China Changes "May" To "Will".
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In This Issue.

* China boosts risk assets.

* Eurozone economy contracts.

* Sweden to halt rate hike cycle.

* Aussie bond yields attract buyers.

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

China Changes "May" To "Will".

Good day. And a Wonderful Wednesday to you! The "Day After". Valentine's Day! I sure hope everyone had a grand day / night, and that there weren't many people sleeping on couches! China has pledged a sweetheart deal for the Eurozone, and the Canadian dollar /loonie is still hugging parity, so the V-Day stuff is still hanging on in the markets today!

I turned my music on to write by this morning, and the very first song is one that absolutely love, and sing along to, and actually get the chills when I hear it. Hard Habit To Break, by Chicago. So, at this point in the morning, things are going much better / smoother than yesterday!

The Big news this morning is that the People's Bank of China Gov. Zhou, said that "China will help resolve Europe's debt crisis." Remember that a couple of weeks ago, the news was that the Chinese "may" help once they figure out to participate in the EFSF. So, the markets are correct this morning to key on the word change from "may" to "will". And the euro rallied on the news, pushing the rest of the currencies onto the rally tracks to join the euro.

But. and you knew this was coming, because since when do we talk about a euro rally without a "but", or "however"? Anyway, the "but" here is that the rally was stopped in its tracks by a report out this morning that showed the Eurozone economy contracted in the 4th QTR for the first time in 2 ½ years. The good news was that it didn't contract as much as was forecast, posting a .3% contraction, when the forecast called for a .4% contraction.

Now, one quarter of economic contraction does not make a technical recession. So, we'll have to wait until April or May for confirmation of that, because I don't see any way, the Eurozone can sidestep a recession. The second one for the region in the past 3 years. But then, with a good portion of the Eurozone economy undertaking austerity measures, that was bound to happen.

I told two audiences in Orlando last week that it was my opinion, and that it could be wrong, but I believed the Eurozone would survive, maybe without a few members, but that the center would hold, and after all the pain the region would suffer in the next couple of years from austerity measures, they would come out on the other side (in 5 years) looking lean, fit, and ready to tackle the world again.

You see. it is my opinion, that the Eurozone will suffer through some real painstaking austerity measures, but. after doing so, they will be able to look back and say they ran through the gauntlet, while here in the U.S. we will continue to go along, kicking the can down the road, not willing to implement one austerity measure, much less the number of them that would need to be implemented to make a difference!

But. like I said, that's just me. I could be wrong. We'll just have to wait-n-see, eh?

I remember telling people at the Orlando Money Show in 2001, that the dollar was ready to enter a long multi-year weak trend, and having them look at me like I was loony! The same thing happened in 2004 when I began talking about the Housing Bubble. And in 2005, when the dollar rallied, that it wasn't the beginning of a long multi-year strong dollar trend, that it was just a bear market rally. The same thing for 2008, when on the road for the FX University Tours, one of my fellow instructors told the crowd that the dollar was ready for a multi-year rally, and I contradicted him by saying it was merely a bear market rally.

So. there's some history here. Now, to be fair. I did say last year that we would see another round of QE by year-end, and we didn't, although I would have to say that I'm somewhat correct in that statement, given the stealth-QE going on by the Fed.

Ok. enough of that! I came across something yesterday that really got me thinking. The Bank of Japan (BOJ) implemented yet another round of Quantitative Easing (QE), in their efforts to weaken the yen. The BOJ saw how well it worked for the Fed, in weakening the dollar, so they went back to square one, and implemented more QE. And for now, the its working, for the yen has lost ground from the 76 figure to the 78 figure. 2 whole figures in 2 days. I wonder what the U.S. thinks of this?

OK. I hear you saying, But Chuck, why would the U.S. care that the Japanese have implemented another round of QE? Ahhh grasshopper. come, sit. hear me now and listen to me later. Let me remind you that when asked if the U.S. QE was successful, St. Louis Fed Head James Bullard, listed among QE's success the fact that the dollar had depreciated. So, it's obvious that the Fed is looking for a weak dollar.

Well, if the yen is going to weaken, it will be against the dollar, and other currencies of course, but what we will concentrate on right now is the yen/ dollar cross. So, the dollar gets stronger VS the yen, and in the past what the does is cause the dollar to get strong VS most currencies on the crosses. (I've explained these crosses and the relationships before, so I won't go into it here).

So, if this Japanese QE goes on much longer, I would think they would receive a call from Big Ben Bernanke, asking them politely to cease and desist! Don't forget for one moment that the President called for a doubling of exports. That won't be accomplished without dollar weakness. So, ride this wave out, hang ten, and be safe! On a sidebar, one of the first songs I learned to play on the guitar, many years ago, was "pipeline". Of course it wasn't until years later that I learned what the song title was referring to!

Ok. Last week, I heard a lot of talk from people that believed the Australian dollar (A$) had reached the end of its run. Of course I argued the other side of that thought, with the caveat that as long as China grows, even at moderated levels, the A$ can maintain its edge. And then I would pull a rabbit out of my hat, Bullwinkle style, and tell them that bond buyers around the world are looking for yield, and the only market that makes sense to them is the Aussie market. Bond buyers are flocking to Aussie bonds in record amounts, and that alone is enough to underpin the A$. In the past 6 months, the A$ has been the best performing currency in G-10, and most of that surge has come from the bond buyers looking for yield. For instance, and this in no way is a solicitation to buy, just a reference. 10-year A$ Gov't bonds yield more than 200 Basis Points higher than U.S. 10-year Treasuries.

