Good day. Well, today’s the day everyone has been waiting for. Did you hear the noise being spread about the possibility of a 50-BPS rate hike today instead of the “measured” 25-BPS hikes we’ve seen for two years? Remember the old saying about leaving the barn door open and the cow was already out of the barn? Well, Big Ben’s predecessor left the inflation door open three years ago; it’s too late to try big rate hikes now. The inflation cow is out of the barn!

I was reading a June 26, 2006, article from LeMetropole, by Adrian Douglas. Mr. Douglas was talking about how the interest rate on the 10-year Treasuries, which drives the rate on mortgages, has been in a well-defined descending channel for 24 years. On June 23, 2006, the yield on the 10-year closed at 5.23%. This means the yield has broken up and out of this 24-year trend channel, and with any rate hike by the Fed today, this break up and out of the 24-year trend will be really defined.

Obviously, anything that hits mortgages is huge in this country given how the housing sector has been responsible for the public-driven economic growth. Mr. Douglas finished his article with this statement that really caught my attention.

“Next week Bernanke will Chair the most crucial FOMC meeting in the last quarter of a century. Unfortunately, destiny is already written; a twenty-four-year trend is broken. For the rate decision he might as well flip a coin, heads he doesn’t win, tails he loses!”

OK, enough of all that! Remember the first two days of this week I said that it was strange days indeed, for euros were being bought ahead of the FOMC meeting? Well, that all stopped yesterday, and the euro was sold. And if the euro was sold, that means, for the most part, all currencies were sold, albeit in a tight range.

We really need to listen to Big Ben’s speech after the rate announcement today, as that will really give us some direction for the currencies going into the funky Fourth of July holiday. I say “funky” because of the day of the week it falls on this year. With the Fourth of July falling on a Tuesday, Monday will most likely be taken as a day off to make the weekend a nice four-day holiday, which means, thin trading desks beginning tomorrow afternoon, and going until next Wednesday!

Anything can happen during times when the trading desks are thin. So, as a knucklehead on a TV advertisement named “Use Your Head Fred” says, Be Careful out there!

I have to get back to my first discussion today and that is what another rate hike is going to do. Did you see consumer confidence on Tuesday? It shot higher once again. What’s going on here in the United States? Do people just not care what is going on in front of them? George Soros says the U.S. will be in a recession in 2007. Now, doesn’t that make you confident?

Dr. Irwin Keller of MarketWatch had this to say about what’s going on, “One thing’s for sure, anyone who is not worried about the second half of this year and 2007 either does not understand what’s going on or is simply hoping that one way or another the economy will squeak through unscathed.”

How about the Chinese? Once again, we’ve got so-called experts coming out of the walls claiming they know all about the Chinese economy, and that it is going to fall flat on its face. Haven’t we heard all this before? Does the boy who cried wolf come into play here? I think so. Every time a so-called Chinese expert claims that the Chinese economy is going to go belly up, it heats up more!

The bad part about these claims is that it hits the commodities hard…and the commodity currencies.

Speaking of China, a Chinese newspaper reported the other day that Deputy Governor of the People’s Bank of China Wu said, “Countries around the world should gradually rely less on the dollar for trade and their foreign-exchange.” Interesting thought, eh? I think that this was a follow up to remind traders of the massive amounts of dollar reserves China holds.

Iran has rejected calls for a fast decision on their nuclear policy. I would think that if it weren’t an FOMC day, gold, Swiss francs, and oil would be heading higher.

I just keep coming back to the FOMC today, eh? Well, it’s been on my mind, like Georgia, and I can’t get it out of my head. I just think, and I can hear you saying, “Oh no, here he goes again!” And you’re right; here I go again. I just think that the Fed is fighting a war on inflation that should have been fought three years ago. Now, it’s something different that I’m afraid of: a squashed economy, high interest rates, and a pop of the housing bubble. Oh, me-o-my. Does anyone know what kind of scenario that will create for our economy? I think you know.

Currencies today: A$ .7305, kiwi .5950, C$ .8925, euro 1.2530, sterling 1.8130, Swiss .80, ISK 76.80, rand 7.33, krone 6.290, forint 225.45, zloty 3.26, koruna 22.7650, yen 116.40, baht 38.44, sing 1.5980, INR 46.28, China 7.9955, pesos 11.42, dollar index 86.79, silver $10.42, and gold $581.40

That’s it for today. A great birthday breakfast with my little buddy yesterday, and then our visit to the ballpark was fabulous as the Cardinals ended their losing streak! As our little Christine/Caroline/Pixie will say when she arrives in an hour, “Chuck, today is your Friday. Yeah for you!” That’s right. I begin the Fourth of July holiday tomorrow, as I’ll be the driver when my beautiful bride has lasik surgery. Chris has the con on the Pfennig till next Wednesday. Have a great FOMC Thursday, and Fourth of July holiday!

Chuck Butler
June 29, 2006

The Daily Reckoning