Fed Raises Discount Rate!
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In This Issue..

* Rate hike sends currencies to the woodshed...

* Gold recovers then sells off!

* The tale of two Americas...

* Weekly Jobless Claims jump!

And Now... Today's Pfennig!

Fed Raises Discount Rate!

Good day... And a Happy Friday to one and all! A Fantastico Friday, if... You were looking for the Fed to raise the Discount Rate yesterday afternoon! If you weren't... Like me... Well then, we're going to have to work at making this a Fantastico Friday!

So... Front and Center this morning... I'm sure you all heard that the Fed, in a surprise move, raised their discount rate 1/4 point to .75%... This really put the currency guys in a tizzy, and they began to earnestly buy dollars the rest of the day... They went at it hard, and didn't stop until the euro was sitting around 1.3475...

Now, I hear some of you saying, What's this Discount Rate, Chuck? Well... It's not the Fed Funds Rate that everyone watches... It's the rate that the Fed charges to banks for short term loans... It used to be a sin, to have to go to the "discount window" and borrow from the Fed... But these days, it's like a walk in the park, nobody watches, and nobody cares!

But, getting back to this discount rate hike... It seems the Fed is attempting to wean the banks and depository institutions away from just going to the discount window and borrowing! Hmmm, I guess the Fed Heads are attempting to "normalize things"... I have to wonder if the economy is ready for such an operation like this...

Of course, if they aren't what's to lose? I mean, the Fed can just come right back, and cut the rates again, pump more money in the system, and or bail them out!

So... I'm not big on this Discount Rate thing... But the markets sure seem to be "turned on" by it! I was going home from work yesterday, when the announcement was made... I immediately thought to myself... Self, Is this just a symbolic move by the Fed to hold the wolves at the door, or.... Is this an warning shot from the Fed, that higher rates are on the way, even when they told us just last month that wasn't the case?

I guess, we'll have to wait-n-see, eh? Until their hand is revealed to us, we'll have to hunker down again, for the dollar is back on the rampage... But the Fed Heads did say that, "The modifications are not expected to lead to tighter financial conditions for households and businesses and do not signal any change in the outlook for the economy or for monetary policy."

This reaction is totally overblown in my opinion... Totally! I take Fed Head Bullard's comments to heart here when he said something about how the market's belief that this indicates higher "real" rates is wrong... In fact, he said, "current policy stance more likely to extend into next year" and that a "fed funds rate increase may be delayed until 2011."

So... Does that sound like "real" higher rates are on the way any time soon? No... It sure doesn't to me!

But that doesn't change the fact that the markets did get all lathered up about this Discount Rate hike... And the currencies, commodities, and the foreign stocks all got hammered. I see where the U.S. futures are down 9 right now, so it doesn't look like it will be a good opening for stocks here in the U.S. today. OK... I'm trying, but finding something to make this a Fantastico Friday is getting a little difficult!

I was talking with a trader friend of mine yesterday, and she was talking about the euro having a tough row to hoe this year... And I said... OK, I'll give you that, but what about the following years? And she immediately mentioned that her firm is looking for a nice recovery for the euro in 2011... Well, that plays into the theme I put down for you all previously... And that is... 2010 could very well be a 2005, or an end of 2008 period of dollar strength and euro weakness... But, that in the end, cheaper dollars is the only thing the U.S. has at its disposal (what? Are they going to stop deficit spending? Or Raise taxes so much to make up the difference?) and eventually the dollar comes back home to roost on that thought!

The currencies weren't the only thing to get sent to the woodshed yesterday... U.S. Treasuries and other bonds got whacked! The 10-year lost 5 BPS to 3.79% after the Discount Rate hike... I know that might not sound like a lot... But the value of a Basis Point (BPS) is quite significant to holders of very large quantities of Treasuries...

Remember when I told you that the Treasury market was the next bubble to pop? I know it sounded far-fetched when I said it, but, given the news I told you last week about the problems with the latest auction... And now this Fed move... Yields should continue to go higher... And as I've told you before, when yields go higher, the price of the bond goes lower.. Good luck to those "safe haven" Treasury buyers recently...

