Bernanke Hints Again

Good day. Well, about 500,000 units are without power this morning in the St. Louis area, as some hurricane-category wind and storms rolled through the area last night. I have some power here at the office, but no access to the outside world. The Internet, my trading screens, and e-mail are all out. I expect our technical people to arrive soon, since they lived through the storm. They are quite aware of what happened here.

So, I have no idea when this will get to you today. If it’s late, you now know why. I guess I should have just stayed home and sent it out from there, as we were the lucky ones and had power all night at the Butler House.

Well, guess who made the markets forget all about producer inflation, consumer inflation, and geopolitical tensions for a day? Big Ben Bernanke. That’s who! He really threw a cat among the pigeons yesterday when he gave his update on the economy and monetary policy on Capitol Hill. I’ll get into more of what he said in a minute, but front and center he sounded like a Pfennig reader! Bernanke said something to the tune of needing to see what past rate hikes have done to combat inflation before going forward with more rate hikes. Those aren’t his exact words, but I don’t have my notes from his speech available (power outage) right now.

And just like every time in the past when Big Ben has hinted at a rate “pause,” the dollar gets sold like funnel cakes at a state fair! I keep harping on this, so forgive me if you’ve heard me say this 100 times already. But if this kind of trading is the result of a “hint of a pause,” can you imagine how badly the dollar will fall when the actual “pause” or halt occurs? The euro gained one whole figure in the matter of minutes, and the rest of the currencies gladly followed. It was a big day for the currencies, and one that was long overdue, in my opinion!

So, Big Ben is a dove, eh? That’s what the media is saying. I don’t buy it. I just think he sees the same data we do, and none of it has given anyone a warm and fuzzy on economic growth. Here are some more of his thoughts (I had these written down). “U.S. economy is moving from a pace above that of its longer-term capacity to a more moderate and sustainable pace and. Over time, pressures on inflation should abate as the pace of real activity moderates and, as future markets suggest, the prices of energy and other commodities roughly stabilize”

I think that while Big Ben is hinting at a pause, the Fed will go ahead with one more rate hike in August. But with all that has happened and been said, I would think that to be the last rate hike for sometime. In fact, in my monthly newsletter to clients of EverBank World Markets, the Review & Focus, I even give an outline for rate cuts by the Fed in 2007!

Once the markets get on the scent of no further rate hikes in this cycle, the second prop will have been removed from the dollar, causing it to fall flat on its face! Recall, the first prop that was removed was the HIA repatriation Act, which expired in December of last year. Ever since that prop was removed, which accounted for over 300 billion in dollar purchases in 2005, the dollar has leaned heavily on the interest-rate-hike prop. So, now you can see what I’m talking about when I say that the dollar will fall flat on its face when the rate-hike prop is removed!

Of course, in the past, any time Big Ben hinted at a pause, the Spin Doctors, and I don’t mean that rock group from the 90’s, got a hold of Big Ben and “set him straight.” We would then see the trading pattern in currencies reverse. I get a huge Cheshire Cat-like grin on my face thinking of central bankers all over the world, especially in Asia, calling Big Ben and screaming at him for making their currencies so strong overnight! You, know, if I were in Big Ben’s shoes, I would tell them too bad, so sad. They’ve had their cakes and eaten them, too – for the past six years. Deal with it; you’re all big boys!

But, that won’t happen. And I don’t expect it to happen. It’s just what I would tell the Asian central bankers. And then, they would wave a statement in front of my face showing how many Treasuries they own, as if that would scare me! Yes, it would! So, maybe Big Ben’s tightrope walking wouldn’t be so easy!

The latest central bank governor to go from my “Hit Parade” to the doghouse is the Bank of Canada’s Dodge. He was talking yesterday, and really dissing the U.S. deficit. Let’s go to the tape. Governor Dodge highlighted that the global economy is out of balance with the United States running a large current account deficit while some Asian and many oil-exporting countries are running surpluses, which Dodge characterizes as “clearly an unsustainable situation.”

As I said above, I don’t have access to currency prices this morning, however the TV is working. It just said that gold is trading at $643 and silver at $11.125. Those two are recovering nicely. It’s not a one-way shot, so volatility is in order, and that’s great because there are days that provide excellent buying opportunities. Of course, I don’t know that gold or silver are going to go higher – no one does. In fact, we could see another correction, but with everything that is going on in the world, gold sure looks undervalued to me.

OK, alrighty now! The technical people have arrived, and I now can see what has happened overnight! The dollar is still being sold, as the euro is now kicking into gear at 1.2650!

In the United Kingdom this morning, retail sales gave those Bank of England policymakers another reason to be ashamed, as retail sales increased twice as fast as expected in June! I’m telling you now, so you can listen to me later. The Bank of England’s policymakers can’t find a meeting soon enough to raise interest rates!

I’ll tell you something else about the “hint to pause.” The high yielders, like the Aussie dollar and the kiwi, will really get some love thrown their way again! Again though, keep in mind that in the past whenever Big Ben hinted about a pause, the Spin Doctors would get things straightened out, quickly. So, today is a big day regarding these moves. We’ll see if they can be sustained. Or we’ll see if this is just another “false dawn.” You know me, I would love to see it be sustained!

We’ll see the June leading indicators this morning. However, according to last month’s debacle with leading indicators – when they fell out of bed, but the dollar rallied – this report is a wild card.

Currencies today: A$ .7510, kiwi .6225, C$ .8825, euro 1.2642, sterling 1.8505, Swiss .8050, ISK 73.35, rand 7.03, krone 6.2750, SEK 7.30, forint 217.60, zloty 3.12, koruna 22.43, yen 116.80, baht 38, sing 1.5850, INR 46.79, China 7.9920, pesos 10.8750, Dollar Index 86.22, silver $11.125, and gold $642.50

That’s it for today. Everything is getting back to normal in the office now. Three hours after I arrived! Oh well, good to see that everyone is arriving safely. I’ve got to get to my trading now. Have a great Thursday!

Chuck Butler
July 20, 2006

The Daily Reckoning