On the Soapbox Again

Good day… And a Wonderful Wednesday to you! The landscape is very different this morning than when I signed off yesterday. The dollar has fought back and found a new person to back U.S. Treasury Secretary Paulson’s claim that he supports a strong dollar. That person is Fed Chairman Ben Bernanke, which is quite strange for a Fed Head to be talking about the dollar.

So… Here it is folks… I’m going to get on the soapbox now and give you my Pfennig’s worth of what I think of Big Ben Bernanke and his words yesterday, along with some general thoughts on reforming the Fed. If that’s not your bag, baby, then skip ahead to the section marked “***”… There I’ll take up an explanation of my thoughts yesterday toward China… So… If you’re ready, I am…

OK… Now I’ve heard just about everything when it comes to central bankers! Big Ben Bernanke threw a cat among the pigeons yesterday when he broke the long standing tradition of relative silence (for a Fed Chairman) on the dollar… (This is the U.S. Treasury’s baby!) But I guess since Big Ben has been so instrumental in the weakness of the dollar, he probably thought he was “qualified” to talk about it!

Big Ben signaled to the markets that he was “uncomfortable” with the weakness of the dollar, and the ramifications that a weak dollar has on inflation. He actually blamed the weak dollar on inflation! Whoa there partner! You’re barking up the wrong tree!

You see… Inflation as I’ve explained to you for a couple of years now is rising, even though the stupid CPI data doesn’t reflect what you and I feel has been going on with our cash. Well… Big Ben finally has admitted that there are rising inflation fears… (Sorry Ben, but inflation is eating us alive… These aren’t just inflation fears!)

Anyway… Big Ben sees inflation (good for him!), but wait… Blame inflation on the weak dollar? That’s putting the horse, and another horse, before the cart, Big Ben!

Now, I’m not saying that a weak dollar doesn’t play well with inflation… But I would think – and unfortunately the markets don’t see the trees in the forest on this one – that everyone would call this for what it is… Big Ben is blaming something else!

Inflation is more associated with low interest rates… And money supply… Things HE CONTROLS! So… Having low interest rates and money supply running at 16% isn’t causing inflation, Big Ben? I say… This has gone on long enough! Someone on Capitol Hill needs to stand up and call him out on this one! I’m seething with anger toward this right now! And anyone getting caught up in his attempt to scare the markets into thinking that the Fed is going to intervene to shore up the dollar, should be grabbing their pitch forks, rakes and shovels and heading to Capitol Hill!

Big Ben has now gone on record with jawboning the dollar higher… And placing blame on something other than himself for this inflation mess. Oh great! I shake my head in disgust… Pardon me, I’m going to go yell at the walls, I’ll be back in a minute!

OK, I’m back! But still angrier than a wet hen! The gall of this guy to try to deflect blame that should be directed at him… And what’s even worse is that the markets bought it all, hook, line, and sinker!

So… After two days of risk aversion, and dollar selling… It all went down the drain. The markets are so assured that the Fed will intervene (and long ago I learned that the markets are never wrong… But in this case, I’ll make an exception… And say, they’ve got it all wrong)… The Fed doesn’t even need to intervene – they just did so verbally!

First we had Big Al Greenspan making one BAD decision after another for 18 years! Now this! Something has to be done here folks… It’s time there was some reform of the Federal Reserve! Let’s review this… One man appoints another… The man that does the appointing has a term limit, but the new appointee does not… There’s no age limit… And – now this is the part that really needs to be reformed – no review of the appointee’s work. In other words… The Fed Chairman can send the economy into the abyss, and he has no one to answer to! It’s time voters told their elected officials that this has to stop!

And if you don’t believe me that Greenspan has a track record that’s longer than a country mile on bad decisions, then you need to pick up either William Rutherford’s book, Who Shot Goldilocks? or William Fleckenstein’s book, Greenspan’s Bubbles – The Age of Ignorance at the Federal Reserve…


OK… Enough of that… We saw the euro (EUR) lose one and a half cents yesterday after Big Ben threw the cat among the pigeons. Now, it will be interesting to see how long it takes to recover – or if it will. My guess is that it will because there will be someone out there besides little ole me (HA!) that will call Big Ben out on this.

