Good day… I’m back again… So a Terrific Tuesday to you! This will be a short gig for me this week, as I’m here through Thursday, and then I get to try to get things back to normal for me and my family by going on my traditional winter vacation. Chris will carry on in my absence as he always does and in such a fine and professional manner!

The Fed’s FOMC meets today to discuss rates and that’s the Big News today. Expect a rate cut of 25 BPS, although, if I were a Fed voting member, I would be banging the table for no rate cut, while the markets would be banging the table for a 50 BPS cut!

The currencies didn’t really budge too much yesterday. The euro (EUR) went down early, and came back to end the day where it started… So, a tight trading range was in order – which was good, because I was on a plane making my way back to icy St. Louis!

Since the markets were in a tight range yesterday, I thought this would be a great day to bring you two of my faves. Yes, I’m talking about my friend, The Mogambo Guru, and someone I’ve never met, but admire from afar, Bill Gross… So, let’s get going, eh?

First… The Mogambo Guru… Now, if you’re not familiar with the Mogambo, let me tell you that he writes with a “flair”… But if there’s one thing that really gets him going it is inflation, which is what first got my attention to his newsletter, which can be found at the Daily Reckoning… So, with no further adieu here’s the Mogambo’s take on the subprime mess…

“So if you are, like me, one of those people who is terrified at the sheer scale of this whole subprime mess and you wake up in the middle of the night bathed in cold sweat and screaming in terror, often shooting off whole clips of expensive ammunition at the horror of it all, and all just because estimates of the direct financial losses are climbing towards a trillion dollars, or trillions of dollars, then let me tell you to relax.

Be calm. Put the gun down. Or at least put some of them down. Keep the big one.

“Instead, be comforted in an existential way, serene in the knowledge that these are relatively good times yet, and things will continue to get worse and worse and worse in the future, as the ultimate horror of the penalty for supreme economic stupidity of allowing the Federal Reserve and the banks to (again) act like greedy, half-witted, corrupt children is going to be several times worse than anyone suspects, and for a Long, Long, Long Time To Come (LLLTTC).

“And I say this with all the Profound Mogambo Sincerity (PMS) that I can muster on so short a notice, so that when you gaze deep, deep, deep into the fiery blue pools of my Bloodshot Mogambo Eyes (BME), you cannot help but think to yourself, ‘Hey! This guy is sincere! You guys ought to come over here and look at this awesome sincerity!'”

Now for Bill Gross… I found this latest note from the “Bond King” Bill Gross on my friend, John Mauldin’s “out of the box” newsletter, which is sent to anyone that gets his weekly newsletter.

Bill Gross was talking about the problems subprime has created, and the dollar…

“How does one protect ‘deposits’ during a run that no one can see? To be blunt, what does this mean for your pocketbook? Commonsensical analysis has only to ask what investments did especially well during the shadow’s formation in order to understand where future losses may lie. Home prices have been the obvious first hit – down 5% nationwide already, with perhaps another 10% to go over the next several years. Following in lock-step have been financial stocks with subprime exposure to be joined in short order by consumer-based equities as jobs and disposable income falter. These investments thrived as the shadow worked its voodoo and now its curse will sap money from the pockets of any and all who believed in its black magic.

“Importantly, add to the list of investment victims the strength and viability of our national currency. The SIVs and CDOs of years past supported the dollar at unrealistic levels as foreign investment in the hundreds of billions powered into our markets. Now with confidence waning, the visible but unphotographable run away from George Washington into the Euro, the Yen anything – but the dollar – is underway. Protecting an American-made pocketbook should begin by understanding that purchasing power is more likely to be enhanced via investments in strong, not weak, currencies.”

OK… So… This all brings me back to the question that I would ask those that believe the dollar will rally… “What is going to fuel the dollar’s rally?” It sure won’t be interest rates… It sure won’t be foreign investment… It sure won’t be the economy… It sure won’t be the U.S. consumer and housing (like before)… And it sure won’t be the rising inflation we continue to experience!

I just talked to 300 people, and only a handful of people were already customers. I kept hearing a common question put to me… “But Chuck… I read in the Wall Street Journal last week that the dollar is going to rally in 2008… Is that true?” I would then explain that the stories have centered on the dollar avoiding a collapse. I’ve never mentioned a dollar collapse in the future… Could it happen? Of course it could! No fiat currency has ever lived forever… But I concentrate on the trends, and the fundamental reasons why the dollar is in a weak trend, and why it’s very likely it will remain there.

