Chuck On Film

Good day… And a Tremendous Thursday to you! Well… Did you see my big bald head and mug on TV last night… I watched it when I got home, and brother am I out of practice! I said so many “uh’s” that if I were charged for them, I would be broke! Oh well… I did it… And stood my ground with Gary Shilling, a well respected economist who did not believe in the weak dollar story.

Of course I could have brought out the BIG GUNS and talked about how since 2002 the euro (EUR) is up 63%, and Aussie (AUD) and kiwi (NZD) are both up over 70% versus the dollar! Or, I could have explained that the Fed’s trade-weighted index for the dollar (not the dollar index), against major currencies like the euro, pound (GBP) and the yen (JPY), is the lowest it has ever been and 30% lower than when floating exchange rates were adopted in the 1970’s.

Which by anyone’s definition is weak! But I didn’t… I stuck to my guns, and beliefs of the currency trends. And how difficult it was going to be for the United States to attract foreign financing of the current account deficit with lower interest rates, and how that would weigh on the dollar as we go into the future.

The currencies had little or no movement on Wonderful Wednesday, the dollar did weaken albeit in a small amount and a very short time after the durable goods orders fell more than expected… The orders fell 4.9% in August… And that’s not good… Why you ask? Ahhh grasshopper I was hoping you would ask! It basically tells us that corporations aren’t making capital expenditures. And we all know from economics 101, that corporate expenditures really indicate a vibrant economy. Falling 4.9% tells us the opposite, eh?

Today, as I told you yesterday, we’ll see personal consumption, the final reading of second quarter GDP and new home sales. There’s nothing here that’s going to help the dollar recover any ground… Personal consumption probably fell, which gives the Fed more “wiggle room” with rate cuts.

There was another ECB member out stoking the cooling embers for more ECB rate hikes. This time it was the German Finance Minister who said that he saw no danger from euro strength! That’s great news for euro bulls… The Finance Minister of the largest economy of the European Union says there’s no problem with the euro strength… And that’s one BIG FAT GREEN LIGHT to euro bulls to take the currency higher!

Over here I saw some disturbing news late yesterday afternoon, when I woke from my nap. Goldman Sachs reported a possible multibillion write-down for Merrill Lynch due to mortgage weakness/CDO’s… Then on Bloomberg TV last night I saw a report that said the write-down would be $4 billion! I haven’t really seen anything definitive yet though… So hold your horses until we do, eh?

But let’s not linger around here… Let’s go somewhere else where the news might be a little more cheery!

Over in the United Kingdom, second quarter GDP met expectations and the year-on-year reading was revised up one tick to 3.1%. With the first quarter GDP in the U.K. only registering 2%, it certainly looks like GDP is on an uptrend, eh? Unfortunately, the outlook has deteriorated since the end of the second quarter with the mortgage meltdown in the United States spreading to the U.K., and the Bank of England having to step in to shore up liquidity. I don’t know when… But the Bank of England (BOE) is probably going to follow the Fed’s lead before the end of the year. So… I’ve backed off my thought that sterling could go to 2.10… Although 2.05 isn’t out of reach, before the BOE pulls the dust covers off the rate cut machine.

Ok… I’ve got to look further! I know! How about gold? How about this piece of data… I asked Chris Gaffney to update our currencies and metals returns to date since the start of the weak dollar trend that began in February 2002. How does a +154% return since Feb 2002 sound? Well… That’s what gold has done! WOW! Isn’t that amazing? You’ve gotta love it, eh?

For more on gold… I always turn to my friend, The Mogambo Guru… There’s nothing like reading the Mogambo to get one’s blood going on a Monday morning… I will go to him on a Tremendous Thursday… This is a snippet of the Mogambo’s letter from Monday 9/24…

“When the Congress leads the Federal Reserve to create more and more money so that Congress can borrow and then spend more and more money to ‘fix’ more and more problems of more and more people…”, he would have been correct if he had finished the phrase by saying, ‘Then The Mogambo is right! We are freaking doomed!’

“And so while even little kids know the terrible price we will pay for our stupidity and greed, there is a salvation! Adrian Ash at writes, ‘the last time America’s credit rating came into crisis – during the late ’70s – inflation ate both equity and fixed-income investors alive’, but ‘gold, on the other hand, rose by 510% for dollar-based buyers.’

Gold! Just like I have been yelling about! See? I’m not as stupid as you thought!”

OK… Back to boring old me! And that “boring” old euro! NOT! The euro just hit a new record high of 1.4166! WOW! It immediately saw profit taking, but still is trading above the “old” record! As ECB President Claude Trichet said the other day… “The euro is an inspiring currency”

I had someone send me an email asking me to talk about the Swiss franc (CHF)… I get these from time to time because I just don’t talk about Swiss that much. The reason? Well… Not much happens there! And… Normally, without the carry trade using the franc as a funding currency, the Swiss franc would just follow the euro around… But these aren’t normal times and the franc tries to follow the euro, but is held down by the carry trade.

This won’t last forever though, because the Swiss National Bank, as I reported here about 10 days ago, recently surprised the markets with a rate hike… And if that’s not the last arrow in their quiver, they could see to it that borrowing costs become too expensive to short the franc, and that would be the end of the franc being used as a funding currency for the carry trade. Whew! That was a long sentence! You should have seen my fat fingers flying around the keyboard!

One more thought before we head to the Big Finish… And that is… Aussie dollars… I see this morning that it has crossed the 0.88-cent handle… This has been an amazing run for the Aussie dollar since the Fed cut rates last week… A quick look at the Pfennig’s archives and I see that last Tuesday morning before the Fed rate cut, the Aussie was trading at 0.8345… That’s an almost five-cent run in about a week! WOW!

And why not? Gold is kicking sand in the dollar’s face… China’s demand for commodities/raw materials that Australia can provide, continues to be strong… The data looks good. The Central Bank is playing along… Five full cents in a week… Amazing! It’s not the mirrors either! It’s all these things I just talked about, and the interest rate differential to the United States. After the Fed cut rates, you could drive a Mack truck through it! Aussie, Aussie, Aussie!

Currencies today: A$ .8820, kiwi .7510, C$ .9990, euro 1.4150, sterling 2.0230, Swiss .8540, ISK 61.80, rand 6.8930, krone 5.4890, SEK 6.5110, forint 176.89, zloty 2.67, koruna 19.5100, yen 115.50, baht 31.65, sing 1.4920, HKD 7.7560, INR 39.71, China 7.5140, pesos 10.92, dollar index 78.40, Silver $13.58, and Gold… $736

That’s it for today… I looked on Bloomberg’s web site, but they don’t list my interview in the video section… So… I guess we’ll have to see if the marketing/web people caught it… I recorded it and watched it when I got home… I look pretty ugly on my Big Screen TV, good thing they didn’t use HD! Oh well… In my current condition, it’s “GOOD TO BE SEEN!” Anyway, if it becomes available, I’ll let you know. No worries! Should be an interesting day with the data that will print… So, strap yourself in… Keep your arms and legs inside the ride at all times! Have a Tremendous Thursday!

Chuck Butler
September 27, 2007

The Daily Reckoning