Questioning the Fed’s Rhetoric

Good day… And a Happy Friday to one and all! It will be a Fantastico Friday (Hopefully) for the boys and girls in the St. Louis office, as we head to Busch Stadium tonight for a Cardinals baseball game. We even have a special guest that will be with us, so party on Wayne… Party on Garth!

Well… Things went a little crazy on the desk while I was away yesterday. When I returned home last night, I had a ton of emails from the Big Boss, Frank Trotter, and that’s usually a sign that things didn’t go well! Frank plays hockey on Friday mornings, and said he will call me to bring me up to date on his way to hockey.

The Big news in the currencies is that the dollar is on a roll… And is not taking any hostages! All this talk about higher interest rates in the United States has the dollar bulls giddy, and has really turned around the negativism that had crept back into the dollar’s camp last week at this time, to be swept under the rug. You know me, I’m going to get on my soapbox and rant about this dollar strength… So here goes…

The dollar rallied after hearing the news of the retail sales print… But as Chris told you yesterday, this was a one and done for retail sales. Yes, I know that some tax checks didn’t arrive until late in May; but I would imagine those that arrived late, were offset by the people in dire straits financially, who could not go out and buy that plasma TV!

Here’s Chris Gaffney’s take on the retail sales data… “I read a couple of articles that touted the American consumer’s resilience in the face of everything negative. I just can’t understand how consumers continue to borrow and spend. But how will the Fed keep the consumer happy going forward? I don’t think they have any more stimulus packages to pull out of their hat (although I read where Barak Obama is already calling for a second one). I still feel the next bubble to pop will be the consumer debt bubble which is reaching record levels. As consumers declare bankruptcy and walk away from their debt burdens, banks will again see massive writedowns of their portfolios and the credit crisis will again be front and center on everyone’s minds.

“But while currency traders are pricing in an FOMC rate increase sometime this year, economists are cutting their U.S. growth forecasts for this year and next. They now project that quarterly growth will not exceed 2% through 2009. Soaring food and fuel prices, tougher lending rules and job losses will continue to hurt consumers. The weaker outlook means the Federal Reserve will forego raising interest rates until next year to combat inflation. Once this becomes more clear to the currency markets, the dollar will give back all of its recent strength.”

There was more bad news in the markets yesterday, as Citgroup decided to close Old Lane Partners, a hedge fund co-founded by CEO Pandit that the firm bought for over $800 million less than a year ago. This is just another in the line of mistakes that banks have made with regard to hedge funds.

Well… In the “I told you so” compartment, I see that Lehman Bros. cleaned house with their leaders yesterday. This was after posting some huge losses last quarter. You may recall me saying this would happen… But if you don’t… Let’s go to the tape of the June 3rd Pfennig when I said, “… It wouldn’t surprise me one iota if long after Lehman announces that loss that another ‘change’ is announced…”

The markets are sweeping all this bad news under a rug folks… And you know me, I learned long ago that you can’t fight the markets… But you can call them DOLTS! I guess all this bad news isn’t “bad enough”.

The markets are all “jacked up” on the Fed’s rhetoric about “fighting inflation”, which the markets take as interest rate hikes… But when? Next year? Oh, so you should give up the positive rate differential that the euro, Norway, Sweden, U.K., Australia, Brazil and others have versus the dollar because the Fed MIGHT raise rates in the next year? Shame on all you pundits out there telling people these things about rate hikes in the United States!

Listen to me now, and hear me later… THE FED ISN’T GOING TO RAISE RATES! The ECB IS, but the Fed ISN’T! At least not for some time, THE FED ISN’T GOING TO RAISE RATES! Did you hear me? Oh, just in case you were busy listening to someone on CNBC telling you that everything is beautiful, I said… THE FED ISN’T GOING TO RAISE RATES!

Over at CitiFX, the researchers there put together a great commentary yesterday that our old colleague and Corporate FX guru, Ashish, sent along to me. The researchers at CitiFX think this whole “interest rates are going higher in the U.S.” is a crock. They point out that the PCE (personal consumption expenditures) that is supposedly a fave indicator of inflation of the Fed’s was 2% last July before the subprime meltdown… It now sits “drastically higher ?????” at 2.1%. So, where’s the emphasis to hike rates here?

They also point out that “we are looking at the only 3 severe economic downturns of the last 30 years and possibly the 4th [right] now. The [previous] 3 were all jump started by a corrosive asset price fall (housing in 1979-1981 and 1989-1991 and equities in 2000-2002). In all 3 instances [they] were all preceded by an oil price surge, which exacerbated the drag on the economy… And all 3 say massive easing cycles from the Fed [lasted] 18 months, 39 months, and 29 months respectively. (Average 28 months)”

They other thing they point out is that when unemployment rises, the PCE falls…

So… I’m not the only person screaming at the walls here, that the Fed’s rhetoric is empty, and can’t believe the markets have swallowed this hook, line and sinker!

