Model Behavior

Good day… And a Terrific Tuesday to you! I suffered a setback yesterday, as the swelling in my leg had increased again. The blood clot they found a month ago moved to the lower part of my leg, which is pretty big. I can barely get my pants leg over my calf… So… Back to hospital, more tests, etc. This is more fun than a man supposed to have without having an “A” ticket! (Youngsters don’t have any idea what an “A” ticket is… So we have something over them today, eh?)

The weakness in the euro (EUR) showed up a bit on Monday, but so did some talk by investment people that should be listened to, about the U.S. economy, etc. Investment guru, Jim Rogers was in the news again… This time he said that he sees the “worst credit bubble in U.S. history”… And a Fed Head, Kroszner, said that the “subprime mortgage market may worsen.” But here’s the best quote of them all… I started to write about this yesterday, but thought it was kind of hokie… But then everyone was commenting on it, so why not?

Supermodel Gisele Bundchen has decided that she wants to remain the world’s richest model by insisting that she be paid in almost any currency but the U.S. dollar! OK… Now the dollar has been officially dissed! Sure guys like Rogers, Buffett, Gross, Butler, Wiggin, and Bonner have dissed the dollar because of the fundamentals… But when a supermodel decides to side with us, well then we’ve got ourselves what I’ll call… “Model Behavior”!

The weakness didn’t last too long as the euro came back hard overnight, establishing another new record high versus the dollar of 1.4538. I love the media’s explanation of this… Here’s the Associated Press… “The U.S. Currency has been on a downward slide since the Federal Reserve’s decision last month to cut rates by a half-point, followed by a quarter-point cut last week, in reaction to market jitters about the U.S. economy driven by the subprime mortgage crisis.”

Ahem… Memo to the AP… The dollar has been in a downward slide with only two major blips since it was bounced from the Bretton Woods agreement in 1971! But, if you’re nearsighted, it has been in a downward slide since the beginning of this weak dollar trend that began in February of 2002! The subprime mess is just the latest of things to help the dollar down the slippery slide, but it’s not the main thing.

We’ve been over this time and time again, but I remember in school, there were times a teacher would have to pound something in my head for me to accept it. So, here goes… The real “Big Kahuna” reason for the downward slide of the dollar is the current account deficit… And don’t be like the guy that argued with me on Bloomberg, and say, “But Chuck, we’ve always had a deficit.” Ahhh, not so fast! We haven’t always had a deficit… And when we did, we never had one that represented over 6% of GDP! And, here’s the bug-a-boo… Now we have to finance that bugger. That means attracting enough foreign investment to the tune of nearly $3 billion per day! So… There you have it… It’s not so neatly wrapped with a pretty little bow, like the AP says it is!

Speaking of the Fed Reserve’s two rate cuts, I see where the Fed Funds Futures are currently pricing in a 62% chance of another rate cut in December… Now, that’s down a bit from last week’s 68% chance, but still, there’s obviously more and more people thinking that the economy is circling the bowl, and the Fed will see that as a need to cut rates further.

Yesterday morning the markets had to come to grips with the Citicorp announcement of $8-$11 billion in additional write-downs. Then came new that Morgan Stanley would suffer a $3 billion write-down, which also weighed on sentiment. Where have all the subprime profits gone? Long time passing…

Anyway… As I said yesterday the markets are gripped by fear… And this fear pushed the price of gold up to $811 per ounce…WOW! Gold’s move is even more impressive when you know that most of the base metals have taken a dive lately. Oil is moving higher along with gold though, as it hit $96 again yesterday. So… Gold, silver, platinum, and oil are moving higher. The rest have taken a back seat to the fantastic four!

The U.S. non-manufacturing (Services Sector) Index rose in October, which doesn’t surprise me, given that we’ve turned into a servicing nation… And as a side bar, I must say our service stinks! Anyway, the Services Sector Index rose to 55.8 from 54.8 the previous month… This data wasn’t going to help the dollar anyway… Everyone knows that service sector economies don’t produce anything to sell… They need imports… And that means we import inflation from other countries!

OK… Over at The Daily Reckoning, Bill Bonner, had a great description of “deflation” yesterday. Let’s listen in to hear what he has to say…

“And then, there’s the dollar. Already this year, the greenback is down about 10% against major currencies. The estimate we remember is that all the stocks, property and other wealth of Americans – quoted in dollars – is worth about $50 trillion. Take 10% off that number and you have a loss of ‘implied wealth’ of $5 trillion.

“This, dear reader, is flation with a capital ‘D’ in front of it.

“Deflation, at least according to our definition, means that people just don’t have as much money one day as they had the last. Then, their whole outlook quickly changes. Where once they were bold, they quickly become fearful. Where once they foolishly trod, they now are afraid to rush in.

“Where once they spent, now they leave their money in their pockets.”

I sure hope that doesn’t happen… We would feel like we were trapped in the ’70’s… Not that it was THAT bad a time… But the late ’70’s did have disco… That’s what it has going for the decade! (OK that’s a cheap shot at Chris Gaffney’s favorite kind of music, but I was a rock-n-roller and didn’t understand the disco craze!)

Geez Louise, I sure got off on a tangent there! I’ll talk a bit about the dollar some more and then head to the Big Finish. I was reading a quote last night from a trader that says, “People no longer see the dollar as a high-yielding currency.” And then this one… “They’d rather switch into other currencies where the economic fundamentals are better and where they can also gain higher yield.”

Well… All I can say to these quotes is… Where have you guys been? I’ve been preaching this stuff for years!

Currencies Today: A$ .9265, kiwi .7765, C$ 1.0810, euro 1.4555, sterling 2.0880, Swiss .8745, ISK 58.70, rand 6.4990, krone 5.3415, SEK 6.3585, forint 173.35, zloty 2.4980, koruna 18.5070, yen 114.60, baht 31.55, sing 1.4460, HKD 7.7630, INR 39.31, China 7.4570, pesos 10.6980, BRL 1.7320, dollar index 76.05, Oil $95.88, Silver $15, (looks like Ty Keough is the latest to wear the lamp shade!), and Gold… $822

That’s it for today… I’m going to have some scans done today to see how I’m doing… Let’s keep our fingers crossed! I spent a good deal of my time in the hospital again yesterday… At least the young lady performing the ultrasound on my leg was nice to me! I’ve been to the hospital so many times this year, that when I come in, even the valet parking guy knows me! I’m not complaining… Just stating a fact! I hope I don’t ever become bitter about this stuff I’m going through! OK… Enough of that! It’s a Terrific Tuesday, and I hope it becomes a Terrific Tuesday for you!

Chuck Butler
November 6, 2007

The Daily Reckoning