Rubin and Volcker Agree

Good day… Well this will be a data dependent day for sure. We’ll see the bogus CPI report. However, in addition, there are two that I do follow…Industrial Production/Capacity Utilization, and the Net Foreign Security Purchases (NFSP). This could be a wild and wooly day!

The first day of the New Orleans Investment Conference went well. The conference has come back after a year’s absence due to Katrina, and it has come back BIG TIME! My luncheon went well, as I got to meet current and prospective customers. Today is chock-full-o speakers and meetings.

The currencies spent yesterday trading within a very tight range. As I signed off yesterday, the bias was to buy dollars…but that bias ended, and the euro was able to climb back above the 1.28 level. There was a story that hit the screens yesterday that I believe didn’t get the correct amount of attention and air play. Here’s the skinny…

Robert Rubin, of the famous line “a strong dollar is in the best interest of the [United States]” (and what’s funny is that it is now reported that Rubin has taken on some huge option positions in currencies! HAHAHAHAHA) and my favorite Fed Chairman Paul Volcker sat on a panel yesterday. Basically, I would think these two to be on opposite ends of the earth regarding economics, but suddenly they turned into a choir, singing from the same song sheet. Rubin and Volcker (who has said that there is a 75% chance of a currency crisis) are in agreement. Over what, you ask? Ahhh grasshopper…come sit, and hear this one!

Robert E. Rubin, Treasury Secretary under President Bill Clinton, and former Federal Reserve Chairman Paul Volcker said “foreign investors probably won’t keep increasing dollar holdings, raising the risk of a slump in the currency.”

“Failure by the U.S. government to shrink its budget deficit may spook the central banks, hedge funds and others who have been buying Treasury notes,” Rubin said. Volcker said “the U.S. borrowing requirements raise the risk of a ‘crisis’ in the dollar as soon as the next two and a half years.”

WOW! See why I don’t understand why traders didn’t pick up on this and send the dollar to the woodshed immediately? Wait…I think we need to wait on this one. I’ll betcha a dollar to a Krispy Kreme that this will get regurgitated at some time in the near future, and everyone will point to it as “the reason the dollar is falling again.” When in reality, the reason the dollar will begin to fall again is already in place…fundamentals.

There have been some strong economic reports coming in from overseas, starting with a very strong retail sales number in New Zealand. With this news, I’m keeping the light on for a rate hike from the Reserve Bank of New Zealand in December.

The economic reports from the United Kingdom this morning have been quite sterling friendly. First of all, U.K. retail sales surged 0.9% in October, which is the biggest gain in a year. Then to follow that report up, the U.K. House Price Index rose to its highest level in four years! These two reports have brought another rate hike from the Bank of England front and center once again. A rising rate differential to the euro, Japan, Canada, and even maybe the United States (if the Fed undergoes rate cuts next year, as many believe they will do) will go a long way toward strengthening the pound sterling.

The Bank of Japan disappointed the markets last night by leaving interest rates unchanged. But Bank of Japan Gov. Fukui, made sure the markets didn’t lose their focus of higher rates to come in Japan by telling the markets he didn’t have a timetable on higher rates. There are also reports floating around that China has been buying yen. Well…they haven’t been buying much of it, or the yen would be rallying strongly!

That leads us back to the data reports due in the United States this morning, which include: The Weekly Jobless Claims…Industrial Production/Capacity Utilization (which for my money is one of the few forward looking reports and one that I follow closely) The Net Foreign Security Purchases (NFSP) which is the pulse of what kind of job we are doing at attracting foreign investment to finance the Current Account Deficit, and then finally the CPI, (consumer inflation). I think CPI will be weaker, and that won’t be dollar friendly. If the NFSP gets back to the previous trend (before last month’s blowout number) and continues to show we are straining to attract foreign investment, the dollar will come under pressure.

So…some biggies today…market movers…

My Canadian trader friend sent me a note regarding the proposed bill to tax the Canadian Income Trusts. The chances of this not happening are slim to none. But there is a slim chance that the Senate could propose amendments or try to block the bill. The most likely amendments could be a reduction of the distributions tax or a longer phase-in period of the new rules. A less likely scenario is that the Senate could try and block this by proposing major amendments, which is still allowed within the rules applying to Ways and Means Bills. If the House disagrees and there was an impasse, then theoretically this bill could die on the Order Paper (i.e. not pass in this session) and would have to be reintroduced later.

As long as there’s a chance that this bill could be defeated, I’m behind it!

Currencies today: A$ .7675, kiwi .6640, C$ .8780, euro 1.2815, sterling 1.8890, Swiss .8015, ISK 70.20, rand 7.1680, krone 6.4170, SEK 7.0770, forint 200.88, zloty 2.97, koruna 21.90, yen 117.90, baht 36.50, sing 1.5570, HKD 7.7860 INR 44.94, China 7.8715, pesos 10.83, no dollar index today, Silver $13, and Gold… $627.30

That’s it for today…We probably have quite a few new Pfennig readers today given all the people I’ve talked to here that weren’t readers. (They don’t know what they’ve missed! HAHAHAHA). Well, I’ve got to begin the “send” process and get down to the booth…so, have a great Thursday.

Chuck Butler
November 16, 2006

The Daily Reckoning