Bunning Throws a High Hard One!

Good day… And a Tub Thumpin’ Thursday to you! The dollar rallied most of yesterday, but has backed off in the morning markets ahead of the housing starts data in the United States that will print later this morning. I’ve got some words to Big Ben from Senator Jim Bunning for you this morning, along with some more discussion on whether our bullet is inflation or deflation. All this and more, as we get to Tub Thumpin’ on this Thundering Thursday!

Well… As I mention above, the dollar was the belle of the ball yesterday, as the U.S. Financials recovered, thus giving those dollar/U.S. assets bulls a reason to believe. Someone like you makes it hard to… No wait, that’s Rod, not the reason these dolts bought dollar assets! The euro (EUR) fell all the way to 1.58 and looked as though it would trade with at 1.57 handle, this just one day after trading above 1.60! What the heck was going on here? Ahhh, grasshopper, sit down, and listen…

So… Here we go again! Everything is beautiful… In its own way… Yes, the U.S. economy flag wavers are out in force again, led by an earnings report at Wells Fargo Bank that beat expectations. So, now, one swallow makes a summer? I don’t think so Tim! And the FOMC meeting minutes that quoted a Fed Head as saying, “the next move may well be higher for interest rates”. Yeah, and I’ve got a flyer on a great new car called the Edsel… Anyone interested? None of that does anything to change the economic problems that exist.

And if Big Ben thinks that raising interest rates will cure all that ails the U.S. economy, then I submit that he return his diploma from Princeton, as “unused”! Hear me now and listen to me later, the Fed CAN NOT raise interest rates in this environment!

Shoot Rudy! Even Big Ben put the problems all out on the table for everyone to see in his speech to Congress the other day! But the “everything is beautiful” campers are out in force, and we’ll have to deal with this once again. The dollar bulls love it when these mini-events take place, as they get to get out of their chairs, and put their dancin’ shoes on!

I got a big kick out of Senator Jim Bunning, you know the ex-Phillies pitcher (from the ’60s!), who sent a hard high one inside to Big Ben Bernanke after Big Ben had asked for more Fed powers the other day. I don’t have the space to give you all of Bunning’s comments, but here are some of the highlights… Oh, by the way, sure sounds like the good Senator is a Pfennig reader too!

“Thank you, Mr. Chairman. I know we have a lot of ground to cover today, but I want to say a few things on the topic of this hearing and of the next.

“First, on monetary policy, I am deeply concerned about what the Fed has done in the last year and in the last decade. Chairman Greenspan’s easy money [of] the late nineties and then following the tech bust inflated the housing bubble and created the mess we are in today. Chairman Bernanke’s easy money in the last year has undermined the dollar and sent oil to new record highs every few days, and almost doubling since the rate cuts started. Inflation is here and it is hurting average Americans.

“Second, the Fed is asking for more power. But the Fed has proven they can not be trusted with the power they have. They get it wrong, do not use it, or stretch it further than it was ever supposed to go. As I said a moment ago, their monetary policy is a leading cause of the mess we are in. As regulators, it took them until yesterday to use power we gave them in 1994 to regulate all mortgage lenders. And they stretched their authority to buy 29 billion dollars of Bear Stearns assets so J.P. Morgan could buy Bear at a steep discount.

“Now the Fed wants to be the systemic risk regulator. But the Fed is the systemic risk. Giving the Fed more power is like giving the neighborhood kid who broke your window playing baseball in the street a bigger bat and thinking that will fix the problem. I am not going to go along with that and will use all my powers as a Senator to stop any new powers going to the Fed. Instead, we should give them less to do so they can do it right, either by taking away their monetary policy responsibility or by requiring them to focus only on inflation.”

OK… It’s about time someone said these things in public, on record, other than me, and a few other writers that get put out in the margins because we don’t “conform to make people feel good!” But wasn’t that line about “The Fed IS the systemic risk” great? I just about fell out of my chair when I read that!

Now… Stay with me here because this gets ugly for the dollar if it all plays out… First, yesterday we saw the TIC’s data, for May, print much worse than expected. Foreigners’ buying of U.S. assets fell in May to $67 billion, far less than the $80-85 billion needed to finance the deficit… But that’s not all. Here’s where the cheese binds folks… Including short-term paper like T-Bills, foreigners actually sold a net $2.5 billion.

