Calling Out the Fed

Good day… And a Terrific Tuesday to you! Well… Someone from the Washington Post is a Pfennig reader (I think!), as there was a great article in the paper calling out the Fed on their “rate hike” rhetoric. I’ll give you snippets of that, and a snippet from my friend, The Mogambo Guru, along with the usual currency talk, on this Terrific Tuesday… Ready, set, let’s go!

Front and center this morning is the dollar getting sold all day yesterday, as the euro (EUR) recovered all the way to 1.5515 in the overnight markets. Unfortunately, the single unit was stopped in its rally tracks by an awful printing of German Investor Confidence, as measured by the think tank ZEW. German Investor Confidence dropped to the lowest level in 15 years this month, as rising inflation is eating away at the economy. I don’t expect this report to put too much of a dent in the single unit’s performance today, but for now it has slipped back below 1.55.

You know, for all my harping on the Fed’s rhetoric about the dollar causing inflation and their renewed interest in inflation – which has given the markets the idea that interest rates were going to rise in the United States – I have been adamant about the fact that the Fed has its hands tied with rising unemployment and a stagnant economy, and that their words are all talk… Not action!

Well… Someone else is paying as close attention as I am… Robert Novak had a piece in the Washington Post yesterday that really opened some traders’ eyes. (Of course if they just read the Pfennig they would have had their eyes opened 10 days ago!) Anyway… Here’s a snippet of his article.

“Speculation that the Federal Reserve is about to begin inflation-fighting interest rate increases appears to be dead wrong. Fed Chairman Ben S. Bernanke is worried more about runaway oil prices contracting the global economy than inflating it with a wage-cost spiral. According to sources close to him, America’s leading central bank has no plans for a raise.”

So… I wasn’t out on the limb all by my lonesome! Now if the cheerleaders in the mass media would join the crusade to call out the Fed, then we would have something!

Before I go on to the currencies… Ty sent me a snippet of the Mogambo Guru’s letter in which he calls out Big Ben Bernanke. Let’s go to the tape…

“And the value of the money going down is felt by the impoverished people as a rise in prices, which brings us to the salient point that a new University of Michigan survey came out with the horrifying news that consumers expect inflation in prices to run at 5.2% over the next year, which is reportedly the highest 1-year expected inflation rate since 1982 or something!

“It will be very interesting to see what Ben Bernanke, chairman of the Federal Reserve, does now, because he has always maintained (as laughably unbelievable as it sounds) that it is not actual inflation that is important to Fed policy, but inflation EXPECTATIONS! Hahaha! What a moron! And now we have both!”

OK… So… The euro led the currencies on an all-day rally versus the dollar yesterday (minus Japanese yen (JPY) I would expect this rally to continue today, as U.S. data is not going to support a rallying dollar. Yesterday, we saw the TIC’s Data, which measures the net security purchases by foreigners. The numbers were a little strange, and appeared to have some burn marks from overcooking. Here’s what I mean…

The Total Net TIC Flows posted a positive $60.6 billon for April, which is below the amount needed ($80-85 billion each month) to finance the current account deficit… But the curious burn marks appear on the March number, which was originally reported at $80.4 billion? Well, the revision shows a negative -$42,7 billion… What? I don’t care what school you go to, that math just doesn’t’ work! You can’t tell me that the preliminary number was that far off!

Remember folks (and here’s another conspiracy theory) the euro had just hit 1.60 in April, and the dollar looked like it was teetering… Then along came this overcooked number showing that foreigners were buying dollar assets, and the rot on the dollar’s vine disappeared for the time being. Oh, and did you notice not one media outlet talked about this? Strange…

OK… I’m back from the sleuth conference! Today, we’ll see the current account deficit for the first quarter. The experts think it will be “steady as she goes” at $172.5 billion. I think they are wrong… I’ll go back out on the thick limb and say I believe it will be closer to $180 billion because of oil.

We’ll also see the stupid PPI data… And more importantly, we’ll see May housing starts and building permits. With foreclosures up 48% versus last year, I would have to think that these numbers would be weak. To close out the data prints today, we’ll see my fave, capacity utilization, which should remain unchanged below 80%, and industrial production, which won’t be great shakes. So… Nothing to support the dollar today if it all prints the way I think it will.

Did you see the price of oil sniffing $140 yesterday? Well… It did, but immediately backed off once Saudi officials confirmed that they would be increasing production by 200,000 barrels a day. There was a report in the NY Times on Sunday that said Saudi officials had agreed to a 500,000 barrels a day increase. Don’t know what 200,000 barrels a day can do to a price that looks as though its bound and determined to get to $150.

With the dollar wilting, and oil soaring yesterday, gold had its best performance in what seems to be a month of Sundays. The shiny metal just doesn’t seem to be able to sustain these mini-rallies lately… But, I’m not worried about it, because I just don’t see the commodity rally as over.

The Chinese renminbi (CNY) moved below 6.90 last night. I hear that U.S. Treasury Secretary Paulson is on his way to visit the Chinese again. Hey Rocky, wanna watch me pull a rabbit out of my hat? Nothing up my sleeve… I just don’t see why Paulson is wasting his time and taxpayers’ money by going there. He’s got nothing up his sleeve that the Chinese haven’t seen, and they will smile and greet him, but then show him the door! What a waste!

I hear Argentina is having debt problems again… I hope this doesn’t spill over to our new shining star, Brazil. The Brazilian real (BRL) has remained strong versus the rallying dollar this month, which leads one to believe that once the dollar rally is in our rear view mirror it will kick some tail and take names later. But… That’s just how it looks from the cheap seats… I could be wrong here.

Well… The weakness the euro saw after the ZEW report has gone away already! Now, someone could say that I went back and wrote, “I didn’t think the ZEW report would put too much of a dent in the euro’s rally”… But, you have to know me… Once I’ve written something, I do not go back and re-read it, change it, etc. it’s all raw Chuck thoughts!

The good news is that I was right… Now let’s see if the euro can go on a run here, and lead the other currencies to higher ground versus the dollar.

Currencies today 6/17/08: A$ .9410, kiwi .7560, C$ .98, euro 1.5505, sterling 1.9520, Swiss .96, ISK 79.85, rand 8.0125, krone 5.1750, SEK 6.0340, forint 159.15, zloty 2.1825, koruna 15.61, yen 108.05, baht 33.17, sing 1.3685, HKD 7.8080, INR 42.90, China 6.8915, pesos 10.31, BRL 1.6220, dollar index 73.63, Oil $132.60, Silver $17.18, and Gold… $883.70

That’s it for today… I forgot to mention yesterday that we all had a great time at Busch Stadium last Friday night. The game was awful, but it was great to get together outside of the office and relax a bit. Good stuff! A nice game last night, as my little buddy Alex, got a hit to start a rally that led his team to an upset win over a select team that held first place. A late game that got me home around 10:30, and will have me yawning around noon today! A crazy day on the desk yesterday… And the rest of the week, they have me in all-day meetings, UGH! Meetings are like the plague to me… No business is done, and no profits are made! But, there’s always a good lunch! HA! My beloved Cardinals renew their I-70 series with the K.C. Royals tonight. Every year when we play them, I get this image of Don Denkinger blowing “the call” at first base in 1985… UGH! OK, so it’s time to hit the send button… I hope you have a terrific Tuesday!

Chuck Butler
June 17, 2008

The Daily Reckoning