A War of Words

Good day… And a Terrific Tuesday to you! Well… Yesterday morning we were back to reality… But that changed quickly, and really got ugly late in the day as Big Ben Bernanke spoke from both sides of his mouth. But the markets only listened to one side! There was a war of words going on between the undynamic duo of Bernanke and Paulson versus ECB President Trichet. Big Ben won the first round… Trichet came back strong in the second round, and Paulson weighed in strongly yesterday, and then tagged his teammate Big Ben to finish off the round.

In other words… All the euro’s (and other currencies’) gains on Thursday and Friday were wiped out yesterday by first Paulson, and then Big Ben. More jawboning folks… That’s what it takes to keep the dollar from a freefall. But let’s listen in on Paulson first, and see just what spooked currency traders into buying dollars again.

U.S. Treasury Secretary Paulson threw a cat among the pigeons yesterday when he flatly stated that he “WOULD NEVER TAKE CURRENCY INTERVENTION, NOR ANY OTHER TOOL, OFF THE TABLE”. And that, once again led the markets to believe the U.S. is near to intervening in the markets to protect the value of the dollar… And that sent the dollar to the penthouse from the woodshed, and exchanged places with the euro (EUR). All the other currencies followed, along with gold. It was an ugly day.

But there was some comedy in Paulson’s speech ­- at least for me there was! Paulson also said, “LONG TERM ECONOMIC FUNDAMENTALS COMPARE FAVORABLY, AND WILL SHOW IN THE DOLLAR’S VALUE”. Yes, I believe that he’s half right there. Put in Chuck words… The economic failures will show in the dollar’s value… WEAK!

OK… As if Paulson didn’t do enough yesterday, then along came Big Ben late in the afternoon. Oh brother, did he ever speak from both sides of his mouth, or as they used to say… He’s a two-handed economist… On one hand we have this, and on the other hand we have that… But before I get carried away with that stuff, let’s listen in to what Big Ben had to say that sent the euro and other currencies even further out to sea.

Front and center, Big Ben said that, “THE FED ‘WILL STRONGLY RESIST’ A PRICE EXPECTATIONS JUMP.” The markets took this to mean that he will raise interest rates. What? Are they drinking Big Ben’s Kool-Aid or what? Did they see that the unemployment rates rose to 5.5% on Friday? Do they not know the history of the Fed, in that they don’t raise rates when unemployment is rising? Just what the heck is going on with the markets being so infatuated with Big Ben’s statements that are so off base, a minor league pitcher could pick him off!

But here’s the two-handed economist talk… First he says… “THE RISK OF `SUBSTANTIAL DOWNTURN’ HAS DIMINISHED”… Then he says… “GROWTH RISKS REMAIN TO THE DOWNSIDE.” So what’s it gonna be, boy?

I’m really getting dizzy from all this volatility the past week. Now, the “war of words” ball is in Trichet’s court. Will he put the undynamic duo in their places?

And speaking of two-handed economists… We received some two-handed data yesterday. On one hand, pending home sales jumped 6.3% in April… That’s a nice print! But on the other hand… At what price did those home sales take place? I’m completely positive that the bad news will come when the prices paid detail is printed. Sellers had to finally capitulate and reduce prices to enter the “realistic buying zone”.

The Big Ben talk about “fighting inflation” really sent bonds into a massive sell-off… But Fed Head Geithner put more weight on Big Ben’s comment last week, saying that the “Fed was attentive to moves in the dollar”. Yes, they may be attentive, but what are they going to do about it other than jawbone the dollar higher? I can’t believe the markets aren’t testing the Fed Heads here… But then again, I guess they did, sort of, last Thursday and Friday. They will need to mount another test, to see if more jawboning comes from the Fed Heads. The United States isn’t going to intervene. They don’t have enough intervention arrows in their quiver! When will the markets wake up and smell the coffee on this one?

What cracks me up is the heading this morning on the Bloomie that, “Bernanke will ‘strongly resist’ any surge in U.S. Inflation Expectations”. Ahem… Big Ben… We’re not experiencing “expectations” we’re experiencing RISING INFLATION! There are lots of names I could come up with here, but my mother always taught me to not say anything if I couldn’t think of something nice to say about someone!

