Why Didn't the Fed Tell Us?

Good day… And a Thundering Tremendous Thursday to you! This is it for me until after Christmas, and unlike the other times when I’m away and I send along notes to Chris, this is my vacation, and I will not be checking the markets daily (I hope!) and therefore will be little use to Chris this time!

So… I kept asking the question yesterday… Why didn’t the Fed tell us? OK… I know you’re wondering what I’m harping about now. Here’s the skinny… The Fed, in concert with the Bank of England (BOE), The European Central Bank (ECB), The Swiss National Bank (SNB) and the Bank of Canada (BOC) announced that they would increase liquidity provisions in the markets. This will provide $40 billion of liquidity to a wide range of depository institutions.

So, if this was such a big deal, why didn’t the Fed tell us the day before at their press conference? Instead they let the markets go into a frenzy thinking the central bank had hung them out to dry… I just don’t like this at all! And I doubt when the markets get a closer look under the hood on this, they won’t trust the liquidity provision. Oh, and I realize the Fed wanted to announce this deal while all the markets were open… But come on… Doesn’t this really focus on just the United States?

Once again… The central banks come to the aid of the markets. Is this really their job? And I’m sure that you’ll hear all kinds of kudos to the Fed for organizing this… But I’ll bet you hear most of those kudos coming from people who are too close to the markets to see what this is all creating. Besides the whole “coming to the rescue” thing that I truly dislike… And… Where will all this money come from? I can hear Big Ben yelling to the boys in the back room now… “Hey, Jonesey, fire up the printing press, we’ve got some markets to restore.”

In addition… It’s just not clear to me whether these initiatives will be enough to shore up investor sentiment.

And when the markets feel like nothing can hurt them… Risk is thrown out the door, and the carry trade lives… It lives I tell you! It’s Alive!

OK… So the trade deficit in the United States for October rose higher than expected to 57.8 billion from $56.5 billion. Imports outpaced exports even with the dollar in the dumps during October! Makes you wonder what the future reports will look like given the dollar’s mini-rally in November.

Canada on the other hand saw a larger than expected rise in their trade SURPLUS in October. Canada’s trade surplus widened to $3.3 billion after posted a $2.3 billion previously. This should be enough to keep the loonie (CAD) hanging around this town on the corner. And hanging around parity to the dollar for some time to come. Remember… $100 oil, and $850 gold is needed for the loonie to push past this trading range. Or, at least that’s how I see it.

Down Under… Australia posted another strong labor report in November adding 52.6K jobs, marking the longest run of jobs growth in more than 27 years! While this is good news for the people looking for jobs, and the economy… It’s bad news for future wage inflation pressures. There are actually job shortages in Australia, which gives the present workers the hammer when it comes to wage negotiations. I’m sure the Reserve Bank is watching this carefully, and looking for the right time to raise rates again to combat these inflationary pressures.

And that should help underpin the Aussie dollar (AUD)… Which has not seen any good times lately… Good times, bad times, you know I’ve done my share… When my women left town with a brown-eyed man and I still don’t seem to care… (That’s in honor of the reunion concert by Led Zeppelin).

While we’re over in the Pacific… I just had to laugh out loud when I saw this headline… Are you ready for this? “China Says Weak Dollar Is a Bigger Concern Than Renminbi”. LOL! Now the dollar has China dissin’ it in the news! Bad enough Giselle did it… It was bad enough when Jay Z did it… Then it was salt in the wound when Indian clerks at the Taj Mahal did it… Now, China disses the dollar!

I find this so funny! Here’s the big old United States pointing their finger at China and blaming them for all the ails in the U.S., and China says… You had better get your own house in order before you come over here telling us how to get ours in order for you!

Gold has been a beneficiary of the concerted effort by central banks to shore up liquidity… And why is that, I hear you asking? Ahhh grasshopper… As I said above, the printing press will be working overtime, and money supply is in its true form… Inflation! What goes up when inflation goes up? The price of gold!

The markets are picking up on what I’ve been harping about since the Fed first cut rates back in September… And that is the Fed losing their focus on inflation. The way it looks to me now is that inflation is becoming a secondary concern for the Fed… And that scares me. Could inflation be the next bubble the Fed creates? I think so, folks… I think so.

In U.S. News & World Report I read an article titled: “5 Lessons Consumers Learned (Again) in 2007” The article talks about things that have hit us hard this year – the housing meltdown, pricey gas, and so on. And what to my wondering eyes did appear? But a story on the plunging dollar, I gave a cheer! I thought for a minute and then said to myself, “This is exactly what I’ve been telling people for so long now” So… Here’s a portion of the article that talks about the plunging dollar.

