Three Months and Counting

Good day…right from the get-go this morning I have to tell you that I have no idea when you will receive the Pfennig today, as our email system is down and out in Beverly Hills. If in the future you find that the Pfennig isn’t in your mailbox, it probably means that there are technical problems, but not to worry…mark down this web site – – This is the Pfennig’s own web site, and you will be able to read it there, along with a picture of my smiling face! No wait! That might be too much in the morning!

OK…the Fed’s FOMC did indeed leave rates unchanged at yesterday’s meeting, and although Big Ben Bernanke tried like the Dickens to tell the markets that there are still inflation pressures, it was almost like the boy who cried wolf. The markets say, if there are still inflation pressures, raise rates! Three months ago, when the Fed first paused, it was taken by the markets as simply a “pause for the cause” to look at the landscape after 17 consecutive rate hikes. But now…uh-oh…three months later, we’re still on hold. And I’m seeing some Fed observers saying that the Fed is on hold until June of next year!

By then the second prop for the dollar will have been removed. Don’t know about the two props? Well, it’s an integral part of my “live” presentations, and I don’t have the time or space to really get into it in the Pfennig; but the broad strokes are simply that the dollar remains in a weak trend, and that 2005 simply represented volatility within the weak dollar trend. That volatility came as a result of two props: First the HIA repatriation of over $300 billion to dollars brought back to the United States by corporations doing business overseas at a reduced tax rate. (This Act ended 12/31/05).

The second prop was the Fed’s two years of consecutive rate hikes. One prop was removed, and now the second prop is slip sliding away. And guess what happens when the second prop is completely removed. SPLAT! Flat on George’s face – the dollar falls to the ground! I think we saw a sign of that yesterday, when after three consecutive meetings, rates had remained on hold. The euro rallied one full euro, and is still looking pretty perky this morning. The currencies that enjoy yield advantages versus the United States – like Australia and New Zealand – really received some attention. Recall, that these types of currencies were sold when the interest rates kept ratcheting up in the United States, thus narrowing the yield advantage these currencies held versus the dollar.

A funny thing happened on the way to the forum, as it was once thought that Australia and New Zealand had reached the end of their rate hike cycles, and would see their yield advantage to the United States go away. Now it’s the United States that may have reached the end of their rate hike cycle (at least for the near future), and Australia and New Zealand that figure to come back to the rate hike table, thus widening the yield advantage they hold over the dollar!

Yesterday, I was reading a report from the Sydney Morning Herald that quoted Australian Treasurer, Peter Costello, calling for an “orderly withdrawal from the U.S. dollar by Asia’s Central Banks.” WOW! Costello also said, “the strategy had changed, and Central Bankers were now looking for alternative investments.” Uh-oh.

And then…there was a report by Gabor Steingart, who heads Der Spiegel’s Berlin office. Steingart was chosen as “The Economic Writer of the Year” in 2004. His report in Speigel, should be read by every investor, especially those that don’t believe the dollar is on rocky ground. You can read the entire story here…,1518,440054,00.html

But if you don’t have time, here’s the most important paragraphs of the report:

“These days, the dollar is making a lot of people uncomfortable. One morning many dollar-owners will wake up and look at the facts about the U.S. economy without their rose-colored glasses – just as private investors woke up one day and took an unflinching look at the New Economy, only to see companies whose market value couldn’t be justified by even the most dramatic of profit increases. Some of the revenue forecasts that had been issued far exceeded the total value of the market. The NASDAQ presented the spectacle of a stock market whose added value increased by 1,000 percent in just a few years, when the nominal growth of the U.S. economy during the same period was only 25 percent.

“Greed triumphed over fear for a few years – but then fear came back. The value of high-tech shares plummeted by more than 70 percent in just a few months, and they’re still less than half as high as they were then. Even the Dow Jones, a stock market index based on the value of the largest U.S. companies, was devalued by some 40 percent.

“Much the same fate is in store for the dollar and for dollar loans. The United States has sold more security than it has to offer. The expectations traded will turn out to be valueless because they can’t be met. Just as the New Economy was unable to provide investors with either the growth or the profits that had been predicted for investors, currency traders will one day have to admit that the economy backing the currency they sold is weaker than they claimed.

“The crash can be deferred, but not stopped.

“The dependence of foreign central banks on the dollar will defer its crash, but it won’t prevent it. Today’s snowdrift will become tomorrow’s avalanche. The masses of snow are already accumulating at breathtaking speed. The avalanche could happen tomorrow, in a few months or years from now. Much of what people today think is immortal will be buried by the global currency crisis – perhaps even the leadership role of the United States.

“Incidentally, the commission that former U.S. President Bill Clinton created to investigate the negative balance of trade concluded in clear terms that the government has to do whatever it can to put an end to the growing disparity between imports and exports. It demanded that the public give up its optimism and return to realism, that people start saving again and that the state reduce its imports in order to prevent too hard a crash landing.

“None of that has been done. In fact, what is being done is the opposite of everything the experts recommended. Debt is growing, imports are increasing and an optimism now lacking every basis in reality has become official state policy. Lester Thurow, a member of Clinton’s commission, draws the sober conclusion that no one will believe the U.S. balance of trade could produce a crisis ‘until it happens.'”

While I’m not one to go out on the limb that far regarding a complete collapse of the dollar, Mr. Steingart’s message is one that I’ve been trying to get across for some time now. I hope this reinforces those who are becoming impatient waiting for the dollar to turn weaker.

Data-wise yesterday, existing home sales fell more than expected in September, falling 1.9% instead of the forecast 1.2% fall. Today, we’ll see the other shoe drop on housing as new home sales are expected to fall 1 percent. We’ll also see the color of the latest durable goods orders, which have been really weak recently. The “experts” believe durable goods will recover this month. Hmmm…I’m from Missouri; they’ll have to show me!

Currencies today: A$ .7630, kiwi .6670, C$ .8895, euro 1.2660, sterling 1.8850, Swiss .7950, ISK 67.95, rand 7.53, krone 6.5575, SEK 7.2925, forint 206, zloty 3.0640, koruna 22.3670, yen 118.70, baht 37, sing 1.5690, HKD 7.7814, INR 45.26, China 7.9859, pesos 10.75, dollar index 86.11, Silver $11.98, and Gold… $592.35

That’s it for today. Rained out last night, and they’ll probably have to play tonight’s World Series game in the rain! Too many plane rides have me coming down with a head cold; I should know better. I don’t know how the Big Boss Frank Trotter isn’t just one BIG Head Cold with all the time he spends on planes! Gotta nip this cold in the bud, as I have a BIG weekend planned in Columbia, Mo, for the BIG Missouri/Oklahoma football game! Have a great Thursday! (That is whenever it is you receive this)!

Chuck Butler
October 26, 2006

The Daily Reckoning