Greenspan Is Still A Pain

Good day. Well, a range-bound session, but one with the dollar holding a strong bid all day. All this dollar strength is tied to one thing: the perception that Big Ben Bernanke is going to start his Fed Chairmanship with both guns a-blazin’! That is, that he’ll take liberties with rate hikes.

History shows us that the previous three Fed chairmen all took this rate hike thing seriously when they took over. William Miller, taking the reins from Arthur Burns on March 8, 1978, hiked rates 71 basis points in the first three months of his chairmanship. Paul Volcker, (a real Central Banker) coming in on August 6, 1979, hiked rates by 310 basis points during his first three months.

And finally, our old gold bug himself, Big Alan Greenspan, chairman from August 11, 1987 to January 31, 2006, hiked rates 101 basis points in the first eight weeks before the 1987 stock market crash prompted him to ease. So, Big Ben has history on his side.

I wouldn’t make any bets on him hiking rates past his first meeting at the end of March. I read last night where Wednesday’s Fed quarterly survey of senior loan officers found mortgage demand had weakened since October. Yes, the fear I have is that the 350 BPS that Big Al threw at us is just now working its way through the economy, and the housing market is just beginning to feel the pain.

My favorite economist, Morgan Stanley’s Stephen Roach, had this to say about the housing market: “The fairy dust that consumers have been spending from their over-valued houses is floating away.” I like the ‘fairy dust.’ I think it describes it to a ‘T’!

So, the jury is still out on the rate hike thing, but until there is concrete evidence that the Fed is going to pursue a 5% Fed Funds rate, the dollar will trade as if rates were going to 6%! I just believe this strength in the dollar is warranted, given the unknown.

OK. The other thing that moved the dollar higher on Wednesday was fallout from a Big Al Greenspan’s speech at a dinner Tuesday night. Big Al (between bites of salad) suggested that stubbornly low long-term rates were limiting the effect of Fed tightening, suggesting that the Fed will need to continue to raise rates. He’s gone, but still giving me a rash!

So, Big Al wants to still try and move the markets, eh? I would think that with the mess he left for Big Ben, he would just slink off into the sunset. But noooooo! He still has to be a big pain for me, and investors!

The European Central Bank (ECB) members have really stepped up their whispering campaign for higher interest rates in the Eurozone. Just this week, we have heard from Trichet, Caruana and Liebscher. And they are all singing from the same song sheet! All three have expressed their feelings that it’s OK for the markets to price in a rate hike for March. Liebscher went further and said it’s OK for the markets to price in a few more moves for 2006. So, this goes right along with my call that we’ll see rate hikes from the ECB in March, June and September this year.

I’m not sure what the markets are waiting for. It’s obvious that right now, the markets are more influenced by words from Big Al (with broccoli stuck in his teeth), versus ECB ministers.

I received some research from a trader friend at Morgan Stanley yesterday. While I’m not even your last choice for a chartist, the economist at Morgan Stanley, Stephen Jen, must be because he sure made sense to me. In the end, Stephen Jen believes that 2006 will be a more difficult environment to define clear U.S. dollar trends.

He points out that the technical picture is beginning to point toward U.S. dollar shorter-term strength against the euro in the completion of a wave ‘B’ move, which would then signal a larger wave “C” weakening of the U.S. dollar.

OK. So, we’ve got short-term dollar strength, followed by a larger move down in the dollar. I would prefer to eliminate the short-term dollar strength, but I can’t always get what I want!

The selling in the precious metals, namely gold, ended yesterday, as precious metals stormed back on the thoughts by investors that the lower levels represented excellent buying opportunities. This move by the metals helped to apply tourniquets to the Aussie dollar, the kiwi, Canadian loonies and the rand. All were not performing well, with commodities getting sold.

Loonies have stormed back above the 87-cent handle. It certainly didn’t take them long. For those of you that had lined up to buy loonies, did you get a chance to buy on the dip yesterday? If not, this current level is still about three-quarters of a cent below where the loonie traded last week. So, I would still consider this level a “dip.”

This just flashed across the screen: “The Bank of England keeps benchmark rate unchanged.” So, the Bank of England has seen the growth here, and has decided to keep rates right where they are. I agree with them. I just don’t see the need for a rate cut here, that others see. This should give the European currencies, not just sterling, some strength. And as I look at the screen, I see euros have gained a bit versus the dollar, on the news.

Currencies today: A$ .74, kiwi .6775, C$ .8712, euro 1.1990, sterling 1.7430, Swiss .7704, ISK 62.70, rand 6.14, krone 6.6925, forint 209.30, zloty 3.1760, koruna 23.64, yen 118.30, baht 39.55, sing 1.6275, China 8.0537, pesos 10.50, dollar index 90.18, silver $9.4850, and gold $556.98

That’s it for today. My beloved Missouri Tigers basketball team has really fallen on difficult times, and it looks as though we’ll be looking for a new basketball coach soon. This makes me even more anxious for spring training to start! I think I’ll adopt the West Virginia basketball team for the rest of the year! We finally see data tomorrow. It’s been a long time coming. Going to be a long time gone! Have a great Thursday!

Chuck Butler
February 9, 2006

The Daily Reckoning