A Moon Shot!

Good day… Well… I finally heard something, but nothing’s definitive yet. The biopsy tissues they pulled from me did NOT have cancer cells! But the doctor wasn’t sure what it was! They have sent the samples and reports to a bone doctor for his expert opinion. The doctor asked me if I had fractured that rib… I don’t think so! Especially, not in the last three months! So… Still no definitive word, but the preliminary word is that our prayers may have been answered!

OK… Well… The euro (EUR) caught some of that major wind that was blowing snow around here in St. Louis yesterday, and sailed out to uncharted waters! Yes, the euro set a new all-time record level versus the dollar passing the old mark of 1.4962… And this time, there was no Plunge Protection Team riding to the dollar’s rescue! I looked at the currencies last night, and saw the euro at 1.4990… Spittin’ distance to 1.50! WOW!

But then it happened… In the overnight markets… A moon shot for the euro, as it soared above 1.50! The markets are convinced, (finally), like me, that the Fed will cut rates even further, given the data that printed yesterday. I’ll talk about the data in a minute, but for now… The dollar’s crying 96 Tears… You’re gonna cry now, 96 Tears…

The Big Dog took all the other dogs along as it left the porch chasing the dollar down the street yesterday… Shoot even poor old beaten and dragged through the mud, pound sterling (GBP) was looking perky! Aussie dollars (AUD) climbed past 93-cents, and kiwi (NZD) hit a 22-year high over 81-cents… Pretty amazing day!

There were a couple of things that got the wind stirred up yesterday, so let’s go back and check them out! First of all… Consumer confidence in the United States is circling the bowl. The Conference Board measure of consumer confidence declined in February, with the index at 75.0, down from 87.3 in January and much lower than market forecasts for a drop to 81.0. This is the lowest level since 2003, and both the present and future expectations components were lower.

The collapse in morale of consumers could prove fairly long-lasting folks… And if access to credit becomes increasingly impaired, this consumer morale could go into a deep dark depression, excessive misery. Oh, stop Chuck… No reason to get into the old Hee Haw song!

Then we had the printing of the Producer Price Index (PPI) or wholesale inflation, which gives you a look down the pipeline at what consumer inflation will be in the future… And the future isn’t so bright for consumer inflation. But we, as Pfennig readers, already knew that! PPI jumped 1.0% in the month, more than reversing the 0.3% monthly decline seen in December. We might not see this PPI jump filter through until later this year… So imagine the collateral damage this will cause to consumer inflation, which will already be hitting double digits, in my opinion, at that time!

And then finally… Home prices, as measured by OFHEO (Office of Federal Housing Enterprise Oversight) showed a 0.3% decline year-on-year, the first decline since 1975… The OFHEO data confirms that the housing correction is the worst seen in several decades… And the Case-Shiller report says that home values declined 8.9% in 2007!

Oh brother can you spare a dime? These house prices are really going to begin to make people sweat, and put pressure on delinquencies and on and on.

Consumption represents 70% of our GDP… Guess where GDP goes when consumption, led by consumer spending, weakens… We’re in a recession folks… The pundits won’t say it… The major media won’t say it… But I’ll say it! And this one is going to last longer than the last recession did.

OK… So what about the “other” currencies? Well… It now appears that yield differentials are really the diesel behind the currency moves these days. Remember when the people on CNBC kept saying that the dollar would rebound because the Fed was going to be “pro growth”? Well… What has the “pro-growth Fed” done for the dollar lately?

The currencies with rate differentials that make a difference, are really gaining ground versus the dollar. Aussie, Kiwi, Brazil (BRL), Iceland (ISK)… They have all taken liberties with the dollar this week. And it doesn’t look as though the Aussie dollar is going to back off any time soon… Sure there could be some profit taking and a correction of sorts… But that wouldn’t be enough to derail this currency right now.

The Reserve Bank of Australia meets next week, and while I don’t think they will be in the mood for another rate hike just yet… We certainly won’t see any hinting around about a rate cut!

Brazil is another one on a mission from God (Blues Brothers), versus the dollar. Just a week ago, the real looked weak and ready for a trip to the woodshed, but one week later, here it is pushing the dollar around like a 90-lb weakling… Brazil has the agriculture and oil business that only provides for their own people, but provides nice export revenues flowing into the country… I know, the real is tied to the carry trade, and when the carry trade eventually runs out of gas, that will spell trouble for the real. But until then… They’ll be dancing… Dancing in the streets… There’ll be swingin’, swayin’ and records playin’ and dancin’ in the streets!

