Barking Up the Wrong Tree

Good day… And a Terrific Tuesday to you! I sure hope my colleague Chris Gaffney got some sleep last night, as he was up the whole night before with his father in the hospital. I remember those days and nights when my parents began to “age” and then grew ill… Not a fun time for anyone. Oh… And my apologies for the typo in the Canadian dollar price yesterday, and so many misspelled words… Fat fingers and no spell checker on a Monday Morning… UGH!

OK… With most trading desks across the United States on skeleton crews for the Columbus Day holiday, the U.S. dollar traded up all day. There was little going on to give one any direction as to how material this move was, or just what the heck was driving it! As I said yesterday, the Eurozone ministers were beginning their meeting to discuss the weak dollar, yen (JPY) and renminbi (CNY)… So… Some traders believe that means the ministers want the euro (EUR) to be weaker.

I believe traders that believe this are barking up the wrong tree. The European Central Bank (ECB) loves the strong euro, and I’ve explained why on several occasions in the past, but for those who missed class on the previous 1,000 times I’ve explained it… The strong euro does so much for the ECB’s mantra to provide price stability… A strong euro fights inflation, and increases its allure for foreign investment into the country. There are more reasons like the price of oil being reduced, so, you can see what I’m talking about now…

Just because the Eurozone ministers are calling out the weakness in dollar, yen, and renminbi, they aren’t saying, “We want them to get strong versus the euro!” They want the Central Banks of those currencies to get a backbone, and provide price stability too!

That doesn’t mean willy-nilly interest rate policies either!

And while I’m at it… I might as well say that I doubt seriously that the United States would play along with any plan they come up with to strengthen the dollar! They’ll just give them that old “strong dollar is in the best interest of the U.S.” speech, which will throw the Eurozone ministers off the scent of the weak dollar and onto yen and renminbi. I’ve said it before and I’ll say it again… “The U.S. loves the weaker dollar!” U.S. Treasury Secretary Paulson may write it 100 times on the board that he believes in a strong dollar policy… But he’s got his fingers crossed behind his back!

Here’s why… Exports. Yes… Apparently we still do “make things” here in the United States! But exports by U.S. companies were up 11% in the second quarter. That’s the best/biggest improvement in 20 years! And for the first half of 2007, exports grew more than twice as fast as imports!

There’s a commercial on TV where an accountant comes out to a woodshop and is all concerned about the growth of the company, and the owner says, “Isn’t that what’s supposed to happen?” Well… It could be these manufacturing companies that are seeing their exports grow and wondering how it’s happening… I would say to them, “It’s the weak dollar! It’s supposed to happen this way!”

OK… There’s a currency in Asia that has been puttin’ on the Ritz lately…The Singapore dollar (SGD).  Yesterday, when I was doing the “currency round-up” I notice the Singapore dollar has really moved lately. Normally, in the past, we would see the Sing dollar rise, and then fall, because the Central Bank would intervene to keep the currency as weak as yen and renminbi… It’s all a competition game for exports!

But recently, we’ve not see the Central Bank intervene. Have they experienced a life-changing event? Nah… Probably just decided that the renminbi had gained about 10% in the past year, so it was OK to allow their currency to rise. The Monetary Authority of Singapore, which controls the exchange rate, says that they are going to allow the currency a “gradual and modest” appreciation to keep inflation at bay.

I would shake their collective hands and congratulate them on moving into the 21st Century of inflation fighting!

The Aussie dollar (AUD) lost its 23-year high of 90-cents yesterday… But that should prove to be short-lived. Yesterday I printed that story from an analyst that believes the Aussie dollar could reach parity to the dollar, like the Canadian dollar (CAD) has done. I received a few emails questioning whether or not I had let the blood thinners reach my brain!

But seriously… Why not? I know most people don’t even know the Aussie dollar existed in the 70’s… But while you were doing the hustle on the disco dance floor (like my colleague Chris Gaffney, A.K.A. Tony Manero (John Travolta) the Australian dollar was trading around 1.50 to the dollar. Well… Actually, that happened early in the 70’s before the disco craze, but I couldn’t pass up putting the image of Chris Gaffney in your mind with his arms up in the air, dancing! Heh, Heh, Heh!