The Fed has, and continues to, put all their eggs in the “inflation expectations” basket… And not give one iota of attention to “actual inflation!”  Here’s the problem as I see it… Inflation has been rising for some time now, as chronicled here in the Pfennig… But as long as it was contained in stuff that didn’t include food and energy, the Fed didn’t see it. But now that China’s inflation is soaring and they have to raise prices to offset their soaring inflation (+7.7%), we have inflation everywhere. Food and energy of course are the main culprits… But come on…

I have a bookmark that’s actually an old ticket stub from the last year that I had season tickets – which was 1994 B.A. (Before Alex). The price on that ticket for that particular seat was $10.50. A comparable ticket in the same section at the new stadium now costs $55. A cold beverage used to cost $2.50… It now costs $8.00. I could go on with examples of my two older kids’ college tuitions, etc. but why bother… You know what I’m talking about with your own experiences.

And… If you are on social security or any other entitlement program and your payments are tied to the cost of living… You are wondering just what the Fed needs to see in order to realize that inflation is a problem – and what they were thinking cutting interest rates!

So… The morning has broken, like the first morning… STOP IT! What I was going to talk about here, is the euro… It just broke below the 1.55 level again. What a wild ride it has been the past week for the single unit, which acts as the offset to the dollar. It has been crazy… And it resembles the “old days” in the currencies. The wild swings… The things that caused me to lose my hair to begin with!

Today, we’ll see the color of the April trade deficit. I get a kick out of the way this data is titled, in that they call it the “trade balance”… As if! As if it would be anything besides a “deficit”! Not these days and times… Anyway, the deficit is expected to deteriorate from March’s $58.2 billion to $60 billion, which sounds about right to me. I also wouldn’t be surprised if the March number is revised upward.

We’ll also see the ABC Consumer Confidence index. This isn’t the national consumer confidence index… This is a separate index, but worthy of notice. The index here is expected to fall further into negative territory, as consumers batten down the hatches.

As I mentioned above, China’s inflation is soaring.  It is reported that their May inflation will print at +7.7%… OUCH! The good news is that that number would be down from the previous month’s print of 8.5%! I think China will find that while they think inflation may have peaked, they will have to revisit that 8% level again, especially with soaring oil costs. But I think that China’s interest rates are probably where they need to be to fight these inflation pressures.

I don’t think this does anything to China’s timetable for renminbi (CNY) appreciation. It will remain slow and steady, with the emphasis on slow!

Hey! Don’t worry about borrowing on your house any longer… A local mortgage lender has a radio ad that says he’ll lend you up to 95% of your home’s value! Bad credit is no problem! Whoa… Isn’t that the stuff that got us into this mess to begin with? When this lender books those loans and sells them to the markets, who is buying them? Strange days indeed…

The Bank of Canada (BOC) meets today, and Governor Carney is expected to announce that interest rates have been cut again… To a base rate of 2.75%. That’s a low that dates back to April of 2005. Every meeting since December has seen a rate cut, so I doubt this one would be different. However, I do see the BOC taking a pause of the cause after this rate cut. The Canadian dollar/loonie (CAD) continues to be dragged through the mud with BOC rate cuts, and lifted up by commodity pricing.

Speaking of commodities… The commodity countries of Australia and New Zealand sure took the Paulson intervention threats seriously. These two jewels of the South Pacific lost some major ground yesterday and in the overnight markets.

And then finally with commodities… The price of oil is hovering above $130 at $134.70 this morning. But the commodity index is much weaker this morning… So the base metals, and commodities other than oil have seen selling.

Well, the euro has bounced up from the 1.55 level breach… Let’s hope that continues…

The Royal Bank of Canada just issued a report saying that, “The U.S. dollar rally is just starting”… Hmmm… Those are strong words from a Bank that has been calling for dollar weakness for some time now… I guess we’ll have to see what happens from here, eh?

Currencies today 6/10/08: A$ .9510, kiwi .7565, C$ .9710, euro 1.5515, sterling 1.9550, Swiss .9640, ISK 76.60, rand 7.9040, krone 5.14, SEK 5.9970, forint 159.30, zloty 2.1750, koruna 15.82, yen 106.75, baht 33, sing 1.3710, HKD 7.8090, INR 42.95, China 6.9199, pesos 10.35, BRL 1.6260, dollar index 73.51, Oil $134.70, Silver $17, and Gold… $885.47

That’s it for today… I almost slept through my little buddy Alex’s baseball game last night, arriving in the third inning, just in time to get rained on! UGH! Two more RBIs for Alex last night. Still not “stinging” the ball… But putting it in play! He has a swim meet tonight. At least a baseball game has a two-hour time limit… These summer league swim meets can last till midnight! You know… The Agora Financial Investment Symposium is getting closer… July in Vancouver sounds awesome!

I hope your Tuesday is Terrific!

Chuck Butler
June 10, 2008

The Daily Reckoning