Big Ben Just Doesn't Understand

Good day… And a Tremendous Thursday to you! I’m back! What a crazy traveling day yesterday! I’m whipped like a tub of butter, but I carry on. I liked Chris Gaffney’s title for yesterday’s Pfennig, “Carry On” and immediately started singing the CSNY classic by the same name, and thought, wow, I probably would have gone off on a real tangent with that one!

Thanks to Chris for an excellent job of Pfilling taking over the Pfennig while I was gone… Chris has to change his life schedule around every time I ask him to do that, so I know the problems that exist for him to do so… Thanks again for a job well done!

Ok… Stocks sold off at the close yesterday, so… If you’ve been paying attention in class you know what happened to the carry trade as we ended yesterday’s trading session, right? Stocks selling off equals carry trade unwinding… Stocks rallying equals carry trade on again. It’s all tied to risk… Perceived risk really… But as my dad taught me many years ago… Perception is reality.

So… Yen (JPY) came back a bit versus the dollar, and the high yielders suffered again. That’s two of the three completed trading days this week, the high yielders have been told to pick out their own switch before being taken to the woodshed.

Here in the United States, retail sales disappointed once again. Don’t let the media rosy those glasses for you by telling you they hit expectations… The problem with that is that they don’t tell you the expectations were lowered! I don’t care what anyone says… They can point to this, that and the other thing in attempt to prove retail sales are strong… I’ll just point to the historicals and prove that these numbers continue to be anemic by historical standards.

And then there was PPI (wholesale/pipeline inflation). How many times I have to tell you, Lucy? No… You can’t go to the club! And how many times have I told you, dear reader, that inflation is out of control in this country? Well… Finally something to hang my hat on… PPI posted a 6.1% increase, which ranks it the fourth highest print since the early 1980’s… I only talk about overall figures… The media however, prefers the watered down version called “core” data, which removes those two things we don’t use every day… Food and energy.

But even playing along with the media on this, “core” PPI was 2.5%, which suggests future inflation pressures for the consumer.

And then there was Big Ben Bernanke telling people that the Fed is going to be looking at the “overall inflation rate” in the future… WHAT?! They hadn’t been doing this? Oh, my! No wonder they cut rates 75 BPS in the last two months… They weren’t looking at the “overall inflation rate”! Ok… I’m getting carried away here… But what a thing to say! Talk about losing credibility… If foreign investors believe that the Fed isn’t providing price stability for the trillions of dollars they hold… Be careful loitering around the “EXIT” door!

So… The currencies have backed off yesterday’s highs… The euro (EUR) had traded back to the 1.47 handle, but is looking at the soft side of 1.46 right now. The carry trade was put back on in the Asian session overnight… What gives with these carry trade people? Game on, Game off, Game on, Game off… Over and over again. It just tends to give me a rash!

The euro even had some good data news yesterday with stronger GDP growth in the third quarter… And the euro should have received some benefit from a statement issued by the European Central Bank (ECB) stating that inflation risks are still skewed to the upside due to higher food and energy prices. And that was followed by an ECB minister warning about further losses by the dollar versus the euro.

We see the Eurozone’s CPI this morning, and it’s expected to remain above the ECB’s 2% target level. I would expect to see the euro underpinned by this report… So, I’m surprised at the weakness of the euro overnight. And… Of course… As soon as I type all that, the Eurozone CPI flashes across my screen… It printed much higher than the 2% target level at 2.6% in October… Now that’s going to cause ECB President Trichet, to begin to sweat bullets. He’s got all those “Nancys” whining about the strong euro, but inflation is beginning to get out of hand for a Central Bank whose main purpose – as carved in stone in the Maastricht Treaty – is to provide price stability!

Speaking of inflation… Australia printed a strong wage growth report yesterday. The Wage Price Index rose by 1% in the September Quarter to be 4.2% higher over the year. I keep writing about how the Reserve Bank still has more work to do here with regards to higher interest rates, and eventually that idea will sink in with the markets, which should put the spotlight on Aussie dollars (AUD) again. Unfortunately, though… Until that happens, the Aussie dollar gets caught up in the Game on, Game off action of the carry trade!

