The Dirty Deed is Done

Good day… And a Happy All Saints Day to you! Hope your Halloween was happy too! I just love seeing the little guys come to the door and try to tell their jokes… So darn cute! And speaking of cute… You should have seen my little Delaney Grace as a lamb.

OK… Onward and upward, as the Big Boss, Frank Trotter, likes to say. Well… The Fed Reserve did cut rates 25 BPS on Wednesday, as widely expected. The dirty deed was done… Of course I know that I was the first to tell you back in September that the Fed would cut rates again following up their initial cut of 50 BPS with another one in October.

Talk about scary though… You should hear the nasty, filthy, scary voice mail someone left me last week… They read the Pfennig through the Kitco website, but didn’t have the intestinal fortitude to leave their name… I’m telling you it was disgusting! Oh, well… At least it was just a voice mail message!

The currencies looked as though they were going to the moon after the rate announcement, which did have one dissenting vote from the Fed voters. The euro (EUR) jumped up to 1.45 and looked as though there would nothing stopping it… But it did hit a roadblock at 1.4505, and profit taking set in. But you should have seen the currency screens lighting up… I’ve seen it like that a few times in my days as a currency trader, it’s a sight to behold!

Overnight though, the euro has seen more profit taking, and the single unit is almost a cent lower than yesterday’s high. The other currencies have followed, except… The high yielders, which I’ll get to in a minute…

Early yesterday, the first reading of third quarter GDP printed and printed much higher than I expected and the markets for that matter… 3.9% was the number, and I have to immediately say that this is hogwash! But what else would we expect in an election year? With all the sex, lies and videotape the accountants keep throwing at us, did we really expect them to show a slowing economy on the way to a recession in an election year? Ok… We’re a bit early on the election year, but the candidates are already taking shots at each other, so to me… It’s already an election year!

But even that news couldn’t put wind in the dollar’s sails… We had a brief sell off in the currencies and then they turned on a dime to rise the remainder of the day.

And talk about the markets receiving a green light to take on risk! I said this in September when they cut rates 50 BPS… And I’ll say it again… The rate cuts don’t do a darn thing to correct the credit crunch, and the lack of corporate derivatives, which include commercial paper… All the rate cuts accomplish is that borrowing rates are cheaper… But… If no one wants to lend money in the first place what good does that do?

Let me also remind everyone that before the credit crunch in August, the corporate sector was responsible for $50 billion in foreign investments each month… In August, that number fell to $4 billion. Without the $50 billion each month, how will the U.S. finance its current account deficit? Through a debased/weaker dollar is the only answer… Said as it is.

Let’s get back to risk taking… The carry trade currencies shot to the moon after the rate announcement because of the green light to risk taking. That just fills the carry trade balloon with even more air… Watch out when that balloon bursts! But for now… There is nothing but green lights all the way down the boulevard for the risk takers.

And let’s get back to the FOMC meeting… The Fed did cut rates, as Big Ben Bernanke allowed the markets to twist his arm until he said Uncle… What does that say for our Fed Chairman? I think it tells the markets that he’s weak, and won’t stand up to the markets. I’ve always told you that one of the ingredients to a strong currency is a strong central bank.

Big Ben did say afterward that this cut was the last one… Yeah, right… Wait until we get into the first quarter of 2008, and the economy is circling the bowl, and the financing of the deficit is lacking funds, and the war wages on… Last one… Yeah, right! PIMCO’s Bill Gross thinks that the Fed will go to 3.25% from its current 4.5%. And I saw research the other day from BNP (Bank Paribas) where their economist thinks rates are going to 3%… So… Unless these guys are wrong, we haven’t seen the last one, period!

Now, over to a strong Central Bank… The European Central Bank (ECB) continues to provide price stability… No wonder the euro hit 1.45 yesterday and is on track to hit 1.50 before year-end! Here’s a test for the ECB though… We’ve heard all the hawkish talk by ECB members… But economic growth in Germany – the Eurozone’s largest economy – is slowing. Now… Inflation has jumped up over the 2% target the ECB uses to tell them inflation is too high (that’s providing price stability, folks). Will the ECB come back to the rate hike table? Well.. They just might… But if anything, we’ll hear the hawkish tones for some time to come… Which means the euro remains strong… And assists the ECB in fighting inflation!

