Consumer Confidence is Shaken

Good day… And a Wonderful Wednesday to you! If things get any crazier on this trading desk, I’m going to jump out the window! No wait! The windows don’t open… That’s good, because I could get really hurt doing that from the third floor! It’s crazy here. But… Isn’t that what I’ve been trying to achieve all these years speaking all over the country, and throughout Canada, Mexico, and Panama? Why did these people wait? Now there’s the mad rush to open an EverBank World Currency account, and our operations people are choking on the applications coming in each day. WOW!

This is what I was working toward with all those trips, and speeches, and standing at booths for hours at a time.

One note before I get into yesterday… Several of you wrote me about the Big Boss’s note that went like this… “Where are the speeches from any party out on the stump promising to send the fiscal mess to the emergency room for triage?” And you mentioned that Ron Paul is doing just that! And you are correct! I’ve known about Ron Paul for years, and his banging on people to correct this fiscal mess… And Frank has too.

OK… Consumer confidence is finally heading in the direction I believe it should be heading… And that is down! Consumer confidence fell even more index points than the “experts” forecast it to fall this month. When this data printed, the euro (EUR) began to bust a move to 1.49… But soon that was halted, and the next time I looked up to the screens the euro was fighting to maintain 1.48! What happened?

Ahhh grasshopper… It’s called smoke and mirrors… The capital infusion that Citigroup received yesterday, has the markets believing that the liquidity and credit crunch are now in our rear view mirrors. I think they are fooling themselves; it’s just a guess on my part, but I bet that liquidity conditions are approaching those we found in the marketplace in August… Which means we’ll revisit the credit crunch… And that… And that alone, I believe, will move the Fed to cut rates on December eleventh.

Forget all about the Fed Heads out on the speaking trail trying their best to calm the markets – talking about how the Fed doesn’t need to cut rates any longer. It’s all smoke and mirrors… I mean… Look at the landscape. Does it look like we’ve swept all the mortgage muck under the rug? It sure doesn’t look that way for Wells Fargo, who until late yesterday, had previously steered clear of mortgage write-downs, but finally threw their hat in the ring with the other mortgage lenders that have announced write-downs. Wells Fargo said it will recognize $1.4 billion in losses in the fourth quarter from non-paying home equity loans.

It doesn’t matter what type of loan it comes from, they are all tied to the subprime/mortgage meltdown.

Have you heard of Sovereign Wealth Funds? For instance… The Gulf States have over $1 trillion in reserves from oil sales of course, and they have created what’s called a Sovereign Wealth Fund. This is where the $7.5 billion came from to put into Citigroup as capital yesterday.

Well… With over $1 trillion in reserves, this $7.5 billion is a tiny morsel, and the U.S. markets are thinking, “there’s gold in them thar hills.” Yes, they’re thinking that cash strapped banks could tap into this fund, and then move along, forgetting the pain they created. If that’s what happens then I bet there’s a good chance that it will come with a “price”. The “price” is unknown… But I doubt it will be cheap… I doubt it will be free of strings attached… And I doubt it will teach lenders anything!

How about the news yesterday that although it looked like a mad house in our parking lot last Friday, U.S. retailers may miss the forecasts for profits, as they are being made to discount items, heavily I must say, (as one of my fave SNL characters, Ed Grimley, used to say) to sell their merchandise.

I would also say that if the retailers did meet their forecasts, then credit card debt probably went through the roof! Once again, the U.S. consumer would be mimicking the U.S. government and going into debt with no ability to pay it back in our lifetime!

The commodity currencies like Aussie (AUD) and Canada (CAD), have really been taking on water lately. And it has to do with the weakness in commodity prices to a degree… (Aussie also has the carry trades unwinding hanging over its head like the Sword of Damocles) So… If we go back to 2003… When the first commodity sell off began, we’ve seen about a dozen or so of these commodity sell offs… And each time the commodities have come back even stronger. So I’m not about to give up on them yet.

Besides… As I’ve pointed out several times in the past… Well-respected author of multiple books, and famous investment guru, Jim Rogers points out in his book Hot Commodities, the bull market trends for commodities. Over a 200-year period, every bull market for commodities trended an average of 17-22 years…. We’re just now in our seventh year of this bull market… We’ve come a long way, and have a long way to go… If history is to repeat itself, as it usually does!

OK… So as we skip forward to this morning, the euro has lost the 1.48 figure… It will be interesting to see where we go from here… Japanese yen (JPY) is back to the 107 figure, but most of the currencies are weaker following the move of the euro. The euro is seeing profit taking on the thought that the European Central Bank (ECB) will have to leave rates unchanged at next week’s meeting… And we can’t forget about the drop in German consumer confidence that was printed overnight.

Having said that about the ECB, I wonder just what it is the traders want from the ECB. At least the ECB is leaving rates unchanged, thus maintaining their rate while the Fed lowers theirs. I guess those rate hikes to traders are like nose candy… Once they begin to sniff they just can’t get enough!

So… Here are my thoughts… Yes, the ECB will most likely lower rates by next March, I’ve said that over and over again, this dance is gonna be a drag. The ECB is attempting to balance rising inflation, and slower growth… Same thing in the United States, but here, our weak back Fed jumped right into the rate cut cycle, with no regard for price stability, and all the rising inflation pressures.

I guess we’ll see people jumping on the “Weak Dollar Trend Is Over” wagon… Hmmm… So, I guess we just continue on through the night, with our current account deficit and funding requirements forever, without ever even stepping onto the road that leads us to a correction in the current account? That doesn’t make sense to me.

At least there will be people on the other side of the fence, and we won’t all be on the same side! That gives me a comfortable feeling really.

And then there was this one last thing before heading to the Big Finish… Did you hear that Orange County, Florida, removed its entire $370 million from the state-run investment pool, two days after learning the money market fund contained more than $700 million in defaulted debt? And Orange County isn’t the only local government to pull funds… Dade County and Pompano Beach also made withdrawals.

I was wondering when this would all unfold… Those mortgage securities that everyone has been talking about since August, have been sold to these massive funds, like state pension plans, and school boards, etc. This is the next shoe to drop on the mortgage meltdown folks.

Currencies today: A$ .8770, kiwi .7625, C$ 1.00, euro 1.4755, sterling 2.0630, Swiss .8965, ISK 62.30, rand 6.9640, krone 5.5020, SEK 6.3450, forint 173.39, zloty 2.4840, koruna 17.94, yen 109.35, baht 31.05, sing 1.4450, HKD 7.7870, INR 39.78, China 7.3940, pesos 10.9580, BRL 1.82, dollar index 75.58, Oil $94.23, Silver $14.43, and Gold… $805.10

That’s it for today… We’re all getting pretty excited at the Butler House regarding this Saturday’s Big 12 Championship Game, with our Missouri Tigers! Tré cool, eh? Visited the kidney doctor and he thinks I’m doing fine… I don’t have to go back there for six months! I still have the hip doctor… And the cancer doctor… So… I’m not Ollie, Ollie oxen free just yet! Long day yesterday, so I’m dragging this morning… I’ve cut back… Way back on my coffee intake… In fact I have had a cup of coffee for three weeks now… Considering the way I used to drink coffee, that’s huge! I’ll see if my daily apple picks me up… I sure hope so! And… I hope you have a Wonderful Wednesday!

Chuck Butler
November 28, 2007

The Daily Reckoning