FOMC Meeting Begins Today

Good day… And a Terrific Tuesday to you! Well… We saw some profit taking in the currencies yesterday, which meant a mini-rally in non-dollar currencies for the first time in what seems to be a month of Sundays! At one point in the day, the euro (EUR) had added more than 1-cent to its figure – dragging sterling (GBP), Swiss (CHF), Canada (CAD) and a host of others along with it. But, that didn’t last in the overnight markets, and we’re right smack-dab back to square one, where we left off yesterday.

This morning we’ll listen in on former Fed Chairman Volcker’s speech – which ought to be a good one, don’t you think? I mean, this is the guy that said a couple of years ago that the United States could see a currency crisis… And didn’t it? OK, it’s not now, but turn your clocks back to June, and you’ll see what I’m talking about here. Volcker is a “hero” of mine in how he took on the inflation of the late ’70 s and early ’80 s and didn’t dance around the dance floor with it. He whipped it into shape, and then left it all in good shape for Big Al Greenspan… We all know what happened after that!

We’ll also see consumer confidence for the first part of this month, which is expected to take the Nestea plunge from and index number of 59.8 to 52! You know me, I can’t ever, for the life of me, figure out how consumer confidence can even be this high! But then, if everyone worried about the stuff I worry about, this would be a dull place to live, eh? HA!

The S&P Case/Shiller Home Price Index will also print this morning, so expect more rot on the vine with home prices here… And finally… The Fed begins a two-day meeting today. The Fed’s FOMC begins today with a rate announcement expected tomorrow. What do you think it will be… A 25 BPS cut? Or 50 BPS cut? I’m thinking that it will be 50 BPS. I’ve always kidded that I wondered what the Fed Heads do for two days before announcing their rate moves… I think they play Battleship! By Joe, you’ve sunk my Battleship! HA

One of my fave economists, Nouriel Roubini, said in interview that he believed the Fed was going to have to move rates to zero! That’s a big fat goose egg folks! Wow! What country does this all remind you of? Come on, you know what I’m referring to here, as I keep bringing this up over and over again. Oh, I’m turning Japanese, I think I’m turning Japanese, I really think so… (My good friend, and big fan of the ’80s, Rick, tells me that song was by the Vapors.)

Let me add up the facts here… A collapsing stock market – check. Falling bond yields – check. Economic stimulus packages – check. Bailouts – check. Dire times for the economy – check. A central bank that believes cutting interest rates to near zero is the right thing to do – check, and mate! Which country was I talking about there? The United States, or Japan in the ’90 s? Oh, I’m turning Japanese, I think I’m turning Japanese, I really think so! This all reminds me of those Memorex commercials… Remember? “Is it live or Memorex?” Is this Japan or United States?

Speaking of Japan… The yen (JPY) saw selling yesterday for the first time in a while. I know from my view in the cheap seats that most of the yen selling I saw was simply profit taking. You have to think that given the price action in almost all assets these days, seeing one with a profit is very inviting, eh?

So… With yen weakening just a bit, did it mean that the risk takers were back? I don’t think so… Not yet anyway. As I said, it all looked like profit taking to me. Not even the threat of Bank of Japan (BOJ) intervention was going to bring the risk takers back out. By that I mean that if the BOJ were going to intervene, which would mean selling yen to weaken it, the risk takers might use that information to their advantage and put carry trades back on the books… But, that didn’t happen; I think the risk takers have had the bejeebers scared out of them with all that’s been going on, and it will be a while before we see them all in their places with bright shiny faces!

And… While I don’t want to spend the whole letter today on Japan… I must say that I think we should all be very wary of the BOJ and their history of intervening to keep yen weak. This will be a huge battle between the carry trade unwinders and Uridashi Bond sellers versus the BOJ. Just don’t get caught up in it… If it happens, stay to the sidelines, you don’t want to get caught up in an intervention battle.

I was reading my friend, Bill Bonner, here at The Daily Reckoning last night, and noticed that he was talking about the Dow going to 5,000. He had this to say about it, which plays well with our thought about all the deleveraging going on in the world right now… Here’s Bill…

“It probably would have corrected to the 5,000-range already. But the feds intervened. And now we’ve really got trouble. Because in trying to head off a recession/bear market, the authorities provoked a housing bubble, a financial bubble, and a worldwide credit bubble. Homeowners over-bought. Banks over-lent. Consumers over-stretched. Almost everyone seemed to over-do it. So, what might have been a typical bear market has been transformed into a monster of deleveraging.”

