Heading Towards Zero

Good day… And a Tub Thumpin’ Thursday to you! It certainly was a Tub Thumpin’ Wednesday for the currencies, foreign stocks, commodities, and the Philadelphia Phillies! By no means does this indicated that the deep dense fog that has hung over the markets for three months has lifted for good… It did, however, lift for one day, and what a day it was!

Oh, and the Fed did indeedly-do cut their Fed Funds rate to 1%, which works out great since Fed Funds had been trading at 1% anyway! I had a reporter from Dow Jones call me a few minutes after the rate cut and ask me my opinion on what the dollar was doing, which at the time was rallying back a bit. I said it looked like a classic case of “buy the rumor sell the fact”; that enough speculators were pushing the dollar lower ahead of the rate cut in hopes that a larger cut would be made. That, however, was not the case, and the dollar rallied… But only for about 20 minutes, and then it took a ride on the slippery slope, with the euro (EUR) pushing to the 1.29 handle as I left for the day.

I turned on the currency screens this morning, and what to my wondering eyes did appear, but the euro trading back above 1.30; I gave a cheer! Not that I have a dog in this race, I just like to see people make money. So, I immediately began to think, “Now Chuck, is this for real… Or just a false dawn?” Well… You know, the dollar really had gone too far, too fast this month and was due for a correction, and what better day to have a correction than a day when your currency was debased by 50 BPS! The dollar was going higher so fast it reminded me of a story I heard a very long time ago. I can’t remember if my dad or mom told me, but it goes like this… Chuck, nothing grows to the moon, stars and sun. Sometimes it might look as though something will… But don’t worry; it will come back to earth.

And so it was for the dollar this month… Of course this all could be wiped out by the fact that tomorrow is month-end, and we could see some adjustments being made in foreign stock funds. Let me explain… These foreign stock funds are off by quite a bit this month; and since they are foreign stock funds, they are denominated in foreign currencies. So… To adjust the amount of currency needed to fund the… Well, fund… These funds might have to sell currencies tomorrow… So, keep that in mind. But after yesterday’s performance, who knows?

The other day, I mentioned how the emerging market currencies had really taken the brunt of the dollar strength… But… I saw where there was an announcement overnight of IMF and Fed dollar swap lines for emerging markets. This is a bold and reassuring measure to address the liquidity problem for the emerging markets. I don’t know if it will be enough, but for now it has brought some calm to these markets.

So… U.S. rates are at 1%… This is the level that former Fed Chairman, Big Al Greenspan, brought rates to in 2003 and left them there for far too long – through eight successive meetings before lifting rates in June of 2004. During that time, gold rose 16%… The S&P 500 rallied, too, and bond yields went up. But… We certainly do live in a different world than we did just four years ago, don’t we? I just don’t like interest rates this low; but the Fed has got to do what they’ve got to do. And I think the Fed Heads believe that they will be “Saved by Zero”. Maybe, someday, Saved by Zero… But I think they’ll have another thing coming! You’ve got another thing coming!

The current Fed Chairman, Big Ben Bernanke (or triple B) issued a statement following the rate cut that was quite somber. To me, he painted a very dark, depressing picture of the economy, and… I think he left the door wide open to further rate cuts, taking us on that path toward 0%. I doubt they’ll actually ever get to 0%, but we could be getting within’ spittin’ distance of 0%.

I could go on and on regarding these low interest rates, but I don’t feel like getting my blood pressure all boiling, and yelling at the walls! This is the first day, in what seems to be a month of Sundays, that I can look at the currency screens and smile… So, I’m not going there, and you can’t make me!

Don’t know if you’ve noticed, but the Chinese renminbi (CNY) has remained virtually unchanged this week. Yes, the peg was dropped in July of 2005, and it should move some each day, right? Well… When you realize that the reality of the situation is simply that China is a Communist Country, and can do whatever they darn well please with their currency! And it looks to me as though China has restored the peg. Maybe it’s just a move to sit on the sidelines during these tumultuous times in the financial markets.

OK… I just saw the euro gap up from 1.3075 to 1.3135 in a heartbeat! It was crazy! Now this is going too fast! Why can’t these currency traders make up their minds? OK, I’m not complaining, this time! But, really… On Monday of this week we were looking at some devastating currency levels, and by Thursday they have reversed about 6%!

