The Madman Across the Water

Good day… And a Terrific Tuesday to you! The currencies range traded yesterday, but the bias to sell the dollar remained in place. With no new data to digest, the euro (EUR) picked up some ground but remained in a tight range. Besides the move overnight (Sunday to Monday morning) was quite astonishing, don’t you think?

The Fed has its hands full with its own decision to cut rates or not tomorrow, while the European Central Bank’s (ECB) decision is whether to raise rates or not. Months ago, maybe even a year ago I coined this scenario as the Tale of Two Economies. Here’s what I think about the Fed rate cut that’s coming tomorrow…

1. Big Ben Bernanke says that he doesn’t really want to cut rates but the markets want him to do so, and he will. Strange don’t you think? The markets are driving the Fed’s Bus.

2. With this rate cut, U.S. and Canadian rates will be the same. Hmmmm… And the euro will enjoy a positive rate differential.

3. Inflation is going to eat us alive, while Big Ben plays footsies with the markets.

4. PIMCO’s Bill Gross says the Fed will cut rates to 3.25% when the rate cut cycle is over.

5. If rates go that low… Doesn’t that put the dollar in the category of a low yielding currency that could be the subject of becoming a financing currency for the carry trade? I think so!

Now, for the ECB… We’ve heard more and more hawkish talk recently regarding inflation, which normally would lead me to believe the ECB would hike rates at the next meeting… However, these aren’t normal times… And, so for now, the ECB will have to just “talk” about higher rates…

Inflation is pushing the envelope in the Eurozone, and with oil trading in the $90 range, it is wise to have inflation fears. Here’s where the strong euro can really help the ECB out of a jam with rising inflation. So, for now… No higher rates for the ECB, but tough talk is to be expected.

In the overnight markets of Asia and Europe the euro has given back some ground, but still remains in a tight range. There was no news concerning the backing off, so I’ll just put that down to profit taking. Considering the record level we saw euros hit yesterday, profit taking is probably the number one answer… Survey says! It WAS the number one answer!

So… How about pound sterling (GBP)? Rising in the face of a possible rate cut next week… Sterling hit a sweet level of 2.0650 overnight. I had given up the ghost of 2.10 once the credit crunch hit Europe too, and the Northern Rock episode eroded customer confidence in the U.K.’s economy… Then came the calls for a rate cut, even though inflation is bumping up against their ceiling target… Sound familiar? Sounds to me as though they Bank of England has taken a page from the Fed Reserve’s book on how to stoke inflation… And will cut rates next week.

But that hasn’t thrown cold water on pound sterling! Look at it like this… The Bank of England (BOE) decides to cut rates 25 BPS. Pound sterling will still enjoy a hefty positive rate differential to the United States, Japan, and the Eurozone… Hmmm… Maybe the ghost of 2.10 for sterling is still walking around….

U.S. Treasury Secretary Paulson was in India speaking yesterday/last night, and he once again was thinking that the audience was singing, “Tell me lies, tell me sweet little lies, tell me lies”. What am I talking about? Well… Paulson decided to bring out the, “I believe in the strong dollar policy” line… Hogwash! Always, Always I tell you that the strong dollar line is followed with… “Currencies should be set in open markets based on economic fundamentals”.

The problem with those two statements is that they are completely opposite of each other. The dollar has no right to be strong given its fundamentals! And I’m surprised he didn’t go after the Chinese again, which is even more opposite of a strong dollar statement! He wants the Chinese to let their currency appreciate versus the dollar, which means… That the dollar gets weaker! Not stronger! What a bunch of Hogwash he’s telling people!

I have to wonder these days if anyone listens to him. Yes, the G-7 members all took a heaping helping of the gospel according to Paulson, which kept them from singling out the dollar as being weak… But, I’m talking about the market participants. Has this boy cried wolf one too many times? I believe so… The markets are rendering him useless in this regard… So long Henry… Bye, bye… Don’t go away mad… Just go away!

Ok… I was a little hard on the Beaver there… I had better be nice from here on out!

And finally… The loonie… The Canadian dollar/loonie (CAD) hit a 37-year high versus the dollar yesterday, as the price of oil kept bouncing around in the low $90 handle. I have to say that this has all been quite exciting to watch. But both of these, the loonie and oil seem to be at a point where a technical correction should take place. The runs of these two have been meteoric in size… But, those moon shots need to be brought back to earth for refueling before more space walks can be made.

However, having said that… I’m reminded that the Fed does meet tomorrow to cut rates… Maybe loonies will forego the correction, eh?

Oh… I almost forgot to mention this… The Big Brokerage that owns a bull announced a $7.9 billion write-down for subprime mortgages and asset backed bond losses. There are reports that they could write down another $4 billion. I’m not poking fun here… I’m strictly trying to say that the housing woes, led by subprime, are not letting anyone off the hook! The losses are everywhere, and I think we’re just beginning to see the damage they created…

But according to the Fed three months ago, the housing woes were bottoming out… Yeah, right! We won’t see the bottom of this for months to come, folks… But here’s some encouraging news for our friends at BIG Brokerage that owns a bull… What doesn’t kill you… Makes you stronger! I truly believe they will come back stronger from this… Those are smart people over there.

And one final thing… I bet you were wondering when I was going to get around to talking about the title for today’s Pfennig, weren’t you? Well… Here you go! Our friend, investment guru Jim Rogers, was quoted last night calling Fed Chairman Big Ben Bernanke a “madman”! Which automatically had me singing the Elton John hit… Madman Across The Water… Which fits quite nicely I must say!

Currencies today: A$ .9190, kiwi .77, C$ 1.0465, euro 1.4395, sterling 2.0655, Swiss .8580, ISK 60.35, rand 6.5625, krone 5.3630, SEK 6.3725, forint 174.25, zloty 2.5240, koruna 28.6950, yen 114.75, baht 31.55, sing 1.45, HKD 7.75, INR 39.36, China 7.47, pesos 10.7125, BRL 1.7470, dollar index 76.90, Oil $92.30, Silver $14.35, and Gold… $787.60

That’s it for today… A long day yesterday got me home in time to eat and go to sleep! Whew! Back to half-days for me today! I’m so excited these days about my Missouri Tigers! They have quietly moved up to #9 in the national football rankings! WOW! In all my years, I don’t recall seeing this… In the ’60’s they were great, but I don’t recall the rankings, if there were any at all! The ’70’s were OK… The ’80’s were the “lost decade”, and so on… If they are lucky enough to get to the Big 12 championship this year, I’m going to have to see about a trip to San Antonio to witness that! OK… Enough.. Time to go… Hope your Tuesday is terrific!

Chuck Butler
October 30, 2007

The Daily Reckoning