Thursday, June 7, 2012

Thursday, June 7, 2012 – Mr Bernanke Goes to Washington – by Sinclair Noe

DOW + 46 = 12460
SPX -0.14 = 1314
NAS – 13 =2831
10 YR YLD unch = 1.65%
OIL – 1.14 = 83.68
GOLD -31.20 = 1589.50
SILV -.84 = 28.69
PLAT – 23.00 = 1447.00

The European Union released GDP was unchanged month to month and declined 0.1% from a year ago. Mari Draghi, the President of the European Central Bank announced that interest rates would stay at 1%. Draghi did not make a major policy announcement although it was widely anticipated that he would. However, he did state that the ECB would continue its main refinancing operations to provide liquidity to European banks.

Fitch just cut its credit rating for Spain from A to BBB with a negative outlook. That's the same credit rating as Kazakhstan. Fitch estimates the Spanish banking system will need between $60 and $120 billion in additional capital to cover potential losses on their domestic loan portfolios.

Apparently the Grand Euro-plan is to maintain unbending monetary policy over multiple and diverse and increasingly frail economies with the justification that there is no gain without pain and suffering will eventually make you feel better, combined with a lack of unity and failure to cooperate on anything other than the destruction of democratic processes imbued with a hint of hubris that the technocrats are much smarter than the hoi polloi despite a seemingly non-stop rainstorm of random policy blunders and dogged consistency in remaining behind the curve.

Yesterday I told you: “Still, the market was looking for the Fed to ride to the rescue with another round of quantitative easing, even though they keep saying they will watch developments, even though there is a good chance Bernanke will use his testimony to reprimand politicians. Maybe Bernanke will step up where the ECB refused to step up. Probably not. Most likely they will all wait for the situation to get worse before they jump into the fray. Keep the powder dry. No rush, after all the austerity doesn't hurt them.”

Today, Federal Reserve Chairman Ben Bernanke went to Capitol Hill to deliver testimony to the Joint Economic Committee. Bernanke said the Fed stands ready to act to protect the financial system and the economy in the event the problems in Europe get worse. Bernanke was very non committal and stated “FOMC has made no decision on more Quantitative Easing’ and added “the option would not be taken off the table. Bernanke suggested some of the apparent slowing in economic data, including last Friday’s weak jobs number, might be due to unusually warm weather this past winter, which may have brought forward some activity. There have been a few encouraging signs in the housing market. Bernanke feels the Fed's Zero Interest Rate Policy is justified. Bernanke also again called on Congress to set in place a sustainable fiscal policy. He said the severe fiscal tightening that will occur at the beginning of next year unless Congress acts, the so-called fiscal cliff, would pose “a significant threat to the recovery” if allowed to occur.

Fitch Ratings warned it would cut its sovereign credit rating for the United States next year if Washington cannot come to grips with its deficits and create a "credible" fiscal consolidation plan. It also said it would immediately cut the credit ratings on Cyprus, Ireland, Italy, Spain and Portugal if Greece were to exit the euro zone. Additionally, all euro zone nations would have their ratings put on its negative ratings watch list, setting a six-month time frame for a potential downgrade.

Today, the accommodative monetary policy came from China. The Peoples Bank of China cut rates for the first time since 2008. Hong Kong based economists are predicting that there will be at least one more rate cut before year end. There is also wide speculation that the Chinese government will respond with a 2 trillion Yuan stimulus package to help jump start China’s sluggish economy. Like I said, it's a global process.

Bernanke told Congress the euro-zone crisis has more potential to hurt the US economy than indications of an economic slowdown in China, saying, in fact, that a less-torrid Chinese economy could actually benefit the US. Bernanke said when the Chinese economy slows, it tends to result in a decline in oil prices, helping the US economy, which is heavily affected by high commodity prices. The Chinese determined that 8.1% first quarter growth was unacceptable. And today, Fed Chairman Bernanke confirmed, through actions not words, that 8.1% unemployment is acceptable.

If there is anything that could prompt the Fed to take action it would be a breakdown in Europe; and for today at least, Europe did not implode. Maybe a problem with the Greek elections; maybe a large Euro-bank failure; but not today. For today, Bernanke can take a wait and see attitude. For now, the US dollar is the prettiest horse in the glue factory.

So, someone called my producer, Renee, and asked her why gold was going down today. OK, first of all, send me an email: Renee is busy. Here's why gold went down today: because it doesn't go up every day. Remember last Friday when gold went up more than $60. Well, the price goes up and sometimes the price goes down and sometimes the daily price moves are big and sometimes the moves are small. The markets have been working on the idea of quantitative easing from the central bankers – because it is an increasingly global process anymore. When free money pours into the banking system it effectively deteriorates the currency. Think of gold as a measure of the central bankers' ability to manage fiat currency. When the central bankers are doing a good job of controlling the currency, the price of gold is flat or it goes down; when they devalue the currency, the price of gold goes up.

So, I told you not to expect Bernanke to announce a new round of QE, but Goldman Sachs had been saying Bernanke needs to announce a new round of QE when he goes to Capitol Hill. So, there were some people who did not listen to me that thought there would be some announcement today. They were disappointed. I could go into the whole risk-on, risk-off explanation but I doubt it would help. You can look at the charts on gold, and the fact that gold gold bounced off support three times in the 1529 to 1535 range should tell you there is some strength in this market. Your new level of support should likely be moved up to $1568 and the next level of resistance would be around $1619. That is if you're short term. If you are longer term than today, you'll note the price is higher today than one week ago. If you can learn to have a little patience, I feel pretty good with the idea that one year from now we'll be looking at new highs. Of course, I could be wrong. I reserve the right to change my opinion if circumstances change, but I think the price movement today was just a little gift to allow you to buy some more for a lower price.

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