Rate Cut Week

Good day… And a Marvelous Monday to you! Welcome to November! For almost 20 years, November was my least favorite month… Cold gray days, dead looking trees, bad memories of the month, and all that… But I just don’t get all involved in that stuff anymore, as my different outlook on life tells me that every day is a great day, and months just contain great days!

OK… On Friday, we saw more and more of the same trading theme; and in the overnight markets last night, more and more of it again! And carry trades are back – for the moment anyway – as stocks rebounded late in the week to end the month with a brighter outlook than they had earlier in the month. But, in my view from the cheap seats, this stock rebound is much like what they call in the markets, a dead cat bounce (OK, no animals were hurt here!), which means… That stocks are going nowhere, but bounces can still happen. I say that stocks are going nowhere, and I’m not even your last choice as a stock jockey… I just survey the economic horizon and see a deeper recession than we are currently experiencing, and a “spent” consumer, which is going to lead to awful earnings for corporations, and thus stocks not going anywhere.

But, hey Chuck! This is not a stock letter, so get on the ball and talk about currencies and economies! Geez Louise, just drift off on a tangent and the crowd is harsh, eh?

Well… The currencies played the trading theme to a “T” on Friday and overnight. A stock rebound gives everyone the feeling that things are getting better, and that means… 1. Carry trades go back on, and 2. The dollar gets sold, thus giving a rebound to currencies. Of course carry trades going back on doesn’t do the Japanese yen (JPY) any good… So, you’ve got to deal with yen weakness, but a stronger euro (EUR) and other “non-yen” currencies.

The data on Friday was interesting, in that personal spending was worse than expected, but personal income was better than expected. The personal spending was a negative 0.3%, marking the lowest level since 2005, and the sixth worst print since 1991. (See what I’m talking about regarding those corporate earnings, now?) And… Those were September’s numbers. I can’t even imagine how bad that spending number is going to look when October’s numbers are printed!

The Chicago Purchasing Managers Index (manufacturing) collapsed in October, falling from an index number of 56.7 to 37.8. That’s a low that hasn’t been seen since the shortened recession of 2001. Other than that one, you would have to go back to 1982 to find such a weak print. I realize that this is just the Chicago region… But is there anything that gives one a feeling that the other regions will be immune to this? NO… And manufacturing can thank… 1. The stronger dollar, 2. The credit squeeze, and 3. The recession… For their misery…

OK… I’ve gotten a ton of emails asking me about the Hal Turner video on the Amero… I thought I addressed this all last week. I don’t believe in the Amero as the story has it all going down… Now someday, maybe two decades off, when the Social Security fund goes negative because of all the retired baby boomers, the dollar will collapse and there will have to be a “new currency”, but now? In February 2009? I put that all down as a hoax. Sort of like… The guy that claimed back in the ’80s that there was going to be the mother of all earthquakes in the Midwest… Browning was his name.

The European Union released a statement this morning saying they believe that the EU may be in recession… I find it interesting that they decided to announce this during the week of a European Central Bank (ECB) meeting… Well, it does grease the tracks just a bit more for the ECB to cut rates this Thursday when they meet. So… Expect rate cuts from the ECB and the Bank of England (BOE) this week. Neither central bank will “want” to cut rates… But both will feel the need to, given the slowdown in the United States and its history of causing major problems for the world when it does slowdown. Of course, I’ve argued that the rest of the world is in a better position to weather the storm of a U.S. slowdown… But a deep, dark recession… Now that’s the horse of a different color, folks… And unfortunately, that’s what I think we’re going to see in the United States as we go through the cold, short days of winter.

There’s a story on the Bloomie this morning that says, “Templeton, Sydbank see Won, Rupiah, Rupee bottoming”… OK… We don’t deal in won, or rupiah, but we do deal in rupees (INR)… And renminbi (CNY), which the story says is being bought by Franklin Templeton Investments. So, it’s nice to see others with large research teams jumping on the Asian currency bandwagon that I’ve been taking memberships to join for some time now. Sydbank is Denmark’s third-largest Bank, and they like rupees.

My point in talking about this story is simply that Asian currencies are catching the eyes of more investment firms, and that’s a good thing!

OK… I’ve been asked about the Big Mac Index say, 100 times in recent days – and why I didn’t see the euro as being overbought, since it was so out of line on the Big Mac Index. Well… That’s because the Big Mac Index has a tendency to be ahead of the actual currency move. For instance, in 2001, the dollar showed it to be totally overbought on the Big Mac Index, but didn’t lose ground to the euro until a year later.

