Cutting Rates for All the Wrong Reasons

Good day… And a Terrific Tuesday to you! Well… Once again, I feel like I did when I watched Colorado get to run a fifth down play, still not get in the end zone, and then have a touchdown given to them to beat old Mizzou… Or, the day I watched a Nebraska player deliberately kick a ball that he couldn’t catch, into the end zone where it was caught for a touchdown to once again beat old Mizzou… Number six in the country, and we can’t even sniff out a BCS Bowl Game! Once again, my heart has been laid out and I’m reminded of an old Hank Snow song he used to sing. You done stomped on my heart, and you smashed that sucker flat, darlin’ you just sorta… Stomped on my aorta.

OK… Enough of that! We’re going to the Cotton Bowl, which is GREAT! The game is sold out already, so I’ll have to be on the lookout for tickets, a place to stay, etc. in Dallas!

I got home last night, and saw an email from Chris Gaffney, letting me know that the carry trade was taken off the boards again yesterday, leaving the high yielders hanging out to dry again. The euro (EUR) and sterling (GBP) seemed to have skipped by without a problem on the day… But are dark clouds forming for the currencies?

I have seen story after story the past five days regarding a dollar rebound in 2008… I wonder, besides the fact that the dollar’s slide has been exaggerated at times, just what fundamental reason the people saying this have in mind to warrant a dollar rebound in 2008. Is it a three-year thing? In 2002 the dollar goes into the weak trend, and sees a bounce in 2005, only to resume weakness in 2006 and 2007. Well, the years don’t work out just right, but you get my drift here… Maybe the dollar does get a breather in 2008.

And then maybe it doesn’t! I mean, look at the landscape! The Fed will close out 2007 with a rate cut next week (more on that in a minute), and will most likely cut three more times in 2008. How are these rate cuts going to help the dollar?

I hear people say, well, the Bank of England (BOE) and the European Central Bank (ECB) will be cutting rates too… Well… The Fed will have three rate cut arrows already pulled from their quiver, by the time the BOE and ECB get around to the rate cut act. And… There’s a major difference in why these Central Banks are cutting rates…. The Fed is cutting rates because of a huge credit and liquidity problem which threatens the markets… The BOE and ECB would be cutting rates as a result of economic slowdown… And… These two won’t be doing it willy-nilly with no regard for inflation!

The Fed is looking for love in all the wrong places, cutting interest rates for all the wrong reasons…

So… As I look across the landscape in 2008… I believe the dollar is not out of the woods, and while we’ve seen dollar props in 2005 work, they ended up causing the dollar even more pain once the props were removed. I’m not sure what props the dollar has up its sleeve… But I’m sure there are plans to invent some!

One prop could be the new plan for the government to organize a “freeze” in subprime interest rates before they reset higher and trigger a wave of defaults. I told you about this rumor last week, and it has come to fruition. Treasury Secretary Paulson believes he has brokered a deal among banks, mortgage services, and securities industry lobbyists to “freeze” these rates. I also told you that I cringe any time the government gets their hands in the mix and acts like they know what they’re doing… So, watch out folks… You know, that I know, that you know that taxpayers will end up carrying the weight, eh?

And… Doesn’t this send another BAD message? Go ahead and get yourself in over your head, don’t worry about the consequences, the government will bail you out. So… When we look back in a few years, this will have just as a bad a taste as the Fed stepping in to stop the recession with interest rates cut to the bone, and the printing presses working overtime.

Paulson thinks that this plan is “no silver bullet”… And trust me he’s no Lone Ranger either!

I think this just seals the deal for much lower rates in the United States. These banks that hold the notes are not going to take on water so that a house doesn’t get foreclosed on. So… In a smokey back room, with green shades and dark glasses, a deal was made… Of course we will have to wait-n-see what that deal was.

OK, enough of all that… I’m sure that most of you think that I’m in a fighting mood this morning because of Missouri’s loss Saturday night… Not so… Not so…

I know one thing that’s going on that won’t be considered a prop! And that’s the dissention in the Fed regarding the need for a rate cut next week. Recall last week, when the two Fed Heads said another rate cut wasn’t needed… And then Kohn, Bernanke, Poole, and now Yellen say a rate cut IS needed… Hmmm… I don’t recall a time in the past when we had some different opinions being spoken by Fed Heads. Under Big Al’s Fed, it was all singing from the same song sheet… But this is no longer Big Al’s Fed!

The lack of credibility might just be a hindrance to the dollar in 2008.

