Fear Overrides Fed Speak

Good day… And a Tremendous Thursday to you! After Tuesday night’s Asian ambush on the dollar, the traders in the United States decided to take profits. The euro (EUR) touched 1.47 yesterday before profit taking set it… But WOW! That was quite the ambush, eh?

Yesterday, we had just about every Fed Head, save Big Ben, out on the speaking circuit… And not one of them could muster up the words to save the dollar. Instead, they allowed the markets to continue their fear of credit, liquidity, and writedowns… And SEC investigations ruled the day. And why not? The news lately hasn’t exactly been giving the markets a warm and fuzzy!

And yesterday had GM reporting a $39 billion deferred tax charge, along with more writedowns at Morgan Stanley, and an announcement that the nation’s leading lender, Countrywide, is being investigated.

And before I move on, even St. Louis Fed President, Mr. “I love the economy” William Poole, said that the “housing fallout may force more rate cuts.” Hmmm, glad to see that he has come around to believing what I believe the Fed is going to feel that they have to do… Cut rates!

So… The bad fundamentals continue for the U.S. economy and dollar… And right when things are beginning to look dark and crusty. Big Ben Bernanke goes before Congress today to talk about all of these things, and his outlook for the economy. At this point, I’m not sure why anyone would value his opinion… But this is a pre-scheduled event… It used to be called the Humphrey-Hawkins testimony… But the bill that required the Fed Chairman to come before congress ended long ago, and Big Al Greenspan, Big Ben’s predecessor just kept the spirit of the bill going.

Yesterday, I gave glowing reviews to the Reserve Bank of Australia for raising rates in an election period, and then the next day the government reports that the number of people employed climbed by 12,900, the 12th consecutive increase, following a revised 8,300 gain in September. There’s actually a labor shortage in Australia… You know what that means? It means wage pressures and wage pressures mean… Inflation! So, as I said a few weeks ago… Expect a rate hike before the end of the year, and one before March, and one before June in 2008… The one before the end of the year is a done deal.

Today marks the central bank meetings of both the Bank of England (BOE) and the European Central Bank (ECB). As I’ve said before, we could see a rate cut from the BOE, although I’m of the belief they will wait, while the ECB is a “no-go” on rates for sure. As I said yesterday, ECB President Trichet would love to hike rates because he knows all too well that $98 oil is going to haunt his inflation scene… But… Economic growth is slowing in the Eurozone, so he’ll have to let the strong euro do his dirty work. It’s a good thing the euro doesn’t sing… I’m a fool to do your dirty work, oh yeah… I don’t want to do your dirty work, no more.

The carry trade currencies have reversed roles again… This on again off again stuff is really giving me a rash! Let’s just decide on a pattern and stick with it, eh? I just want serenity now! But with the Dow being dumped to the tune of 360 points yesterday, risk was being taken out of the markets… And when that happens… The high yielders get trashed, and the low yielders become darlings.

For instance… Japanese yen (JPY) is seeing the underbelly of 113 for the first time in a while, and Swiss francs (CHF) hit a multi-decade high versus the dollar! On the other side of the trade… Kiwi (NZD), and Icelandic krona (ISK) got sold… Aussie (AUD) also saw some selling but I think most of its selling was tied to profit taking.

The Chinese renminbi (CNY) didn’t see any profit taking, and has moved to the highest level versus the dollar since the drop of the peg in July of 2005. Ever since our friend and investment guru, Jim Rogers, talked about moving his dollars to China to invest in renminbi, yen and Swiss francs, things have been pretty crazy with renminbi. It’s nice to see the move, although it’s still as slow as molasses.

The Canadian dollar/loonie (CAD) continues to impress with its performance versus the green/peachback… I believe that last week I said that we could see some profit taking in loonies as it had jumped up so fast. There are calls on the street that it looks overbought, and that may well be, but when oil is churning toward $100, and gold is looking at new record highs, why wouldn’t investors be buying the loonie?

So… Keep your pants on here… There may be a technical correction, but as long as oil and gold continue to book new record highs, the loonie will be underpinned. That’s my opinion of course… I don’t know if this is actually going to happen any more than anyone else! It’s just how I see it!

Speaking of oil… We did see $98 oil yesterday… But since then the price has retreated to below $96. I saw a headline that was touting this decline as some kind of good news. Hey! Bonehead! $96 was a record high just a couple of days ago! So… We dropped back to the previous record high, and that’s something to get lathered up about? I don’t think so, Tim! Now… If the price of oil dropped, say, the same percentage it dropped yesterday, for about a month… Then… And only then, could we get lathered up over the drop!

So… As we head to the Big Finish, the European markets are waiting for announcements from the BOE And the ECB. A rate cut from the BOE could very well spark a mini-dollar rally of sorts, so be prepared for that. If both decide to forego rate cuts this month, then there should be a relief rally for sterling (GBP) and euros, along with the other European currencies that are so tied to the euro.

I will have hit the send button long before the announcements are made, so Chris will tell you about them in tomorrow’s Pfennig.

Currencies today: A$ .9285, kiwi .7740, C$ 1.08, euro 1.4680, sterling 2.1060, Swiss .8850, ISK 59.80, rand 6.5140, krone 5.2870, SEK 6.3110, forint 172.90, zloty 2.4810, koruna 18.33, yen 112.85, baht 31.58, sing 1.4390, HKD 7.7670, INR 39.32, China 7.4210, pesos 10.79, BRL 1.7390, dollar index 75.40, Oil $96, Silver $15.29, and Gold… $834.30

That’s it for today… Well… I don’t have any health news to share with you… As I said yesterday, I’m going to go with the “no news is good news” thought. I’m told that I will hear from the doctor after one o’clock today. Hmmm… Anyway… You all have been so kind with your positive thoughts for me… Again… Thank You! Since the medical people don’t believe this to be life threatening, I’m getting on that plane tomorrow morning with my beautiful bride and little buddy, and heading to Amelia Island. I’ll be there through next Wednesday, as corporate meetings begin there on Monday… But I’ve got the whole weekend to just sit back and get all this health stuff out of my mind! I’ll send notes to Chris from the road, but other than that, I’ll talk to you next Thursday! Time to go… I hope you have a Tremendous Thursday!

Chuck Butler
November 8, 2007

The Daily Reckoning