Using Smoke Screens

Good day… And a Terrific Tuesday to you! Well… So much for that glorious weekend weather. Yesterday, we got hit first with torrential rain, turning to sleet and ice, and today we’re getting bombarded with 6-10 inches of snow! I had to make sure Ty walked out with me last night, in case the parking lot had become icy.

OK… Well… Yesterday started off with a bang right after I hit the send button… (Yes, I know it didn’t go out for a couple of hours later. We just can’t seem to figure out why our distribution server keeps balking at sending out the Pfennig!) There were rumors going around that someone was underground. Yes, there were rumors that the Fed was holding a “closed door meeting”. Was this going to be another inter-meeting rate cut? Or was this the Plunge Protection Team coming out in full view?

I mean, stocks in the United States got pasted on Friday, and stocks in Asia didn’t fare any better. U.S. stock futures were down big before the market opened, and then…. Nothing… A wimpy market open.

The euro (EUR) climbed very quickly to 1.5260, but then gave it all back once there was no announcement, and the markets calmed down. The euro then remained around 1.5175-1.52 all day. So… What do you think happened to calm the markets? It sure wasn’t the data cupboard!

The ISM (manufacturing) Index again came in below the 50 (contraction or expansion) level, this time to a level not seen since 2003… 48.3. The report points to sub-trend growth and elevated price pressures. Can you say “stagflation?” I knew you could!

And construction spending fell 1.7% in January, the most in 14-years!

OK… Remember in January and again in February I kept telling you that we would have to be patient this spring, as the ECB decided to cut rates, which would bring the euro back to 1.40? Well, that was when it was trading 1.46. We certainly haven’t had to be patient yet, but then it’s not spring! But… As I look at things… I think the only thing the dollar has going for it these days, is the hope that the European Central Bank (ECB) tries to play catch up with the Fed regarding rate cuts.

I don’t think the ECB will do that… But they will, most likely, cut rates this spring. I’ve said it before and I’ll say it again… Probably in May… So… When that happens, it just might be a buying opportunity, and not a crying opportunity!

Now that the euro has reached the psychological level of 1.50, the ECB ministers are beginning to get a little gun shy. They see the strong euro as damaging their economic growth… But apparently, these guys didn’t get the memo, which stated that 80% of the Eurozone trade is among themselves! Anyway… I think we’ll see more of this hand wringing over the strength of the euro… But in their heart of hearts they are dancing a jig!

I was talking to a customer on the phone yesterday, (yes, I was on the phone because they were so backed up – which put me so far behind on stuff that I had to finish work from home last night!) But anyway, I was talking to this customer, and he expressed a concern over the commodities bull market run and thought it was probably near the end.

Well… I let him talk, and speak his mind… And then I talked about how Jimmy Rogers points out that in over 200 years of commodity trends, the bull market trends averaged between 17-22 years, and that we were only starting our eighth year in this bull market. I also pointed to how many times the “experts” had called for China to “slow down” in the past five years, only to end up in tears.

I then pointed to a report that was just issued from the Bureau of Agriculture and Resource Economics in Australia. The report said that commodity exports from Australia (the world’s biggest shipper of coal, iron ore, and wool) are forecast to gain for a fifth straight year driven by demand from China. The Bureau expects a “record year” of sales in the next year… So…

Are commodities near an end? I hardly think so… But then, that’s just me; I’ve been wrong before!

Somebody, might say, “But Chuck! You don’t sell commodities!” Ahhh grasshopper… You are correct… We’re a currency division… But we have the currencies of the commodity countries! The thigh bone is connected to the knee bone; the knee bone is connected to the shin bone…

Speaking of a commodity currency… The Aussie dollar (AUD) is set to see more investments come its way, after the Reserve Bank of Australia (RBA) met last night, and raised their interest rates to a 12-year high of 7.25%! I told you all months ago that the RBA would be doing this into 2008… However, RBA Governor Stevens decided to throw up a smoke screen after the rate announcement, with this statement: “Interest rate increases since mid-2007 are ‘substantial’ and [there are] signs consumer demand is slowing.”