Ahhh… A little Martha and Vandellas to get us going this morning! The first band I ever played with, played R&B, or what we called Soul Music… The Soul Wonders Revue! We all wore matching shiny gold pants and shirts… Did the moves while playing the songs… That was really something… And while I later moved on to play rock music, I’ve always had a place on my IPOD for “soul music”…

OK… I really slipped away there for a minute, eh? Can you imagine? The euro is 1.5050 and I’m talking about stuff I did as a young man… Shame on me!

So… It’s not just the high yielders gaining on the dollar, although those are the ones on the fast tracks right now… Singapore dollars (SGD), for instance, hit an 11-year high versus the dollar overnight. As we wrote so eloquently, in a recent issue of the Review & Focus, the Singapore Monetary Authority (their Central Bank), is allowing the Sing dollar to appreciate faster than in the past to help combat inflation pressures in Singapore…

Now that’s the proper use of a currency as a “policy tool” by a central bank! Not allow a debasement! Let me repeat something I’ve said on many occasions in the past…  Currency debasement does not lead to what the Fed and Treasury believe it will… A prosperous economy.

Another low yielder taking liberties against the dollar is the Swiss franc (CHF)… It’s just an all out rout on the dollar, folks… The pressure had been building for some time, as traders held out hope for a miracle in the U.S. economy. They were singing… All I need is a miracle, all I need is the economy to bounce… But, as time goes on, their hopes have been squashed like, well… They were squashed!

The Federal government of Canada announced their 2008 budget yesterday… And it had all the usual “we’ll do this and we’ll do that” stuff in it… But what really caught my eye was the announcement of a Tax Free Savings Account. WOW! What a great idea! Starting in 2009, Canadian taxpayers can contribute up to $5,000 per year… So kudos to Canada for thinking about how to get people saving!

Oh… The Canadian dollar (CAD) liked the other stuff in the budget, as traders pushed the loonie higher. The loonie is within spittin’ distance of 1.02 again… Hmmm, you’ve got to admire this currency, as it keeps getting tarred with the same brush as the United States but keeps its chin up… Chin up mate! No Worries!

And two of my faves since 2006, Norway (NOK) and Sweden (SEK) have also gained ground, as you would expect, given the euro’s rise versus the dollar. The thing to keep in mind about Norway and Sweden is that their central banks are still in the rate hike seat… So, further underpinning of potentially higher rates and having a Big Brother like the euro, should be enough to keep Norway and Sweden on my “A” list!

And don’t look now… But silver didn’t spend much time in the $18 range, as it skipped to $19!

OK… Big Ben Bernanke does his semi-annual testimony to Congress today. I’m sure the markets will keep an eye on any developments there… I would not like to be in Big Ben’s shoes today… Sort of like if you ever had to come home with a bad report card… Not that this ever happened to me! But, let’s say, you had a “friend” and your “friend” had a bad report card… Sort of like that!

The data today, given how the markets reacted to yesterday’s data, probably carries more weight than Big Ben. We’ll see the color of the latest durable goods orders, and new home sales. I believe that the durables will be more proof in the pudding that we’re in a recession… And new home sales? Could be anywhere! But, the thing to look for is that if sales were strong, at what price were those sales done? Watch for the falling prices, which… Shoot Rudy, if you had a pile of cash, and you always wanted another place somewhere warm, or cold if for some unknown reason you like the snow and cold, these falling prices are now beginning to get reasonable again.

Currencies today: A$ .9375, kiwi .8185, C$ 1.0185, euro 1.5045, sterling 1.9865, Swiss .9350, ISK 65.50, rand 7.50, krone 5.2175, SEK 6.21, forint 171.82, zloty 2.3550, koruna 16.60, yen 106.30, baht 30.10, sing 1.3965, HKD 7.7860, INR 39.83, China 7.1420, pesos 10.73, BRL 1.6820, dollar index 74.46, Oil $101.25, Silver $19.25, and Gold… $956.30

That’s it for today… We’ve witnessed days like this before… Just don’t forget that we certainly could see profit taking today… But the idea is simply that the euro did move to 1.50 and could again, should it lose it to profit taking. Momma said there’d be days like this, my momma said… So… Here we are at the end of February, and it’s cold outside! We’re two people short on the desk this week, which makes for some hectic days… I bet the phones light up today, given the movements overnight! Time for my apple… I hope you have a Wonderful Wednesday!

Chuck Butler
February 27, 2008