, we'll see two of my faves. Personal Income and Spending. Which has been going back to circa 2007 lately, with the Spending showing greater gains than the Income. In other words, we're back to spending more than we make here in the U.S. Sure, the price discounts, and sales are inviting, but, you've just got to say NO! But that's not what's happening. I'm sure you see it, but if you don't. I see this great big bubble created by the Fed, once again, blowing up in our faces again. it's a shame.

And then, China. Chinese premier, Wen Jiabao, announced to the people of China that he pledged to curb inflation in food and housing. Apparently, there's something called the "jasmine revolution" protests going on, but does anyone think that China is going to allow that to grow? Not me. that's absolutely absurd to think that China would allow the protests to grow. So. see, even the 800 lb gorilla has to deal with problems too.

Then there was this. ok. well, the Quantitative Easing in the U.S. isn't just fueling inflation in the U.S. according to Reserve Bank of Australia (RBA) board member Warwick McKibbin. Professor McKibbin told the RBA that he believes that "the surge in global liquidity fuelled by US monetary expansion had echoes of the early 1970s surge in food, mining and energy prices that led to global "stagflation", or the combination of high inflation and high unemployment." He goes on to say that, "Australia is being caught up in a global bubble that could hit us much harder than the global financial crisis and expose the weaknesses of Labor's economic settings."

Chuck again... yes, I see what he's talking about... with commodity prices soaring, and Australia's economy being driven by commodities... But, I believe that he's way ahead of himself there... Yes, the Fed's Quantitative Easing has been the latest item to drive commodity prices higher, but the thing that has always been there, has been the Chinese economy... and until China's economy falters, commodity prices will remain strong...

To recap... Currencies are stronger this morning, led by the euro, which has climbed above the 1.38 handle this morning, and is helping the other currencies to stronger figures VS the dollar. The Canadian dollar / loonie has reached its highest level since March of 2008. Gold & Silver are stuck in the mud, but should be able to gain again if the European leaders don't come up with a resolution or plan to deal with the Eurozone peripheral countries' debt problems, and Sweden's Riksbank Gov. Says the rate hikes will continue to come, and be larger than previously...

Currencies today 2/28/11... American Style: A$ $1.0150, kiwi .7520, C$ $1.0225, euro 1.3830, sterling 1.6250, Swiss $1.0775,... European Style: rand 6.9775, krone 5.39, SEK 6.3480, forint 196.15, zloty 2.8640, koruna 17.6370, RUB 28.85, yen 81.90, sing 1.27, HKD 7.79, INR 45.26, China 6.5720, pesos 12.12, BRL 1.6590, dollar index 76.90, Oil $97.92, 10-year 3.40%, Silver $33.56, and Gold... $1,411.95

That's it for today... Well... this will be a short week for me, as I head to Jacksonville on Wednesday morning, and Chris will have the conn on the Pfennig while I'm gone... I have to say, Happy Birthday, to my sister, Barbara... I know my sisters read the Pfennig from time to time, so hopefully Barb will read this one! My beautiful bride leaves for Florida on Thursday, and I'll meet up with her the following Thursday, with Alex and friend in tow. Had a lovely dinner with the whole family last night, even little Everett the EverBaby! We won't all be going to Spring Training this year, as son Andrew is now the head Water Polo coach, and has to stay to run practices, and his lovely bride, Rachel is expecting... So, another grandbaby is on the way... Congrats to Alex and the Lindbergh lab jazz band, that took 2nd place in the jazz band competition that took place in Chicago over the weekend... and on that note (get it? HA!) I'll get this out the door... I hope you have a Marvelous Monday

Chuck Butler

President

EverBank World Markets

1-800-926-4922

1-314-647-3837





Posted 02-28-2011 8:30 AM by Chuck Butler
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