One person not buying into this dollar strength (I’m told) is Pat Robertson. I didn’t hear this… But I was told that Pat Robertson of the 700 Club said on his program that his followers should “get out of the dollar”, which is fine… But the important thing he said was to invest with EverBank!

One bank that did raise rates yesterday/last night was the South African Reserve Bank (SARB). This is the sixth rate hike in the past year… Other rate hikes helped push the rand (ZAR) higher versus the dollar, but I doubt this one will, given this mental brain drain going on in the markets right now.

So… We head into the weekend on a very sour note for currency holders… I said a few weeks ago, that we might have to deal with euro (EUR) weakness, which leads to other currency weakness as the euro is the Big Dog, for some time to come. I even said that this could be much like 2005, when the dollar rebounded on the Fed’s rate hikes. But sooner or later, love is gonna get you… No wait! Sooner or later the traders all eventually come back to the underlying fundamentals.

The high yielders in the South Pacific, Aussie (AUD) and kiwi (NZD), have seen their lofty levels of just 10 days ago, gone with the wind. And as for the ill wind that the dollar’s blowing, with all the wind given to the dollar by the Fed’s rate hike rhetoric… I would say to that rhetoric… Frankly, Big Ben, I don’t give a damn! (OK, don’t get all mad at me; that’s just a play on the line earlier about “Gone With the Wind”).

The Chinese renminbi (CNY) keeps ticking higher versus the dollar though. Remember all those naysayers talking about China and how they were going to slow down? They said it in 2003, 2004, 2005, 2006, 2007 and again, that “this would be the year” that China slowed down. Well, guess again boys! China is kicking tail and taking names later… And now it has the momentum that goes along with a currency who’s country is host of the Olympics.

Chris Gaffney and John Kaupisch on the desk here, along with Frank and I remember the euphoria for Spanish pesetas when the Olympics were in Spain in 1992!

But afterward… Things might not be so rosy. Could there be an “Olympics bubble” for China that will burst afterward? We’ll just have to wait-n-see. If I were take a guess, because I don’t know any more than anyone else, I would say yes… But that will be tough, because if China’s GDP were to fall to 5% from 10%, they would still be outperforming everyone else!

Another currency holding its own against the “ill wind aided dollar” is the Brazilian real (BRL)… I keep talking about this currency as the one holding its own, sounding much like a broken record (or scratched CD for the younger crowd that don’t know what a record is!) But really, the real has it going on folks.

The price of gold has really been on the slippery slope down this week, after recovering nicely back above $900 last week. This all makes sense to me, given the Fed’s rhetoric about fighting inflation. If the Fed’s going to fight inflation, then commodities like gold are needed less… But that only plays well if you believe the Fed’s rhetoric. Otherwise, these certainly look like some cheap levels to buy gold, eh? But, that’s only if you don’t believe the Fed’s rhetoric!

I can’t head to the Big Finish on such a sour note, so I’ll tell a “feel good” story!

I was going back through some old emails the other day, and I came across some pictures from our 2005 trip to spring training that my good friend Rick, sent me. There was my fave right there… A picture of yours truly and my all-time fave baseball player… Ted Simmons. Why Ted Simmons isn’t in the Hall of Fame, is beyond me… But there he was. I sat down next to him, and Rick took the picture… Yours truly and Ted Simmons!

Currencies today 6/13/08: A$ .9355, kiwi .7460, C$ .9735, euro 1.5325, sterling 1.9450, Swiss .9510, ISK 79.50, rand 8.1350, krone 5.2525, SEK 6.1175, forint 161.40, zloty 2.2150, koruna 15.79, yen 108.25, baht 33.20, sing 1.38, HKD 7.8125, INR 42.92, China 6.9020, pesos 10.38, BRL 1.6340, dollar index 74.16, Oil $135.79, Silver $16.32, and Gold… $861.30

That’s it for today… Well, yesterday was my 32nd Anniversary… My beautiful bride was surprised, as I’m sure it is a day that she would like to forget! HA! Just kidding… As I said above, we’re all headed to Busch Stadium tonight; I hope we don’t get rain delayed, as “sever storms” are supposed to roll through St. Louis again today… UGH! My little buddy, Alex threw a baseball through my beautiful bride’s car window last night… Glass everywhere… Obviously, his aim needs to get better! Another blow to my beloved Cardinals, as now we have two number one pitchers on the disabled list, and the best player in baseball, Albert Pujols on the list too. UGH!

Sunday is Father’s Day… This is a great day for me, as I always remember those Father’s Days when I was a kid, and my dad would have all his kids, and the kids in the neighborhood that called him dad, etc. all around him, looking quite satisfied. I’ll spend Sunday, much like those Father’s Days past, with all my kids around, and little “D”. So… I hope your Father’s Day is grand, and hug your dad if he’s still around! I hope today turns Fantastico, and you have a fabulous Friday and Wonderful Father’s Day weekend!

Chuck Butler
June 13, 2008

The Daily Reckoning