Good day… And a Wonderful Wednesday to you! An FOMC Wednesday to boot! I had two more interviews yesterday, and one is on the docket for this morning before I sneak out the back door to the Cards/Reds game at Busch this afternoon. I’ve had a few readers ask me to publish the times and whereabouts of my radio interviews, so… For those keeping score at home, today I’ll be on the Business for Breakfast Show on KRCN AM broadcasting from Longmont Colorado at 10:30 AM CT.
Yesterday, I was talking to a reporter from the Star Ledger in New Jersey (a Pfennig reader!) and was discussing the false dawn calm in the markets right now. I told the reporter that I just didn’t get it. How could the markets feel as though there is no more risk just because the Fed bailed out Bear Stearns? These people looking at the markets through rose-colored glasses really only have that on which to base their “what me worry” attitude toward risk. I’m reminded of a song… Don’t cross the river if you can’t swim the tide…
The tide represents the unknown risk events that could spring on the markets at any time… And I know someone will say, “But we could see clear sailing too!” Yes, we could, and the “all is clear now” campers would be correct… But there are just too many dark clouds hovering above us to feel that way as far as I’m concerned. To me, the dollar bulls are going to get their heads handed to them, and it could start today with the Fed announcement of a rate cut.
More importantly, though, are Big Ben’s comments after the rate announcement. The markets are banking on their thought that he will announce that the Fed’s rate cut work is finished… And if he doesn’t? Well… These “party all night ’cause the Fed’s the savior” market participants will be running for the hills.
I don’t think Big Ben will be so strong with a statement like that… Not with the Jobs Jamboree and the thought of another month of negative job creation looming over us… And don’t forget GDP, which will print today. The first estimate of first quarter GDP will print this morning, and is expected to be around 0.5%. Ooooh… I’m getting chills. That is one strong number, eh? NOT! I was also telling the Star Ledger reporter that this number has downside risk all over it.
Here’s the skinny on that… At just 0.5%, the number only has to be off by 0.5 for it to fall into negative growth territory… While, the number would have to be really strong – probably adding 2% or more – to really get the fires stoked for strong growth! But… Don’t let me rain on the “everything is clear now” party!
So… By now you’re probably saying, “Is he ever going to talk about the currencies today?” Yes… I am…
The dollar continued to swing a mighty hammer yesterday although the trading range was tight. The dollar looked as though it was going to give up on the rally in the morning hours after digesting the awful Case-Shiller housing report, and an awful consumer confidence report. But by the end of the day, the euro (EUR) was back to below the 1.56 level, and continued to fall overnight.
So, let’s look at the color of these two reports, eh? Batting lead-off was the Case-Shiller housing report which printed much worse than expected… The S&P/Case-Shiller house price index for 20 metropolitan areas dropped more than expected falling a negative -12.7% year-on-year… The experts thought it would fall -12%… The previous report showed a fall of -10.7%, so the speed of this price correction has picked up. The index has adjusted just under 15% from its July ’06 peak, just under half the 30% correction that Professor Shiller has indicated is likely.
If Professor Shiller is correct, then we’re only halfway down the road to a turn around. I would think this to be very scary for market participants, but apparently not… When you have rose-colored glasses on, you can make a pig smell good with enough perfume. Their take on the price fall acceleration is that “the faster prices correct, the faster we can get back to normal”. Well… You can dress the pig in lace, you can bathe it in the best French perfume, and you can put lipstick on it… But in the end, what have you got? You’ve still got a pig.
OK, enough of that. How about consumer confidence? Well, consumer confidence dropped 3.6 points in April to 62.3, its lowest level since March 2003. Finally, it appears that consumers are pessimistic, and maybe, just maybe, they’ll not listen to the Fed (and spend), and start saving… Hunkering down, battening down the hatches, and get ready for the storms still to come…
I know, you’re now thinking… “But Chuck… If the data was so bad, why did the dollar rally?” Ahhh grasshopper, the mysteries of life… This one is explained by the people wearing the rose-colored glasses. They are sweeping the bad data under the rug right now, and the rug is showing signs of lots of bad data being swept under it… Don’t slip on the rug!
