Game Off!

Good day… And a Terrific Tuesday to you! I had to laugh last night when I pulled up Monday’s Pfennig… The title was typed… “The Lonnie Hits Parity!” What the heck is a Lonnie? I know of Lonnie “Skates’ Smith… But that’s it! My fat fingers at work again, eh? HAHAHAHAHAHA!

There was no real movement in the currencies on Monday, as there was no real news or data to deal with. The markets are still trying to digest last week’s move against the dollar. I had another interview yesterday, this time with the St. Petersburg Times. About four years ago, a writer for the St. Petersburg Times interviewed me at the Orlando Money Show, and then wrote a very nice article, featuring me, and my calls for a weaker dollar… I can only hope this one turns out so well!

There is mounting talk from the Eurozone, mainly France, that the euro (EUR) is too strong, and they want the ECB to cut rates to ease the pain of the strong euro. Well… The ECB may stop raising rates… But with oil prices rising, thus putting inflation pressures on the economy again, I doubt seriously that the ECB will cut rates any time soon… And they certainly won’t do so, especially if it makes them look to be easily controlled by member nations.

Eurozone inflation will print this week… And I’ll betcha it jumps up over the 2% target ceiling, and probably hits 2.3%. Before the liquidity/credit crunch last month, a report like that would have seen ECB President, Trichet, muttering the need for “strong vigilance”, which as long time readers know used to mean a rate hike was coming!

Yesterday, I mentioned that euro at 1.45 may very well be a conservative call. You may recall that I first said euro 1.40 this year… But when the mortgage meltdown began, I said we should look for 1.45… And now that the Fed has begun to cut rates, and let me also say that the markets are now looking for additional rate cuts (maybe they are Pfennig readers!), anyway. Now that the Fed has begun to cut rates, a move to 1.50 can’t be ruled out of the equation!

Before we get there though, the euro may see some weakness… Yesterday I told you about how a technical correction could be in the cards… And today, we’ll see the color of German Business Confidence, which will probably have fallen to a 12-month low when printed. But not to worry… Any euro weakness is not a change in the weak dollar trend… Just short-term noise that allows investors to buy at cheaper levels!

There was a Big Story yesterday about a rumor going around that BHP Billiton had found the largest gold reserve in South Australia. I received a couple of emails from people that had read about the rumor, and asked me if it would hurt the price of gold going forward… I don’t really know the answer to that except to say that I think that the declining dollar will have far more to do with the price of gold than this story.

But… One thing I do know is that if the rumor is true… It can’t be anything less than seashells and balloons for Australia… And the Australian dollar!

In yesterday’s Pfennig I wrote about how the carry trade reminded me of a Wayne and Garth street hockey game… With “Game On” for the carry trade this week… Ahhh… But “Game Off” is now on as there was a report by an independent newspaper that the U.K.’s deposit protection scheme holds funds of only 4.4 million pounds or ($8.9 million dollars). The news brought about risk aversion again, which means Japanese yen (JPY) gets to receive some love… For how long is the question?

While I’m talking about Japan… The minutes of their last Central Bank meeting tells a story of the Bank of Japan holding back a rate hike because of all the market turmoil in August. Hmmm… I wonder if that’s really true… I mean, come on… Was the Bank of Japan really ready to raise rates? Or are they just using the market turmoil as an excuse? You know… The sun was in my eyes, I tripped on a rock, and all those other excuses a youngster uses to explain why they didn’t catch the pop fly!

Back in December of 2005, a magazine asked me what currencies I saw advancing in 2006 and beyond. I pointed out that the countries with positive balance of payments balance sheets should be the currencies to look to… Those included: Norway, Sweden, Switzerland, euro, Canada, and anything Asian! The reason I bring this up again, is not to pat myself on the back… Sure don’t want to cause the bursitis to flare up!

No… What I’m talking about here is the fact that Norway’s krone (NOK) just hit a 26-year high versus the dollar. Of course the price of oil has a lot to do with the recent run in the krone… But there’s more to the story here than meets the eye… Like the fact that the pension of every citizen is paid for… Oil revenues have seen to that! So… Continue to look for gains from the Norwegian krone, and the krone’s kissin’ cousin, the Swedish krona (SEK), which has also been a strong performer for over two years now!