So, after settling them down, they would be very excited about opening an account and I would hear, “Where have you been? I’ve been looking for currency deposits for years?” To that, I would just say, “We’ve been here. We’ve been issuing currency deposits for over 20 years… And if you’ve never heard me speak, or read about us in financial newspapers and magazines then we haven’t done a good job!”

Well… The FOMC meets today… Everybody and their brother knows that the Fed will cut rates 25 BPS… And some believe that by cutting in small pieces the dollar will rally. Come again? Do, we really believe that stuff? Small rate cuts just mean the Fed is putting off to the future what needs to be done now!

Bank of America froze a $12 billion enhanced cash fund due to losses on holding that included debt sold by SIVs yesterday. Swiss banking giant UBS warned Monday that it will write down the value of its subprime mortgage holdings by a further $10 billion, leading to a loss in the fourth quarter and potentially wiping out all its profits for the year…

And Washington Mutual, has become the latest mortgage lender to resort to scrambling in attempt to shore up their finances because of mortgage losses. Washington Mutual is the nation’s largest savings and loan, and even that isn’t going to insulate them from the mess… They announced yesterday that they were slashing their dividend, setting aside $1.6 billion for loan losses, closing offices, and laying of more than 3,000 employees.

Oh… And remember what I said yesterday. Let me take you back to last August when Treasury Secretary Paulson said, “the subprime crisis was largely contained.” Or last May when Fed Chairman Big Ben Bernanke said, “the subprime mortgage crisis would have ‘limited’ impact on the housing market, and there was ‘no serious broader, spillover’ to the credit markets.”

I shake my head in disgust, because these two should have known better when they uttered these comments, as it was clear they would lead the markets to a dollar rally.

And remember what I told you last week about MBIA, the large bond insurer? Well… Their stock was halted from NYSE trading yesterday. The Armonk, New York-based company’s AAA credit rating is under scrutiny by ratings companies and MBIA said last week it may raise capital to protect its ranking.

I was all over this story like a cheap suit, before it even came to fruition, eh? Just shows to go you that even a blind squirrel can find an acorn!

This morning, we’ve already seen the latest German Investor Confidence report, and it wasn’t pretty. German Investor Confidence as measured by the think tank ZEW, fell to a 15-year low this month. You would have to say that investors here are in tune with what’s going on in the world, as it was noted the investors are just unsure how long the financial markets crisis will last. Hmmm… I talk to people here everyday that don’t even know we are in a “financial markets crisis”!

And there’s word this morning that China’s latest printing of consumer inflation spiked to an 11-year high of 6.9%. (Of course, if inflation was properly accounted for in the United States, we would be looking at a figure higher than this!) So… The economy is still red hot in China. So… Expect to see higher internal interest rates… But what I would like to see the Chinese do is follow the European Union’s example of allowing a currency to help in the fight versus inflation. And that can only be achieved by a free-floating currency!

Oh… And while the Chinese are fighting inflation, they also have to fight off the Americans and Europeans regarding their trade surplus… Which in November hit $26.2 billion! WOW!

I see the carry trades have made another comeback. I find this most interesting. Risk is all over the board… The Fed is going to cut rates again this afternoon, and quite possibly remove the “balanced growth” wording (which was a crock anyway)… We’ve got mortgage lenders doing the two-step boogie to keep from closing their doors, and carry trades make a comeback… It’s a sign of the times, Chuck.

Investors no longer are scared to take risk… There’s a bailout plan somewhere that will save them!

Currencies today: A$ .8855, kiwi .7840, C$ .9920, euro 1.4715, sterling 2.05, Swiss .8840, ISK 61.20, rand 6.6930, krone 5.4550, SEK 6.3960, forint 171.25, zloty 2.43, koruna 17.70, yen 112, baht 30.32, sing 1.4410, HKD 7.7985, INR 39.36, China 7.38, pesos 10.8150, BRL 1.7630, dollar index 76.16, Oil $88.17, Silver $14.78, and Gold.. $812.20

That’s it for today… I’m finished with phase three of my cancer medicine! YAHOO! The last two weeks have been pretty tough on me, so I’m glad to have put that behind me! I get to go three weeks off this time, which takes me through Christmas and New Years… Good deal! Then I get to start up with the doctors again in January. So far so good… It sure was beautiful down on Marco Island… Sort of like Disneyland without all the kids! Everything looks so clean and new! I hadn’t been to Marco Island since 1989, so it has changed BIG TIME! 80 degrees yesterday when I left… 29 degrees when I landed in St. Louis, UGH! The Fed has the Conn today… So, have a Terrific Tuesday!

Chuck Butler
December 11, 2007

The Daily Reckoning