He's Baaaaaack

Good day… And a Marvelous Monday to you! Well… Beat the drum, and hold the phone, the sun came out today, we’re born again, there’s new grass on the field. A-roundin’ third and headed for home, it’s a brown-eyed handsome man; anyone can understand the way I feel….

Yes… It’s Opening Day here in St. Louis, and unfortunately, the forecast for the day is YUCKY! Rain, and chill… But, unless they call it off before I head out, I’ll be on my way to Opening Day once again. I only have one ticket, so, I’ll be going alone… Sure hope the crowds don’t run me over!

Hey! I’m back! What a great vacation! Mike did a great job while I was gone… Nice to know I can leave with both Chris and Mike Pfilling in on the Pfennig!

OK… I’ve got a lot to say about the Fed’s bailout of Bear Stearns after having a week to think about it. (I really didn’t think about it until I got back!) But I did have my little buddy, Alex get me a newspaper each day for me to read before heading out to the ballpark… But first, let’s talk about the currencies.

The dollar rebounded a bit on Friday, but by the end of the day, it had given up some of that ground it had gained earlier in the day. The euro (EUR) traded above 1.58 last week for a bit… But that seems to be uncharted waters for the single unit, as each time it heads there it finds that it is not on terra firma. But that’s OK… We needed the euro to slow down the pace, so that new investors could buy in and not chase the BIG DOG down the street!

It’s back to 1.58 and change this morning… You just can’t keep a good currency down too long! You see… Eurozone inflation jumped up to 3.5% this month according to the latest survey. This is the fastest pace of inflation growth in 16 years. This is going to make it very difficult for the European Central Bank (ECB) to cut rates.

I’m still leaving the light on for a rate cut from the ECB in May… But, if this inflation continues to bark this loud bark, the ECB will have to think twice about cutting rates, as their mandate requires them to provide price stability.

The U. of Michigan’s Consumer Sentiment index fell again in March. Friday the report printed and showed a drop to 69.5, from 70.8 the previous month. This level represents the lowest level since 1992! The expectations component was also at its lowest level since 1992. Once again, all reports point to the fact that I’ve said over and over again… We are already in a recession!

So… Let’s have the dollar put on the recession pants and walk down the street! I have been talking about the dollar’s next big problem since October, when I featured those thoughts in my presentation at the New Orleans Investment Conference… I also tried to explain to the folks at CNBC on New Year’s Eve Day, but they didn’t want to hear it.

The thought was simply that the dollar would face a big problem with financing… The deficit continues to grow, and the global capital flows continue to shrink! And the large current account deficit countries like the United States are left with HUGE currency risks! And the current account surplus countries like Japan and the Eurozone? Well… They have no need for imported capital… And guess what their currencies are doing? They are enjoying the spotlight of strong currencies. I don’t see this scenario changing any time soon either!

I bet those knuckleheads at CNBC wish they would have let me talk three months ago. Imagine how many investors could have benefited from hearing the TRUTH!

OK… I have some serious stuff to talk about here regarding Iceland… Now… I have been warning people for six months about how when the carry trade unwinds, currencies like Icelandic krona (ISK), South African rand (ZAR), and New Zealand dollars (NZD) could, and most likely would get hurt by the unwinding. And the currencies that would benefit from an unwinding… Japanese yen (JPY) and Swiss francs (CHF)…

This is what we’ve been seeing the past month and even longer… Swiss francs and Japanese yen have been the two best performing currencies this year… While Iceland and South Africa have really taken on water… New Zealand has held ground. But like I’ve said before, their fundamentals aren’t as bad as Iceland’s and South Africa’s, and with commodities underpinning their currency, they’ve been able to weather the unwinding carry trade storm.

But here’s what’s happening now in Iceland… Some of you may have noticed that we had to drop the interest rate on our Icelandic CDs. The speculators are making business in Iceland very difficult to do. The liquidity is drying up… And the cost to do business there has gone up significantly, therefore requiring us to lower the interest we could pay on Icelandic CDs. So, now the yield is gone.

OK… Did you see where Lehman Brothers were victims of fraud? $350 million lost to fraud… Lehman provided funds for a hospital investment business backed by guarantees from Marubeni Corp, Japan’s fifth largest trading house. Seems the documents were forged… And now Lehman has to sue Marubeni in an attempt to recover the funds. Don’t know how they’ll show that on their investment balance sheet.

Last night, Japan posted a drop in industrial production for the second consecutive month. This makes sense given the recession going on here in the United States, but don’t for one minute think that this will cause a problem with the yen. In normal times, yes… It would be a difficult pill for yen to swallow… But, these aren’t normal times… And yen’s strength is derived simply from unwinding carry trades.

