Happy New Year!

Good day… And welcome to January 2008! It’s a Wonderful Wednesday to boot! Before I get into currency/economy news, I want to get something off my chest about the CNBC shot on Monday…

I can’t tell you how mad I was at that whole thing! The two people that disagreed with me spoke out of both sides of their mouths, and I was never allowed to debate their stances with them… Shoot, I felt as though, I was just an after-thought to their “show”…

When I returned I told Frank that I was mad, but what did I expect? Isn’t CNBC one of the media outlets I call out all the time for telling “feel good stories”? Why, yes it is! The woman that spoke said she expected the dollar to recover because the Fed would be cutting rates… But then she said she expected the euro to hit 1.55! Ahem… It was only 1.46 on Friday, if it goes to 1.55 that’s even higher than I expect! And the guy… He said that “currency investors go to currencies that have rate differential advantages”. But then he said he expects the Fed to keep cutting rates. How will the dollar have a rate advantage when the Fed keeps cutting rates?

All the way back, I shook my head in disgust that I was not able to tell these people just how (I would say stupid, but my mother always told me not to say bad things about people, so I’ll say) silly they sounded.

OK… So while I was telling the world that I believe the dollar will have a funding/financing problem in 2008, it rallied 2 whole euro figures before I returned to the desk! UGH! But I put that down to year-end short covering. As soon as London closed, the selling of the euro (EUR) stopped, and it recovered the rest of the day.

On Friday, Existing Home Sales nudged up… But the overall picture of the housing market remains bleak, folks. Wanna know how Existing Homes got sold? The prices on these Existing Homes fell 3.3% from a year ago. This is the fifth biggest annual decline on record. Oh, and before you pour that last remaining bit of champagne into a glass to celebrate Home Sales nudging up, you might want to:

1. Smell the champagne to make certain its still good…

2. Check to see that even though they nudged up, the pace of sales was the second lowest on record…

So… The housing/mortgage meltdown continues to be a big albatross around the neck of the economy… And eventually the dollar… Oh, and foreclosures are really soaring, and to top that off, a large number of mortgage resets take place early in 2008, which will only add to the delinquencies and foreclosures.

I was asked last week to prepare about five minutes of information on why the dollar would continue to be weak in 2008 by the producers at CNBC… Since they only let me talk for about 30 seconds… I’ll share with you what I was going to say, had they given me the chance. Don’t worry, there’s nothing new here, so if you don’t want to go through my thoughts here, simply skip down to the Big Finish.

I believe in trends… Assets go into a trend for a fundamental reason, and do not exit the trend, whether it be a weak or strong trend, until that fundamental reason no longer exists. And trends are NOT one-way streets! There can be volatility within a trend – (think 2005).

There have only been four completed currency trends since the dollar was bounced from the Bretton Woods Agreement in 1971. They have alternated… Weak dollar (7 years), strong dollar (7 years), weak dollar (10 years), strong dollar (7 years), and now the weak dollar trend that began in 2002.

The dollar entered the weak dollar trend because of the current account deficit reaching 4.5% of GDP. Historically, 4.5% of GDP has meant a currency correction or crisis for other countries. The current account reached 6% of GDP in April of 2006.

With the current account deficit there is a need to finance it with foreign investment that is equal to more than $2 billion dollar per day.

For the longest time, attracting this amount on a daily basis did not create problems for the dollar… However, since August and the problems arising from the mortgage meltdown, attracting foreign financing has become a problem. Then add in the Fed’s rate cuts, thus making U.S. assets garner lower yields, and the prospects that the U.S. economy could very well reach a recession in 2008.

All this is creating a financing problem for the United States. The TIC’s (net security purchases by foreigners) data has shown this difficulty. Through October of 2007, we have averaged only $48.8 billion a month in TIC’s. The current account deficit requires up to $80 billion per month.

When a country experiences funding problems, they have two choices… They can raise interest rates to attract funding, which in our case doesn’t work since the Fed is in a rate cutting cycle. Or… The clearing mechanism, which in this case is the dollar, can be debased, thus creating a discount on the assets purchased. Given the choice between raising interest rates and putting your economy at risk, or debasing the currency, a government will always choose debasing.

So going forward into 2008… The fundamental reason remains in place, and even though the government (wink, wink) tells us the deficit is narrowing, I doubt it will narrow enough to keep the dollar from experiencing further weakness in 2008.

Wouldn’t that have been great for CNBC to put on the air?

So… We’ll see who’s right and who’s wrong, eh? But for the record… I believe the euro will continue its climb versus the dollar. I believe commodities make a comeback, thus pushing Aussie (AUD) and Canadian (CAD) currencies higher, with Aussie probably reaching that parity level we talked about a couple of months ago. I think we’ll see about a 10% rise in renminbi (CNY) for the year, and gold to continue its 7-year climb.

Today, we’ll see U.S. manufacturing data as measured by the ISM Index… I’m of the opinion that this index will continue its overall trend downward toward the line in the sand index figure of 50… Above 50 equals expansion, below 50 equals contraction… I believe that we’ll see this index trend down to around 45 this year, thus, indicating a recession is in place.

But don’t let that fact get in the way of a “feel good story” coming to you from the media soon!

Currencies today: A$ .8820, kiwi .7745, C$ 1.0150, euro 1.4665, sterling 1.9830, Swiss .8875, ISK 62.50, rand 6.8370, krone 5.4240, SEK 6.4170, forint 172.61, zloty 2.4520, koruna 17.95, yen 111.60, baht 29.87, sing 1.4380, HKD 7.8140, INR 39.43, China 7.2930, pesos 10.90, BRL 1.78, dollar index 76.34, Oil $96.75, Silver $15, and Gold… $844

That’s it for today… Long winded, I know, but I had a lot on my mind! I hope your New Year Celebrations were fun… Mine was pretty low key… And how about my beloved Missouri Tigers? WOW! That was a fun game to watch! There’s only one team in the country that’s better than Missouri in my opinion, and that’s the team that beat them twice this year. Oklahoma… Who should be playing in the National Championship Game! Little Delaney Grace was here to cheer on the Tigers in her little Missouri cheerleading outfit… How cute!

The city and county of St. Louis have decided to shut down the major artery that runs from county to downtown and sees about 200,000 cars travel on it daily. The shut down won’t last a day, week, or month… No….. We’re talking one year for the first section, and one year for the second section… Two years total. So, I have no idea what’s going to happen traffic wise. I guess I’ll go back to getting to work at 5 AM and writing the Pfennig there, instead of at home to avoid traffic problems… I wonder what dolt thought up this highway plan? Oh well… We carry on despite the dolts in the world! It’s off to work I go! So, have a Wonderful Wednesday, and first work day of the year!

Chuck Butler
January 2, 2008

The Daily Reckoning