Yellen Tells It Like It Is

Good day…Well, November is here – my least favorite month. The days are gray and ugly, the trees look dead, and the temperatures are raw. And so far this November the weather is playing out to a “T”! There’s more to dislike about November, but I won’t get into that. All I can say is that the only good thing about it is that it precedes December!

OK…now that I’ve gotten that off my chest, we can take a look at the currencies and other stuff. Right out of the starting gates this morning, I see that one of my fave Fed Heads was talking last night. Let’s see what San Francisco Fed Head, Janet Yellen, had to say now. After giving a speech, she told reporters that “countries may decide to channel less of their reserves into dollar assets.” As Aaron Neville once sang, Yellen is “telling like it is.”

I’m not really sure why she felt the need to talk about this, but more power to her! Of course, she’s correct. Even Big Al Greenspan is now talking this point up! Ty Keough handed me some stats yesterday on this subject. (He must have known, Yellen was going to talk about it!) As of October, foreign investors, including foreign central banks, owned almost 43% of all U.S. marketable treasuries, 32.7% of all outstanding U.S. corporate bonds, and just over 16% of all U.S. equities. Oh, and in case you are wondering…these numbers keep going up each month…not down!

The bias overnight in the currencies has been to sell dollars. Not a big move, but both the yen and the euro have gained overnight. The yen received a boost when Bank of Japan (BOJ) Gov. Fukui, said in a speech last night, that he believed Japanese prices were rising and he would act to pre-empt those rising prices. “We will adopt a forward-looking approach, and take action in advance, moderately.” Those are Fukui’s words, and it sounds to me as though he’s signaling to the markets that rates are going higher.

Speaking of rates going higher…on Thursday of this week, the Bank of England’s Monetary Policy Committee (MPC) meets, and as I’ve been saying for a month now, I fully expect the MPC to raise rates 25 BPS. This would bring the official rate in the United Kingdom to 5 percent. This should go along way toward fighting inflation, and keeping the pound sterling underpinned.

I’ve talked about the European Central Bank (ECB) and how they would raise rates in December. If you could go back to this time last year, I said that the ECB would raise rates starting in December, and then quarterly through 2006. Well, that’s played out, and I love it when a plan comes together! But what about 2007? Is the ECB finished with this next rate hike in December? I don’t think so, Tim!

Just like last year, when I was the first to talk about the ECB raising rates…I’ll be the first one on your block to tell you that I believe the ECB has their sights set on raising rates to 4% in 2007. That would put the spotlight on the meetings in February and April. Mark your calendars, and then check back to see if I’ve gotten this one bang on too!

All this rate hike talk has got to start filtering through to the minds of traders and investors. Besides all the fundamental problems in the United States and reasons to not own dollar assets, there are strong fundamental reasons to own foreign assets, or just their currency to make it easier. Sooner or later, love is gonna get ya; and sooner or later, this thought process will enter the minds of traders and investors. Until then, we have an opportunity to get in before the crowds. Think about that one.

Yesterday, Chris Gaffney yelled over that Chicago Fed Head Moskow was talking about how there was a greater risk of high inflation than that of low growth in the United States. My response was “He’s a Fed Head, it’s not like he’s going to talk about slow growth, and admit that he and his fellow Fed Heads have dropped the ball.” Watch out for these Fed Head statements that build up what they are responsible for. In my mind, they’ve done a very poor job of providing price stability in the United States. They waited too long to hike rates two years ago, and then they went after inflation with a wet noodle. And now there’s all this hemming and hawing about whether inflation is whipped or not.

Of course it’s NOT! But because they whipped out their wet noodle to combat inflation, they risk bringing the economy to its knees, which they may have already done with regards to the manufacturing and housing sectors. Keeping rates low and money supply high kept the U.S. consumer spending. But as one of my fave economists (LG) always says…consumption is not a creation of wealth. We’ve not created any wealth with the Fed at the helm. All we’ve done is create profits for Chinese companies, and gone so far into debt, I doubt we’ll ever see the light of day again!

OK…I’m back now, I was gone for a minute, and my evil twin said he would fill in and say some nice things about the Fed…HAHAHAHAHAHAHA!

Down in the South Pacific…The Reserve Bank of New Zealand (RBNZ) may have let me down last week with no rate hike, but I think I can count on the Reserve Bank of Australia to come through with a rate hike this week. With the RBNZ on hold for now, the kiwi will have to hang on to the Aussie dollar’s coat tails through the end of the year. That should be enough to keep a floor under the kiwi, and allow it to move higher as the Aussie dollar moves higher. I still believe the Aussie dollar to be an 80-cent currency. That’s not to say that I guarantee it will get to 80-cents, I just think it should be there!

Just like I believe that the Japanese yen is still the most undervalued currency. But until the markets believe that, I’m just whistling Dixie! Well…OK. I don’t really know how to whistle Dixie, but I think you get the point!

You know, last week, I talked about the new taxation rules that have been proposed for Canadian Royalty Trusts, and how that proposal had caused losses in the loonie. Well, the loonie continues to be resilient. The fundamentals in Canada are still good.

OK… Today is Election Day. Get out there and vote!

Currencies today: A$ .7730, kiwi .6690, C$ .8855, euro 1.2760, sterling 1.9055, Swiss .80, ISK 68.10, rand 7.32, krone 6.4660, SEK 7.17, forint 203.80, zloty 3, koruna 21.93, yen 117.85, baht 36.65, sing 1.56, HKD 7.7850, INR 44.73, China 7.8745, pesos 10.81, dollar index 85.52, Silver $12.64, and Gold… $626.20

That’s it for today… Next week is the New Orleans Investment Conference. I’ll be there along with the Big Boss Frank Trotter. I’m hosting a lunch on Wednesday, with a limited number of seats available. If you are going to be there, and are interested, here’s the skinny:

For more details and to RSVP for the event please call 802-253-4681 ext. 2138

Please RSVP by November thirteenth.

Have a great Tuesday, and Election Day!

Chuck Butler
November 7, 2006

The Daily Reckoning