Bernanke Sends a Warning Signal

Good day… And a Happy Friday to one and all! Let’s make this a Fantastico Friday following Valentine’s Day! We received some good news yesterday from our Nikki Storm, who gave birth to a baby boy yesterday… Mom and baby are doing fine. I was very late to the doctor’s office yesterday, and missed my scan, but that’s rescheduled for Monday… Besides that, the doc says I look good, sound good, and the blood looks good… So, as long as the scan on Monday is clean, I’m good to go!

This is a three-day weekend, as we celebrate President’s Day on Monday. I’ve already whined about doing it this way, so I won’t bring that up again. The important thing is that it’s a three-day weekend, which means we get Monday off! (I’ll be getting my scan done. Nice way to spend a Holiday, eh?) That also means that the markets will lose their liquidity once London closes the books this morning. The NY boys and girls will be heading to the Hamptons this afternoon early.

The currencies rallied more on Thursday, especially after Big Ben Bernanke tried to come clean with comments about the economy. My impression of Big Ben’s speech is that it was downright dovish, which was to be expected from a Fed Chairman that had just cut interest rates 125 BPS in 10 days time. Big Ben made one comment that confirms my thought that another 50 BPS will be cut March 18th… Big Ben said that he pledges adequate insurance against downside risks. That’s central bank parlance for, “We’re cutting rates!”

Big Ben is smoking something again though, as he is quite confident that the economy will bounce back strongly towards the end of this year. He believes the Stimulus Package will be enough to kick-start the economy.

I’m surprised that he has put so much faith in such a stupid idea! But then… As Forest Gump used say… “My momma says, stupid is as stupid does”.

And I’ll tell you something else I think I got a hint of in Big Ben’s speech… He was talking down the dollar! The dollar had rebounded a bit lately… And he was talking it down. I don’t know if everyone got the memo on that one though. The dollar lost ground, but not THAT much ground!

Oh, and according to the mass media… We’re all supposed to do a jig in the streets because the trade deficit didn’t set a sixth consecutive year record! Yes… It “narrowed” to $711.6 billion in 2007. But then think about this for a minute… Didn’t the fourth quarter GDP slow to an anemic pace?

Anyway… I don’t get excited about trade deficits reaching $700 billion a year, do you?

Canada’s trade surplus narrowed last month. That’s not good! Canada’s trade surplus narrowed to C$2.4 billion in December, as exports slowed. This is the smallest trade surplus Canada has posted since November 1998! This trade report drives home the point that the headwinds from the slowdown in the United States are filtering into the growth outlook for the economy… And… Probably gives a green light to the Bank of Canada to cut rates again soon.

This news won’t carry through as good for the loonie… So, be careful there. Yes, commodity prices are still rising and that puts a floor under the loonie (CAD)… But you’d hate to see it fall to the floor!

The U.S. bond insurers received some bad news last night… Moody’s downgraded FGIC from AAA to A3. This downgrade could precipitate CDS losses on FGIC and CDO downgrades, losses and involuntary selling by investors of the bonds FGIC backed. This is beginning to get scary folks.

Take the deteriorating economic outlook, the rising downside risks, the increased impairment of banks’ balance sheets… And add this threat of bond selling because of a downgrade in the bond insurers… Did you see the fear in Big Ben’s eyes yesterday? I did.

And don’t look now… Too late, you looked! HA! No seriously, don’t look now, but the price of oil has slowly risen stealthily above $95 again! Like we need soaring oil prices on top of all the other “fun” stuff we’re heading toward!

I have to share this email with you… My friend, The Mogambo Guru, saw that I was going to be in the Tampa area in April, and asked me if I wanted to play golf with him. I told him that I used to play, but my surgeries last summer left me with a handicap and I could no longer play… In typical Mogambo style, here’s his response to me… “Bummer!  At least the scars healed and you still look good in that Speedo swimsuit, right?” LOL! He cracks me up!

Instead of golf, we’ll go to dinner somewhere and share stories. I’ll write about it, as I’m sure he will too!

OK, back to currencies… In Australia yesterday, the government printed yet another strong employment report. Australia added another 26,800 jobs in January, which brings the unemployment rate to a 30-year low of 4.1%! WOW! The employment participation rate remained near historic highs of 65.2!

