Hoenig Talks Inflation

Good day… And a Wonderful Wednesday to you! Well… All the healing in the currencies we saw yesterday has been wiped out by one statement from a Fed Head. Imagine if you will that a Fed Head actually mentioned “inflation”! Well… One did! I feel like Tweedy Bird here… I saw a Fed Head mention inflation, I did, I did!

OK… Fed Head Hoenig has thrown a cat among the pigeons this morning by stating that “inflation pressures may spur a rate rise by the Fed.” Hmmm, is he serious, or just blabbering some currency intervention, seeing the dollar beginning to lose ground again? Well, that’s the question of the day.

To me… It’s the right thing to say for a Fed Head if it’s true. If he’s just trying to provide some verbal intervention for the dollar, then he should be stripped of his Fed Head Title and given the Title of court jester!

So, the dollar is back with the hammer in its hand again. The selling has been strong again too. The euro (EUR) has fallen 0.5 cents since I came in to the office about a half hour ago! UGH! I bet the writer from the Los Angeles Times is wondering why he printed that interview with me yesterday at this point…

Los Angeles Times writer Marty Zimmerman has a blog on the paper’s web site, and he writes about money. He called yesterday and said that he thought he saw the dollar getting sold again, and wanted my take on it. I told him that the markets had probably come to grips with the Fed’s statement last week, which ended up being quite “unsure” and vague, while the European Central Bank (ECB) would meet this week and keep rates unchanged, thus giving the euro the strong rate differential to the dollar.

But, then Hoenig came along and threw a cat among the pigeons!

Well… The euro had Hoenig’s comments going against it all night, and then ran into some weak data this morning, which really has the single unit selling like funnel cakes at a State Fair. Retail sales in the Eurozone fell 1.6% year-on-year, which was much larger than the forecast slide of 0.7%. Sales were off 0.4% from the previous month.

This is the first report that really slams the euro and shows a slowdown happening in the Eurozone. I’ve still got my colors pinned to the mast of “the Eurozone will pass the test of a U.S. recession”. But this report sure shakes my confidence. Oh, retail sales, you’re breaking my heart, you’re shaking my confidence daily.

OK… I’m back now, I was away for a moment…

The price of oil again set another new record level, moving to $122.73 yesterday. So, if Hoenig is sincere about his inflation talk, then he should be shaking in his Hugo Boss Patent leathers today… But there’s more to make him shake, and that’s all the market chatter surrounding the possibility of oil prices hitting $200 by the end of the year. OUCH! Our friends at OPEC (NOT!) have something to say about this, and OPEC’s President, Khelil, warned last week that oil prices could touch that level by the end of 2007.

For a while yesterday, it looked as though gold had gotten some wind in its sails, with the wind being oil prices… But that just couldn’t last, as the dollar strength overnight and this morning has gold running for the hills again with a $5 loss. Should $200 oil continue to dominate the markets’ discussions, I would think that gold would get some wind in its sails again.

The Canadian loonie (CAD) sure likes the look of oil prices. I was doing a trade yesterday in loonies, and looking at the daily graph I had a V-8 moment… Wow! The loonie had moved stealth-like back to near parity to the green/peachback. I know that I’ve said over and over again that this dance is gonna be a drag… In other words, the loonie will be pushed higher by commodity prices, and pulled lower by Bank of Canada rate cuts… But if $200 oil continues to dominate, it could push the loonie past parity once again.

Well… It looks like the Eurozone will have to set another place at the table, as the European Commission approved the Slovak bid to adopt the euro next year. You know, I find this strange that the Slovaks will move ahead of Poland, Hungary, and the Czech Republic, which were once thought to be on the euro “fast track”. That was in 2002! They still haven’t moved to the euro! But… Those three have done quite nicely moving along side the euro the past six years!

Pound sterling (GBP) is weaker this morning too, as it has absorbed the euro selling, and some weaker domestic data too. U.K. consumer confidence fell to a new record low in April, dropping from 77 to 70… OUCH! Now that’s going to leave a mark! Ever since the Bank of England started be weak kneed with the credit crunch like their friends on the other side of the Atlantic, I’ve not been a fan of sterling. We even moved it out of the World Energy Index!