I’m reminded that at the Agora Vancouver Investment Conference in 2006, I gave all kinds of data on reasons to look at currencies other than euros and yen… Norway and Sweden were at the top of that list too!

Ok… Onto other things… Big Ben Bernanke spoke yesterday, but kept to his script regarding education. I think some observers were hoping he would throw the dollar a bone, but that was not to be… Fed Head Fisher did mention that “the recent trend in inflation gives the Fed some wiggle room.” That’s Central Bank parlance for, “we can ease monetary policy further.” So no bones for the dollar from Fisher either!

Just remember that you heard it here first… I told you in August that the rate cut for September by the Fed was in the cards… And that the Fed would follow that up with rate cuts in October and December… Well… Maybe they wait till December and cut another 50 BPS. That would still equal out to what I’ve called for.

Talk about bringing inflation pressures into your living room! By the time the Fed carves up its Christmas goose, they will have invited inflation into all of our homes and businesses (not that it ever really went away!) And with a falling dollar, and rising oil/commodity prices, inflation will be eating us alive! So look for gold to really be on the hunt for higher levels to trade.

And speaking of oil… I’ve read that a lot of people believe that last week’s run up to $83 indicates a high, and oil’s price rise is over. Over? I doubt that one little bit! Was it over when the Germans bombed Pearl Harbor? It’s not over until I say it’s over! HAHAHA… OK… That’s from Animal House… I have to disclose that, because one time, years ago, I printed that and I received all kinds of emails from people telling me it wasn’t the Germans that bombed Pearl Harbor, it was the Japanese! As if I had lived in a cave all my life! HAHAHAHA!

Seriously though… We’ve seen these run up the leader board by oil in the past few years followed by a fall off in price, only to rally back and rise even higher the next go around. So… Even if we see a big correction, as some people are calling for, that shouldn’t scare commodity owners much… We’ve seen it before… Been there, done that, bought the T-Shirt!

OK… As I stated above, we were looking for a weak German Business Confidence report this morning, and that’s exactly what just printed. German Business Confidence as measured by the think tank IFO, fell to a 19-month low this month. Now… Some people see the glass half empty and will tell you that this knocks the stuffing out of the German economic recovery… I see the glass half full and see this merely as a message to the ECB from German businesses that the euro is too high!

This report may indicate a weakening recovery… But it’s not the end of the world, because that ended when you said, good-bye… No Wait! Those darn song lyrics sneaking into the Pfennig all the time! Of course lots of people email me and tell me that whatever particular lyric I’ve put in the Pfennig has been in their head all day… So that’s a good thing, right?

I say that it’s not the end of the world for the German recovery… You don’t grow stronger for three years and suddenly allow a 90 lb weaklings kick sand in your face! Remember what I always say… One Swallow doesn’t make a summer… Anyway… That’s just how I see it! Oh, and the weak report hasn’t pushed euros lower… At least not at this time!

Before I head to the Big Finish I want to mention that I read a research paper last night from HSBC Bank regarding India… I like what they had to say, because… They agree with most of what I’ve said about India and the rupee (INR)! I’m still bullish on rupees, as foreign inflows are rising. This has been the best performing currency in Asia (not like it has a lot of competition, given the manipulation in the other Asian currencies) and has gained 11% versus the dollar this year! I don’t expect this gain to stop any time soon.

Currencies today: A$ .8650, kiwi .7355, C$ .9970, euro 1.4097, sterling 2.0105, Swiss .8540, ISK 62.50, rand 7.0150, krone 5.5330, SEK 6.54, forint 177.84, zloty 2.6750, koruna 19.5410, yen 114.70, baht 31.92, sing 1.50, HKD 7.7670, INR 39.80, China 7.51, pesos 10.97, dollar index 78.57, Silver $13.51, and Gold… $735

That’s it for today… I received a nice phone call yesterday from my friend John Mauldin. John called to tell me that he had thought about me over the weekend, and wanted to check the status of my battle with cancer. You know… That’s a true friend… John is a busy man, and important man, and yet, he was checking to see how I felt… I can’t say enough about all the wonderful emails of kind words, encouragement, thoughts and prayers I have received from thousands of readers… I know, in my heart, that they have been a huge part of my healing… Again… I thank everyone from the bottom of my heart! OK, before I make our little Christine start to cry, I’ll move on, and say… Have a Terrific Tuesday!

Chuck Butler
September 25, 2007

The Daily Reckoning