A Pause For The Cause

Good day. I’m baaaaaaack. Did you miss me? I missed you, although I did get to see about 250 Pfennig readers in Vancouver last week. The other 250 (non-Pfennig readers), kept asking, “What am I missing? So, I expect a fresh batch of 250 new readers this week! Welcome to August!

Vancouver was great! The worse part of the whole trip was trying to get through the check-in and customs lines. Ugh! Anyway, I’ll have more on the trip, especially my meeting with the Mogambo Guru later. First, we have some news that leads me to believe the Fed just might pause next week. OK. Let’s get to the tape!

Well, I’ve changed my mind about the Fed’s August meeting. As I told Chris last week, and he so neatly inserted it into the Pfennig, as Lord Keynes famously quipped, “When the facts change, I change my mind. What do you do, sir?” The facts are quickly changing. The Fed Heads have been out laying the groundwork for a pause. Let’s listen in on St. Louis Fed Head, Poole: “I’m was still undecided on the Fed’s August rate decision, putting the chances of an August rate hike at 50-50.”

And how about San Francisco’s Fed Head Yellen: “A gradual approach is likely to be better. If we kept automatically raising rates until we saw inflation start to respond, we most likely would have gone too far. We have more data to receive and more analysis to do,” Yellen said, “and I will be going into the meeting eager to learn what my colleagues think and help them form a judgment.”

The thing to keep in mind here is that a “pause” is not an “end.” At least not for a couple of months anyway. There’s always a chance the Fed Heads come back to hike one more time. However, currency traders are champing at the bit, and quite restlessly waiting for this Fed announcement. That’s what’s holding the euro back right now, as the traders really want to make certain they hear the Fed correctly.

The European Central Bank will meet this Thursday, and their rate hike has been quite transparent by ECB President Trichet. So, the rate increase is probably already priced into the euro – except, if the ECB goes 50 BPS. The euro would really gain versus the dollar, and on the other side of the coin, if the Trichet doesn’t mention the vigilant word or sound like these rate hikes will continue, the euro would get spanked!

I don’t think the latter will happen as I still see the ECB moving rates to 3.50% by year-end, which should firmly support the euro.

I think we’ll see a rate hike from the Reserve Bank of Australia (RBA) on Wednesday night. The economy is really looking quite perky again, inflation is on the rise, and the RBA is well aware of these happenings. The Aussie dollar has already climbed back above the 76-cent handle. I still expect to see 80-cents from the Aussie by year’s end. And from there, who knows? Of course, I don’t really know that the Aussie dollar will reach 80-cents – nobody does. But to me, it sure looks like it wants to go there!

There was a report issued this last weekend from the IMF in which they very politely mention that the dollar is overvalued anywhere from 15-35% on a trade-weighted basis. This is a switch in that all we ever hear about is the fact that the Chinese renminbi is too weak. I found it really interesting that the IMF, which you might recall was given the con on the currencies by G-7 back in April, preferred to phrase it as the dollar being overvalued! We all know that it is overvalued, but now we have the IMF on our side!

Today, we’ll see the color of one of my new favorites in data-land: Personal income and spending for June. The experts believe personal income to outperform spending, which would certainly be a change in the weather, eh? We’ll also see PCE, (Personal Consumption Expenditures), which the Fed Heads look at very closely.

But wait! That’s not all! If you call right now, you can also see the ISM manufacturing index, which has been falling lately. It is dangerously close to falling to the 50 level, which is the line drawn in the sand that determines expansion or contraction. And here’s a note that I’ve mentioned before: There has never been a rate hike when the ISM manufacturing index was below the 50 level!

OK. I’m running late. I have to tell you more about Vancouver and the Agora Wealth Symposium. A great crowd. A great list of speakers. But my favorite was the Mogambo Guru, otherwise known as Richard Daughty! The Mogambo was at his best with the title of his speech telling it all: “We’re all Freakin’ Doomed!” More tomorrow!

Currencies today: A$ .7618, kiwi .6195, C$ .8830, euro 1.2770, sterling 1.8680, Swiss .8120, ISK 72.50, rand 6.9615, krone 6.1650, SEK 7.21, forint 213.89, zloty 3.07, koruna 22.31, yen 114.70, baht 37.85, sing 1.58, INR 46.60, China 7.9730, pesos 10.98, dollar index 85.34, silver $11.41, and gold $635.

That’s it for today. Well, a short week for me and then onto my summer vacation! I left Vancouver with a temperature of 72 degrees, and hit the ground in St. Louis at 101! Ouch! My little buddy was away at camp for 11 days; it was good to see him again yesterday! If camp had lasted much longer for Alex, I think we would have had to commit his mother! Thanks to Chris for pfilling in on the pfennig. And, thanks to Jennifer for taking over the trading duties in my absence. That was a long trip, but only because it takes so long to get there and back!

My next trip will be to Montreal in a month. Then, San Francisco, Panama, New Orleans, and back to Puerto Vallarta again before the end of the year. Lord, I was born a rambling man…Trying to make a living and doing the best I can. Leaving you with a little Allman Brothers. Have a great week and Tuesday!

Chuck Butler
August 1, 2006

The Daily Reckoning