A Pfennig For Your Thoughts

In this issue…

  • Big Al says deficits out of control!
  • Great stuff from Stephen Roach
  • China to revalue? Rumors again…
  • From Russia With Love…

But first a word from our sponsor…


Diversify, seek higher yields, and safely invest in Gold Bullion market returns. You can do it all with the new MarketSafe(SM) Gold Bullion CD from EverBank®.

100% principal protection, market-driven upside potential, no account fees, and FDIC insurance.

Click here to learn more about the new MarketSafe Gold Bullion CD today!

And Now… Today’s Pfennig!

Big Al Gives The Markets A Mess

Good day… Well… I’m back in the saddle again… I have to say right from the get-go this morning, that I have no idea when you might get this, as we are experiencing technical difficulties this morning… And since I’m the only that’s here, or will be here for the next 2 hours, those difficulties are not likely to be corrected any time soon!

Well… This weekend, G-7 met in London, and while they haven’t had any communiqué’ in the last 2 years that would amount to a hill of beans, there was a snippet from Big Al… Yes, Big Al was in attendance at G-7, and all the ministers were slapping him on the back and presenting him with a gold watch to commemorate his years of service… But then Big Al, decided to “come clean” and told the crowd that the exploding U.S. budget deficit and protectionist backlash against trade deficit could disrupt the global economy… Whoa, there partner, has Big Al become a Pfennig Reader? Because that sounded like something torn from the pages of the Pfennig!

He did say something else that should have sent the dollar into a tail spin… But you know what? I don’t think currency traders and speculators got the message… Apparently it has to be spelled out to them with illustrations… No wait, I’m a currency trader, and I got the message, so not all were befuddled by his words…. And those words? Ahhh, grasshopper, you knew I would get to them sooner or later, eh? Greenspan said that it was his belief that U.S. Trade Deficits can be addressed through market forces without any harm to the economy… That’s Greenspeak for…. The dollar should be weaker!

OK… So, as I said above, the message was lost on the masses, and therefore, we’re sitting about where Chris left you on Friday morning… Except, Japanese yen, is getting smoked after a government official said that his office was not worries about the slide in yen, and that they were more than happy to see it! Oh, Geez Louise, why did those words have to come out of their mouths? As, I’ve told you many times in the past, when a county’s Gov’t and Central Bank announce that they don’t mind seeing a weaker currency, it usually doesn’t take the markets long to grant them that wish! And so, it is with yen this morning… It does not make one iota of sense… But the currency is getting smoked…

Did you see the story on Friday, that talked about a German newspaper’s claim to have inside scoop on China? Well… The newspaper said that China was about to announce a renminbi / dollar revaluation to 7.50 from the current 8.08 level…. I sent Chris a note on Friday, and said that this was weird, because if you go back and look at where I’ve told you I believe the renminbi would be next year, just based on the tiny daily appreciations… I said, 7.50…. Of course, I say…. “Bring it on!” Because the Asian currencies need this right here, right now!

I don’t have any market screens this morning, due to our technical difficulties, and therefore I can’t bring you up to the minute reports, which from what I can tell wouldn’t be great shakes any way…. But since this is the situation this morning, I thought I would share some words by Stephen Roach that appeared on Morgan Stanley’s website last Monday… As you know, I hold what Stephen Roach writes about in high regard… So, here you go… Stephen Roach from last Monday’s web site report…
“There is deepening concern over the dollar outlook in the Middle East. Despite this year’s rally following nearly three years of decline, most of the asset allocators I spoke with felt there was more to come on the downside. Like me, their concerns are mainly an outgrowth of America’s massive and ever-widening external imbalance. The Middle East “house view” on the dollar is yet another consideration that probably inhibits petro-dollar recycling of the recent windfall of oil revenues.

Interestingly enough, the lack of petro-dollars also shows up in the US capital inflow data. Based on monthly US Treasury data from the Treasury International Capital System (TICS), OPEC holdings of US Treasuries have fallen from a peak reading of $67.6 billion in February 2005 to $54.6 billion in September 2005. To be sure, these flows are for the broader OPEC grouping, which, in addition to Middle East producers, also includes Venezuela, Nigeria, Libya, Algeria, and Indonesia. Moreover, the flows are just for Treasuries and exclude demand for Agencies and other dollar-denominated assets. But they provide a relatively clean read on the demand for the risk-free portion of capital inflows by oil producers into dollars — a reasonably good indication of trends in petro-dollar flows. And in the midst of a huge run-up in oil prices and oil revenues, these flows went down — not up, as the petro-dollar play of yesteryear would have suggested. Nor do I think this is a coincid ence. The US capital inflow data very much corroborate the intelligence I picked up from the Middle East.”

Hmmm… This is an interesting development isn’t it? I’m going to have to pay special attention to this going forward…

And another thing to watch going forward, was an announcement by Russia on Friday that they were going to change the allocation of their currency reserves. This change would involve reducing dollar holdings, and increasing euro holdings… There’s been no actual allocation change details provided that I could find this weekend, but I’ll keep looking, once the IT people arrive and fix all the difficulties…

Friday’s Jobs Jamboree was pretty much as expected… But the surprise came in what I always tell you people should be looking for… The Average Hourly Earnings rose 3.2% year-on-year… This will keep the Fed’s rate hike plans smack dab in the middle of the burner, and there are inflation pressures that will arise from this gain…

The Reserve Bank of New Zealand (RBNZ) will meet this week, and once again, I expect them to raise interest rates to combat inflation pressures in their economy… These high interest rates in New Zealand are going to keep the demand for the currency high, and the issuance of the Uridashi bonds going strong… That’s all good for kiwi…

Currencies today: A$ .7480, kiwi .7155, C$ .8630, euro 1.1745, sterling 1.7365, Swiss .7610, ISK 64.30, rand 6.36, krone 6.72, forint 214.50, zloty 3.29, koruna 24.66, yen 121, baht 41.37, sing 1.6850, pesos 10.46, and gold…. $509.40

That’s it for today… A nice trip last week to Ft Lauderdale with the International Living folks… Thanks to Chris for filling in, as he does so nicely whenever I’m away, which in 2005, was more than I think Chris bargained for! I expect to be on the road just as often in 2006… Hey! Tomorrow is St. Nick’s Day… That means you need to leave your shoes outside your door tonight! Two weeks, till my winter vacation! Have a great Monday (come to think of it that’s an oxy moron isn’t it? Great Monday), and week!

Chuck Butler
EverBank World Markets