Failing to Be Attractive

Good day… And a Marvelous Monday to you! Our Fantastic Friday didn’t turn out to be so Fantastic for the dollar, or the U.S.’s ability to attract enough foreign investment to finance our current account deficit. This is beginning to get scary folks… And then on top of that, we’ve got the Persian Gulf States considering changing their fixed exchange rates to the dollar!

OK… Not to spook everyone so early on a Monday morning, but I know the Gulf States have made these announcements before… Talking about leaving their peg to the dollar and going to a basket of currencies peg… But this time could be very different… With the dollar continuing to post losses and leaving these six member countries of the Gulf Cooperation Council with losses on not only their own currencies, thus allowing inflation to enter their economies, but also losses on all the dollars they own!

No wonder, the six members have decided to discuss a proposal at their next meeting to revalue their currencies. I think that the markets are not really taking this story, hook, line and sinker… Yet that is… Because these countries have cried wolf many a time in the past… But, should this all come to fruition… YIKES!

And our friends (NOT!) over at OPEC could receive a yellow flag for “piling on” after they decided at their weekend get-away that they are interested in converting their cash reserves into non-dollar currencies. The Iranian President called the dollar a “worthless piece of paper”… Well, I don’t know about that Mr. Iranian President, but it is weak.

Now, back to the financing problem… Foreigners were NET SELLERS of U.S. long-term securities in September. That’s two months in a row, for those of you keeping score at home! Remember last month when I gave you these facts? In August, it was reported that Japan cut their holdings of Treasuries by 4%… while China cut their holdings by 2.2%, and Taiwan cut their holdings by 8.9%.

I know those sound pretty bad… But what if I were to tell you that Japanese holdings reached $582 billion, which represents the fourth consecutive monthly decline, and a 17% decline off the all time high reached in 2004 – and that Chinese holdings fell to $396 billion, which has been on a downward slope since the April high?

This is called “failing to be attractive”. Remember when I told you about how the Treasury people wanted to put lipstick on the dollar to make it attractive? Ahhh, but we all know you can put lipstick on a pig… And… It’s still a pig!

Hopefully you have checked your investment portfolios and allocated dollars to currencies to diversify your portfolio and protect you, should the dollar continue to weaken… Which – given these numbers – it has no other choice to do! The administration isn’t doing anything to protect it…. The Fed is cutting interest rates… And the guy impersonating Corky the Clown over at the Treasury is really hammering nails in the dollar’s coffin!

OK… Enough! I know that at times I sound like a broken record… No wait! The youngsters don’t know what that means… How about, at times I sound like a CD with a scratch? Anyway… The point I’m trying to make is simply that I say these things over and over again… And we have grown our business to the largest it has ever been, but I still meet people or receive emails from people that have no idea that we exist, or that we offer foreign currency deposit accounts in an FDIC insured bank… (FDIC only covers your deposit in the bank should EverBank fail, it does not cover losses from currency fluctuations.)

In Asia, the dollar got sold based on the two items I have so eloquently explained above… OK, so here blowing my own horn… Oh, well… Someone’s got to do it! HAHAHAHA… The selling has been somewhat subdued though… I guess the evidence needed to sell more dollars still isn’t enough for these guys!

Last month I wrote a long piece in the Review & Focus on Singapore… And put snippets of the write-up in this newsletter. So… I thought I would do a follow up on Singapore. Singapore has raised their economic growth and inflation forecasts as financial services expanded the most in a decade… The 2008 forecast for GDP was raised to 6.5% (from 6%) and the inflation forecast was raised to 4.5%… (Inflation in 2007 has been around 2%)… Talk about the need for higher interest rates!

Look for rates to move up here, and that should continue to underpin the Sing dollar (SGD).

Former Fed Chairman, Big Al Greenspan, was in the news again yesterday… Speaking in New York. Big Al said, “So long as the dollar weakness does not create inflation, which is a major concern around the globe for everyone who watches the exchange rate, then I think it’s a market phenomenon, which aside from those who travel the world, has no real fundamental economic consequences.”

