The Fed's Quiver is Getting Empty

Good day… And a Thumpin’ Thursday to you! This is it for me until Opening Day! Chris has the conn on the Pfennig tomorrow, and then Mike Meyer will have the conn next week. Again, Mike will only be giving you a brief one-paragraph update on the currency markets, and the currency roundup. I don’t think we’ll have this problem of both Chris and me being out at the same time again… But I’ve learned to never say never, no, wait, I said never! UGH!

The dollar rebounded on no data yesterday against most currencies… The Swiss franc (CHF) and Japanese yen (JPY) held their ground during the dollar rally. I’ve said more than once during the last month of new record highs in the currencies almost daily, that the currencies had moved too far too fast and needed a brief correction or at least a breather. Well… It looks like we’re seeing it! But don’t despair… This should only lend itself to providing new, cheaper, buying opportunities.

So, while the dollar enjoys its brief stint in the sun… Let’s go back to the Fed’s 3/4% rate cut on Tuesday. You know the Fed has trimmed 3% of its Fed Funds rate since they began cutting in September. And… Since it normally takes 9+ months to see a rate cut filter through the economy, we’ve got a few months before that happens. The Fed’s rate cut quiver is just about out of arrows, and the markets feel there is more work to be done! So, they’ve got a couple of rate cut arrows left to use, but believe me… The quiver is getting pretty empty!

And that’s not a good thing, given what the markets believe will be needed to fight against further mortgage related losses, and a credit crunch. Major Bank losses are looming… I mean when policymakers are warning about significant bank defaults, we should all sit up and pay attention! Add to all our problems a little price “bump” in gasoline for our cars and trucks, higher food prices, and a weaker jobs market… And don’t forget that there are lots of losses to go around, which means that those who do have a job will not see much in the way of higher wagers… UGH!

Today, for instance… We will see the color of February’s leading indicators… Which leads to the question… “Why are we looking backwards to February, when they are supposed to be leading indicators?” Anyway… That’s what we’re doing… And the “experts” believe leading indicators will fall 0.3%, which doesn’t bode well for the future of the economy.

We’ll also see the Philly Fed Index (manufacturing in that region), and I would bet a dollar to a Krispy Kreme that it’s negative, and a very disappointing showing, which should lead to the National manufacturing index call ISM… The ISM is the key master for the recession gates. When ISM first fell below 50, three months ago, I called out to anyone that would listen, that we were entering a recession. No one heard me calling, no one came at all, they were too busy watching those old raindrops fall!

Commodities sure got whacked yesterday… But once again, I will remind everyone that they went too far too fast, and needed to back off to form a new base before heading higher again… At one point yesterday I noticed gold off $44!

The commodity currencies also backed off yesterday, as Aussie (AUD) and kiwi (NZD) both sold off on the day. Wheat, oil, and gold prices all slumped, and so did these two gems from the South Pacific. So, you have to ask yourself… “Do I believe the commodity rally is over?” If you say no… Then jump on my bandwagon. If you say yes… Then you should be selling. It’s as easy as that!

Someone asked me to give an update on Indian rupees (INR), which had lost some ground recently. I’m still bullish on rupees, but there were some nervous Nellies that just couldn’t take the heat when the rupee began to weaken, and got out, thus causing more rupee weakness. But, that could be all over now, Baby Blue… Bank of America agrees with me, calling for an end to the rupee weakness as domestic demand and trade with Asia and Europe help the nation weather the U.S. recession.

Pound sterling (GBP) lost some luster yesterday, as the Bank of England (BOE) minutes showed a split vote (7-2) at the last meeting that saw the BOE leave rates unchanged. Lower rates already took some air of pound sterling, which was pumped back in by lower rates in the United States. So… The thought of even lower rates in the U.K. took more air out of the currency. As I said earlier this year… I believe pound sterling has seen its highs… But I also believe it has a floor, due to its oil production.

One of my Hall of Fame Central Bankers, Paul Volcker, was talking yesterday… Let’s listen in to what he had to say about the Government playing a larger role in restoring confidence to the financial markets, and helping Bear Stearns…

“The Federal Reserve is designed to lend to banks,” Volcker said. “In this situation, [Bear Stearns] they stepped in and nobody else was there to do it. I don’t think we should sit back and say, well, take care of the next one, or do more.” He went onto say… “There are limits to how much you can reduce interest rates, and lurking not very far in the background anymore is whether inflation comes back. That would be the ultimate destructive result. We just must not let that happen.”

Well… Sorry Mr. Volcker… But inflation is rising… Like there’s a bad moon a rising. Inflation figured using the same methods as those used in the ’70s before all that mixing and switching began, would put inflation over 11% according to John Williams over at ShadowStats.

