The Big Dog is Off the Porch!

Good day… And a Wonderful Wednesday before Thanksgiving to you! I hope you are blessed to have your family around you for Thanksgiving… I know my children will be here along with other family members and that makes me happy. Not to get too teary eyed on this, but every holiday that comes along now, I for a moment think about how at one point there might not have been a chance of me seeing that holiday… But for the grace of God, and the thoughts and prayers of thousands of people… I’m here… I’m getting stronger everyday… And I’m Thankful!

OK… The currencies traded in a range yesterday, after the Asian ambush Monday night… However, the range was biased towards selling dollars, as the euro (EUR) did teeter totter back and forth over the 1.48 handle, before finally moving over it to stay late in the day. The trading pattern was quite familiar, as this was the scene during most of the five years of the weak dollar trend… The euro (the Big Dog) jumps off the porch, and begins to chase the dollar down the street… Then the rest of the little dogs follow…

So, much trading since summer has been around the carry trade. But for my money, I’d much rather see the Big Dog leading the currencies than carry trades!

Yesterday, housing starts didn’t turn out to be as bad as forecast, and actually, and quite unbelievably, rebounded in October… The trend remains down. The rebound in housing starts likely represents only a technical rebound after we saw a 134K drop in September. Building permits however, dropped like a rock, and more than expected. The permits figure probably provides a better indicator of the continued downtrend. Housing starts will have to continue to decline in order for the housing market to be able to burn off the excess inventory, which if you recall Big Al Greenspan said would help the housing mess… Selling off excess inventory.

On top of Old Smokey… No wait… On top of that bad news, the economy, inflation, and the dollar all took one on the chin yesterday when the price of oil inched closer to $100. $98.03 was the last price I saw it trade on Tuesday before I went home.

Last night… U.S. Treasury Secretary Paulson told the Wall Street Journal that home defaults will be “significantly bigger” in 2008 than in 2007. Not that I relish the news, as I would not like to see anyone lose their home, but isn’t this the stuff I’ve been writing about for over two years and warned and warned and waved the red flag? Your darn right it is… People just didn’t want to listen, the bubble had grown bigger than the NASDAQ bubble, and just like during the NASDAQ bubble, people didn’t want to listen to fundamentals. It couldn’t happen to them… They had drank the Kool-Aid… But look what’s happening now… It’s a shame… A real shame… Because this could have all been avoided.

Sure, people who never owned homes before were able to own them for the first time… But what good did that do, if they were forced out of the home two years later? I just get a burning feeling in the pit of my stomach on this stuff… The snake oil salesman came to town and the town will never be the same…

Take all that, and blend in the talk of further rate cuts by the Fed that I told you about yesterday… And voila! You’ve got a weaker dollar!

OK… Now, I’m going to go to war with the Fed! Folks… Our central bankers have LIED to us! At the Fed’s last meeting, they told us the risks were balanced between growth and inflation… Hmmm… If that’s so… Then why did they lower their forecasts for growth next year and suggest that expansion wouldn’t reach its trend rate until 2009? I’ll tell you why… Because they knew it all along, and was hoping to get this news swept under the rug…

But… My man on the scene, Chris Gaffney, spotted this story and shot it over to me. I sat there reading it over and over again to see if I missed something… But I didn’t… This forecast was based on information up to October 31st. So… It was available to them when they made their statement… They just failed to tell us the risks are NOT BALANCED!

Geez Louise, and we trust these people to steer our economy? Oh, there’s a lot of directions I could go with that last line, but I won’t. Tomorrow’s Thanksgiving, and I’m in a good mood!

Japanese yen (JPY), and Swiss francs (CHF) continue to gain versus the dollar… I find these moves to be well received and long awaited for! In fact… It’s been a long… Time coming… It’s going to be long… Time gone… Yes, the old CSN song plays well with Japanese yen’s recent performance… Don’t look now folks, but yen is down to 108.30 this morning… WOW! It won’t be long, yeah, till the Bank of Japan gets the orders from the Finance Ministry to intervene… And it will be interesting to see how much fight is in the dog on this one.

You may recall about four years ago, maybe five, yen had rallied all the way down to 101 and the Bank of Japan (BOJ) fought the move every step of the way, throwing trillions of yen sales at the markets. Eventually the markets backed off and yen has been in the woodshed ever since. I was surprised at the markets’ reaction to the BOJ intervention, for as I’ve said many times before, the markets have much deeper pockets than a central bank… Even the BOJ! I wonder how they feel about owning all those dollars they bought back then.