Gold is up $13 this morning! But silver has dropped below $9… And we still can’t find physical gold or silver supplies anywhere! We did find 2,000 Gold Olympic Coins from Canada a few weeks ago, and those went out the door as fast as they came in! This whole lack of physical metals and slumping prices is beyond my ability to figure it out… I get asked all the time, “Why isn’t gold going higher?” and I went through all that yesterday, but it’s important to know that I’m a firm believer that all this stimulus, and all these low interest rates are going to fuel much higher inflation, and that should be a good thing for gold prices.

The Swiss franc continues to remain well bid and resist the strong pull down of the euro. I would think that given all the “risk” in the global markets these days, that francs would be well bid, which means that there are buyers of the currency. There’s little in the way of yield here in Swiss francs, but it’s better than the nothing, nada, zero, zilch, big fat goose egg like we’ll soon see here in the United States!

In its semi-annual Financial Stability Report released overnight, the Bank of England (BOE) said that the five biggest banks and nationwide building society could lose as much as 130 billion pounds over the next five years, well in excess of the 50 billion pounds that the banks recently promised to raise as part of the Treasury’s bailout plan, forcing the banks to ask shareholders for even more cash. Things don’t look rosy for the United Kingdom or pound sterling, folks.

And speaking of not looking so rosy… Nothing has changed in Iceland. We can’t get payment for our maturities, as the clearing mechanism for currencies has been shut down, with the takeover of the largest banks in Iceland. Now, I read that the Icelandic Central Bank raised interest rates 400 BPS to 18% this morning… For what? I don’t get it… That’s like rearranging the deck chairs on the Titanic! I just wish the central bank would worry more about getting maturities paid! UGH!

You know… I talked a lot about foreign bonds when I was doing the Currency Tours. Foreign bonds are a great way to take a long-term position in a currency, and not worry so much about the day-to-day moves of the currency. You lock in a yield to maturity on the bond, and it’s liquid… Seems like a lay-up to me, especially when you consider that in a lot of countries your yield to maturity would be higher than what you can find here. Foreign Bond trading is how I got my feet wet in the currencies… I cut my teeth on Foreign Bonds, so they have always been near and dear to my heart.

I was thinking the other day about all these people taking losses breaking their CDs and attempting to catch a falling knife, and said to myself… “Chuck, why don’t you tell people about taking that currency they own, and using it to buy a foreign bond?” So… There! I did just that! Should you want to talk to somebody about that, our bond guy is Don Ries… He can be reached at: 800-926-4922.

Chris Gaffney sent me a note yesterday regarding our first MarketSafe CD maturity, which happened yesterday! Recall, we created MarketSafe CD’s on different assets (before all the volatility in the markets squeezed us out of the structured product creation), and the owner of the CD would have upside potential of the underlying asset, and enjoy 100% principal protection… Well, this first maturity was one based on the S&P 500… And it sure looks like the owners of that CD did quite well!

Chris tells me that the ending price of the S&P 500 index today was 848.92, which equates to a 29% fall versus the original S&P price of 1196.54. Investors in this MarketSafe CD will be receiving their original investments with no upside payment. So… We saved investors 29% (assuming they would still be holding stocks)… Pretty cool.

And on that note… I think I’ll head to the Big Finish! Oh, and the currencies have risen a bit since I first came in, so we’ve got that going for us today!

Currencies today 10/28/08: A$ .6190, kiwi .5495, C$ .7720, euro 1.2505, sterling 1.5680, Swiss .8615, ISK (no quote), rand 10.66, krone 6.8650, SEK 7.9950, forint 212.75, zloty 2.9775, koruna 19.48, yen 94.60, baht 34.90, sing 1.5075, HKD 7.7520, INR 49.87, China 6.8385, pesos 13.21, BRL 2.19, dollar index 87.13, Oil $64.03, Silver $8.91, and Gold… $742.50

That’s it for today… A very long day yesterday… Systems problems delayed our start, and then there was a ton of stuff to trade. It was incredible! And the phones? Unbelievable! Today’s another day, so I had better get ready. I found out yesterday that we’re having an art gallery show in the office on Thursday evening. Frank has supported the arts regularly – this being the third art show we’ve held in our offices after hours. Our old friend, Rick Barcheck, picks out the artwork, comes in, hangs it, and hopes someone will make an offer to buy it! They are good times, with lots of old friends from the Mark Twain Bank days… And then, Friday is Halloween! My darling daughter, Dawn, called the other day to see if it would be OK to bring her daughter (my granddaughter), Delaney Grace by on Friday in her Halloween costume. Can’t wait to see that! When Dawn and her brother Andrew were little, my beautiful bride would always bring them by to see me at the office in their costumes. Dawn is carrying on the tradition! OK… Enough! Time to get to work! Hope you have a Terrific Tuesday!

P.S. To get The Daily Reckoning sent directly to your inbox, sign up for our free email newsletter, or if you prefer to use RSS, subscribe to the Daily Reckoning RSS feed.

Chuck Butler
October 28, 2008