FOMC Already Discussing "Options".
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In This Issue.

* Currencies & metals rally Tuesday

* But give way to book squaring today.

* Trichet sounding dovish?

* Gold. not a bubble.

And, Now, Today's Pfennig For Your Thoughts!

FOMC Already Discussing "Options".

Good day. And a Wonderful Wednesday to you! The last two days were spent in a fog, with me sleeping most of the time, only waking up to take pain medicine. But, that's all over now. No, I'm not healed, just not taking the pain stuff that makes me sleepy. I'll give it a go today, and see what happens.

As Chris was telling you (and by the way, Thanks Chris!) the past couple of days. the markets are in a mood to take it out on the dollar. But, not every non-dollar asset has seen the consecutive green lights that brings one to "rally town". For instance, this morning, the euro, is seeing some weakness as economists are marking down their previous forecasts for global growth, which would hurt German exports. Yes, the Chicken Littles are out in force, claiming the sky is falling, the sky is falling, all over the world. So, that brings the worry warts to buy dollars. strange, eh?

But to me, this all will come back to bite the dollar one day. You see, for the past year, I've been giving a presentation about the coming regime change in currencies. Where I talk about all the great things that happens to the country and the currency that is the reserve currency of the world. And then I show how China is taking steps to replace the dollar as the reserve currency of the world. Now, this isn't going to take place tomorrow, or next month or next year. There are baby steps the Chinese need to make they aren't missing a step here folks.

So, to get back to this situation, I think about how the dollar is the reserve currency of the world, and when things get ugly, people flock to it. Well, what will happen if the dollar is no longer the reserve currency of the world? I think we can simply look back to the pound sterling circa 1945-2002, and see how people no longer looked to previous reserve currency of the world, instead choosing dollars. The currency was in a deep, deep funk for all those years, and it wasn't until the dollar began its current Weak Trend, that the pound was allowed to recover.

Alrighty then, back to today. Well, it is Month-end, right? And traditionally, on Month-end, (especially quarter end, but that's for next month) we see traders close their short trades, and even up their book to start again tomorrow. That would mean, in my mind, that we could see some dollar strength today, for the traders' books are filled with dollar shorts.

The Fed's FOMC meeting minutes for August were available for review yesterday afternoon. I found a couple of things interesting in the minutes. First of all, there was a ton of discussion about the tools or arrows, if you will, in their quivers. Then it was suggested that the Committee cold buy additional assets to meet the goal of lowering long-term interest rates. (Read QE. ) and then finally on the back pages of the report you could find a discussion about cutting the interest rate that the Fed pays banks on excess reserve balances. They would do that to encourage banks to lend.

But think about this for a minute folks. Real Unemployment is around 23%, and lending to anyone these days is tricky at best. So, you're a bank. and you have this excess money, you would love to lend it out and have a nice interest rate differential of 3 to 4%, but there's risk. But over here, you can earn about 1%, with no risk. Hmm. I know what I would do, until the economy recovered, and more people had meaningful employment. How about you?

So. the Fed Heads have their work cut out for them, but like I said the other day, they've finally admitted that they don't have a magic wand to wave over the economy. So, they need the help of the boys and girls in Washington D.C. Good luck with that!

I think that the fact that they've already discussed their options, including more QE, means that they truly don't believe the stuff they've been saying about the economy recovering is not on terra firma.

Well.. Chris told you yesterday that the Eurozone inflation rate had printed weaker than expected. And now the markets are taking the position that the European Central Bank (ECB) will discontinue their rate hike cycle. Well, let me say that this is no time to be backing off. The inflation ceiling target is 2%, and inflation printed at 2.4%... The two previous rate hikes have done their work in reducing inflation there, but more is needed. That's my opinion, which doesn't mean a hill of beans to ECB President, Trichet. And the Wall Street Journal is reporting this morning, that Trichet indicated that the central bank is reconsidering its position on inflation, which could lead the bank to stop raising interest rates.