Keeping with the inflation theme… Here’s one of the culprits… Oil! The price of oil jumped three bucks yesterday and overnight. The U.S. reports on its petrol supplies later today. Hey Rocky, wanna see me pull a rabbit out of my hat? The demand in the United States may have slowed folks… But it doesn’t matter, because the demand in India and China remains strong!

I’ve told this story over and over again for the last three years, but in case you are new to class… You see… This global growth has created wealth among people in India and China who never had it before… So, what do they do with that wealth? They buy a car! And what does that car require to make it go? That’s right… Gas, from oil. So… For the first time ever (and I mean ever) the United States has competition for oil demand! So, for the first time… India and China are demanding oil, and did I mention that this has never happened before?

Our friend, and famous investment guru, Jim Rogers, was back on the speaking circuit again last night, and telling anyone that would listen to “get out of U.S. dollar holdings.” Rogers said… “If you have dollars, I urge you to get out… That’s not a currency to own.” He repeated his earlier call to buy Chinese renminbi (CNY), Japanese yen, and Swiss francs (CHF)…

He also took another, well deserved, swipe at Fed Chairman Big Ben Bernanke for Bernanke’s comments last week to Congress. Bernanke said that the only effect of a weaker dollar on a typical American with their wealth in dollars, buying consumer goods in dollars, would be, “their buying powers, it makes imported goods more expensive.”

Rogers disagreed with the statement, and said… “he’s a total fool, I was terrified.” Rogers then went on to say… “if you only buy American products and the dollar goes down, the price of oil goes up, copper goes up, wheat goes up, that affects you. He (Bernanke) doesn’t understand the economy as far as I can see.”

Way to take Big Ben to the woodshed! I saw those comments and thought the same things Jim Rogers thought… “this guy doesn’t understand!”

There’s another story this morning about the U.A.E. considering changing its peg to the dollar to a basket of currencies… This has been discussed numerous times now… So either get to it or stop talking about it!

I do think that we’ll continue to see the countries that have pegged their currencies to the dollar come up with new plans and scrap those pegs… Just another in the laundry list of reasons for the dollar to continue to weaken.

Pound sterling (GBP) received some not-so-good news this morning, as October retail sales dropped in the United Kingdom for the first time in nine months! This is the result the Bank of England (BOE) was looking for by raising rates… So it should have come as no surprise. Unfortunately, the markets are acting like it is a surprise and marking down pound sterling.

Gold got so close to its all-time high recently that it could taste it! But a new all-time high was not to be… Not yesterday at least! I think we’ll have this back and forth trading going on in gold too, due to the stock market teeter tottering on a daily basis. When there are widespread stock losses… Gold tends to struggle to move higher. This is caused by investors that have stock losses selling gold to meet margin calls, etc.

But the trend in gold is still in place… And that is for a stronger gold price… You can’t get caught up in the daily noise here… Just like I’ve always told you about the currencies.

This is going to have to end here… I didn’t get home until late last night, so now I’m behind… NO! I didn’t say I WAS A BEHIND… I simply AM BEHIND! HA!

Currencies today: A$ .8915, kiwi .7585, C$ 1.0280, euro 1.4625, sterling 2.0465, Swiss .8905, ISK 60.35, rand 6.6940, krone 5.4610, SEK 6.3250, forint 174, zloty 2.51, koruna 18.19, yen 110.60, baht 31.55, sing 1.45, HKD 7.7850, INR 39.29, China 7.4250, pesos 10.9170, BRL 1.7360, dollar index 75.93, Oil 93.60, Silver 14.75, and Gold… $803

That’s it for today… I’m still flying high from my Tuesday night adventure with Steve Sjuggerud. I was wondering if he wanted to take that act on the road… OK, I’m not really serious there. I haven’t had a chance to talk to you all since my report last Thursday of no sign of new cancer… I think Chris said it best when he said… “this is what happens when you have a positive attitude and the prayers of thousands of people.” Yes… That’s true. I’ve had the prayers of thousands of people… What else could a man ask for? You all have been just wonderful… Thank You! No… I’m not out of the woods yet… But this first hurdle was a big one to leap. Now… Can you believe that next Thursday is Thanksgiving? WOW! How’d that happen? Well… I know I have a few more things to be thankful for this year! On that note… How about having a Tremendous Thursday, eh?

Chuck Butler
November 15, 2007

The Daily Reckoning