The Reserve Bank of New Zealand (RBNZ) printed their Financial Stability Report last night, and contained a note that I thought was interesting. RBNZ Governor Bollard noted that “banks appear to be tightening the availability of credit” and that “there is a risk that if credit conditions are tightened too much, the slowdown in the economy will be exacerbated, putting additional pressure on households and businesses.” Governor Bollard also left out the word “significant” from his statement that rates would remain on hold for “a time yet”. It was just six weeks ago that he stated, “rates would remain at current levels for a ‘significant’ time yet.” Hmmm…

I don’t think that means the RBNZ will run out and cut rates at their next meeting… But Bollard is greasing the tracks here folks. He’s making overtures of lower rates. I would look for additional follow up comments in the coming weeks for more indications of what he plans to do. If he continues to grease the tracks, kiwi (NZD) will not react favorably.

There’s a note on the Bloomie this morning that Greg Gibbs of ABN Amro Holding NV, said in an interview that “the commodity currencies is where the action is.”

I’ve never wavered on that thought. I keep telling anyone that will listen that we’ve been hearing the stories about how the commodity bull market has been over for five years now… And those calls have been wrong for five years now, and I still believe they will be wrong now too. For new readers to the Pfennig… Let me explain…

Famous and well respected (and a friend of ours) investment analyst Jim Rogers, explained a couple of years ago that in over 200 years, bull markets for commodities have averaged 17-22 years in length. This bull market has only been going for about seven years now.

I’m a true believer of trends… So… With that in mind… Commodity currencies should be “where the action is” or as the Dave Clark Five used to sing… Come on, let me show you where the action is!

And on that note… It’s time to head to the Big Finish! But first, the Big Boss, Frank Trotter has an announcement (no they didn’t name me employee of the year! HA!)

Here’s a note from Frank:

“We are looking forward to seeing EverBank customers next week while Chuck and Chris and I are at the MoneyShow in Las Vegas! Be sure to stop by our booth (#106) to say hello, attend the three talks Chuck is doing, and talk about adding more money to your EverBank accounts. I wanted to add to the excitement of the event by making a special invitation for you to join the EverBank team and some of the great financial editors attending the MoneyShow for an exclusive private dinner Monday night. This is an incredible opportunity to spend some one-on-one time with Chuck and enjoy dinner prepared by a Michelin-rated chef. We have a very limited number of slots for this dinner that will occur in one of the canyons north of Las Vegas on Monday night May 12th. We’ll depart the Mandalay at 4 PM, enjoy an evening of fine dining in the great outdoors, and return to the hotel by 10 PM. If you are interested please email me at EverBank-LasVegas@everbank.com – of course not everyone can come so we’ll let you know by Friday if we have space. Be sure you include an email address that you monitor and a phone number so we can provide you with the details.”

Alrighty then… It’s not every day that the Big Boss adds to the Pfennig, but I love it when he does!

Currencies today 5/7/08: A$ .9470, kiwi .7860, C$ .9965, euro 1.5440, sterling 1.9675, Swiss .9475, ISK 76.80, rand 7.5340, krone 5.0875, SEK 6.0175, forint 163.30, zloty 2.2180, koruna 16.29, yen 105.20, baht 31.70, sing 1.3640, HKD 7.7950, INR 41.37, China 6.9860, pesos 10.50, BRL 1.6580, dollar index 73.41, Oil $121.50, Silver $16.71, and Gold… $870.88

That’s it for today… So… As Frank said above, I’ll be in Las Vegas next week for the Money Show. Vegas is completely lost on me, as I’m not a gambler, and after working all day at a booth, I go out to eat dinner and return to my room. Pretty exciting guy, eh? I caught up with an old friend yesterday, Ellie, who was kind enough to mention my Pfennig in one of her books years ago. Ellie is a cancer survivor, so we have even more to talk about these days! My little buddy, Alex, got another baseball game in last night, this time it was a winner, winner, chicken dinner! However, the rain is back, and tonight’s game is going to be a washout I can tell already! Three inches of rain is forecast for our area in the next few days… Not a good thing for my little river town… But… That’s for another day… Today, I hope you have a Wonderful Wednesday!

Chuck Butler
May 7, 2008

The Daily Reckoning