FOMC Week!

Good day… And a Marvelous Monday to you! After all the hype, Friday’s data proved to be a non-event. Retail sales disappointed – only rising 0.3%, while they were expected to rise 0.5%… However, last month’s disappointing rise of 0.3% was revised upward to 0.5%. So… Nothing… In the way of direction for the currencies, from retail sales.

Retail sales minus autos fell 0.4%… But since I don’t like when the media gets all lathered up removing food and energy from inflation numbers, I won’t do the same here.

Did you see Big Al Greenspan on 60 minutes last night? I watched it for a while, and then he began to bore me… When it was over, I received an email from Ty Keough telling me that Big Al had talked about currencies… So I went to the CBS website and got the transcript of the interview with the big guy.

I have to say I was a bit taken back by his candidness. He admitted that he knew his low interest rates had spawned new practices by mortgage dealers, but felt the Fed was unable to deal with these growing problems. He also repeated his note of about 10 days ago when he said that the market woes of now, remind him of 1987 and 1998.

However, the thing I wanted to hear finally came out of his mouth when he said, “It doesn’t matter what currency he is paid in. ‘Key question, basically, is, in what currency do you wish to hold your assets,’ he explains. ‘And what I’ve done is I diversify.'”

Well… What’s good for the goose… Is good for the gander! If Big Al feels the need to diversify the currencies in which he holds his assets, then that should be good enough for all investors! Oh… And one more thing from Big Al… He has “upped” his forecast of a recession from 1 in 3 to “slightly” more than 1 in 3.

Big Al is going to have a recent interview printed in Thursday’s edition of a German magazine. An advance copy of the interview reveals that Big Al believes the euro (EUR) could replace the dollar as the reserve currency of choice. “The dollar is still slightly ahead in its use as a reserve currency, but it doesn’t have all that much of an advantage anymore.” That’s right!

My good friend, David Galland, wrote in his newsletter on Friday a great description of what we should expect given the three different scenarios for the Fed FOMC meeting tomorrow.

“On Tuesday, the brights at the Fed will gather once more to do their solemn and much watched duty. Outside of deciding whether to have coffee or tea, or perhaps a scented Italian fizzy water, they have only limited options available to them at this juncture. Loosely assembled, they are:

“1. Stubbornly refuse to reduce the Fed funds rate (the American equivalent of ‘stiff upper lip’). The response to this by the market, we suspect, would be to take a long dive off a tall building. In this case, gold may have a mixed day, but as we have seen of late, the odds are strong that gold pops to the minds of many as the crisis hedge it is, and heads higher.

“2. Begrudgingly consent to a 25 basis point cut, in which case the market – which is strongly anticipating 50 basis points – will likely hesitate a few minutes before taking the jump. Meanwhile, the shift from a tightening to a loosening mode should take its toll on the dollar. Gold moves up strongly.

“3. Signaling a decision to ‘git ‘er done,’ the Fed decides to shave a full 50 basis points off the Fed funds rate. At which point the markets may step back from the edge to think things over for another few days. But the dollar will be the one taking the plunge, sending gold soaring.”

As I read his excellent newsletter, I came to the conclusion that none of these are “good for the dollar”. Again, as I’ve said many times in the past… Given the choice of either bringing the economy to its knees, or debasing the currency, the choice to debase the currency is always the easy one.

And debasing the currency leads to not only euro strength, but also to a rise in gold and silver. But predominately gold. And while the shiny metal spent last week staying above the $700 level, but failing to add to it’s move above $700, I expect a rate cut by the Fed to be the reason for the next price push from gold.

In a follow up to a story I wrote about last week… The British Bank/lender, Northern Rock saw a run on the bank’s deposits on Friday. That’s a scary thing… And while the Bank of England has held a “stiff upper lip” with regard to helping banks out, they have come to the aid of Northern Rock. This news has really thrown a spanner in the works for the rising pound sterling (GBP). I think sterling will weather the storm here. As right now this is merely a tempest in a teacup, since the BOE has stepped in and provided cash. Let’s hope it doesn’t become something more!

The Canadian dollar/loonie (CAD) has pushed past the 97-cent level once again overnight. I talked at length last week about the loonie, so I won’t go into it again, but this currency has been somewhat short of amazing, eh?

So, the question now is… Will the loonie reach parity to the dollar? Ooooh… That’s a good one! I have to say what I’ve always said when people ask me about this… I doubt the Canadian government is going to do anything to help the currency reach parity (interest rate hikes), so… I see the currency getting oh-so-close to parity, but not quite reaching it. That is unless the Fed goes crazy folks with rate cuts in the coming months. Recall, that I called for a rate cut in September, October and December last month.

Anyway… The loonie is up almost 11% this year versus the dollar, and when asked what it did during its summer vacation, it can reply that it spent the summer reaching one record level after another!

I see that profit taking has brought the price of oil back to the $78 handle. Oil did reach $80.36 briefly on Friday only to see the profit takers come out of the walls! Just a month ago oil was trading in the $69 handle. So, it has seen some major volatility in the past month. Falling inventories, and concerns about growing demand have fueled this run, which in my opinion isn’t over.

So… As we start the week, I need to alert you that there are plenty of things to “worry” about in the economic calendar. While there are lots of “B” data printings, I’ll stick to the “A” data… Obviously, we have the FOMC tomorrow, but we also have PPI for August, and the ever-important TIC’s data (net purchases by foreigners). On Wednesday, the stupid CPI is printed along with housing starts. Thursday gives us leading indicators, and the Philly Fed Survey, and Friday is a HUGE day for option expirations.

So… Buckle yourself in tight… This is going to be quite a ride this week!

Currencies today: A$ .8390, kiwi .71, C$ .9715, euro 1.3865, sterling 1.9980, Swiss .8425, ISK 65.10, rand 7.20, krone 5.6340, SEK 6.6950, forint 184.20, zloty 2.73, koruna 24.4070, yen 114.90, baht 31.90, sing 1.5150, HKD 7.7880, INR 40.57, China 7.5230, pesos 11.13, dollar index 79.71, Silver $12.75, and Gold… $718.40

That’s it for today… I told you about the New Orleans Conference that will take place the last week of October. Well, also going on later that week is the CASEY RESEARCH CRISIS & OPPORTUNITY SUMMIT October 26 & 27 in Denver, Colorado. The Big Boss, Frank Trotter will be speaking at that Conference. The Casey Research Crisis & Opportunity Summit will be held at the four-diamond Westin Tabor Center hotel in Denver so contact the people at Casey Research now to book your spot at the conference. So… My World Champion Cardinals won’t even make it to the playoffs this year… UGH! As my beautiful bride says… Give someone else a chance to win! I begin two weeks off the cancer medicine today; maybe I’ll get my taste buds back! That’s phase one put away… I really enjoyed watching my little buddy play tackle football on Saturday… It’s these kinds of things that really put a smile on my face these days… Time to go to work… Have a Marvelous Monday, and a not so worrisome week!

Chuck Butler — September 17, 2007

The Daily Reckoning