"Somewhat Receded"?

Good day… And a Tub Thumpin’ Thursday to you! Well… If you are a non-dollar owner, you might want to quickly go to the currency round-up to check on your currency/currencies. The Fed left rates unchanged and were quite dovish in their statement, and the dollar has been sent to the woodshed.

Welcome back! Front and center this morning, we have a currency rally going on, with the euro (EUR) leading the dogs off the porch to chase the dollar down the street. The single unit has pushed past the 1.57 handle this morning, and the high yielders of Aussie (AUD), kiwi (NZD), and Brazil (BRL) are all dancing in the streets because their positive rate differentials are even more in the face of traders now.

Well, the Fed DID leave rates unchanged yesterday, and there are differing views of what they had to say afterward… However, the markets heard what they believed to be dovish comments from the Fed… And lo and behold, we had that scenario that I presented to you yesterday morning, of the dollar bulls running for the hills, and their currency being dropped into one of those fryers they use at my local fish fry.

So… Here’s what the Fed had to say. The statement said that the economy is expanding and is expected to continue to grow at a moderate pace. However, policymakers listed weakening labor markets, high energy prices, the housing market recession and financial market stress as “likely to weigh on economic growth” in the quarters ahead. The Fed sees downside risks to the economic outlook but said that these risks are deemed to have receded “somewhat” since the last statement on April 30.

OK… Whom among us really believe that the “economy is expanding”? And what’s with the vague statement that downside risks have “somewhat” receded? What the heck is that? What data have these knuckleheads been looking at? What in that data gives them any reason to believe the downside risks have “somewhat” receded?

And… That deal with one of the Fed Heads (Fisher) voting for a rate hike, to me is simply a “smoke screen” to keep the threat of a rate hike in the minds of the markets. I’m not buying it! There are still some that believe the Fed will pull the dust covers off the rate hike machine in August. I say… HOGWASH! With the housing market still melting down and the financial sector under pressure (and remember, I still think there’s another risk event out there) and the jobless rate going higher, and the Fed threatening to hike rates only chokes off growth… Add all that together, and there’s no rate hike coming. Correct all that? Sure, correct all that, and we’ll see a rate hike… What are the odds of that happening this year? Slim and none, and Slim left town!

Alright already, that’s enough of all that! The CEO of the largest U.S. steelmaker was interviewed yesterday and he believes that “we haven’t seen the worst impact on the economy yet”. He was speaking about the credit crisis. That plays well with my thought that I presented last week that we haven’t seen the worst of all the losses yet.

That certainly doesn’t sound like a situation that would allow the Fed to raise rates now does it?

OK… Someone sent me a note and wanted me to talk about renminbi (CNY)… I thought that I was sounding like a broken record, regarding China and renminbi, but apparently not. So here goes… The renminbi continues to climb versus the dollar, reaching yet another new record level since the peg was dropped in July 2005. China is finally learning that a strong currency can go a long way toward helping fight inflation, and they have allowed the renminbi to appreciate on a faster scale than in the past. However, the Chinese don’t want investors to believe this is a one-way bet, and every now and then they throw a spanner in the works to deter investment… But like I said, yesterday, the Chinese don’t ever keep their finger on the deter button long enough.

Investing in China is a tricky situation… You can’t believe just how expensive it is to deal there. It’s painful! However, EverBank does offer a savings account that’s liquid, which has a minimum of $10,000. This balance pays no interest, because all the interest is eaten up by the dealers and speculators that make dealing here so painful! You see, renminbi is traded on what’s called a “Non-Deliverable Forward”, which means it’s not ready for prime time, and can only be settled in dollars. So… The dealers know that when you buy renminbi, you can only do one thing a the end of the forward, and that’s… Convert back to dollars… And you have to pay dearly to do so!

That’s the reason there is no CD in renminbi, as the CD’s balances wouldn’t be eligible for rolling.

I received a few emails yesterday about the thought that I had regarding the “academic” that said, the economy was set to recover in the second half of this year. One guy said… “We need more academics like Custer needed more Indians” HAHAHAHAHAHA!

Another guy said… “I liked your comment from an academic saying ‘recovery second half’ of this year. Sure sounds like 2000 to me… How many times did we hear Q3 recovery of 2000… Then it was Q3 2001 etc etc.

“Another thing I’ve found funny is the yield curve. Our Fed Cheerleaders from 2006, 2007 said how it wasn’t pointing to a slowdown because it was different this time. Now in 2008 those same Fed Head Cheerleaders are saying we will not see ’70s style inflation because, ‘its different’ this time.

“Well they have been wrong so far, and if the history of Fed actions is anything to go on, they will probably be wrong again.

“Although it sure feels like our Fed policy is similar to that of 1970s Fed policy of growth versus inflation fight.”

I’ve created thousands of “Pfennig writers”! But that’s good! Get everyone thinking again! Even if you disagree with me, as long as you do it civil, we’ll be fine.

