Tapering Off...A Pipe Dream?

06/12/2013 7:45 am EST

Focus: MARKETS

With the economic recovery creeping along at a snail's pace, don't look for the Fed to put a halt on QE, says Chuck Butler of the Daily Pfennig.

May's ISM Manufacturing Index fell below 50 to 49, missing estimates of 51. This is yet another piece of data that has failed to meet expectations on the downside this month.

A slip below 50 one month isn't exactly something to hang your hat on that the economy is faltering, but let's go back to January of this year. Just like every year since 2005, we began the year with high hopes that this was going to be the year that the economy stood on its own. The ISM for January was 53.1, and for February, it was 54.2, and then the rug was pulled from under the sector.

The markets saw this drop in manufacturing in the US as a huge reason why the Fed Heads are not going to be able to taper off Quantitative Easing or their zero interest rate policy. And all those trades to buy dollars that were put on when the markets allowed the Fed Heads to pull the wool over their eyes were reversed—with a vengeance!

China allowed a nice-sized appreciation of the renminbi overnight. That stronger move in the currency was followed up by the People's Bank of China (PBOC) Governor Zhou, who said that "The central bank will not intentionally depreciate the renminbi to boost competitiveness." Capital flows into China continue to be strong.

I recently read some research on China that makes abundant sense to me. The analyst concluded that because of the huge capital flows into China, the PBOC had to continue accommodating the appreciation of the currency. Because if they don't, the PBOC will be forced to intervene in the market and take on huge amounts of foreign exchange reserves.

China's foreign exchange reserves are already more than they need. In dollar terms, China's total FX reserves are $3.44 trillion—of which a ton of that total is represented by dollars.

Gold may be on every stock jockey's "no" list right now, but that doesn't mean it's not of any use any longer. My friend and writer par excellence, David Galland, wrote about gold this past week in his letter for Casey Research. His three reasons why the case for gold will remain intact:

  • opposition to austerity
  • declining gold production
  • physical demand

When I was in Las Vegas last month, I spoke about the opposition to austerity, with hopes that it would not come to fruition. I'm talking about the Eurozone's austerity, which is working, but now becoming an "evil thing" among some Eurozone leaders.

Sure, the Eurozone's economy is slow, and that is expected to happen given the austerity measures put in place to help the countries that had forgotten what fiscal conservatism was. But now that the calls for a breakup of the Eurozone, the collapse of the euro, and overall devastation for the Eurozone aren't going to happen, some of the leaders want to ease up on the austerity measures. Hopefully, the smart people in the Eurozone can make these leaders see the light.

I told you about how Goldman Sachs had come out with a call to sell Treasuries—that the bond bubble was about to pop. Now Bank of America says, "Risks of a bond crash are high," and "Investors should sell US Treasuries and buy bank stocks, because bonds may be headed for a crash."

Their chief investment strategist, Michael Hartnett, said, "It's hard to believe that the greatest bond bull market will end without some bloodshed."

OK; I guess more big names are jumping on my bandwagon that the next bubble to pop will be bonds.

Read more from the Daily Pfennig here...

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Why Would Anybody Buy a Bond?

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