G-7, Schmee Seven

Good day… And a Marvelous Monday to you! It IS a Marvelous Monday as not only did G-7 go as I told you I thought it would… My beloved Missouri Tigers won a BIG game on Saturday, and my little buddy’s football team remained undefeated with a double overtime win! WOW! And Big Ben Bernanke didn’t stop by the office to meet with me on Friday! Not that I thought he would… But it was fun thinking about it!

Ok… Enough of the personal stuff… Let’s go to the G-7 meeting this weekend and see what the finance ministers of the world are thinking… OK… I use the term “thinking” loosely here… And soon you’ll see why! G-7 Schmee Seven… These guys and gals really had a lot of hoopla going into this meeting… And for what? Nothing… Absolutely nothing… That is unless you say their lack of action is a green light to sell dollars and that in itself is an action…

G-7, basically was a non-event this weekend… There was no call for dollar strength… There was no call for yen strength… There was only the same old verbiage about the Chinese currency being weak.

Where are all those dollar bulls that were buying dollars a week ago, thinking that G-7 was going to hatch a plan to strengthen the dollar? Where have all the flowers gone… Long time passing… That’s right… I’m calling out around the world… Where have you gone? I’m tired of being a nice guy on this… I’m tired of people saying things about currencies when they haven’t even checked under the hood at the fundamentals… I’m just plain tired of all of it! These people are short euros… Plain and simple… And they have tried to scare investors into closing out their positions… It just doesn’t make sense, I tell you… It just doesn’t make sense!

The European Central Bank (ECB) certainly isn’t looking to sell euros! And if they don’t have a problem with it being so strong… Why should these people that keep talking it down have a problem with it? OK… I’m going to stop here before I get upset! Let me tell you what the ECB ministers had to say at the G-7 meeting…

“Inflation risks are to the upside… If inflation goes above the tolerance level the ECB will accompany words with actions” Now… Does that sound like a wimpy Central Bank? Does that sound like they give two hoots whether their actions drive the price of the euro higher? No… And No!

To me… And it looks like the traders of the world agree with me… G-7’s lack of a “hoola-hoop” for strengthening the dollar, has given traders the green light to sell dollars! Overnight, the euro hit 1.4350… Before profit taking set in…  Now… G-7 called for more strengthening of the renminbi… But when haven’t they done that? So, as far as the traders are concerned it business as usual… And the selling of the dollar can continue…

There was something that happened on Friday that spooked the markets… It was the 20th anniversary of Friday sell off prior to Black Monday… And the earnings reports coming through have the stock market reeling… And as we saw in August when the credit crunch first came to a head, and stock sold aggressively… This indicates that risk is being removed from the markets… And if risk is being removed, you can put good money on Carry Trades unwinding…

Carry Trades unwinding is being seen in a two day rally in Japanese yen… Japanese yen is down to the 113 handle, and Swiss francs traded into the 86-cent handle overnight!

OK… Remember last week’s TIC’s data going negative? And recall the story about Asian Central Banks selling Treasuries I told you about on Friday? Well… Here’s a word from “Mr. Obvious”!

Former Fed Chairman, Big Al Greenspan said last night that “the dollar depreciation may reflect growing unwillingness among foreigners to buy U.S. debt.”  OH really? You think, Big Al? Mr. Obvious!

Ok… Tell me, tell me and then tell me again… Who does this quote by Big Al sound like?  “Obviously there is a limit to the extent that obligations to foreigners can reach. The dollar’s decline to its lowest level since 1997 may be an indication America is approaching its limit.” I know, you got this right on the first three words… I can name that speaker in 3 words or less! It’s me! This is the stuff I’ve been fretting about over and over for 5 years now…

Well… Enough of all that! Besides euro and yen… What currencies have moved higher? Well… How about the Canadian dollar / loonie? Out going Bank of Canada Gov. Dodge, said that the currencies rise is going to quick… Or how about pound sterling? The pound jumped over the 2.05 level after a stronger than expected GDP number printed, and a report showed unemployment fell to a 2.5-year low!

“Mr. Fish” IMF’s Managing Director, Rato, was out talking again this weekend… He didn’t “flip” his views this time… He decided to go with his latest statement, and that is “the dollar is overvalued.” Recall recently he did the old “flip” of his views, saying one week that it was undervalued, and then saying it was overvalued…

As least I agree with this statement! I was challenging him to a duel, when he said the dollar was undervalued!

I see that Mickey D’s (McDonald’s) posted a strong 3rd QTR earnings report… The reason I even dare to tread in the stock jockey’s water here is to point out that these earnings were a direct reflection of the weak dollar… Profits made overseas get converted back to dollars and those conversions from stronger currencies helped fuel their earnings.

So… A Royale with cheese (remember they have the metric system, so they don’t know what a 1/4 pounder is!) in France helped Mickey D’s… Cool…

You can tell that I’ve run out of things to talk about when I’m quoting lines from movie and tying it into stock earnings and the dollar! I had better check the data cupboard to see what’s on the docket this week…

Well… The data cupboard is bare today… In fact, we won’t see much from the data cupboard until Wednesday, when Existing Home Sales are printed. Thursday sees Durable Goods, and New Home Sales data, and that’s about it! No data to support the dollar this week… No G-7 safety net was thrown over the weekend… I don’t think it looks good for the dollar this week..

I can see euro pushing the envelope to 1.44 this week, and maybe even 1.45… The key is the Carry Trades… As I’ve explained before, a time or two, the euro could get hung up in the cross trades… If yen rebounds a lot… It could put pressure on the euro, due to crosses in euro / yen… But that’s the only thing nipping at the euro’s ankles this week… So, watch those Carry Trades!

Currencies today: A$ .8870, kiwi .7420, C$ 1.0250, euro 1.4305, sterling 2.0450, Swiss .8580, ISK 61.30, rand 6.8660, krone 5.3870, SEK 6.4330, forint 176.86, zloty 2.5780, koruna 19.0120, yen 113.70, baht 31.47, sing 1.4630, HKD 7.75, INR 39.82, China 7.5080, pesos 10.85, BRL 1.8020, dollar index 77.40, Oil $87.66, Silver $13.40, and Gold… $759.50

That’s it for today… I head out to New Orleans tomorrow… Hopefully Chris will be able to pick up the Pfennig for the rest of the week… I will file reports from New Orleans… I’m going to get to see old friend David Galland there, what a marketing genius! And I have plans to have dinner with John Mauldin… I usually get to see my two fave ladies in the biz… Pam and Mary Anne Aden too! There’s a whole host of others that will be there… I hope to get the chance to talk to them all! And the customers / readers… I’m sure they will stop by our booth just to make sure I’m there! So… Off to New Orleans… I sure hope you have a Marvelous Monday, and a Wonderful Week!

Chuck Butler
October 22, 2007

The Daily Reckoning