If commodity prices continue to climb – as our long time friend, Jimmy Rogers, believes they will – there’s no telling where they will take the Aussie dollar.

Speaking of commodity prices (and of course this is opposite of what I just talked about) but we all know what won’t last long – a falling gold price. Gold dropped $8.50 yesterday to $738.70. This is all in reaction to the dollar movement yesterday.

My friend, Jon Nadler, of Kitco had this to say about gold’s performance yesterday…

“A few ships hit some rough waters this Columbus Day, and gold’s was one of them. What started as a mild decline in values overnight in Asia, soon turned to more serious selling.”

Well… I think the head of the IMF, Rato, probably threw more cold water on gold and helped the dollar when he decided to give us his thoughts. Mr. Rato believes the U.S. dollar is now undervalued.

Man… Would I like to sit down and have a conversation about that thought with Mr. Rato! He’s soooooooo wrong! But, that still got what little volume there was yesterday to swing in the dollar’s favor.

First, I would point out that the U.S. current account deficit requires financing to the tune of $3 billion per day from foreigners… While Germany, the Eurozone’s largest economy has a SURPLUS! But, don’t let that item get in the way of you talking with your foot in your mouth, Mr. Rato! Oh, there’s more here I could go on about, but you hear it every day from me, so you know how I would not stop until Mr. Rato broke down and apologized!

We get to experience “Fed Speak” today, as Fed Heads, Poole, and Yellen are both scheduled to speak. The markets will keep an ear to the ground on these speeches, as both of these Fed Heads are known to throw out juicy lines about the economy, the Fed, the dollar and whatever else pops into their minds.

And then very late today, we’ll see the FOMC meeting minutes from the Fed’s last meeting, in which they cut rates by 50 BPS. I still can’t believe the markets have allowed the Fed to get off the hook on that move! Anyway… Recall last month the Fed stated in their minutes that wage growth was strong, which we know to be untrue, and that the housing “problem” was bottoming out, which we also know to be untrue!

So, what un-truths will the Fed have for us today? One thing we know for sure is that this is the meeting they cut rates, and did an about-face. I, for one, will want to see what excuse they have up their sleeve for that about-face!

In the “good news” department for us here in the United States, oil prices continue to slide from the lofty $83 achieved about 10 days ago. Is this a long-term trend? I truly wish I believed that it was! No… This looks like the same trading pattern oil has held for some time now… The price pops up to a lofty level, and then backs off, but each time, it pops up it goes higher than the previous lofty level.

Oil has recently fallen due to rising inventories, and profit taking of course. Doesn’t that all make abundant sense? The price goes high, and people stop buying as much, which leads to rising supplies/inventory.

Currencies today: A$ .8950, kiwi .7620, C$ 1.0120, euro 1.4050, sterling 2.03, Swiss .8425, ISK 60.75, rand 6.8825, krone 5.4880, SEK 6.5270, forint 178.45, zloty 2.6750, koruna 19.5730, yen 117.20, baht 31.45, sing 1.4730, HKD 7.7590, INR 39.40, China 7.5150, pesos 10.8440, BRL 1.8170, Dollar Index 78.84, Oil $78.60, Silver $13.25, and Gold… $733.30

That’s it for today… Well, the Baseball Playoffs move to the next round, as the Yankees were eliminated last night. All the other series ended up in sweeps, so at least the Yankees stayed around for an extra game! How about that Marion Jones? After all those rants about never taking steroids, she admits to taking them and returns her Olympic medals… You have to ask yourself this question… Would you be shocked to find out if any athlete playing these days takes steroids? I wouldn’t… I’m not saying they all do… I’m just saying I wouldn’t be shocked to hear about anyone that is exposed. Well… On that uplifting note – NOT! – I’ll hit the send button, and hope everyone has a Terrific Tuesday!

Chuck Butler
October 9, 2007

The Daily Reckoning