The Japanese Trade Minister is already greasing the pipes for intervention, as he expressed to the newswires last night that yen 110 was “OK”… But that further declines in dollar/yen would be “too rapid”. I wonder what he’ll think or say when he wakes up this afternoon (for us) and see yen with a 108 handle?

One of my faves the past three years has been the Norwegian krone (NOK)… You know, every time I say the word “Norwegian” I begin to sing… I once had a girl, or should I say, she once had me… She showed me her room, isn’t it good, Norwegian wood.

Anyway… Norway printed a stronger than expected GDP report for the third quarter yesterday, and should keep the oven warm for another central bank (Norges Bank) rate hike, which should push the krone even higher versus the dollar. Norway’s GDP grew at 1.9% in the third quarter, when it was expected to grow just 1%! So… The spotlight is back on the krone, and well it should be!

I don’t know if you know this, I know I explained this once or twice before, but Norway’s pension is fully paid for every citizen! That’s unbelievable! But true! And they have also secured more! WOW! Add that to a trade surplus… Rising interest rates… Economic growth… And petrol production… And you should have a strong currency!

Six rate hikes this year by the Norges Bank, have failed to dampen growth, and with oil prices going to $100, more rate hikes will be needed to fight inflation!

The euro has just backed off about 1/4 cent while I was typing away… I’m not sure if this is a move to take profits or what at this point… I will say that the next three days will be chock-full-o-risk given the low volumes that will exist. Thinly traded markets can turn into routs due to the fact that there isn’t “the other side” of the trade to keep things balanced… Last year at this time is a perfect example… The day before Thanksgiving the euro gained 1-cent, and the day after Thanksgiving it gained 1.25-cents, and never looked back.

I don’t know if we’ll see anything like that again this year, but there is the “risk” that it could happen – and not just on the upside. We could very well see some profit taking turn into a rout on the euro too… But for my money, I would protect myself against a move up in the euro.

Oil has moved above $99 overnight… YIKES! Can you say $100 oil? I knew you could! That $99 handle didn’t last long though, and the price has fallen back but still a $98 handle on oil is not like we just saw a major shift in oil prices! It’s still too high! And it most likely is going to go even higher! Can you say inflation? I knew you could! Unfortunately, the Fed Heads can’t see it… Smell it… Touch it… Couldn’t see inflation if it was a snake ready to bit off their collective noses! If inflation had a voice (beside me of course!) it would be singing to the Fed right now… See me… Feel me… Touch me… Heal me… Unfortunately, the Fed has turned into The Who’s Tommy.

I could rant and rave about inflation all day… But what good would that do me? I’ve bought gold; I’ve hedged my investment portfolio… I’ve done all the things I preach about to protect my investments. Gold, folks… Historically proven to act as an excellent hedge against inflation… Need I say more?

I’m going to head to the Big Finish now, as I want to get to work even earlier than normal, so that we have a fighting chance of getting out of there before 7 PM today! Just a note of warning to our clients… We are going to shut down the phones today at 3 PM EST… And of course we will be closed tomorrow! Gobble, gobble…

Currencies today: A$.8725, kiwi .7510, C$ 1.0155, euro 1.48, sterling 2.0550, Swiss .9040, ISK 61.90, rand 6.83, krone 5.4350, SEK 6.3150, forint 173.54, zloty 2.4970, koruna 18.11, yen 108.40, baht 31.39, sing 1.4520, HKD 7.7790, INR 39.39, China 7.41, pesos 11, BRL 1.7840, dollar index 75.22, Oil $98.35, Silver $14.60, and Gold… $799.60

That’s it for today… Like everything else… The radio jumped ahead of schedule yesterday… I had just said to Kristin the day before…”Just think on Friday, we’ll begin to hear Christmas music again”… But yesterday, there it was… A Christmas song on the radio! Don’t they know they are supposed to wait until the day after Thanksgiving? Pretty soon we’ll be hearing Christmas songs while sitting out at the pool in July! I love Christmas music so don’t get me wrong here… Just saying there’s a traditional time… Why can’t they keep to that?

Did you see the front page of the Wall Street Journal yesterday? It had a feature story on the BIG GAME this weekend between my beloved Missouri Tigers and Kansas… Pretty neat! Kansas is undefeated this year, so my Tigers have their work cut out for them… The excitement is building on this one, and by 7 PM on Saturday night I’ll be about ready to burst! Great stuff, folks… Great stuff.

And finally, speaking of stuff… I hope your stuffing is excellent, your bird plump and juicy, and the wine chilled to perfection! Thanksgiving is here!

Chuck Butler
November 21, 2007

The Daily Reckoning