FOMC Minutes Point to Problems

Good day… And a Tremendous Thursday to you! Well… Don’t look now, but oil has reached $135 overnight… UGH! I recently told an interviewer on radio that I believed that 20% of the price of oil was speculation. That was when oil was around $122. I would have to think that the speculation percentage has gone higher.

OK… The Fed’s FOMC meeting minutes caused quite a stir in the currencies yesterday, so let’s go to the tape. The Fed noted that prior easing had provided a better balance to the risks to inflation and growth, although the risks were still towards downside growth. In addition, the Fed downgraded their outlook for growth and pointed toward higher inflation, reporting “much weaker 2008 growth, inflation to remain elevated in 2008, jobless rate to rise significantly.” Ooooh, now that doesn’t give me a warm and fuzzy, and it shouldn’t give you one either!

So… If that’s what they “really” talked about, then why on earth did they go ahead and cut interest rates? They put in print that they believe inflation is going higher, and they went ahead and cut interest rates! OMG! These guys (and gals) are really something… What? I don’t believe I can say what they are in this letter, as this is a family letter! But, I’m sure my friend, the Mogambo Guru will have something to say about this, in his special Mogambo way… Can’t wait to read his letter next Monday!

The Fed notes sent a message to currency traders and the message said… “With low growth forecast, and higher inflation forecast, the Fed doesn’t have a clue what to do.” Which means there aren’t strong feelings about an interest rate hike now either.

Last night, after getting home from my little buddy Alex’s baseball game, I checked what was going on in the Asian markets, because the Fed FOMC minutes printed after Asia and London had gone home for the day, and I wanted to see how the Asians took the FOMC minutes… At that time, the euro (EUR) was close to 1.58 again.

But something funny happened on the way to the forum for the euro this morning… So, let me explain what happened. It’s called jawboning. The dollar was falling too far too fast again, and something had to be done to slow down the fall, a governor if you will on weakness! And that something came in the form of a report showing that futures traders are adding to bets that the Fed will raise interest rates before year-end.

Well… With inflation (in my terms) at 11%, I would think they would be raising interest rates well before then… But, then, that’s just me… And if the Fed does raise rates, what good will it do if they wait till year-end? By then, inflation will probably be around 14-15% (in my terms) and the price of oil will be… Oh, who knows how high it will be by year-end?

So… The euro has lost about half a cent overnight on this news. Still, the euro has made a nice recovery this week, and all those banging on the drum for and end to the weak dollar trend have crawled into the back seat and shut their traps this week.

OK… Enough on the Fed and their ineptness! Under the category of: “It’s about time they agree with Chuck”… Banks including Royal Bank of Canada, and ABN AMRO Holding NV, believe that the Aussie dollar (AUD) is going to parity with the green/peachback. So, the “parity watch” is on… With champagne bottles chilling and party hats all ready to be worn. The “parity party” is being planned… Too bad these Big Banks with their Big Research Departments don’t read the Pfennig.

Just kidding… These guys are great at what they do! But, how about that Aussie dollar? I’ve spent most of this week talking glowingly about the Aussie dollar… Yesterday, it hit a 25-year high!

The New Zealand dollar/kiwi (NZD), finally got off its duff and moved higher last night. Kiwi had lagged the Aussie dollar lately, but finally saw some love when a more expansionary than expected budget for 2008 was printed. I still like Aussie more than kiwi, as New Zealand’s debt situation is just too much for me to try to sweep under the rug!

U.S. stocks lost another 200 points yesterday… And we all know what that means… So a quick look at Japanese yen (JPY) and Swiss francs (CHF) shows some nice gains this week. This all plays well with what I’ve been talking about… (Stocks to fall, and carry trades unwind)… It’s too early to tell if this will continue, but for now, it sure looks like another “plan” has come together!

A couple of weeks ago I talked about the Indian rupee (INR), and how it had weakened for no apparent reason, therefore laying the blame on the Indian Central Bank. It now appears that a credit market slump has led to this weakness. Corporate Treasurers in India believe this credit market slump has passed and the currency will rebound 8% in the next year.

Yesterday, Reuters reported that Warren Buffett had this to say about the dollar…


Sounds like Warren Buffett has been reading the Pfennig! Doesn’t that all sound familiar? Of course it does… Because that’s what I keep saying over and over again! The fundamentals remain awful!

OK… Today, we’ll see the Weekly Initial Jobless Claims, which are forecast to have jumped to 373K, which would be equal to the level at the start of the 2001 recession. We’ll also see the OFHEO House Price Index for the first quarter, which is expected to show a 1.3% decline. And if that number prints, it would equal a record low since the data began in 1975… UGH!

Fed Head Kroszner is going to talk today about the recovery and “repair” of the mortgage markets… What recovery? What repair? This ought to be interesting!

Bank of Canada’s Governor Carney will speak today, but only after Canada prints March retail sales, which are forecast to show a rebound from the February report. The Canadian loonie (CAD) continues to move higher versus the green/peachback, so expect some “jawboning” from Carney to slow the loonie’s rise.

Gold has seen some profit taking overnight… The bit stronger dollar versus the euro has helped with gold’s move lower… But, with oil hitting $135, gold has a champion in its corner. I would expect gold to gain back this move lower overnight.

OK… Onto the Big Finish!

Currencies today 5/22/08: A$ .9605, kiwi .7855, C$ 1.0170, euro 1.5750, sterling 1.9810, Swiss .9725, ISK 73, rand 7.7075, krone 4.99, SEK 5.9115, forint 155.55, zloty 2.17, koruna 15.94, yen 103.35, baht 31.85, sing 1.3580, HKD 7.80, INR 42.95, China 6.9420, pesos 10.37, BRL 1.6570, dollar index 72, Oil $134.21, Silver $17.76, and Gold … $921.88

That’s it for today… The end of my four weeks on my cancer meds… You gotta love it! By next Wednesday, I will have regained my taste for food, and the rest of my body will begin working normal again… So enough of that! I had a brain drain yesterday when I told people to call John Kaupisch regarding bonds… I knew that John wasn’t going to be in yesterday and plum forgot! UGH! Looking forward to the three-day Memorial Day Holiday weekend for sure! Got home in time to see my little granddaughter, Delaney, yesterday… She’s pulling up on everything and crawling around now… Such a cutie! She loves to wave hi and bye, which is what I need to do right now… Say good-bye Chuck… Good-bye Chuck, and I hope you have a Tremendous Thursday!

Chuck Butler
May 22, 2008