I was really ticked off on Wednesday when I saw this news, and yes, I totally forgot to tell you about it yesterday... Shame on me! But... Did you hear that George Soro's fund, The Soros Fund Management added to the 2.5 million shares of the GLD in recent months... Now that would be a cool story to tell about Gold if, we hadn't stored this tid-bit in our memory banks from a couple of weeks ago, when Soros was quoted as saying, "Gold was the ultimate Bubble"... Was he just trying to get you to sell so he could buy? Don't know if it was, but it sure looks that way... And... When something looks like a duck, quacks like a duck, and so on...

OK... The PPI (wholesale inflation) number was atrocious yesterday. PPI increased 1.4% in January... That would be near 17% for the year if it was annualized! YIKES! The thing that really got my dander up was the TV media guys and girls, saying this increase was merely a one-month temporary blip... WHAT? Look... Oil was about $70 in January... It's $79 now... One month blip? I don't think so!

I have a reader that bangs on me all the time about there's not such thing as inflation, and that deflation is king... I wonder if I'll hear from him today?

Yesterday, I began doing some research on what I've been hearing lately about the only place people can find jobs these days... The Government... Here's what I found... You might think that this has nothing to do with currencies... Well... It does! You see, our Gov't continues to deficit spend... And this is one of the things they spend money on... Building Big Gov't!

The tale of two Americas...

Total nonfarm employment is down 4.6% since January 2007, reflecting a decline of 6.27 million jobs.

Private-sector employment has fallen 5.8% and lost 6.625 million jobs.

Total government employment climbed 1.6% over the past three years and added 355k jobs.

The Average salary of the Private sector is $40,000

The Average Salary of the Public Sector is $72,000

The Private sector America has been devastated...

The Public sector America has flourished...

Is this what we, as a country really want? A Government so big, that it pushes down the private sector? That one day, everyone is a Government worker? I don't think so, but then, we have to ask the question as to why this is happening... So... U.S. Government... Why is this happening?

My friend, David Galland, wrote in his most excellent newsletter on Wednesday that: "One of the best terms I've read to describe what's going on in these two Americas is "Detroitification." Coined by Jack McHugh, "Detroitification" is defined as the hollowing out of the private economy to prop up unsustainable government establishments."

I ask again... Is this what we, as a country really want?

The data cupboard has just the stupid CPI (consumer inflation) data today... I was just talking to a guy and explaining that I really don't understand why they even take the time to print this data any more, given all the hedonic adjustments that have been made to the data over the years... Again, let me say for those that are new to class... Inflation is what you experience... It has nothing to do with what the Gov't says it is... It's you knowing that you pay more for medications, insurance, books, tuition, and bubble gum that's the real inflation!

And yesterday, we saw the Weekly Initial Jobless Claims jump higher to 473,000 from 442,000 the previous week... I told you yesterday that this number could be a little jiggy from the previous week's snow storms... But... In the case of the jobless claims rising... That's a different story... And one that should have taken the markets' attention... Apparently it didn't!

To recap... The Fed raised the Discount Rate by 1/4 point yesterday to .75%... This is NOT the Fed Funds rate, but the markets took it as such, and currencies, and commodities got whacked! This seems to be overblown a bit, but for now, we have the carnage of the currencies that got whacked by the dollar after the Fed's move yesterday.

Currencies today 2/19/10: American Style: A$ .8925, kiwi .6960, C$ .95, euro 1.3510, sterling 1.54, Swiss .9220, European Style: rand 7.7110, krone 5.9920, SEK 7.2765, forint 201, RUB 30.08, yen 91.80, sing 1.4150, HKD 7.7675, INR 46.30, China 6.8326, pesos 12.86, BRL 1.8155, dollar index 81.10, Oil $78.12, 10-year 3.79%, Silver $16.05, and Gold... $1,111.60

That's it for today... I've got a guest with me this morning, so this will be shorter than usual... Did you watch the Olympics last night? More of that women's downhill... That stuff puts me on the edge of my seat, for the safety... I spent some time with my oldest son, Andrew, last night, for the first time in a month... I said to him, "hey stranger!" Spring Training got rolling with players in uniform and the whole shootin' match yesterday... That means there's now less than 20 days before I head to Spring Training! YAHOO! Wrestling season comes to an end next week for Alex, and he's not playing baseball this year, so it will switch to swimming... It's one thing or another... But it keeps us going, eh? OK... Time to get this out the door, I think the day is becoming Fantastico... What do you think? Have a great weekend!

Chuck Butler


EverBank World Markets



Posted 02-19-2010 10:36 AM by Chuck Butler