The Three Bears

Good day… And a Happy Friday to one and all! Another Fantastico Friday I surely hope! Oh brother did first Trichet, then Bernanke light a fire under the euro (EUR) yesterday! WOW! And all that stuff I said about hoping Trichet sounded like a hawk and not a yellow-bellied central banker came out just like I hoped it would! Trichet did sound like a hawk, and the yellow-bellied central banker award went to…. Drum roll please… Big Ben Bernanke! Let’s hear it for him!

OK… First… Let’s check out the European Central Banks and their rate meeting outcomes… The Bank of England got this party going yesterday with a surprise for the markets… The surprise was that they left rates unchanged… Sterling (GBP) which has been beaten like a rented mule lately on thoughts that the Bank of England would cut rates, rallied on the news. But the big rally for the day belonged to euros, so that’s our next stop on our European Central Bank tour.

The European Central Bank (ECB) left rates unchanged also, but it was the press conference afterward that really stirred the drink. Besides all the regular stuff like: “The ECB will do what is needed to contain inflation” There were some real gems thrown out by Trichet… Like this exchange… When asked if a rate cut was discussed, Trichet answered… “Only 2 options discussed, the pros and cons of raising rates.”

And then this one, which really got the currencies all, lathered up… When asked if the ECB has a tightening bias, Trichet said, “that was a good interpretation of what I said.” WOW!

So… Again this morning, I’m removing the hand from my back, as I was front and center the first one on your block to tell you that inflation had become a problem in Euroland and that the ECB would have no other choice but to raise rates again… And now that rate hike looks like it will take place next month… I love it when a plan comes together!

Trichet was the man! He stood his ground! And the euro was rewarded for having a Central Bank with credibility! As I saddled up and headed southwest yesterday, the euro had rallied back to 1.48 again… Wow! And to think just Wednesday I had said if this all came out wrong today, we could be seeing 1.45 again! But it didn’t go all wrong, it went all right!

Then came the story of Big Ben Bernanke… Or the story of how a Central Banker “caved in” to the markets demands… Big Ben has drunk the Kool-Aid the bond markets have been giving him, and he now believes that we are in dire need of more rate cuts… What we need are more rate cuts, right? That’ll make everything better, right? WRONG!

Big Ben said that the Fed is “ready to take substantive additional action”, which is all fine and dandy to be “ready”… But the markets got the wink and nod, folks… Big Ben was saying 50 BPS rate cut is on the board… And the markets got the message, as the odds of a 50 BPS rate cut ramped up to 86% in the futures markets immediately!

This “more rate cuts, more rate cuts”, reminds me of one of my fave all time Saturday Night Live skits, with Will Farrell, and Christopher Walken… “What this song needs is more COW BELL… I have a fever and it can only be cured with more COW BELL!” HAHAHAHA!

OK, I’m back now… So… Today could be a version of the three bears. One (BOE) was just right and stayed steady Eddie at the wheel, One (ECB) was too hard on inflation, and the other (FED) was too soft on inflation.

Maybe when your grandchildren need a bedtime story in the future you can read them this one, which led to wild inflation in the United States.

Ben Bernanke should be fired! But wait! Isn’t he simply following the groundwork laid by Big Al Greenspan? Why yes, he is… After all our hopes of him going down another path, and fighting for price stability… He’s turned into Big Al deux!

OK, enough of all that, I could literally spend a whole day venting on Big Al and Big Ben.

In other news… The recession story is really getting the airplay… Folks, we’re already in the recession… So, when you hear another “economist” say, “I think the chances are we could go into a recession.” say out loud… YOU SIR, ARE A DOLT!

Major retailers reported yesterday, largely disappointing December sales… There’s another sign, folks.

And remember one of our “rumors” from Wednesday? Not the Fleetwood Mac album, but the rumor about Countrywide filing for bankruptcy? Well… That rumor has changed, and it now circles a story that Bank of America, whom you may remember made a huge $2 billion cash infusion into Countrywide, is in “advanced” talks to buy Countrywide. This must be akin to the white knight riding in to save Countrywide… Which is really a shame isn’t it? Just a year ago Countrywide boasted of their largesse.

And gold got right back on the horse it fell off of on Wednesday, after the talk by Big Ben, and is once again knock, knock, knockin’ on heaven’s door… I mean knocking on the door to $900! Well within spittin’ distance of $900 yesterday as gold climbed to $898 before profit taking took it back to $893… Still higher on the day!

Oh, and the stock market cheered the Bernanke talk… Which reduced credit concerns, which puts on carry trades.

And finally… Since it’s Friday, we finally get to some data worth looking at! Today, we’ll see the color of November’s trade deficit in the United States. The experts have forecast a deficit of -$58.6 billion. I think it will be worse, if you think back to retail sales in November. They were better than expected, so that gives me reason to believe that this trade deficit will be closer to $60 billion than the experts forecast.

Oh… And one more thing regarding the Fed… I wonder how Fed St. Louis President, William Poole, felt yesterday when he saw the “boss” talking about near armegeddon, right after he had told the world the day before, that “everything is just rosy with the U.S. economy”. You would think they would get together on these Fed speak talks, eh? Just goes to prove that the Fed Heads aren’t singing from the same song sheet! Talk about a lack of credibility!

I keep hearing people say that China is going to go bust when the United States gets down and dirty in their own recession. As usual though, I will differ with this thought going around. (You knew I would!) While I expect China to slow, I believe that they will maintain +10% growth, just on public demand. That should keep the commodities bustling, and the renminbi (CNY) on track to gain about 10% this year… That’s how I see it from the cheap seats!

Currencies today: A$ .8960, kiwi .7850, C$ .9920, euro 1.4790, sterling 1.9550, Swiss .9080, ISK 62.80, rand 6.8340, krone 5.2890, SEK 6.3520, forint 171.50, zloty 2.4225, koruna 17.49, yen 108.90, baht 29.57, sing 1.43, HKD 7.8030, INR 39.29, China 7.2620, pesos 10.94, BRL 1.7550, dollar index 75.91, Oil $94.32, Silver $16.35, and Gold… $897.50

That’s it for today… I was talking to a reporter from the Baltimore Sun yesterday regarding inflation. I think she was surprised to hear me go on, and on and on for some time regarding inflation. Guess, she asked the wrong person! Tomorrow marks the 26th birthday for my oldest son, Andrew. Happy Birthday, Bud! Andrew is a high school teacher at his alma mater, where he starred in swimming and water polo. He now coaches those two sports. I always told him to give back to the sports he loved, and he is certainly doing that! Good job! Some big games this weekend in the NFL playoffs, should make for some interesting television, I hope! So… Let’s head to the weekend, eh? I hope you have a Fantastico Friday, and a wonderful weekend!

Chuck Butler
January 11, 2008

The Daily Reckoning