OK… So how before Big Al gets taken to the woodshed by Jim Rogers? Recall last week, that Big Ben Bernanke said something similar, and investment guru, Jim Rogers really called him out… Of course, Senator Ron Paul from Texas, also took it to Big Ben when he testified before Congress a week ago… So, it was take a shot a Big Ben week.

Anyway… I look at what Big Al said and thinks… “Does he really think that? Or… Is he merely trying to keep the dollar from going into a free fall?” If he really thinks that then there’s no wonder we’re in the mess we’re in today! Come to think of it… That’s probably it!

Tuesday, we’ll see the latest report on housing starts. The report for October is forecast to show housing starts falling to a 14-year low! Here’s the scenario folks… Sales are dropping and inventories are growing, which doesn’t lead builders to start new homes!

This housing mess continues to be the top story of 2007… And nothing leads me to believe we have even seen the bottom yet! Robert Toll, Chairman of Toll Brothers, the largest U.S. luxury homebuilder, said, “We do think that this is worse than it was in 1988 through 1990… We can’t predict how long this down-period will last.”

We had a G-20 meeting this weekend… NBD… No big deal! Not a lot of weight to this group… But they did call on Asia for more currency flexibility… That’s about as useful as rearranging the deck chairs on the Titanic!

When will these people ever learn? When will they ever learn? The Chinese are going to do what they feel is best for their economy, and will not be moved to change their currency policy by the United States, the Eurozone, G-7, G-8, G-20, or whatever other G-number that comes along as calls on them to do so!

The price of oil is back on the pain tracks. Yes, it’s painful to my wallet to see it moving higher… But then I did warn everyone that the sell off in recent days was merely a technical correction/profit taking at best. Oil is moving back towards $95 again… The inflation meter should be about ready to explode… But don’t let that get in the way of a CPI that shows less than 3% inflation!

It looks like pound sterling (GBP) has weathered the latest storm, and could get the ship on course once again. Event risk is still hanging over the pound like the Sword of Damocles… But, for now it has gained back some lost ground to the dollar.

Ok… The data cupboard is pretty bare this week, as it will be a short trading week with the Thanksgiving holiday on Thursday, and skeleton crews on the trading desks Friday. I said this a couple of weeks ago, but that Friday after Thanksgiving has ALWAYS been a day off for me… Except this year, as two people had already signed out that day, so I guess I’ll get to see what it’s like to fight the people trying to shop till they drop!

So, back to the data… The housing starts tomorrow highlight the week of data. Wednesday, we’ll see consumer sentiment, and leading indicators. Leading indicators should be a good piece of data to hang your hat on, but the markets sweep it under the rug. I just don’t know why.

Anyway, the dollar will be on its own this week…

Currencies today: A$ .8950, kiwi .7595, C$ 1.0250, euro 1.4640, sterling 2.0495, Swiss .8945, ISK 60.80, rand 6.6990, krone 5.5150, SEK 6.3340, forint 173.69, zloty 2.5060, koruna 18.21, Yen 110.30, baht 31.37, sing 1.4450, HKD 7.7830, INR 39.34, China 7.4275, pesos 10.91, BRL 1.7460, dollar index 75.90, Oil $94.52, Silver $14.53, and Gold… $788.90

That’s it for today… How about those Missouri Tigers! This Saturday is the BIG showdown versus Kansas. This match-up has been a HUGE rivalry game for a long time, way before I was even around, but this year it is even BIGGER! I’m keeping my fingers crossed! I got to see my little Delaney Grace all weekend. She is a stinker! But cute… So she gets away with it! A lot of people will be traveling this week for Thanksgiving… Please be careful! I remember when my beautiful bride and I lived in Des Moines, Iowa, and we had to get back home to St. Louis for Thanksgiving, which meant driving through snow in Iowa, and ice in Missouri… Glad we don’t have to do that anymore! So… I hope you have a Marvelous Monday… And your Thanksgiving week is Wonderful!

Chuck Butler
November 19, 2007

The Daily Reckoning