“A strong country has a strong currency, according to conventional wisdom. So shouldn’t America’s leaders pull the levers to keep the dollar strong? Well, maybe… Except that the value of the dollar is linked like the blocks of Rubik’s Cube to numerous other complex factors in the global economy, such as the U.S. Trade Deficit, foreign investment in the U.S., and the maneuverings of currency speculators. The Fed could fiddle with interest rates to strengthen the dollar, but that could have other negative effects, like crimping credit at a time when it’s already drying. The only real [choice] is to endure the vagaries of the currency fluctuations and be glad that U.S. exports, at least, are booming.

“The Relearned lesson: What happens in other countries matters, a lot. Strong Chinese investment in the U.S., for example, helps keep mortgage rates down. It pays to understand foreign economies.”

Well said… U.S. News & World Report!

Speaking of China… U.S. Treasury Secretary Paulson is in China once again to see if he can persuade the Chinese to allow a relaxation of their currency controls. He’s also there to see what he can do about Chinese product safety. Paulson had this to say, “China isn’t ready to have a market determined currency yet, but they need to move in that direction and they’re going to continue to hear about it until they get a market determined currency.”

Ahem… Secretary Paulson… You were a little hard on the Beaver there weren’t you? Have you not been paying attention to the Chinese response every time you blast them? In case you haven’t paid attention, here’s a little of what they have to say to you… “Moves against China before the World Trade Organization threaten economic ties”. In other words… The Chinese are saying, “Don’t play with me, cause you play with fire”.

OK… The data cupboard yields a couple of reports for us today… Wholesale inflation (PPI), retail sales, business inventories, and the weekly initial jobless claims. Of these, the media will latch onto retail sales; it’s the best “feel good” report of the day… And as I said yesterday, retail sales should have pushed higher in November… Does this mean the economy is over the hump?

No! It simply means that the first “official” shopping day for the Christmas season was in November! And… The Butler Household Index (BHI) tells me retail sales will be stronger than the recent trend. So… If that’s what prints… The dollar should receive some love… But not too much, because it’s been a bad child!

I had better put an end to this today, and get to work…

Oh… This just came across the screens… The German think tank, IFO, has downgraded Germany’s economic growth forecast… Hmmm… Seems like a lay-up to me, I doubt a “think tank” was needed to see this! But the news has taken the euro (EUR) back a step or two from when I first turned the screens on this morning.

Currencies today: A$ .8810, kiwi .7845, C$ .9890, euro 1.4690, sterling 2.0425, Swiss .88, ISK 60.80, rand 6.75, krone 5.4025, SEK 6.4275, forint 171.83, zloty 2.4420, koruna 17.89, yen 111.80, baht 30.17, sing 1.4495, HKD 7.7960, INR 39.38, China 7.3690, pesos 10.8450, BRL 1.7830, dollar index 76.20, Oil $93.96, Silver $14.76, and Gold… $814.10

That’s it for today… My last work day before vacation! My first day of vacation is a special treat. For many years now, a group of my good friends get together and go Christmas “shopping”… We hire a driver, and the whole works… Did you see the article in the Los Angeles Times yesterday about interest rates? The Big Boss, Frank Trotter, who just back from a world tour of Australia, was quoted. Nice to have the Big Guy back! Of course he’s traveling, and I won’t see him before I leave, so it will have been a month in between sightings of Frank and Chuck in the same room!

I ended the December issue of the Review & Focus with a personal note, and I will do the same here, as this will be my last opportunity to say Merry Christmas… Here’s the R&F:

An End To 2007

As many of you know, 2007 on a personal front has been a very difficult year for me, as I was told those three dreaded words by doctors in June… You have Cancer.

I’ve fought hard to defeat this awful disease, and with a positive attitude, and the thoughts and prayers of thousands of readers, I’ve gotten stronger every day, and at this point the future looks bright. I’m not foolish, I do realize that the wolf is always at the door. But, I have even more reason to fight, as I am now a grandfather of a precious little girl.

So I say goodbye to 2007, with ease. The year has been good to non-dollar investors in currencies and metals.

I wish everyone a joyous holiday season. Myself, I celebrate Christmas, so I tell everyone Merry Christmas in hopes that it doesn’t offend anyone that doesn’t celebrate Christmas!

May the light of faith, the warmth of heart, and the love of family be your gifts this year.

You’re enjoying the holiday season even more this year, friend.

Chuck Butler
December 13, 2007

The Daily Reckoning