Slip Sliding Away
Good day… And a Wonderful but Wild and Whacky Wednesday to you! It should be wild and whacky as the markets try to digest the Fed’s move to cut rates 25 BPS yesterday. The move sent stocks reeling, as the stock guys wanted 50 BPS… From what I hear, so did Fed Head Rosengren, as he voted no to 25 BPS and cast his vote for 50 BPS…
The dollar didn’t go into the toilet though… Which is really on the minds of the Fed Heads these days… But just to set the record straight on these rate cuts at the past three meetings… I take you back to my Pfennig of September 18th, 2007…
“You all know that I’ve said for 4 months now that the Fed would begin to cut rates in the fall… And here we are… The days are crisp, the sun doesn’t pack the punch it did a month ago, the kids are back to school, so it must be fall! (I know, not technically for a few more days!)
And while I said the Fed would begin to cut rates in the fall back in May, I’m not one of those that believes this is the “end all” for what ails us. First of all, I wish the Fed would concern themselves with fighting inflation, instead of appeasing the markets… In other words… The Fed needs to balance short term liquidity needs and financial stability with longer run inflation objectives. Second, I just don’t see a rate cut as something that helps us out right now… Sure it helps those mortgage holders with ARM’s that are about to reset… But, does a rate cut really help the liquidity / credit crunch in the U.S.? Does it help in our quest to attract foreign investment to finance the Current Account Deficit? The answer to both of these and many more questions I could come up with, is a big fat NO!
Oh, and one more thing… It was August that the Chinese mentioned their “nuclear option” of selling Treasuries. So… If July’s balance shows further weakening, August’s balance should be quite ugly… And that means… Further currency debasing, which will come in the way of rate cuts. Which by the way… I not only said in May while talking to a group of people in Panama, that the Fed would begin to cut rates in the Fall… But followed that up with a call for additional rate cuts in October, and December… And all that plays well, with the currency debasing that will be needed to attract foreign investment to finance the Current Account Deficit!”
OK, fast forward to yesterday… The Fed finished the year with those three rate cuts I called for back in May… And just to refresh your memories… I’ve also said that the Fed will continue to cut rates in 2008, until rates get to 3-3.25%… That’s at least another 100 BPS folks… Think we’ll be getting foreigners to line up at the door for our 3% yielding assets? Ooooh… The thought of it is giving me goose bumps!
Yesterday, I also said that the we might see the Fed change their wording of “balanced growth”… They didn’t go so far… But, should have… The did say…”Economic growth is slowing, reflecting the intensification of the housing correction and some softening in business and consumer spending. Moreover, strains in financial markets have increased in recent weeks.”
Hmmm… Doesn’t sound as if growth is balanced with risk / inflation does it? So why didn’t they just drop the bias? Because, they know that it could “spook” foreign investors… And when foreign investors get spooked, they don’t buy our assets, and when they don’t buy our assets, the Current Account doesn’t get financed, and when the Current Account doesn’t get financed… The dollar gets weaker!
Remember the little spoof I brought you the day after Thanksgiving? Well, the singing is getting louder each day… From Nov. 23rd Pfennig…”Then… I see a story on CNN regarding a “Santa Rally” for stocks, it goes like this… “sing it with us: You needn’t watch out. You might as well cry. You might as well pout I’m telling you why. Santa Claus ain’t coming to town.”
Yes… Big Ben and the Fed Heads they’ll be here all week folks, please try the veal… Seriously, Big Ben and the Fed Heads have kidnapped the stock market Santa…
The Japanese yen sure took the bull by the horns after the Fed decision yesterday, and rallied strong! But we’ve seen this kind of move all too often, and each time it falls back… Every time yen goes away, it takes a piece of me with yen… I sure would love to see yen take off to the moon Alice! But that just won’t happen, unless the rest of Asia (read China) sees their currencies go on a rampage VS the dollar… It has to happen all at the same time.. Which could really a bit of a problem for the dollar when it happens…
Remember a couple of years ago, yen was 125 and I said then that I thought traders would grow tired of waiting for China, and begin to chip away at yen so that the Current Account could see some breathing room? Well… It didn’t really play out just like that… But… Yen has gained from 125 to 110 today… And if you look at that closely you’ll see it represents about the same size move the Chinese renminbi has had in the same time frame…
Speaking of Japan… Japan’s wholesale inflation rate jumped to a 14-month high in November hitting 2.3%… This could be a precursor to higher Consumer inflation… Unfortunately, more than 3 years of wholesale inflation hasn’t fed into higher Consumer prices or wages… Hmmm… Sounds to me like it’s due! And that would lead to higher Japanese interest rates, and a stronger yen… We can only hope this time it isn’t another false dawn!
