Credit Woes Equals Risk Aversion

Good day… And a Wonderful Wednesday to you! Well… The currencies didn’t really move yesterday, up a few ticks and down a few ticks all day long… It made it easier for me to get buys done without worrying about whether I was getting the best price of the day.

The Bank of Canada (BOC) did cut rates yesterday… It was a 50/50 chance of should I stay or should I go now… If I stay there will be trouble… If I cut it could be double… Yes, as I said yesterday it probably wasn’t going to be a good day for the loonie (CAD), as either the BOC was going to cut rates or they were going to talk about cutting rates at the next meeting… So, bully for them to have done the deed… A swift, clean, cut… 25 BPS… And… I really think… (Now take notes because this is important stuff here) I think that the BOC cut rates to ensure that the problems going on south of their border stay, south of their border, and do not head north… For that… The BOC should get a gold star!

I would have to say the loonie’s run to 1.10 this summer was the peak for now…I’m not ruling out a huge commodity run again… But for now, at least, the peak as been reached… Now, I know that a huge number of people will be throwing things at their screens and calling me names for not saying this before. But… I’ll go to my economic training and repeat the words of John Maynard Keynes, and say… “When the facts change, I change my mind. What do you do, sir?”

Oil has backed off, and in my mind it won’t be down for too long, and gold has backed off… So the loonie’s motor has two cylinders missing right now, and its’ timing is off with this rate cut. Does this mean the loonie is going down the drain? NOT SO! I’m just pointing out that the peak has been reached… For now…  You get Oil back up close to $100 and gold going past $850 again, and we’ll look for a rebound in loonies. So… If you think those two commodities are going to blow those levels out of the water, then loonies would look like a blue light special right now, eh?

The credit woes are really beginning to make the U.S. economy sing the blues… And these credit problems are really pushing the Fed to cut rates next week, and for Carry Trades to continue to unwind. Did you see the story in the Wall Street Journal yesterday… The WSJ reported that at least another dozen money-market mutual funds ranging in size from $2 billion to $36 billion likely have 1-2% exposure to the dreaded SIV’s… I’ve explained these SIV’s before, so I won’t get into it again, but this is really getting ugly folks… And when things get ugly in the U.S. it makes it even harder to attract the nearly $3 billion needed everyday in foreign investment flows to finance the Current Account Deficit.

I’ve also explained the Risk Aversion before… And that’s what’s we’re really beginning to see take hold of the markets… And that’s before we see the color of the November Jobs Jamboree that prints this Friday… Another weak number of jobs created will probably be the final straw needed to move the Fed to cut rates again next week. (of course, I’m of the opinion that a rate cut for Dec 11th has been in the cards since the Fed first cut rates in September.)

A weak jobs number would also put this Risk Aversion on the main tracks, which will see a jump to Treasuries…

You know how I’m always complaining about Consumer Confidence, and wondering what these people are Confident about? Well… The last report was quite weak, and at that time I told you that Consumer Confidence had been falling for a few months… My friend, John Mauldin, printed an article by his friend, Greg Weldon, on Consumer Confidence… So, I know John won’t mind that I borrowed some of these numbers…

This is looking forward 6 months…

Percent Expecting Worse Conditions…

…16.7%…versus 13.9% in October.

Percent Expecting Better…

…12.4%…down from 14.0% in October.

The fall from the July level of near 115 (index points) to last month’s near 85 is quite a fall, and from the looks of the 6-month forward looking survey… I understand why.

But, let’s not forget, who kept railing about how Confidence should be much lower!

The dollar did get a reprieve of sorts yesterday when the Gulf Arab States said they would stick to their 2010 deadline for currency union, and had made no plans to end their fixed-rate exchange rates to the dollar at this time.

You may recall that there had been a ton of speculation that the Gulf Arab States would drop the dollar peg, and move to a basket of currencies, most likely heavily weighted with euros… So… The dollar dodges a bullet here…

The Reserve Bank of Australia left their interest rates unchanged last night, citing “heightened uncertainty about the international outlook and rising credit costs, as their reason for leaving rate unchanged…

The A$ could use a little love from the Reserve Bank right now, with Carry Trade unwinding, but it was not to be this time around…

Yesterday, I told you about how the Fed members were singing from different song sheets yesterday… And last night I was reading a story about how the odds had raised to 50% that the Fed would cut rates 50 BPS instead of 25 BPS next week… Hmmm… Talk about telling the world that they have a major problem on their hands… I don’t think we’ll see 50 BPS… For that reason!

