The Fed Saves the Day (NOT!)

Good day… And a Wonderful Wednesday to you! I was right, I was right! After I did the, “I’m sorry I messed up” statement last Friday, regarding the Fed cutting rates out of meeting… They proved me right yesterday by cutting rates out of meeting, just as I said they would… But only last week! Kudos to my friend out West, that pointed out the global stock meltdown, and how my call for an out of meeting rate cut could come to fruition on Tuesday… He banged it home!

And what a wonderful turn-around for the currencies! When I left you yesterday, the euro (EUR) had fallen below 1.45. At the end of the day, it was 1.4635, and had traded higher on the day!

The euro had recently experienced some selling due to a plethora of reasons… One of which was the fact that recently, ECB ministers had spoken more dovishly toward inflation in their 13-member union. Well… The markets all agreed… “If the Fed is going to cut 75 BPS, which is what they did yesterday…” (Can you believe 75 BPS at an out of meeting rate move?)… “Then if the ECB is going to look to cut rates, it won’t matter… They will still enjoy a positive rate differential to the dollar!”

So… Let’s talk about this out of meeting rate cut of 75 BPS for a minute… (You knew I would!) I was the first to tell you that the Fed would start cutting rates back in August… I was the first to tell you that the Fed was going to cut rates out of meeting… And I’ll be the first to tell you that I fully expect the Fed to come back next week at their regularly scheduled meeting and cut another 50 BPS! And that’s not all! If you order today, we’ll send you these Ginsu knives! (That’s what that was beginning to sound like!)

But seriously, 50 BPS next week… And here again, I’m going out on the limb (not to worry I found a big strong branch!) I believe we’ll see 50 BPS cut at the next two meetings following next week. So… Add those together, carry the one, and you have 150 BPS still to go… That would bring rates here in the United States down to 2%!

I don’t think the ECB, nor the Bank of England will be cutting rates that low! Shoot Rudy! The Bank of Canada cut 25 BPS yesterday, and nobody cared! The loonie (CAD) rallied versus the dollar! The loonie enjoys a nice positive rate differential to the dollar these days, even with the Bank of Canada cutting rates!

The Fed has officially panicked folks… They have raised the warning system to DEFCON 3, skipping DEFCON 1 and 2… Because, presumably, they kept telling us that all was OK! Well it wasn’t, now was it? And didn’t I keep saying that I didn’t know what these guys telling you “all is OK” were smoking? Don’t you just love leadership like this?

They sell us a bag of goods back in July and August regarding the housing meltdown, and follow that up with more “all’s OK” talk, only to have to come to the markets a week early, and cut 75 BPS! I shake my head in disgust. We should be able to fire these guys, and hold them up for public interrogation!

So, the day was about the Fed… All about the Fed and nothing but the Fed, so help me God!

This was interesting, yesterday… The European Union’s Economic Commissioner, blamed the United States for the global stock meltdown, due to the its overspending! Here’s more from Mr. Almunia…

“The main reason why the equity markets have this extreme volatile situation these days is the risk of a recession in the U.S., it’s not about a global recession.” he went further to say, “Bit imbalances have been created, have built over the years in the U.S. economy, a big current account deficit, a big fiscal deficit, a lack of savings.”

Hmmm… Couldn’t have said it better myself! And I’ll tell you something else… Yes, the rest of the world may indeed slowdown during the U.S. recession; we’re seeing that begin to happen already. But with 80% of your trade among your member nations, I don’t see Europe shutting down like the United States is going to do… I also don’t see Asia shutting down either, as they have opened bridges of trade amongst themselves. Yes, they will slow down… But follow the U.S. down the recession road? I don’t think so… At least not from what I’m seeing right now.

I had a feeling the Asian markets – which weren’t around when the Fed announced its rate cut yesterday – would have a field day with the dollar. But, these guys (and gals) were nowhere to be found. The Asian currency players that had twice ambushed the dollar a couple of months ago, didn’t come out to play. In fact, as the night went on, the euro lost some ground… Strange, don’t you think?