There are a few people that think that I’ve avoided talking about gold because it has fallen from $1,000, and now from $900 too… But that’s not true… I’ve talked about it, but just can’t get my arms around why, with all the inflation going on, and the price of oil pushing the envelope, gold has been sold… But yesterday, my friend, Bill Bonner did a great job of explaining why gold should be higher… Let’s listen in to Bill from yesterday’s Daily Reckoning…
“Gold is correcting. Is the bull market over? Readers will remember that we can’t forget what happened to gold in 1980. The price of gold shot up over $800…but then began a bear market that lasted 20 years. Many people think it is happening again. But we also remember that the United States had a positive current account in 1980…and that Americans owned more of foreigners’ assets than foreigners owned of theirs…and that Paul Volcker pushed lending rates above 15% in order to protect the dollar!
“Look to the left, dear reader. Look to the right. Do you see Paul Volcker at the Fed? Nope. Volcker is still alive – warning that there is a painful adjustment coming. But at the Fed itself, there is only Ben Bernanke, promising to drop dollars from helicopters, if necessary, in order to keep the economy bubbling along. And since the United States lives so far beyond its means…and owes so much money to so many people…the likelihood that a Paul Volcker will come along to protect the dollar is probably about as likely as Alan Greenspan being elected as the new Pope.”
Ok… A brief note on pound sterling (GBP), a dissertation on the Fed rate cut today, and then off to the Big Finish!
Just Monday of this week, pound sterling was trading in the 1.99 handle and looking as though it could very well trade at 2 again. But this morning it’s barely holding on to the 1.96 handle. Yesterday Bank of England policy maker, David Blanchflower put a dagger in the pound. Blanchflower said, “Developments in the UK are starting to look eerily similar to those in the United States six months ago. There has been no decoupling of the two economies: contagion is in the air.” He also chastised the Bank of England for moving slowly on rate cuts saying that “easing slowly will mean more rate cuts will be required medium term.”
The Fed will cut interest rates 25 BPS this afternoon - that’s a given as far as I’m concerned. And I know that I’m out there on a limb on this one, but I still believe they have more rate cuts in their quiver to use at future meetings. Here’s the scenario I believe we’ll see. (Of course, I could be wrong)…
I believe that at some time in the next couple of months, we’ll be presented with another Bear Stearns, and the markets will go into a tizzy, and be back at the Fed’s door asking for more rate cuts, of which the Fed will kindly give them… Sort of like a druggie and a drug dealer, not that I know anything about that stuff!
OK… One more thing today… A former People’s Bank of China advisor, Li, is warning the government that the rises in the renminbi (CNY) should be stopped. Li believes that the renminbi is nearing a “balanced” rate. He believes the exporters need the help of a currency that stops rising. Hmmm… I wonder how much weight Li’s comments carry in China… Because talk like this could really spring into action the proposed tariffs on Chinese goods that U.S. lawmakers have ready at hand.
Currencies today 4/30/08: A$ .9340, kiwi .7775, C$ .9915, euro 1.5550, sterling 1.9660, Swiss .9630, ISK 74.45, rand 7.60, krone 5.13, SEK 6.0225, forint 162.90, zloty 2.22, koruna 16.22, yen 104.10, baht 31.65, sing 1.3610, HKD 7.7940, INR 40.59, China 6.9870, pesos 10.54, BRL 1.7060, dollar index 72.96, Oil $115.45, Silver $16.47, and Gold… $865.15
That’s it for today… May 11th is Mother’s Day… You now have over two weeks to make certain that you start to think of the most exciting gift for your mother and then get it! I know my mother always just wanted for me to see her on Mother’s Day and give her a hug. OK, before I start getting too sappy, Mother’s Day will also be the day that the New York Times Magazine will have an interview with me in it… That’s Tre’ Cool!
And speaking of the New York Times… My friend Addison Wiggin at Agora Financial wrote a book called Demise of the Dollar a while back that made it onto the New York Times bestseller list. I was honored to write the forward for the book, and was happy to hear that they’ve just reissued it with some new insights on current dollar trends. Click here to get your copy.
Day game today at Busch Stadium, you’ll know I’ll be there! Chris will have the Conn on the Pfennig tomorrow, as I report bright and early for my scan. Thanks to all who have sent along good thoughts and wishes for a clean scan… You are truly, heart-warming people, and I am blessed that you read my letter! Thank you! I hope you have a Wonderful Wednesday!
April 30, 2008