And you know what all this dollar weakness and euphoria brings to the currency table, don’t you? Of course you do! Risk trades, carry trades, dollar and yen weakness (JPY), Aussie (AUD), Kiwi (NZD), and other higher yielders stronger. Yen is still below 100, so that’s a good thing… And maybe, the Bank of Japan (BOJ) will lose the scent of currency intervention… Or, maybe they’ll just stop talking about things that would weaken the yen… For now!

I’ve been around the currencies since 1985… Trading them since 1992… I’ve never seen the volatility that I see every day since July in the currencies. Crazy, I’m crazy for feeling, so lonely… No wait! Ahhh… Patsy Cline, one of my all-time faves! And, on a sidebar here… What’s the most played song ever in jukeboxes? Crazy…

OK… Don’t know where I was going there, but quickly turned to trivia. UGH! Today, we’ll see the color of the first estimate of third quarter GDP. This ought to be interesting. Remember in the third quarter, the dollar was stronger, so imports won’t be there to pump up GDP like they did in the second quarter. Hans and Franz, pump you up! The experts believe that third quarter GDP will be negative to the tune of -0.5%… I’m going to go out on a limb and say it will be worse than that… But the fact that it’s negative really reinforces my claims that we’re already in a recession.

We’ll also see personal consumption for the third quarter. This is a report that the Fed Heads usually pay close attention to. Personal consumption is expected to have fallen by 2.4% in the third quarter. That’s another rate cut arrow in the Fed Heads’ quiver. Personal consumption falling is akin to falling inflation, which you and I know is a bunch of bunk! But the Fed believes what it wants to believe.

And with it being a Tub Thumpin’ Thursday, we’ll see the Weekly Initial Jobless Claims like we do every Thursday. This report has showed that the Initial Jobless Claims will not slow down. The weekly number remains around 475K, and the continuing claims number adds to the figure every week. This all will lead to unemployment rising to at least 7% in the near future.

Again… I received a letter yesterday from someone that ripped me for not providing solutions and always criticizing. Hmmmm… For years now, I’ve said… “Reduce the debt, reduce the debt, reduce the dept…” That’s the solution! I think everyone can think of one way the government and consumers could reduce their debt… And that’s the solution! I’ve beaten the proverbial dead horse with that statement… Reduce the debt! Geez Louise… Oh, and did I mention… Reduce the debt!

And with the smoothness of a Carlos Santana guitar solo… I slip right over to talk about my friends, Addison Wiggin, and Kate Incontrera’s book I.O.U.S.A., which accompanies the movie of the same name that was released last August. I read the book on all the flights during the currency tour, and even recited parts of it in my presentations. This is a must read for everyone, period. It makes no difference if you are rich, poor, middle-class, in debt or not. It doesn’t matter what you wear, just as long as you are there…. See how I slipped right over to I.O.U.S.A. from my tirade about reducing the debt? I’ve learned something from writing a daily newsletter for 16 years!

Currencies today 10/30/08: A$ .6870, kiwi .5995, C$ .84, euro 1.3140, sterling 1.6575, Swiss .8855, ISK (still no quote), rand 9.91, krone 6.5770, SEK 7.5050, forint 194.70, zloty 2.7040, koruna 18.60, yen 98.70, baht 34.85, sing 1.4610, HKD 7.5110, INR 49.67, China 6.8410, pesos 12.81, BRL 2.1150, dollar index 83.64, Oil $68.25, Silver $10.06, and Gold… $770.15

That’s it for today… Congrats to the Philadelphia Phillies on their World Series title. I told the people of Philadelphia (when I was there) that I had thought the Phillies were the best team in the National League all year… Got to have dinner with my little buddy, Alex last night, as we went out (my beautiful bride was gone). Just the two buddies… I had a flashback to when he was three, and would sit on my lap while I wrote the Pfennig, and would help me sometimes, which would look like this 0970987u038yr8hy32o…. He’s 13 now, loves to work out, play his guitar, and sports… I don’t know how it happened but that sounds exactly like me when I was 13! One difference though, I was bigger than he is… And… I had no qualms admitting I liked girls at 13. He hasn’t felt comfortable with all of that yet! So, see, kids aren’t always ahead of what their parents did! OK, I’ve rambled on here too much… Time to go and have a Tub Thumpin’ Thursday, hope your is Tub Thumpin’ too!

Chuck Butler — October 30, 2008