I received an email yesterday with an interesting response to my question yesterday about why we’re so afraid of a recession… The reader said, “Maybe the reason ‘they’ are afraid of a recession is that it has been put off for so long that the probability of going beyond recession to a depression is too great?”

Ahhh, this grasshopper has mastered his lessons… He has wisely learned what sensei Butler has been preaching about for years… The greatest sensei, Hy Minsky’s lessons regarding putting off the inevitable, and allowing things to remain status quo for too long. Well done, grasshopper!

I haven’t touched on gold in a few days… The shiny metal has really moved from the head of the class to the second row… But, if my thoughts are correct, that won’t be a permanent seating arrangement for gold. The sharp fluctuations of gold recently have probably scared a few innocent bystanders away. Yesterday, for instance, gold moved in a $40 range… YIKES, like we could have ignored all that Scooby, if we had just bought a MarketSafe Gold CD, which gives the holder 100% principal return, and 100% of the average move of gold over five years… That way, we “set it, and forget it.”

Back to the range for a minute, before I head to the Big Finish. I think the wide fluctuations are caused by the global participation in gold. In other words… There are millions of new players that own gold, and those price inputs cause these wild swings. That’s why, when gold was heading to $900, there was nothing stopping it… Too many buy orders all at once… So, I say to those innocent bystanders… “Come on in, the water’s fine.”

European Central Bank (ECB) President, Trichet is speaking right now. Here’s a snippet of his speech… “Particularly in demanding times of significant market correction and turbulences, it is the responsibility of the Central Bank to solidly anchor inflation expectations to avoid additional volatility. The ECB will ensure an orderly functioning of the money markets at the level of interest rates required for anchoring the inflation expectations.”

That’s Central Bank Parlance for… “I’m keeping rates where they are to fight inflation, I don’t care what the Fed does.”

Interesting, don’t you think? We’re going to see the Tale of Two Central Banks playing right out before our very eyes.

The ECB still believes the Eurozone economy will grow 2% this year. I think they are off just a wee bit… And thus, my expectations for a rate cut or two later this spring and summer… But, they’re in the ballpark, and hey! They should have a better understanding of their growth potent ional than little old me!

The carry trade was back on yesterday, but once again it was taken off immediately. What we’re seeing with the carry trade is simply that it is wearing out. When it gets put on, it doesn’t have the staying power it once did. Pretty soon, it will wear out completely, and be done… Unless… There’s a new funding currency to be used… Like… The dollar! Yeah, that’s the ticket! The Fed cuts rates to the bone, and the dollar gets sold short as the new funding currency of the “New and Improved, Carry Trade” Hey! It could happen!

Currencies today: A$ .8675, kiwi .7625, C$ .9740, euro 1.46, sterling 1.9585, Swiss .9140, ISK 66.35, rand 7.11, krone 5.5250, SEK 6.5140, forint 176.80, zloty 2.4860, koruna 17.87, yen 105.90, baht 30.95, sing 1.4350, HKD 7.8040, INR 39.55, China 7.2310, pesos 10.95, BRL 1.7935, dollar index 76.41, Oil $88.26, Silver $16.05, and Gold… $887.50

That’s it for today… Crazy day yesterday, absolutely crazy! Probably more of the same today, but reinforcements are on the way! We were two people short yesterday, and brother did that throw a spanner in the works! But, we survived, and what didn’t kill us, made us stronger! I recently learned that my annual “guys go to spring training” long weekend will not take place this year… UGH! That’s probably best anyway, as I was already going to be traveling three times in March! I’m still heading down with my family in tow though… The end of March can’t get here fast enough for me! Sunny and 80 degrees sounds awfully good to me right now! HEY! Time to go to work! Buckle up again… Here we go! Hope you have a Wonderful Wednesday!

Chuck Butler
January 23, 2008

The Daily Reckoning