Yesterday, I told you about China’s FX reserves and how they just set a new record in April… I said something that confused a few people, so let me try to explain… First and foremost, I truly believe that a strong currency helps fight inflation. I’m on record for many years saying that, and many times saying that about the Chinese renminbi (CNY)… Yesterday, I said that the Chinese officials might have to slow down the appreciation of the currency to fight inflation… Now, I know that’s counterintuitive to what I said earlier… But let me explain what I’m talking about…

The amount of Hot Money coming into China is fueling inflation faster than the Chinese can combat it. They could allow the currency to float and its increase would go a long way toward shutting down inflation from Hot Money… However, that’s NOT GOING TO HAPPEN! So… The Chinese have to think of a way to shut down the HOT MONEY, and if they make the renminbi have the appearance that it will be slow to appreciate, the thought here would be that the Hot Money would grow impatient and leave. I never said that China should STOP the appreciation of the renminbi… Just make it appear to slow down, to have the Hot Money leave.

So… It’s been a tumultuous 24 hours in the currencies… Stocks took one on the chin yesterday too, but for different reasons. Earnings reports and the report by Tyson Foods that said it is working with the U.S. Department of Agriculture to manage a flock of breeder hens exposed to a low-pathogen strain of avian influenza. Tyson says no chickens are affected, but the report was out there already.

That’s Bird Flu… Nothing is confirmed so I’m not trying to say anything about it except that the report threw stocks into a loop.

According to Bloomberg Magazine, the tote board of losses from write-downs now stands at $335 billion. Recall… I said last November that the total would reach $400 billion… Well… I think I’m going to revise this number upward… If we’re already at $335 billion, it won’t take long to reach that initial number that I guessed at last November. It’s funny how, I made that call, and soon afterward, there were a ton of news stories floating around using that same number!

Anyway, the point I’m making here is that this is not getting any better, which makes you wonder why anyone would be buying dollars right now, eh? The Wall Street profit formula is broken, and no one seems to know how to fix it… But don’t let that get in the way of Big Ben stoking the dollar!

Someone asked me yesterday what the heck was going on with the Canadian dollar/loonie (CAD), as it had been quite volatile lately. Yes, it has grasshopper… I believe it’s all tied to the volatility in the price of oil. I’ve said this before, oil is the bellwether for commodities, and that also includes the price of gold.

After all this yelling at walls, and head shaking this morning, I’ll head to the Big Finish with a “happy” item…

The Brazilian real (BRL) continues to buck the dollar buying binge, and post nice gains versus the dollar. The Brazilian Central Bank President, Meirelles, isn’t going to go around blaming something/someone else for his inflation problem. Instead, I look for Meirelles to hike rates at his meeting today, following up on last month’s rate hike. Inflation had picked up to 5.25% in May… And that’s not acceptable. The Brazilian President is also singing from the same song sheet as the Central Bank President regarding inflation… So, expect another rate hike today… And that should increase the fire under reals.

Currencies today 6/4/08: A$ .96, kiwi .7835, C$ .99, euro 1.5470, sterling 1.9560, Swiss .9625, ISK 77, rand 7.7666, krone 5.1610, SEK 6.0375, forint 156.70, zloty 2.1820, koruna 15.96, yen 104.60, baht 32.68, sing 1.3640, HKD 7.8070, INR 42.72, China 6.9390, pesos 10.32, BRL 1.6280, dollar index 73.27, Oil $123.35, Silver $16.66, and Gold… $878.40

That’s it for today… Hey, did you hear the news there’s good rockin’ at midnight! No, what I’m talking about is… Did you hear Glenn Beck talk briefly about me on Monday night? Here’s the text of what he said on his nationally broadcast show…

“All this week you can find out how to be ready for absolutely anything with my free e-mail newsletter. In tomorrow’s edition, I’ve asked the president of Everbank, Chuck Butler, to show you the basics of investing safely outside of the U.S. dollar. You can only get it by signing up right now at GlennBeck.com.”

Regular readers of the Pfennig and Review & Focus won’t have to go there to read, because it’s all the things I tell you about all the time… But imagine the number of people around the country that will go and read my stuff, and finally see things correctly! HA!

I can see the “real” President of EverBank, rolling his eyes right now, as once again, someone said that I was the President of EverBank… He’s good about it, though, and that’s a good thing given the number of times that’s happened in the past six years! Anyway… It’s time to go… You’ve been a great audience, I’m here all week, try the veal! I hope your Wednesday is Wonderful!

Chuck Butler
June 4, 2008

The Daily Reckoning