Do you know what that is? It’s a good old-fashioned smoke screen. Mr. Stevens is very concerned that the Aussie dollar could go to parity, and if really spoke his mind, he would say something like this… “Commodity prices keep rising faster than you can say inflation – which is rising even faster – which means to keep our inflation below our target of 2%, more rate hikes will be on the way.”

So… The Aussie dollar was not able to enjoy the fruits of the rate hike, as Governor Stevens rained on the Aussie dollar’s parade… But… With all I’ve told you this morning on commodities, and Australia, you’re not buying this smoke screen, right?

Canada received some “not so good” news yesterday, as economic growth, as measured by GDP, slowed markedly in the fourth quarter. Canada’s economy grew at a modes 0.8% annual rate in the fourth quarter, while the “experts” were looking for a 1% growth rate. The domestic economy is still strong though… Unfortunately, this is not enough to keep the Bank of Canada, (BOC) and their new Governor Mark Carney, from cutting interest rates at today’s BOC meeting. I think since this is Mr. Carney’s first meeting, that he’ll want to cut rates even more than a Governor would normally want, given that he wants to make a “statement”.

But this should be no surprise to anyone… Canada gets tarred with the same brush as the United States and the U.S. slowdown has affected Canada like no other country. This won’t be the last rate cut you see from the BOC… And Canada, like Australia, will play a game of tug-o-war with the loonie (CAD). On the positive side, we have commodity prices rising… And on the negative side, we have the BOC cutting rates. This won’t allow the loonie to move too much higher… But it should provide a floor, too!

OK… I think I’ll talk a bit about inflation before I head to the Big Finish. Did you know that money supply in the United States is exploding? Guesstimates have February’s money supply jumping to 16.5% versus the 15.5% in January! Can you believe this? No wonder inflation is kicking us in the shins! When will all this stop? Apparently not any time soon, folks… The trend in money supply doesn’t bode well for a slowdown! And… money supply is inflation in its purest form… Uh-Oh! Can you say 1970’s all over again?

Geez Louise, I hope not! Besides the music of that decade (minus disco – sorry Chris!) there wasn’t much that I would take from it… And certainly not Stagflation! I can see us all going around with little buttons on our shirts that say, “WIN”. Remember those? WIN stood for “Whip Inflation Now”. Get ready to dig those old buttons.

Oh… And I’m sorry about the mis-quote in the loonie yesterday… These darn fat fingers!

Currencies today: A$ .9305, kiwi .8015, C$ 1.0135, euro 1.5195, sterling 1.9860, Swiss .9635, ISK 66.15, rand 7.8450, krone 5.1715, SEK 6.1625, forint 173.15, zloty 2.32, koruna 16.38, yen 103, baht 31.60, sing 1.39, HKD 7.7840, INR 40.30, China 7.1050, pesos 10.70, BRL 1.67, dollar index 73.66, Oil $102.20, Silver $20.23, and Gold… $982.09

That’s it for today… Good luck to our little Christine’s youngest son, Eddie, who gets some tubes for his ears today… And Good luck to all those that don’t get up as early as I do, as they find their way into the office today. The sleet was coming down pretty hard when I arrived… This is it for me until next Thursday. Chris has the Con the Pfennig for the next week. Can you believe that I still haven’t heard anything from the doctors about whatever it is they found on my rib? I can only take the road that it isn’t serious or else they would have called me. I began my next phase on the cancer meds yesterday… I had just gotten my taste buds back, too! UGH! Oh well, this stuff isn’t near the nastiness of the stuff my mom, dad, and oldest sister went through, so I’m not complaining… Well, maybe just a little… OK! Sure hope my plane takes off tomorrow for Tampa! Have a Terrific Tuesday!

Chuck Butler
March 4, 2008

The Daily Reckoning