The pundits that write stories, or sweep them under rugs will tell you that you can’t focus on the “net” number… What? Why not? It all goes to the same place, right? Well… That was yesterday… And then this morning, the Financial Times has this story, that plays well with my concern about the net short position…

“Some of the world’s largest sovereign wealth funds are seeking to scale back their exposure to the U.S. dollar in a sign of global concern about the currency.

“One big sovereign fund in the Gulf has cut its dollar-denominated holdings from more than 80 per cent a year ago to less than 60 per cent, while China’s State Administration of Foreign Exchange (SAFE) has been looking to strike deals with private equity firms in Europe as a part of a strategy to reduce its dollar holdings.”

Uh-Oh! This is scary stuff folks, and I can’t believe the markets aren’t taking this story seriously… For if they were, the euro would be back to 1.60 this morning. Well… One day, people are going to look up and say, “What happened to foreigners being attracted to U.S. assets?” And I’ll say, “Where the heck have you been? This has been going on for years!”

U.S. CPI showed a rise of 1.1% in June, which is surprising to me. I say that with tongue in cheek, as consumer inflation in the United States, which has been building for years now, hasn’t shown up in the CPI data until now! Oh great, what good is this report if it doesn’t tell us inflation is a problem until its too late? Reminds me of one of my fave sayings… It’s too late to remind yourself that your main objective was to drain the swamp, when you’re up to your rear in alligators! HAHAHAHAHAHA!

OK… So, the U.S. Housing Starts data for June, along with the Weekly Initial Jobless Claims – which you may recall was very distorted last week, and should be corrected this week – print today. The Philly Fed (manufacturing) prints today also. If the reports are bad, you won’t hear about them… If they are better than expected, look for the media to be all over them like a cheap suit!

Canada has seen two data reports in a row that point to stronger growth. I submit yesterday’s Manufacturing report as evidence. Manufacturing sales jumped another 2.7% in May, once again making the “experts” look foolish as they called for a more modest 0.5% rise. This marked the strongest gain since March 2007! Things are looking brighter in Canada again, and this is reflected in the loonie (CAD) showing a pulse once again. The loonie had gone into a coma this spring… But looks to be out of it and walking around the room!

A reader that owns a hardware store sends me info on prices, etc. from time to time, and I thought this was timely given what I’ll talk about before I head to the Big Finish. Here’s our hardware store owner…

“Nearly every manufacturer and wholesaler has now levied a ‘fuel surcharge’ on top of price increases. A gallon of paint thinner cost me roughly $1.85 a few years ago. Today it costs me $5.70. Paint products in general are up 10% this year alone. Solvents, glues and adhesives are up considerably with more increases on the way. Fasteners and related products are up nearly 30%. Power tools and most of the goods imported from China are starting to creep up as well.”

Now… I get lots of questions from people asking me about whether its inflation or deflation. Here’s my standard response, but now plays well with the thought above. Inflation is currently winning, as Big Ben has the printing press running overtime to bail out his buddies on Wall Street. But the deflation wolf is always at the door… And this one could be the real killer, just ask the Japanese, who dealt with it for a decade! Either one is not good… Sort of like… “pick your poison”.

Currencies today 7/17/08: A$ .9755, kiwi .7685, C$ .9990, euro 1.5855, sterling 2.002, Swiss .9825, ISK 76.90, rand 7.58, krone 5.0825, SEK 5.9825, forint 145.60, zloty 2.0340, koruna 14.60, yen 105.40, baht 33.43, sing 1.35, HKD 7.7985, INR 42.80, China 6.8208, pesos 10.21, BRL 1.5950, dollar index 71.94, Oil $133.80, Silver $18.67, and Gold $957.75

That’s it for today… Quite wordy today… You should have seen the fingers flying across the keyboard… What a sight! HA! There’s like a list of 15 financial institutions that will report earnings today. I finally got my car back from the shop last night… I was getting used to driving that brand spankin’ new one they gave me to drive as a loaner! No worries, I’m not in the market to buy a car! Getting ready to ship off to Vancouver next week. I speak 5 times during the week… WOW! I hope I have enough to talk about 5 times! I then come home and am on vacation till I leave for San Francisco and the Money Show there the first week of August… So… If you’re in the S.F. area, come on by to see me… I’ll be all by myself, don’t wanna be all by myself… No Chris, No Frank in S.F. just little ol’ me! HA! Let’s get to Tub Thumpin’, eh?

Chuck Butler
July 17, 2008