Overnight our friends (NOT!) at OPEC decided to keep oil production unchanged, which has given a flyer to oil traders to mark up that bubbling crude, black gold, Texas tea… Let me explain why this announcement has pushed oil prices higher… With this announcement it means that the supply gap that we are currently experiencing, between global oil demand and non-OPEC supply growth will be met by a draw in inventories… Which means… Dwindling inventories, and lack of supply is always bullish for a price, and this is no exception to the rule!

So… The inflation wolves are still at the U.S. economy’s door… And our Central Bank is fooling around with rate cuts to bail out the knuckleheads who created all of this mess we’re experiencing, instead of fighting off the inflation wolves… I don’t know folks, but this sure looks like it is going to come to an ugly outcome for us… Look… I don’t want to be gloom and doom… I just do my best Aaron Neville and Tell It Like It Is… Don’t be afraid, to let your conscience be your guide…

Pound sterling is getting taken to the woodshed this morning, after posting a drop in house prices and a huge drop in Consumer Confidence… This might be the straw that breaks the camel’s back with regard to the Bank of England’s rate decision tomorrow… I’m sticking to my guns regarding a postponement of the rate cut… But these were some pretty ugly reports!

Oh… And another thing… Yesterday when all my troubles seemed so far away, I talked about how there are mounting stories regarding a major dollar rally in 2008… I went back to re-read the Wall Street Journal article, and noticed something I missed the first time around…. The article talked about a “dollar collapse”…

Well… You know me… I’ve never ever mentioned that I thought the dollar would collapse… I believe in trends… Since the dollar was bounced out of the Bretton Woods Agreement in 1971, we’ve only seen 4 completed currency trends. And they have alternated, weak dollar, strong dollar, weak dollar, strong dollar, which brings us to the current weak dollar trend. These trends have averaged 7-10 years in length. We began the weak dollar trend in 2002…

The dollar goes into a trend, whether it be a weak or strong trend, because of a fundamental reason… And it will remain in that trend until the fundamental reason has either been corrected or exhausted. And here’s the important part of this speech… A Trend is not a ONE-WAY Street! There is volatility within a trend… We saw this in 2005, but the fundamental reason the dollar was weak to begin with had never gotten better, in fact, it had gotten worse… There were tons of nasty emails to me when the dollar got stronger in 2005, but I stuck to my fundamental guns only to see them shine again in 2006 and 2007.

So… You see, while I won’t like the fact that the dollar may get stronger in 2008 for some unknown reason, I won’t raise the white flag either! The fundamental problem for the dollar is only going to get worse in 2008, and therefore I do not see any reason for dollar strength… And the fundamental reason that’s plaguing the dollar? The deficit and the need to attract enough foreign investment to finance it… The reason it’s going to get more difficult for the dollar to attract enough foreign investment in 2008? Well… That’s all this stuff I keep writing about folks… If the problems in the U.S. keep mounting, it makes our assets look ugly… If interest rates keep falling, it makes our assets even uglier…

I still believe that a diversified investment portfolio is the best way to hedge your portfolio from this downward dollar risk… And you do that with currencies and metals… It’s that simple…

OK, this public service announcement has been brought to you by…. ME!

Currencies today: A$ .8685, kiwi .7650, C$ .9815, euro 1.4730, sterling 2.04, Swiss .8940, ISK 62.20, rand 6.81, krone 5.48, SEK 6.3850, forint 171.75, zloty 2.4475, koruna 17.8250, yen 110.15, baht 30.40, sing 1.4470, HKD 7.7950, INR 39.47, China 7.3870, pesos 10.87 BRL 1.8050, dollar index 75.70, Oil $90.25, Silver $14.50, and Gold… $809.90

That’s it for today… Hey! Don’t forget to put your shoes outside your door tonight! Tomorrow is St. Nick’s Day, and the tradition at the Butler House is the kids put their shoes outside their bedroom door, and St. Nick fills the shoes with goodies… I truly enjoy this time of year… Even more this year! Things are still pretty darn crazy on the desk these days… I don’t really see an end any time soon, so… Please be patient when you call in to the desk, you might have to hold a bit… OK… So, I have to find my biggest shoes to put out in hopes that St. Nick might fill them this year! I hope you have a wonderful Wednesday!

Chuck Butler
December 5, 2007

The Daily Reckoning