In my days as a foreign bond trader, I would be drooling over a swap in bonds where I could pick up 200 basis points (2%)! We would do swaps for 50 basis points. But, back then, things were different, in that there were more markets to choose from (pre-euro) and rates didn't jump around like Mexican jumping beans like they do now.

But that brings me to a thought that I've been swishing around in my head lately and that I blurted out to the Wall Street Journal interviewer yesterday. And that with Swiss francs and yen now on the slippery slope down, and U.S. Treasuries basically paying nothing. the markets will be looking for a new safe haven, and why not Australia?

OK. Remember a year ago, when things in the Nordic countries were looking up, and the respective Central Banks of each country (except Denmark) were raising rates, to combat inflation pressures created by strong economies? Both Sweden and Norway saw rates go higher, and expected the rate hike cycle to continue for some time in the future. Well, all good things must come to an end, I guess. Norway has already cut rates as their economy slowed greatly catching the illness from the Eurozone. And now Sweden's Riksbank will most likely cut rates today.

Sweden actually has the largest economy of the Nordic countries. And when they saw their Trade Surplus (yes, that's right I said Surplus!) shrank to the narrowest in more than a year, at the end of 2011, the exporters demanded a rate cut. And it looks like they'll get one today.

But, as we all know, the markets have been in a strange state of mind, rewarding currencies from countries that cut rates (debase the currency) to promote growth. So, hopefully, this rate cut won't damage the krona too much.

Well. yesterday, here in the U.S., January Retail Sales rose a smaller than expected .4%, which while was not as strong as forecast (.8%) was better than December's .1% gain (during the Christmas shopping season!) . Looks like vehicle sales were very weak falling 1.1% in January. So, once again the BHI (Butler household Index) was bang on with its indication that the January Retail Sales would be better than the average bear.

Today, we'll get inundated with data here in the U.S. The TIC Flows used to be a big deal, but no longer is it a market mover, and the minutes of the last FOMC meeting will print. The key prints of the day will be Industrial Production and Capacity Utilization, both of which really ticked higher in December. Another strong tick higher for both is forecast for January's print. If that's so, then I'm going to have to re-think some things about the economy.

I put the finishing touches on the March Review & Focus yesterday (nothing like two weeks ahead, eh? ) and I highlighted the moves that Gold has made in the past 11 years, with every consecutive year posting a higher price than the previous year. This is the longest run in a bull market that I've ever seen. And it's still not even close to being a bubble!

Speaking of Gold. one of the best minds in economics and markets is James Grant. I always stop to see / hear what he's talking about when he's interviewed on Bloomberg TV. The Big Boss, Frank Trotter, gets the Grant's interest Rate Observer letter, so, he's held in high regard with us here.

Well. in his latest interview, James Grant, said that " The U.S. Treasury should begin to issue longer-date bonds backed by Gold and that investors should also buy Gold as it is "something substantial". In addition, James Grant said that the "U.S. has been "overmedicated" by public policy and should consider the government's 1920 response to recession."

He was referring the Gov't responding to the 1920-21 recession by having the Federal Reserve increase interest rates, and balance the national budget. He believes that "U.S. policy makers are prolonging the pain of the so-called Great Recession by intervening in markets and running unprecedented federal budget deficits."

Then There Was This. from the Washington Post. "The administration has repeatedly boasted how the historic rescue of Wall Street will cost taxpayers far less than originally expected. But the budget proposal released Monday came with some unwelcome news: The price tag of the bailout is suddenly going up. As a result, the administration said it will seek twice as much money from its proposed bank tax compared with last year, $61 Billion VS $30 Billion.

The main reason for the increased bailout cost is that the government's stock holdings of companies rescued by taxpayers has fallen in value."

Chuck again. Whew! That's a lot to take on. but, wasn't I one of the few back 2 ½ years ago that said this would happen? And let me remind you that this is the main reason the Fed keeps interest rates low, otherwise their holdings of the toxic waste bonds circle the bowl.

To recap. The Chinese changed from "may help" to "will help" with regards to the Eurozone debt problem, and that news has boosted the euro and other currencies that play follow the leader. The euro ran into a roadblock though in the form of a contracting economy in the Eurozone for the 4th QTR of 2011. Sweden's Riksbank will most likely cut rates today bringing an end to their rate hike cycle. And record numbers of bond buyers are flocking to the Aussie bond market. and Chuck has a thought there.

Currencies today 2/15/12. American Style: A$ $1.0760, kiwi .84, C$ $1.0055, euro 1.3150, sterling 1.5710, Swiss $1.09, . European Style: rand 7.68, krone 5.7310, SEK 6.6770, forint 219.90, zloty 3.18, koruna 19.1150, RUB 29.98, yen 78.55, sing 1.2585, HKD 7.7540, INR 49.28, China 6.30, pesos 12.72, BRL 1.7140, Dollar Index 79.27, Oil $101.69, 10-year 1.95%, Silver $33.75, and Gold. $1,728.40

That's it for today. Two Ambrosia songs played this morning, great memories from the 70's there. My beloved Missouri Tigers will try to get revenge for getting upset at Oklahoma St, earlier this year, tonight, when they play at home. Alex is bummed that he can't be around anyone, as the skin herpes he has is very contagious. A few more days, and he'll be fine. And the month is half over! Soon March will be here, and the NCAA basketball tournament, and Chuck's spring break to Jupiter, Florida, to watch my beloved Cardinals' spring training. So, I just need to get through these next few weeks! Next Monday is a holiday, so we'll get a 3-day weekend coming up. Gotta love those 3-day weekends! And with that, I thank you for reading the Pfennig, and hope you have a Wonderful Wednesday!

Chuck Butler


EverBank World Markets



Posted 02-15-2012 10:49 AM by Chuck Butler