I keep receiving forwards from people of an email that quotes former Chrysler Chairman, Lee Iacocca. Apparently, Lee Iacocca has written a book, and in it he goes “postal” on the current situation in this country. I haven’t read the book, but I’ve read the forward that is supposed to have his thoughts in it… And… He’s bang on!

OK… U.S. Home Sales in the fell 2.5% in May. Apparently, not even price chopping is helping right now. And durable goods orders were unchanged in May, unable to correct a revised 1% drop in April. There was nothing in the durable goods orders report that indicated the economy is “expanding” as the Fed suggests!

Did you hear about the $800 billion package to help homeowners that are being foreclosed on? When will this all stop? We, as a country, cannot, continue to bail people out for making mistakes. I don’t care whose mistake it was, this package would bail them both out! Let’s just hope that the President vetoes this bill, because I just don’t see how these past mistakes end up being MY, and other taxpayers’ problem!

Today, we’ll see the FINAL print of first quarter GDP, which is expected to show a 1% gain. Think about that for a minute folks… With inflation over 4%, even using the current methodology, that’s real growth of more than negative -3%!

So… With the huge gains in the euro and other currencies the past two days, one would expect to see some profit taking some time today or tomorrow. I see where one chartist at a Big Bank, says that the euro’s rise will stop at 1.5726 according to his charts. I would love for the single unit to blast through that and not look back, proving the chartists wrong!

New Zealand printed a larger than expected current account deficit last night of NZ$ 2.160 billion. Look for this to place a strain on GDP, which will be printed today. I think we’ll see GDP take a hit here for the first time in a month of Sundays. The Reserve Bank of New Zealand (RBNZ) will be somewhat proud of this, as this has been their goal for a few years now… To slow the economy and keep it from overheating. That’s the reason their interest rates are so high! However, look for the RBNZ to begin cutting rates later this summer, as they don’t want to bring the economy to a complete halt! And once the rate cutting begins, the pimples on the New Zealand fundamentals will be exposed… Clearasil won’t even help at that point!

You know Ward… You were a little hard on the Beaver last night. I know, I know, I blasted the Bank of England (BOE) for cutting rates when inflation was above their ceiling target… And thought it would be a knife in the heart of pound sterling (GBP) – and it was for a while… But every day when I list the currencies, I notice that pound sterling has been quite resilient. Here’s the thing that gets me… The BOE is now contemplating whether or not to raise rates to combat rising inflation. If they hadn’t cut them in the first place, they wouldn’t be here now! But that’s water under the bridge, right? But, if the BOE is going to come back to the rate hike table, it will certainly give pound sterling a boost… But for how long? Ahhh grasshopper, that remains to be seen!

Canada sent a shot across the U.S.’s bow last night… Finance Minister Flaherty spoke last night, stating that the United States may lose its preferential access to Canadian energy should it try to renegotiate NAFTA. Oh, and looky there! The Canadian dollar/loonie (CAD) is knocking on the door to parity again! (Of course that has nothing to do with the NAFTA story… I didn’t want people to think that the loonie was rallying based on that!) No… It’s rallying because it’s a fundamentally strong currency that has seen the end of the rate cuts!

Gold, which sold off big time earlier this week, is still below $900… Wink, wink…

The Asian currencies all took a flyer on the Fed keeping rates unchanged, and rallied too. Nice to see the Asian currencies join in on the dollar’s trip to the woodshed.

And finally… Norway’s Norges Bank lifted rates 25 BPS yesterday… The move was somewhat a surprise, as I thought the last meeting would yield a rate hike, but didn’t… Then they slip one by yesterday… Oh well, who cares when or how they do it, as long as they do it! The Norwegian krone (NOK) rallied on the news, as their positive rate differential expanded!

Currencies today 6/26/08: A$ .9605, kiwi .7580, C$ .9905, euro 1.5712, sterling 1.9830, Swiss .9710, ISK 80.65, rand 7.8710, krone 5.0610, SEK 5.9875, forint 150.70, zloty 2.1375, koruna 15.36, yen 107.75, baht 33.55, sing 1.3640, HKD 7.8045, INR 42.71, China 6.8635, pesos 10.27, BRL 1.59, dollar index 72.77, Oil $135, Silver $16.88, and Gold… $892.50

That’s it for today… It’s raining here again. As I passed the river that flows past my little river town yesterday, it was still rising, and now more rain! UGH! We’re putting a studio in our office here, all the equipment looks tre’ cool. From now on, when we’re asked to be on TV, we won’t have to book time at the local TV station, we will be able to do it right here! Of course, now we have to learn how to use the equipment! I was helping my little buddy, Alex, change some strings on his guitar last night, and then listened to him play a little… He’s getting quite good! Well… Off to our Tub Thumpin’ Thursday now. Hope yours is Tub Thumpin’ too!

Chuck Butler
June 26, 2008

The Daily Reckoning