Risk Aversion Boosts the Dollar

Front and center this morning, we have a very strong dollar rally going on… It began yesterday mid-morning, when things turned on one thin dime. First, we had the US Manufacturing Index rise in September and the trading theme kicked in with the dollar getting sold on the good news for the economy… But then a strange thing happened on the way to the forum. Everyone began to fear what’s been going on in banking… Friday, the 115th bank failed this year, and suddenly traders, investors, hedge fund dudes, and everyone else, got a case of the flu… Not the “pandemic” H1N1 flu… This is the “chicken flu”… Chicken to continue to take risks in the face of a banking problems… Well, to think of it, maybe, just maybe, it’s not the “chicken flu” but the “prudent flu”!

So… The dollar’s losses were reversed by mid-day, and the non-dollar currencies were taken to the woodshed. Shoot, even a rate hike by the Reserve Bank of Australia (RBA) couldn’t reverse the risk aversion trading. I’ll get back to the rate hike by the RBA in just a minute… But first I need to talk about this shift to risk aversion once again… We saw this briefly last week, and it faded into the wind… I hope this shift to risk aversion is soon a small item in our rear view mirrors!

Now… The ISM Manufacturing Index rose to 55.7 from the prior month’s 52.6 reading. This marks the strongest reading for the index since the April 2006 reading of 56.0. Let me explain something to you, which I’ve explained before, but this really illustrates what I’m talking about… And that is… This Manufacturing renaissance here in the US comes as a benefit of the weak dollar that’s been in place for over six months now. It’s that simple, folks… You want Manufacturing in the US to be robust? Then you need a discounted clearing mechanism… And that is the dollar.

The Asians are learning to trade among themselves without the US, and the Eurozone already has 80% of their trade among themselves. That doesn’t bode well for US exports unless… Unless there is a discount… And that discount comes in the price they have to pay/convert their currency for the dollars that are needed to buy the export… So… Why shoot the goose that lays the golden eggs?

OK… As I mentioned above… The RBA raised rates 25 BPS (0.25%) last night, as I expected them to, and had told you they would! The Aussie dollar (AUD) got sold though after rallying briefly… Traders got spooked when the RBA Governor said that “it was prudent to lessen gradually” the stimulus to the economy provided by lower borrowing costs… OK folks, that’s central bank parlance for: the interest rate hikes are going to slow down from here on out… So don’t expect a rate hike at every subsequent meeting!

Oh come on, Aussie dollar traders! The Aussie dollar yield differential to the US is now staggering! As it is to Japan, Europe, and Canada! Only New Zealand and Brazil can play on the same team as Australia when it comes to significant yield differentials! But NOOOOOOOOO! You get spooked! Have you no intestinal fortitude? HEY! The good news is that it gives latecomers a chance to buy at cheaper levels, or… Those that already own, a chance to pick up more at a cheaper level! Courtesy of the Chicken Little Aussie dollar traders!

Well… I guess I can’t blame them too much, with the risk aversion campers taking over the campground… Here’s another thing that I saw last night that has the risk aversion campers spreading like wildfire… A long time reader of the Pfennig and Bloomberg TV personality, Pimm Fox reported last night that: President Barack Obama’s advisers are “seriously” considering proposing a second stimulus measure to boost the economy, Commerce Secretary Gary Locke said in an interview. Locke said another stimulus would be “very targeted and specific and we need to be mindful of the deficit as well.”

Hmmm… OK… How many times have I said in the past eight months that the government was going to see the need for more stimulus? The answer? MANY! I’ve got a question… If the GDP was “so robust” as the government officials claimed it to be, then why are they discussing more stimulus? BECAUSE THE GDP WAS A FRAUD! We all know that… I explained it all to you yesterday! But the announcement that more stimuli is being “seriously considered” is what we as kids used to call “cheater’s proof”!

What does “very targeted and specific” mean? It means the government is going to get deeper and deeper into the private sector… That’s what it means!

I have a question for the government… You told us the $787 billion stimulus package last February was going to keep unemployment from reaching 10%… Guess what? That didn’t work! So, what makes you think whatever taxpayer money you spend now is going to work? Oh, and don’t give me that barrel of baloney that you’ve “saved” 650,000 jobs. Saved Jobs CANNOT BE PROVED! So why not say you saved 1 million or 2 million jobs? I mean, what difference does it make… It’s not true, and can’t be proved!

Whoa there big boy… You had better stop before the Pfennig gets sent to the White House to shut me down! Yeah, like it hasn’t been sent there before now!

OK… Did you hear about the IMF gold sale? The IMF sold 200 tons of gold… Not to worry though, the Reserve Bank of India stepped to the plate and bought the gold… Gold revisited $1,060 after this announcement, but in reality it should have been a wash, and the price of gold has backed off a few dollars overnight… But still pretty well bid, given the risk aversion going on in the currencies.

And why not? Gold is a store of value… Of wealth… Whey wouldn’t it buck the trend?

Speaking of which… The Big Boss, Frank Trotter, and I were talking last week about gold, and we kicked around this thought of sharing a money lesson with kids… And he sent me this…

“The weather turned around here in about three weeks. Great Fall, then ten days of deluge, now the chill of late Fall. And instead of Thanksgiving displays, the march of catalogues imploring us to turn away from savings and save the world through spending have begun to hit the door. In the past few years as our children have become young adults we have started to turn away from the quest for unneeded presents and zombie-like consumption and have started to implement a contribution concept: research and choose a cause that will appeal to the recipient, ensure that the cause is not acting like your average NGO running around in white land cruisers or and staying at five star hotels in the third world, and make a modest contribution. It isn’t working perfectly and we certainly backslide enough; but it’s underway. We may turn it into a gift of a few shares of a good company but enough of this.

“Something else that meets the need of a physical gift, but one with a message has been on my mind lately. It isn’t easy to start a conversation with a young person, especially quite young about global economics and the transient value of money. In fact, it’s hard to start a conversation with almost anyone on the topic. So what’s a better way to provide a gift box and a message? (Readers of ‘A Pfennig for your Thoughts’ will certainly be ahead of me…) The gift of real money, of course… Gold coins.

“With the gift of a coin, or a set of coins you can tell so many stories or impart values in a variety of ways. Coins are struck around the world providing a geography lesson and of course an insightful and cogent discussion of central bank attention to their country’s money supply (well okay, you might want to skip that one). You can tell the story of gold in the history of the world, and if you are brave and the audience attentive, how gold has held its value over the centuries and will probably do so for centuries to come. Bringing things up to date you can cover the astounding fiscal and monetary policy that has become our new national pastime over the current and past administrations (but be sure to take your blood pressure medicine). Tell ’em ‘you are worth an ounce a year’ (or more).

“If you are buying for one or two friends or children or grandchildren, head down to the local coin store and grab a couple bullion coins. If you have a good size list or have the capacity to do something substantial then give the team here at EverBank a call. In any event, let’s all be sure to teach our kids, grand-kids and the people around us in general about the monetary value of gold.”

WOW! That was great Frank! I love it when the Big Boss puts down his thoughts in writing and shares them with the rest of us!

OK… To recap… The dollar is enjoying a strong rally thanks to the risk aversion crowd that is getting spooked about the banks, after the 115th US bank this year failed… The Reserve Bank of Australia raised rates again by 25 BPS, and the Reserve Bank of India bought 200 tons of gold that the IMF felt it needed to sell, so a wash if you will. And then Chuck went on a rant about stimulus.

By Chuck Butler

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