Just Tuesday, I wrote about the pound sterling (GBP) and how I had given up the ghost on sterling at 2.10 as I originally called for earlier this year… The mortgage mess and Northern Rock put a damper on pound sterling… But lo and behold, pound sterling hit 2.08 yesterday! Ahem… That’s a 26-year high! WOW! I still think the Bank of England will lower rates next week… But at this point it does not look as though it will throw a spanner in the works for pound sterling!

And just yesterday… When the dollar’s troubles seemed so far away, but now it looks as though they’re here to stay… I said the Canadian dollar/loonie (CAD) had hit a 47-year high… Well… Yesterday… It hit a 50-year high! WOW!

One more thing and sorry that I keep coming back to this, but the thoughts keep popping into my head… I need a recorder to record these thoughts like… Feed the mayo to the tuna!

Seriously though… The Fed cuts rates in the face of rising inflation… I know, I know, their reports don’t show inflation rising… But who ya’ gonna believe? The government accountants… Or.. People like this reader that sent me this note…

“January 1, 2008 my electric company (PNM) will be raising rates by 16.5%. My trash collection goes up 6%. My catastrophic insurance has gone up 15% (December 2007). A friend in Phoenix says his electric rates are going up 8%. Another friend in the Chicago area says his are going up 22.5%. I’m still trying to shove these ‘non-inflationary’ numbers into the official rate of 2-3%!”

I’m with you on that one! But the media just doesn’t get it… It zooms right over their collective heads!

The price of oil has hit $96 overnight, as U.S. crude stockpiles showed a surprising drop. This drop then causes questions and concerns about the winter supply. The price of oil is really beginning to put the kyboshes on the central banks that wanted to cut rates to go along with the Fed. Seeing that discretion is the better part of valor on this one, the central banks have decided to pass on the rate cuts… The ball is now in the Bank of England’s court on next week’s rate decision. I wonder which they will choose… Easier growth, or allowing inflation to enter their economy… What’s it gonna be boy? I gotta know right now, will you cut rates, or will you fight inflation forever?

We had two rate announcements other than the United States’ yesterday… Norway’s Norges Bank left rates unchanged, which surprised me a bit, as I had thought they would raise rates to keep in step with Sweden… Iceland’s Sedlabanki raised rates 45 BPS, which surprised me and the markets as inflation seemed to be under control there.

Apparently not, as the Sedlabanki issued a statement calling for an “extra meeting” on December 20, so that too much time doesn’t pass before they meet again… So, we can expect another rate hike on December 20… They didn’t set up an “extra meeting” to exchange Christmas gifts!

This just fuels the fire for the high yielders and the carry trades. Iceland already had the highest interest rates of these carry trade currencies, and now… Well… They are higher!

Currencies today: A$ .93, kiwi .7705, C$ 1.06, euro 1.4435, sterling 2.0785, Swiss .8610, ISK 58.85, rand 6.5550, krone 5.3975, SEK 6.3775, forint 174.27, zloty 2.5180, koruna 18.65, yen 115.60, baht 31.71, sing 1.4480, HKD 7.7550, INR 39.33, China 7.4540, pesos 10.66, BRL 1.7360, dollar index 76.82, Oil $95.43, Silver $14.48, and Gold… $797

That’s it for today… I’m so sorry about the tardiness of the Pfennig yesterday. You can imagine my pain knowing that I wrote it at five in the morning and sent it out then, only to have it not arrive until 3:30 in the afternoon. The IT folks were messin’ with the delivery system. I don’t know why they decided to do that on a Wednesday morning! “But, it’s just Chuck’s ‘little newsletter’. Nobody reads that,” I can hear them saying… I’m bitter about this as you can tell… But, it’s a new day… I don’t have time to waste on being bitter for too long!

Hope your Halloween was fun… Now we switch to Thanksgiving plans! I can see that a couple of guys have already signed out for the day following Thanksgiving, which I ALWAYS take… I guess not this year! I hope you have a Tremendous Thursday… I certainly am going to try to have one!

Chuck Butler
November 1, 2007

The Daily Reckoning