Instead of the Big Mac Index, I’ve been watching the iPod index… That’s right, there’s a new kid on the block to compare trade competitiveness and “Purchasing Power Parity”… And guess what the latest iPod index shows? It shows that Australia has the cheapest iPod in the world! (Well, really the top 62 industrialized countries.) That means that the Aussie dollar (AUD) is very cheap, and oversold! The last time the index was printed, Australia had the 14th cheapest price. Guess when that was? Yes, July, when the Aussie dollar hit 98+ cents! Now, this doesn’t make up for the fact that the Aussie dollar has fallen from the sky (and fallen very hard), causing some major losses since July; but it does give a glimmer of hope that the selling could be coming to an end. It’s just a glimmer, folks; don’t hold my feet to the fire here.

One thing that won’t help the Aussie dollar right away is a Reserve Bank of Australia (RBA) rate cut, which is most likely to happen at their next meeting tomorrow night.

Well… Recall when I told you that the Fed was going to open up the Commercial Paper market and buy the paper from corporations in an attempt to revive this form of funding for corporations? Well, last week was the first week, and in the first day (Monday) commercial paper sales were strong, spiking to $232 billion that day. Think it was overdue? That’s the most Commercial Paper has done in one day in 5 years!

Again, I’m a free markets guy, and don’t care for government intervention in any way. I would rather see markets work things out for themselves, whether it causes pain or not. But… If the government is going to stick their hands in the cookie jar… This is probably the one thing they’ve done that doesn’t give me as bad of a rash. This market is essential to corporate borrowings, and could get things moving in the credit squeeze. And the credit squeeze is the BIG KAHUNA with regards to getting things back to the fundamentals, which we all know spell “weak dollar”.

I saw an article in my local newspaper’s business section yesterday that made me laugh out loud. The article inferred that now that October is over, the threat of a stock market crash was over! Who writes these things, and where is the editor? Just because we’ve seen some major stock moves in October, doesn’t mean that they can’t happen any old time! Strange…

So… I expect to see 50 BPS rate cuts in Australia, England, and the European Union this week. We’ll also have the U.S. election tomorrow, which ought to bring the markets to a standstill until the dust settles on the outcome. If the polls are correct, then it won’t be a close election result… I’ve been asked by many people while on the road, etc. to outline the markets with an Obama or McCain win… I’ve steered clear of that stuff. All I’ll say is that in my opinion, neither one were addressing the important things, like the deficit spending, and how are we going to pay for the baby boomers. I heard one party say they would balance the budget by the end of their term… That’s 4 years from now! We have to add to the national debt for three more years? YIKES!

So… There you have it… Chuck’s election coverage! And that’s all I have to say about that!

Data this week… We’ll see the National ISM (manufacturing) Index this morning. Look for more rot on the vine from manufacturing as I stated above. We end the week with a Jobs Jamboree, which, right now, is looking awfully bad… Really bad… And that, I’m afraid, will do nothing but add to the deep dark dangerous days for the U.S. economy, which will cause the trading theme to buy dollars once again. But it does add to the awful economic fundamentals, which, when this trading theme gets turned off, should come to the front of the class once again and cause dollars to be sold. Should… That’s just my opinion… Should…

Currencies today 11/3/08: A$ .6775, kiwi .5890, C$.8395, euro 1.2845, sterling 1.6190, Swiss .8640, ISK (still no quote), rand 9.71, krone 6.5940, SEK 7.6666, forint 200.50, zloty 2.7720, koruna 18.95, yen 99.15, baht 34.95, sing 1.47, HKD 7.75, INR 48.65, China 6.8380, pesos 12.73, BRL 2.1725, dollar index 85.20, Oil $68, Silver $10, and Gold… $735.10

That’s it for today… How was your Halloween? My little bumblebee came to visit. She is such a cutie! It was a beautiful night here. We sat outside with friends and family, had a fire in the chimenea and gave out candy to the trick-or-treaters. Best joke I heard… What did the fish say when he swam into a wall? Dam! Only my beloved Missouri Tigers made it out with a victory this past weekend, as the Rams lost, along with the hockey Blues. The Butler family, including Delaney Grace, will be heading down to Columbia, MO this weekend, as the Tigers take on Kansas State. Two weeks from today I’ll be speaking at the New Orleans Investment Conference. And three weeks from today I’ll be returning from Marco Island after speaking at the Wealth Masters Conference. Then I’m finished speaking for this year! Great weather weekend here, WOW! OK… Time to go, people are arriving. Have a Marvelous Monday!

Chuck Butler — November 03, 2008

The Daily Reckoning