Bill Gross and Others Call for QE3

Good day. My first day back in the saddle went fairly well, the meetings were short and sweet — just the way I like them — and I got out of here at a decent time to get home and get my feet up. It was a busy day in the markets, and with no economic data to guide them, they continued to steer toward the dollar.

The currencies, metals, commodities and stocks are all on the run from the dollar this morning, all while people like Pimco’s Bill Gross and Jan Hatzius at Goldman Sachs are telling their customers to prepare for QE3, to combat a slowing U.S. economy.

Now, I don’t believe these two think QE3 is the answer that the Fed heads believe it is; I think they are simply doing what I’ve said all along, and that is telling people what we see. And with the Fed heads showing that they are bound and determined to keep the stimulus machine well oiled, they will once again feel that “they SHOULD do something.”

However, even though the thought of QE3 might be shared by a few, the rest of the market participants haven’t gotten the memo yet. The dollar is swinging a mighty hammer, and the risk takers, as I said yesterday, have all headed for higher ground. It’s a messy scene on the currency screens I have in front of me. The Japanese yen (JPY) is the only currency gaining versus the dollar this morning.

And for those of you new to class, QE is quantitative easing, and QE3 would be the third round of QE that the Fed heads implement. Now, I was told by someone that says he has friends in high places that the Fed will never call their next round of bond buying or monetizing the debt or — when you get right down to it — money printing. QE has become persona non gratis. So while we all know what they’re doing, they won’t call it QE.

And again, for those of you new to class, or a refresher for everyone else, the first two rounds of QE brought about higher stock prices, and a lower dollar against currencies and metals. So that’s why I say the dollar is rallying in the face of these comments from big-time analysts that QE3 is coming. Seems a little strange to me, how about you?

You know, while I believe that the Chinese will continue with their slow, general appreciation of the renminbi (CNY), I am having thoughts about 2008, when we saw the front of the storm. The Chinese basically held the renminbi steady until June 2010, when they announced that they would return to a general appreciation of the renminbi. Will the Chinese do that again, or have they already begun to go down in their bunker?

I ask this because the renminbi hasn’t posted a gain in over a week! Yes, we’ve seen this before, but given what I think is going on in the U.S. economy, and how badly the eurozone has stepped in the dookie, I can’t seem to get the thought that it could be 2008 all over again for the Chinese.

But let’s see, from August 2008 to June 2010, the renminbi remained steady Eddie versus the dollar, while 99% of the currencies lost ground to the dollar as a safe haven. So if that were to happen again, at least you have the potential opportunity to hold a currency that keeps your investment portfolio diversified with an allocation of an asset class that’s not dollar denominated, that holds its value in the face of dollar strength. I say “potential” because I don’t know any more than you do if this is will happen. It’s just my opinion, and I could be wrong!

So here’s the rundown this morning. The euro (EUR) has fallen below 1.30, as Greece can’t form a government and the Greeks will have to go back to the election booths. The Australian dollar (AUD) is still above parity, but is losing ground quickly, as Aussie Prime Minister Julia Gillard threw the A$ under the bus again by saying that the forecast for a budget surplus next year will allow for more interest rate cuts.

I have to stop for a minute here to say that I just don’t buy the Greek thing as the driver for further euro weakness. Initial weakness, yes… further weakness, no. It’s as if the markets are using it as an excuse to drive the euro down. Because the Greek election thing is what it is. And yes, it presents an “unknown,” which I’ve explained to you over the year that currency traders don’t like “unknowns.” But this “unknown” is more like a tempest in a teacup, for not having a Greek government doesn’t stop the eurozone as a whole from functioning.

Back to the blood in the streets — I mean the currencies and metals. Yesterday at one point, gold was down $40. It’s down another $15 this morning. Sure, go ahead and sell your gold — get that price down so that I can buy more at a cheaper price! The selling of gold, by some entity — either investors, hedge funds or governments — isn’t stopping the Chinese from buying more gold. Get this: Chinese gold imports from Hong Kong in the first quarter of 2012 (this year!) totaled 135.5 metric tons. In 2011, the first-quarter total was 19.7 metric tons!

I’ve told you all quite a few times previous to this, but here goes. I truly believe that the Chinese are buying all this gold so that when they finally allow their currency to be backed by gold, in some percentage — it may not be 100%, but 25% — backing of gold, would, in my opinion, make the renminbi the most attractive currency in the world.

The Canadian dollar/loonie (CAD) lost its grip on parity to the U.S. dollar yesterday. I think traders have given up their hope on all the lathering up they got from Bank of Canada (BOC) Gov. Carney that interest rates would rise sooner than later. Canada saw some strong housing data yesterday that briefly provided a speed bump to the decline in the loonie, but eventually, the pull down from the U.S. dollar strength proved to be too much for housing data to offset.

But in case you’re keeping score at home, Canadian housing starts increased 14% in April, and like the U.S., the driver for housing starts is the multiple-family units.

The U.S. data cupboard is basically empty again today. Yesterday didn’t work out too well for the risk assets without data.

I saw this blip yesterday and it struck me as something that is important. The Federal Reserve said borrowing by U.S. consumers rose in March for the seventh month in a row. Total borrowing increased $21.4 billion, the biggest jump since November 2001.

Hmmm, very interesting, don’t you think? And they say that you can’t get a loan? Seems like we’re heading right back to where we were prior to 2008. But then, that’s just me, I guess.

Then this was sent to me by Scott Pluschau, from The New York Times. Here are the requirements to receive principal reduction on home loans at BOA:

“To be eligible for the principal reductions, homeowners will have to meet certain criteria, including: having a loan owned or serviced by Bank of America, owing more on the mortgage than their property is worth, and being at least 60 days behind on payments as of the end of January.”

OK, what do I get for continuing to honor the contract I signed with my lender? What kind of principal reduction do I receive for being good and continuing to pay on time? Have we really become a country of wimps? Take the easy way out? And what about BOA? Not that I have a problem with them, but what about giving these people some encouragement for making payments? Instead, we just give everyone the easy way out? I shake my head in disbelief of what has come of this.

To recap: The dollar is swinging a mighty hammer in the face of top analysts calling for QE3 to be coming soon. Gold has really gotten whacked the past two days. China has slowed down their general appreciation of the renminbi. Is this 2008 again? U.S. consumers are borrowing at rates that haven’t been seen since 2001. Does that bother you like it does Chuck?

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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