With the wage pressures associated with this strong job market, I now expect the Reserve Bank of Australia (RBA) to raise 25 BPS in March, and 25 BPS in May. Yes, the RBA has lots more rate hike work to do, and this should provide a strong underpinning for the Aussie dollar (AUD)!

It occurred to me yesterday as I was buying some Norwegian krones (NOK), that I hadn’t talked about Norway and it’s currency for some time! Norway and Sweden (SEK) have backed off recently just like the euro (EUR) has. And with euro strength the past two days, Norway and Sweden have come back strong! The jury is still out on whether the Norges Bank (Norway’s Central Bank) will continue its rate hike cycle or let it fade into the distance. I think the Norges Bank still needs to raise rates, but that will be a tough sell, unless the European Central Bank (ECB) raises rates first…

If the Norges Bank sits on its hands, it doesn’t mean the end for Norwegian krone. Norway still enjoys a wonderul set of fundamentals including a strong trade balance position. I still like Norway, and Sweden for that matter, to keep on keepin’ on!

And finally… Yesterday, I talked about how the retail sales numbers looked suspect… And Chris gave us his explanation with the talk of credit card debt soaring… But there’s something else, and it happens at this time of year every year, and by golly, one would think that by now, I would have a handle on this… But NOOOOOOO!

What I’m talking about is the scenario where gift cards are given in December as presents, but then aren’t “cashed in” until January, thus creating a stronger retail sales figure in January. I’ve had people tell me it goes both ways… The gift cards are counted as sales when they are issued (as in December), and then they are counted as “cashed in” when they use them (as in January). I’ll go with the former, as it makes for a better story! HA!

Oh, and one more ditty on this Fantastico Friday… Former Fed Chairman, Big Al Greenspan was speaking last night and left us with this uplifting note (NOT!) for a Fantastico Friday… “We have a long way to go before housing prices hit a bottom”… But there’s more… Greenspan said the economy is “clearly on the edge of a recession”, and that the economy will continue to erode until there is a stabilization of house prices. “It’s a burden now” Big Al was heard to say… Yeah, thanks to you!

Now that Big Al is in retirement, whenever he speaks I get this tiny high pitched voice in my head doing the old Rocky the Flying Squirrel bit… Come on now, do this in your best falsetto… “And Now A Word From Mr. Know-it-all”… HAHAHAHAHAHAHAHA!

And then there was this… When everyone was thinking China’s red-hot economy had slowed down… China announced last night that their trade surplus widened faster than expected to $19.5 billion in January. Here we go again! Expect more tariff rhetoric from lawmakers.

Currencies today 2/15/08: A$ .9085, kiwi .7905, C$ 1.0070, euro 1.4675, sterling 1.9640, Swiss .9135, ISK 66.50, rand 7.61, krone 5.40, SEK 6.3570, forint 178.83, zloty 2.5580, koruna 17.17, yen 108, baht 31.76, sing 1.4120, HKD 7.80, INR 39.63, China 7.1790, pesos 10.75, BRL 1.7425, dollar index 76.05, Oil $96, Silver $17.43, and Gold… $914.90

That’s it for today… There was yet another shooting at a campus last night. It’s so sad… My thoughts are with those people at Northern Illinois University. Sunday is our colleague Mike Meyer’s birthday! He shares that day with our Suzy Q, who is on sick leave. You should have seen my little Delaney Grace yesterday, all dressed up in a red dress for Valentine’s Day… She’s going to melt a few boys’ hearts in the future! A reader sent me an email and asked me to tell the story about how I met my beautiful bride. You know a nice Valentine’s Day story… I think I’ll save that one for next Valentine’s Day!

There was some exciting news on the desk yesterday other than Nikki’s new baby… Our own Ty Keough, and new/old colleague Don Ries were both elected to the St. Louis Soccer Hall of Fame! WOW! Hall of Famers right here on my trading desk! I’m so excited for these two that I’ve known for years! Their induction ceremony will be held on September 19th, and I hope we’re all there to cheer them on!

So… Now it’s time to say good bye, wait, that was beginning to sound like the Mickey Mouse Club Song! But it is time to say good bye for now… Now start getting into that Fantastico Friday!

Chuck Butler
February 15, 2008