And then there was China, and their strongest paced Retail Sales in 8 years looking all cocky and stuff! China posted an 8-year high in Retail Sales for November… So much for all those calls of a Chinese slow down, eh? When will these guys ever learn? When will they ev…er… Learn?
And here’s a funny story from China… Google is not a normal Chinese spelling, and people are struggling to pronounce it correctly! Instead they Chinese call Google… “Go-Go”
And one more thing on China… Seems U.S. Treasury Sec. Paulson is now going after the Chinese regarding safety in toys (and other products) they manufacture and send to the U.S… That’s all good in my books, the problem I have is with the person sent to do the job… Given Paulson’s track record with getting the Chinese to loosen the reins on the renminbi, we might, want to choose someone else for this fight… We might, eh?
Talking about China is a great Segue into talking about today’s printing of the Trade Deficit for October… The experts have it pegged to come in at $57 Billion… I think it could be even better than that given the rot in the dollar during September and October… Which is exactly the one good thing a weak dollar can do for us!
Tomorrow we’ll see November Retail Sales, which includes Black Friday sales… I’ve been watching for indicators in the Butler Household Index (BHI) and I would say that Retail Sales will be better than the recent trend, which showed slowing sales… So, we’ll keep an eye out for that one tomorrow…
British pound sterling bounced back yesterday after the rate cut announcement… Seems this is playing out just how I explained I thought it would. Yes, the Bank of England (BOE) cut rates a week ago, but with the Fed now having put 3 rate cuts in their back pockets, the pound still enjoys a hefty positive rate differential to the U.S. 125 BPS for those of you keeping score at home…
With the Fed’s next rate cut, they will no longer enjoy a positive rate differential to the euro… And then on down the line with Norway, Sweden, etc. I see this as a major hurdle for the dollar to overcome in 2008… The dollar’s positive rate differential is slip sliding away…. Slip sliding away… You know the nearer your destination, the more you’re slip sliding away… But then the biggest hurdle will be the dollar’s ability to attract about $3 Billion dollars a day in foreign investments to finance the Current Account Deficit.
Now, all we have left as we head to year-end is data, which will give us indications of future Fed rate cuts… Like the Trade Deficit today, and Retail Sales tomorrow, CPI and Industrial Production on Friday… So, we’ll have to be on the lookout for things in the data prints that would lead the markets to push Big Ben again…
Monday should be a real “data zinger” as we not only see the Current Account Deficit, but the TIC’s data (net foreign purchases). This TIC’s data has been absolutely awful the past two months (August and Sept)… So, October’s data will be a premium release… If the data shows more rot on the vine here… It should play into more dollar weakness… But that’s next week, and I’ll be on vacation and probably won’t even see the data when it prints! I’ll have to read about it in the Pfennig, that Mr. Gaffney will have taken over, once again!
Currencies today: A$ .8840, kiwi .7850, C$ .9915, euro 1.4705, sterling 2.0460, Swiss .8845, ISK 61.15, rand 6.7370, krone 5.4325, SEK 6.4270, forint 171.64, zloty 2.4350, koruna 17.71, yen 110.98, baht 30.26, sing 1.4415, HKD 7.7970, INR 39.38, China 7.3720, pesos 10.8450, BRL 1.7680, dollar index 76.12, Oil $89.90, Silver $14.70, and Gold… $811.80
That’s it for today… I hope it’s not too wild and whacky today, as Chris is taking some time off, and leaves us short on the desk again… My beautiful bride tricked me into leaving work and not staying so long yesterday… She told me that my little buddy Alex’s band performance was Tuesday night, only to find out (when I got home) it’s tonight! Nice trick! Except for all the work I left on my desk! Oh well… I’ll see how today goes, and hope for a more Wonderful than wild and whacky Wednesday! Hope yours is Wonderful too!
December 12, 2007