A lot of people think that the Fed took “risk” out of the markets with their bailout of Bear Stearns… But I think that is a “false dawn”. I think the Fed made an error BIG TIME in doing this. Here’s my way of thinking…

I believe the Fed short-circuited the creative destruction process… In other words… Not allowing those that were “bad” to be punished… I also think that not enough of this bad mortgage paper bubble that had grown was destroyed, but rather left to start again and create bubble problems down the road. (Sound familiar?) How many more “Bear Stearns” will come along and possibly create the need for more government action, which just might take on some once thought impossible thoughts, of unbelievable proportions!

The markets are hanging their hats on the Fed action… Much like they did in previous problems… And all that happened was another bubble was created. The Fed’s track record here is awful… But don’t let me rain on the media’s parade here!

I received a note from Jim Rogers the other day. What a great thing to see in my email box when I returned. He pointed out that “I have been shrieking about inflation and bashing the Fed for some time so there are 2 of us.”

Nice company to keep, eh? Well, at least it is for me! And speaking of the Fed… Did I mention I believe they’ve made a big blunder with the Bear Stearns bailout?

Tonight, the Reserve Bank of Australia (RBA) will meet… And I’m certain that they will keep interest rates unchanged. The RBA needs to see the results of their recent rate hikes before making any moves… And with inflation still on the rise, I doubt we’ll see any rate cuts this year. Thus, the high rates will continue to underpin the currency. I still think that the Aussie dollar (AUD) could see parity this year. That’s just my guess… I don’t own a crystal ball… But… As Styx used to sing… Perhaps I’ll get a chance to look ahead and see… Soon as I find myself a crystal ball… Soon as I find myself a crystal ball…

The pound sterling (GBP) hit two again last week. It has been quite resilient in the face of gathering storm clouds. You see, the U.K. is another high current account deficit country like the United States, and their financing needs could see the same financing problems plaguing the dollar. On top of that, the U.K. has a lot of the same housing bubble problems the U.S. has, and they drank the Kool-Aid of the mortgage bonds. They’ve already seen one lending institution fail… Northern Rock… And my guess is they will see more.

And Jim Rogers says that the “U.K. will be importing oil in 10 years, so much for their petrol currency status”…

New Zealand dollars saw slippage on Friday, and last night’s trading after the latest report on business confidence showed a drop to a 17-year low! Ooooh, that’s going to leave a mark! Really, folks… I know this currency has done quite well in the face of all the things I have said about it… But how many lives can it have?

The data cupboard isn’t stacked this week, but what it does have to offer could by quite filling! Tomorrow we’ll see the color of the latest ISM Index (manufacturing). I’m certain that it will remain under 50… And then Friday is a Jobs Jamboree! Here… I believe we’ll see another negative month in job creation… Neither of those two will leave dollar buyers with a warm and fuzzy.

Gold and silver haven’t seen the sunny side of the street in a while, as commodities continue to go through a correction.

We have the doomsday people out in force again, talking about how this is the end of the run for commodities. We’ve heard this over and over again since 2003… I guess, if they just keep saying it, sooner or later they’ll be right, eh? My guess, and this is an educated guess from reading Jim Rogers’ book, Hot Commodities, is that they’ll have to wait a good time longer for their doomsday predictions for commodities to come to fruition.

Currencies today: A$ .9155, kiwi .7915, C$ .98, euro 1.5815, sterling 1.99, Swiss 1.0070, ISK 75.90, rand 8.09, krone 5.0825, SEK 5.9370, forint 164.65, zloty 2.2280, koruna 16, yen 99.40, baht 31.48, sing 1.3790, HKD 7.7840, INR 40.13, China 7.0120, pesos 10.6950, BRL 1.7435, dollar index 71.59, Oil $104.98, Silver $17.98, and Gold… $935.70

That’s it for today… Have you checked out our new Currency Research Center on our website? It’s tre’ cool! It’s what I’ve been asking for since we launched a web site eight years ago! Kudos to all those at EverBank that had something to do with the project! (I did all the currency writeups!) Thank you to everyone that sent along Happy Birthday wishes… I got to spend my birthday at the ballpark watching my beloved Cardinals with my family… Can’t ask for much more as far as I’m concerned! I head back to Florida next week to speak at the Investment U. Conference… The Big Boss, Frank Trotter, normally does this gig, but he had to call for the big right-hander in the bullpen… ME!

My beautiful granddaughter, Delaney Grace, was great on the trip… She had better learn that you have to go with the flow when you’re with the Butlers! So… Back in the saddle today… Only briefly though, as it IS Opening Day! I’ll talk to you tomorrow… Have a Marvelous Monday!

Chuck Butler
March 31, 2008

The Daily Reckoning