You know… We hear about the mortgage mess daily in the mass media… But who’s talking about rising inflation? No one! (In the mass media that is…) But I am! Sam I am! I will talk about inflation in a car, I will talk about inflation in a bar, I will talk about inflation… Oh, that’s enough… You get the picture! Inflation is my Lex Luther… An enemy, always trying to ruin everything and take over the world!

Hey! I’m no Superman! But at least I can be Superman’s alter ego, Clark Kent, and report the news that inflation is out of control, and the Fed has “inflation amnesia”. That reminds me of the old song… I hope that it’s only amnesia, believe me I’m sick but not insane… That’s Big Ben’s new theme song!

The famous Robert Prechter of Elliot Wave, must be reading the Pfennig along with his charts (I’m kidding there, I don’t want any nasty grams from charts people that think the world of Mr. Prechter). The reason I say this, is that he has issued a report recommending Swiss francs. He’s also recommending New Zealand dollars… But I’d like to focus on Swiss francs…

I spent 1.5 hours on the phone with a reporter from the NY Times yesterday… She was great! But very new to the currency business, so most of the time was spent explaining things like “currency pairs”, “the carry trade”, and so on… The point I’m getting to is that I talked to her about the dollar replacing the Swiss franc as a funding currency of the carry trade. As I reported yesterday, the dollar now has the second lowest yield, of major countries, in the world – second only to Japanese yen.

But let me tell you something about Japanese yen being used as a funding currency for the carry trade… That dog is not gonna hunt any longer! Here’s the skinny… People sold yen short and will have to buy it back at some time in the future, right? OK… But with yen rising like it has, those people are under water on their trade, as they will have to buy it back at a higher price than they sold it. Who would go into a trade knowing it will be underwater? Who would hold onto such a risky type trade that is underwater? Well… Maybe those that held onto their tech stocks when everyone told them “this time it will be different”… But… That’s not what I’m talking about now.

So… If Swiss francs and Japanese yen are no longer going to be used as funding currencies of the carry trade (and I’m just speculating here, I don’t know this is going to happen any more than you do), but let’s just say, these two currencies are no longer used as funding currencies… What currency is left to use? Ahhh grasshopper… You have learned your lessons well… The dollar… It’s low yielding, and getting weaker all the time.

Now that was some talk wasn’t it? I’m on a roll this morning… Hey! They didn’t stop the Germans when they bombed Pearl Harbor did they? They were on a roll! (OK, that’s a line from Animal House, I am well aware of the fact that the Germans didn’t bomb Pearl Harbor, but I used that line a few years ago, and I actually had people take the time to send me an email and attempt to correct me!)

But for today… The dollar is rallying… This looks to me to be the short-term correction that I’ve been waiting for. This also looks to me to be a Blue Light Special on currencies… Even Japanese yen is back to 100, and Swiss francs have fallen back to 98-cents. Attention currency shoppers! There’s a Blue Light Special in currencies today.

Currencies today: A$ .9065, kiwi .7975, C$ .9775, euro 1.5450, sterling 1.9810, Swiss .9850, ISK 78.20, rand 8.12, krone 5.2450, SEK 6.0950, forint 166.30, zloty 2.2850, koruna 16.65, yen 100, baht 31.31, sing 1.3890, HKD 7.78, INR 40.46, China 7.05, pesos 10.70, BRL 1.7275, dollar index 72.78, Oil $100, Silver $17.29, and Gold… $912.41…

That’s it for today… Tomorrow at this time, I’ll be in the security line getting wanded, but that won’t bother me, as I’ll be on my way to Jupiter, Florida! Tomorrow is Good Friday, so the stock market will be closed, but what remains of the trading desk will be here! Sunday is Easter… We’ve celebrated Easter in Jupiter Florida before, but never this early! In fact you and I will never see another Easter this early again in our lifetime, as the next time it happens this early it will be some 285 years from now! Saturday, I’ll be in the stands at the ballpark with my family, watching my beloved Cardinals. I can think of no better way to spend my birthday! A birthday that quite frankly, I welcome this year, given what I’ve been through! I used to not make a big deal of my birthday, but not this year!

The NCAA Basketball Tournament gets goings in full swing today… Do you have your bracket filled out? We always do a drawing of teams, random from a hat… I don’t know which team they pulled out for me, but I usually get a small name team that has a slim and none chance and slim left town! But it’s so much fun! So… I’m outta here today and won’t return till March 31st, which just happens to be Opening Day! (I’m going! YAHOO!) I hope you have a wonderul time while I’m away… Onward and upward!

Chuck Butler
March 20, 2008

The Daily Reckoning