Good day… And a Wonderful Wednesday to you! I was out to dinner with EverBank colleagues from Vermont, Jacksonville, and points in between last night. At noon yesterday it hit 70 degrees here in St. Louis. By the time I went to my car to go to dinner it was 14 degrees! BRRRR! Dinner was great! Got to meet some new people… And the ones that I have met before say… “It’s good to see you, Chuck.” I always reply, “It’s good to be seen!”

Today is the day the Fed will announce their rate cut… Will it be 25 or 50 BPS? Most of the Big Banks have pulled back on their previous calls for 50… But not me! I want to think that since I’ve been ahead of the markets on the Fed’s moves since July, that I have my finger on the pulse of the Fed… But then if they only move 25 BPS today, I’ll have proven nothing! Except, that they did cut rates!

What’s it gonna be boy? 25 or 50? I gotta know right now! But since it was a two-day, meeting the Fed told the markets, “Let me sleep on it, baby, baby, let me sleep on it, I’ll give you an answer in the morning…” (Actually afternoon).

Last week, I told you that the Fed would cut rates to 2%. I’m seeing some forecasts now calling for rates to fall to 1.25%! Now that would mean serious problems for the dollar, folks.

The currencies didn’t move much yesterday… As I said yesterday morning, the markets seem to be on hold waiting for the Fed’s announcement… That held true, as euros (EUR) drifted around 1.4770 all day!

The Aussie (AUD), kiwi (NZD), and Canadian dollars (CAD) were acting like it was “old times” as they did rally some versus the U.S. dollar yesterday. Looks like with all these forecasts for much lower rates in the United States, the high yielders are dusting themselves off and making themselves presentable again. Shoot Rudy, even sterling (GBP) looks like it wants to re-visit the “2” level again!

Aussie dollars are the fave currency of Antipodean Capital Management’s hedge-fund manager, Craig Ferguson, who said last night that he believes the Aussie dollar will go past parity to the green/peachback this year, due strictly on rate differentials between the Aussie and U.S. dollars.

Recall, a few months ago, I told you that all the talk on the street was that Aussie was going to go to parity ($1)… Then that talk faded, along with the Aussie, which fell from over 90-cents to the high 80-cent range. I have to wonder if the rate differential will be enough to overcome the unwinding of the carry trade? As I discussed yesterday… I like Aussie dollars… I like the fundamentals… I like the rates… I’m just concerned about the carry trade unwinding.

Apparently, the unwinding of the carry trade doesn’t bother Mr. Ferguson. I hope he’s right! I hope he’s being conservative!

The data yesterday was a bit confusing to the markets, as durable goods were strong… And consumer confidence slipped a bit, but in all was stronger than forecast. My colleague Ed and I were discussing consumer confidence, and we decided that December’s number probably was true, given it was December and the spirits were high, etc. Unfortunately, this month all those bills began to arrive in mailboxes. I doubt January’s consumer confidence will be strong. In fact, I look for it to fall out of bed! But that’s a month away. By then, pitchers and catchers will be reporting for Spring Training, and I’ll be itching to get down to Jupiter!

Every day, I’m asked about the European Central Bank, (ECB) and if they are going to remain Steady Eddie at the interest rate wheel. Well, my guess is this… Yes, they will for a few months… But by May or June, I suspect the euro will be better than 1.50, and inflation will have come back toward 2%. The ECB will probably look to lower rates at that time… And while I won’t be happy about a rate cut from the ECB, I will be proud of them for holding out that long, and making certain they had a handle on inflation before cutting rates.

By then, though, U.S. rates should be pretty darn low, which means, the euro might not take on any water from an ECB rate cut at that time.

I started to put together my presentation yesterday for the Orlando Money Show next week. I think I’ll keep to my basic thoughts that centered around what I talked about in New Orleans at the end of October… And that is the dollar’s problem going forward. I’ve talked about this before, but for anyone missing class, or new to class, here goes.

I believe the dollar’s problem going forward will be one of financing… That’s right, financing the current account deficit. Financing has to come in the form of foreign investing to the tune of over $2 billion per day. With yields on U.S. assets falling, what will be the attraction for foreigners to invest in the United States? With a recession on the books and rising inflation, what will be the attraction for foreigners to invest in the United States? With the credit crunch basically shutting down commercial paper operations, and corporate bond issuance, what will be the attraction? And so on… The list is long and scary folks.

So… When you look at the financing needs on a monthly basis, along with foreign direct investment stuff, it comes out to about $80-85 billion needed each month. In 2007, we averaged less than $55 billion per month. Uh-Oh… And I believe this financing problem will just get worse in 2008 due to all the problems attracting the financing.

So… (Here I go again, I know, but it has to be said)… When a country has financing problems they only have two choices: 1. Raise interest rates aggressively to attract investment. Well, the Fed’s cutting rates so that dog’s not going to hunt! And 2. Allow a debasement of the currency, which acts as a clearing mechanism for the assets being purchased. If the currency is cheaper, then the asset is bought at a discount… Given the choice between raising interest rates and bringing an economy to its knees, or allowing a debasement of the currency, a government will always choose what’s behind door number 2.

That’s it… That’s the big problem going forward for the dollar in 2008. Of course I’ll spruce it up a bit with stories of how the median investment amount in the United States is only $8,000, and so on… Should be good!

OK… Overnight, not much has happened, the euro is a bit stronger but no great shakes, as the markets are really focused on the Fed announcement this afternoon…

The Union Bank of Switzerland (UBS) announced a $14 billion write-down of mortgages last night, which led to a record loss for UBS of 12.5 billion Swiss francs ($11.4 billion in U.S. terms). UBS gets to take its place among the other financial companies that have booked losses of about $130 billion since June of last year… Oh-My!

Before I head to the Big Finish… Late yesterday afternoon, I looked up at the trading screens, and said to Kristin, our metals trader, “Hey, look at gold, it’s down $6, and it’s still trading at $923!”. That’s when you know the levels are lofty, when the asset can fall $6 and still be above the previous all-time record! Good show!

Currencies today: A$ .8880, .7780, C$ 1.0040, euro 1.4815, sterling 1.9920, Swiss .9180, ISK 64.20, rand 7.25, krone 5.4380, SEK 6.3750, forint 174.34, zloty 2.4450, koruna 17.58, yen 106.80, baht 31.45, sing 1.4180, HKD 7.8020, INR 39.23, China 7.1910, pesos 10.84, BRL 1.7790, dollar index 75.45, Oil $92.20, Silver $16.74, and Gold… $926.90

That’s it for today… Up very late last night (for me) and up very early this morning (usual time) is not my cup o’ tea. No worries though, I’ll sneak out early today, and come home to catch up on rest. I fully understand that I need my rest… Looks like my trip to Jupiter with the buddies might be back on the table. It’s a tradition… I’ve gotta go! Now, if our buddy, Jay in Oklahoma would sign on to go, the “posse” would be back in full force! I got a one-day reprieve on the economic update I’m supposed to give… And I still haven’t prepared a thing! UGH! I’ll just wing it… I think I can do these things in my sleep anyway! Time to go… Hope your Wednesday is wonderful!

Chuck Butler
January 30, 2008

The Daily Reckoning