And what about oil? Will that be dollar friendly or not in 2008? I believe it will not be friendly to the dollar… I just continue to be amused at the pundits that write about oil and believe it will see a major sell off in price in 2008, thus reducing the inflation fears in the United States. I would love to see one of these people stop to tell us why they believe the price of oil will fall in 2008.

I can tell you that with the demand from India, and China, the price of oil won’t stand a chance of falling greatly. Instead I see it rising in 2008… And that should keep the dollar down, and gold rising.

OK… I also keep hearing noise about how people think the European Union ministers are upset with the strong euro. The pundits believe the ministers “have” to be upset due to fears of economic slowdown caused by the strong euro… However, I’ve got this to say to those thoughts… 1. I don’t believe I’ve heard one major complaint, except from Italy, and nobody listens to Italy’s complaints… And 2. I don’t think that I’ve seen any evidence to support the thought that the strong euro has slowed the economy.

For instance, look at yesterday’s print of the European Manufacturing (PMI) for October… It was stronger than expected, and showed activity in France and Germany accelerating. Hmmm… Doesn’t sound like the strong euro is any hindrance here!

Speaking of strong manufacturing… The United Kingdom printed a nice strong manufacturing number for November. Their manufacturing index rose from 51.9 to 54.4… This has helped the pound sterling rebound as it sees some trades taken off that were betting on a slide in sterling after a rate cut this week. With data like this, one would think the Bank of England (BOE) would sit tight this month… Yes, I understand that rates will be lower in 2008… But they don’t have to end the year on a lower note… Not with this kind of data!

The Bank of Canada (BOC) also meets this week. In fact… They meet today! This is not going to be a good meeting either way for the loonie (CAD)… Either the BOC cuts rates today, or they leave them alone and send out a warning of lower rates to come. The loonie has lost the parity level to the green/ peachback, as most traders see this same writing on the wall… Let’s hope it’s a sell the rumor and buy the fact, eh?

In Australia overnight, retail sales slowed for a second month only advancing 0.2% in October, although September’s sales were revised upward to 0.7 percent. This October reading has put a lid on any rate increase before year-end… The Reserve Bank meets tonight to discuss rates, and at one time I held out hope for another rate hike before year-end… Unfortunately, this retail sales report probably put a damper on that rate hike, now, at least.

This won’t help the sagging Aussie dollar (AUD) either… With carry trades being unwound, the high yielders get taken to the woodshed and beaten like a rented mule. And with no support from the central bank, rate hike wise, the Aussie dollar will probably have to remain in the woodshed even longer.

If the carry trades are truly being unwound, and it’s not another false dawn, look for yen (JPY) and Swiss francs (CHF) to become the last ones on the roster but number ONE in the hearts of the fans!

Back in the United States… I left you on Friday with the story that the Florida Investment Pool had frozen the activity and suspended withdrawals after a “run” on the pool… This week, the plot thickens as Florida pensioners find out that their pension fund owns about $1 billion worth of downgraded and defaulted debt. I told you last week the mortgage meltdown tentacles were beginning to reach further, with pensions and funds finding out their holdings are defaulting, and the mortgage insurers getting tons of defaulted debt put back to them.

I commend Treasury Secretary Paulson for attempting to do something about all this… But like the song goes, I’m afraid that it is… Too much, too little, too late…

Currencies today: A$ .8745, kiwi .7650, C$ .9975, euro 1.4675, sterling 2.0615, Swiss .8897, ISK 61.75, rand 6.80, krone 5.52, SEK 6.4165, forint 172.15, zloty 2.46, koruna 17.90, yen 109.70, baht 30.60, sing 1.4480, HKD 7.79, INR 39.42, China 7.3980, pesos 10.91, BRL 1.8120, dollar index 75.90, Oil $88.50, Silver $14.25, and Gold… $795.70

That’s it for today… It was quite exciting going to San Antonio on Saturday; the plane was chock-full-o-Mizzou fans chanting MIZ… ZOU… Led by my little buddy, Alex, of course! And the game was pretty cool, until we lost control in the third quarter. The plane ride back yesterday was very quiet… I turn right around on Friday and head to Marco Island, Florida for the Wealth Masters International Conference. The Wealth Masters people have been very kind to me, and invite me to speak at their conferences. I missed their summer conference this year, due to my illness, but I’m back! And ready to rock-n-roll… Well, maybe that’s stretching it, but I am back! It’s good to be back though for a few days at least! So… Have a Terrific Tuesday, and I’ll talk to you tomorrow.

Chuck Butler
December 4, 2007