So. that's another thing weighing on the euro this morning. I just have to say one more time, that I truly don't believe the ECB's work with inflation is over.

The data cupboard gave us some revealing data prints yesterday. First, Home prices gauged by the Case-Shiller home-price index printed down -4.5% year over year. Every city in the 20-city survey experienced a year-over-year decline. And second, we had the latest pulse of Consumer Confidence, which plunged in August. The Index which last printed in July at 59.2, and was expected to fall to just 52, fell to 44.5! Talk about a free fall! You know, I'm usually wondering just where they found all the Polly Annas to survey on this. but this time it looks like they found a bunch of Chucks!

Today, we'll get a feel for Friday's BIG Jobs Jamboree, when the ADP Employment Change data is printed for August. We'll also see another regional manufacturing index, this time from Chicago, and it too should show rot on the vine as the other regionals did. And finally, the last piece of data for August, will July Factory Orders.

And then finally, that brings me to Gold. I read yesterday, in between naps, that there are more and more calls from well respected people saying that Gold is in a bubble. Hogwash! I truly don't believe that one iota! These people must be myopic, and don't see what's going on all over the world, with people buying Gold that could never even thing about buying it before! It's not just a U.S. thing. I wish I could show you this chart that I show at presentations (I can't since this is just text) that shows the S&P 500 Bubble, the Gold Bubble in 1980, and the current trend in the price of Gold. It's simply just a steady rise, with no sign of bubbling!

Then there was this. My friend, and author supremo, Bill Bonner, over at the Daily Reckoning ( had this to say yesterday. "If you believe the stock market, the storm is over...all is well...

But US GDP grew at only a 1% rate last quarter. That is a small number. Don't look too carefully or it will disappear altogether. If you deflate the latest 'growth' number by the inflation rate published by the Bureau of Labor Statistics (actual year-to-year CPI-U is 3.6%) you get negative real growth. Recession, in other words.

And then, you have to wonder. Suppose you were to adjust that number for population? US population is growing at something just under a 1% rate. What you would see is that the average American is getting poorer (his share of GDP) at about 3% or 4% per year."

Chuck again.. Thanks Bill!

To recap. yesterday, currencies and metals continued to take down the dollar. But this morning, it looks like we'll see some book squaring for month-end, which is today!, This book squaring would support the dollar today. The data in the U.S. continues to be weak, with both Home Prices and Consumer Confidence falling in yesterday's prints. The latter, was more than a fall. Consumer Confidence plunged in August! The FOMC meeting minutes told us a couple of things, like how the Fed Heads were already discussing their options to stimulate the economy.

Currencies today 8/31/11. American Style: A$ $1.0675, kiwi .8525, C$ $1.0210, euro 1.4435, sterling 1.6290, Swiss $1.2360, . European Style: rand 7.0235, krone 5.3550, SEK 6.3540, forint 188.30, zloty 2.8740, koruna 16.6970, RUB 28.94, yen 76.60, sing 1.2025, HKD 7.7950, INR 46.09, China 6.3775, pesos 12.49, BRL 1.5950, dollar index 73.93, Oil $88.75, 10-year 2.18%, Silver $41.35, and Gold.. $1,831.50

That's it for today. Well. Sunday, I did bring luck to my beloved Cardinals, and what a beautiful day it was too! Baseball the way it should be played. during the day! The Allman Bros song, The Whipping Post, is playing, and I said, "Wow, that's how I feel, like I've been tied to the whipping post"! talk about timing! I'm sure all has been handled here while I was gone, so I don't worry about that stuff. Thanks again to Chris for taking the conn on the Pfennig Monday & Tuesday. I don't worry about that getting done either! Hey. if this place does this fine without me, I guess I'll just retire! HA! Yeah, right, with a son still in High School? I don't think so, they'll just have to deal with me a bit longer! And with that, thanks for reading the Pfennig, and I hope you have a Wonderful Wednesday!

Chuck Butler


EverBank World Markets



Posted 08-31-2011 3:52 PM by Chuck Butler
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