Will a Weak U.S. Economy Lead to QE3?

Good day… And a Tub Thumpin’ Thursday to you! It wasn’t so much of a Tub Thumpin’ day yesterday for the stock jockeys… Oh my goodness what a sell off! Now they know how badly we felt when silver sold off a few weeks ago! European stocks are selling this morning, in a reaction to the selling yesterday in the US, so this could become one vicious circle, eh?

What caused the selling to begin? Well… I’ve been telling you about the whispering campaign that’s talking about how weak the US economy is, with stimulus, and how stimulus will need to be continued to keep the economy from falling off a cliff. Well… That whispering campaign is really gaining some traction, folks… And that “fear” is beginning to creep into the minds of stock jockeys… (If they had just been Pfennig readers, they would have already known and gotten out before all this!)

There’s something eerily familiar about this stock selloff, though… Ahhh… There it is… Let’s go back in time… On June 4th 2010 (almost exactly one year ago), the S&P fell 3%, from 1098 to 1065. And here’s where things begin to come together for my call, long ago I might add, for QE3… Yes, from June 4th, through the rest of the summer, stocks wallowed in the mud… And everyone, including me, said the economy was ready to do a “double dip” into another recession… But then along came Big Ben Bernanke… And at the end of August, Big Ben Bernanke spoke at the Jackson Hole boondoggle.. It was there that the first thought of further stimulus was going to be implemented… And go ahead, go back and look at stocks from the end of August… If I did the math correctly, a 25% gain in the next six months occurred…

I truly believe that stocks are headed to wallow in the mud again, but I’m no stock jockey, so just take that with as many grains of salt as you wish… I would certainly understand if you thought that I was full of baloney here… But, the history can’t change, folks… It is what it is… So, will we repeat? I think so…

And then, this fall when QE3 is implemented, the whole shootin’ math begins once again for the dollar… Unfortunately, the “shootin’” is at the dollar! Think people aren’t scared about what’s going on right now? Then you should see the 10-year Treasury yield trading below 3%! That looks very strange to me, but we’ve seen it there before. The point is simply that people/investors are running for the hills, so to speak, and as always, they find safety in Treasuries… One of the reasons that the flight to safety didn’t really help the dollar yesterday, is that it was US investors simply switching from stocks to Treasuries… But the Treasury announcing three new auctions totaling $64 billion won’t help that Treasury rally… Especially when Treasury buyers think about what’s going to happen when the Fed is no longer the buyer of 70% of Treasury auctions!

OK… So much for what might happen… What happened yesterday in the currencies and metals? I’m so glad you asked! The dollar is weaker this morning, as the euro (EUR) has enjoyed a very nice rally overnight… There’s a rally and selloff with every bit of news that comes out of the Eurozone/Greece these days… The euro, for the most part, has been quite resilient in the face of what’s going on, and again, I think it’s simply a matter of the euro being the offset currency to the dollar, and the two of them playing a game of “who’s uglier”…

But there are some “good looking” currencies out there! I know my friend, Eric Roseman, likes to call all of the countries “drunken Sailors”… But I always cringe when he says that, because he’s forgetting about the “little dogs”… Like Norway, Sweden, Australia, Singapore, Canada, Switzerland, and the emerging countries of Brazil, India and China… When we do the “circle of fire” – which throws out the “drunken sailors” as Eric calls them – we end up with the countries and currencies mentioned above… And these are the currencies that traders and astute investors flock to when “risk is on”…

Of course, the best-looking currency is gold… And speaking of gold… I see where it went past its previous high overnight, just proving that you can’t keep a good currency down!

OK… Australia printed a strong April retail sales figure last night, surprising the forecasters, as retail sales rose 1.1% (forecast for 0.4%). That’s nice to see… Good domestic demand, and once mining gets back on board (after last year’s floods), the trade balance should begin to normalize again. The Aussie dollar (AUD) has really recovered nicely from the selloff in early May, and will probably trade in a tight range for the next month, until the markets come to the belief that I already have: that the Reserve Bank of Australia (RBA) will be hiking rates in August…

And the Scandis rallied overnight too… Norway (NOK) and Sweden (SEK) followed the euro onto the rally tracks and then proceeded to race faster down the tracks than the euro. When the karma is flowing for the currencies, the krone and krona tend to run faster than other currencies…

Yesterday’s data here in the US was again showing signs of not being able to stand on its own two feet, much less run… The ISM Index (manufacturing) fell from 60.4 to 53.5 in May… Yes, 53.5 is still expansionary (remember 50 is the dividing line between expansion and contraction), but the huge gap down is scary. The report was driven by decreases in “new orders” and “production”. New Orders, for instance, fell 10.7 points to 51, which represents the slowest pace in two years!

Now… Here’s something from the “good side” of the economics ledger… Construction spending increased 0.4% in April, with residential construction supporting the increase. Not sure what to make of this, as we sure have enough “houses” for sale here in the US.

And then there was the ADP Employment Report – which, to me, is more reliable than the jobs jamboree junk – which printed and showed a measly 38,000 new jobs created in May (forecasters thought the number would be more like 175,000). This report doesn’t bode well for the Jobs Jamboree, but then the Jobs Jamboree always has the BLS (Bureau of Labor Statistics) to fill those job numbers with all sorts of hedonic adjustments…

My, did I sound quite cynical there! I had better head to the Big Finish, and try to get in a better mood!

Then there was this… From the WSJ this morning…

European Central Bank President Jean-Claude Trichet called for much tougher fiscal intervention within the euro zone and suggested the creation of a euro-zone finance ministry, a proposal that comes as a number of the bloc’s member states struggle with debt crises.

Mr. Trichet said that if a bailed-out country isn’t delivering on its fiscal-adjustment program, then a “second stage” could be required, which could possibly involve “giving euro-area authorities a much deeper and authoritative say in the formation of the county’s economic policies if these go harmfully astray.

Interesting… But I doubt it gains any traction… I’ve long said that this is what the Eurozone needed, along with one bond market… Yes, I know, it takes away from each country’s sovereignty, but they gave that up years ago when they joined the euro!

To recap… The whispering campaign regarding the weak economy and its need for further stimulus is gaining traction, as stocks get sold and Treasuries bought. The currencies, led by the euro, continue to be resilient. Gold and silver had good trading days, and gold has pushed past its previous high water mark overnight. The US data yesterday, while mixed, was dominated by the awful showing of the ISM manufacturing index…

About Chuck Butler 105 Articles

Affiliation: EverBank

Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter.

With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News, World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune.

Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.

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