Brazil Throws The Cat Among The Pigeons!
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In This Issue..

* Real leads Commodity Currencies to the woodshed!                     
* Niall Ferguson speaks his mind...                          
* BOC leaves rates and statement unchanged...                                     
* Bollard gives the green light!                                                                                    

And Now... Today's Pfennig!

Brazil Throws The Cat Among The Pigeons!                              

Good day... And a Wonderful Wednesday to you! How many people out there know about "network neutrality"? Well, if you don't know, you're about to find out tomorrow, when it will be decided upon... I'm not going to get into it, because after you find out what it is you'll know why I didn't explain... All I'll say is that this is just another thing that's flying below the radar that's about to be thrown in our laps...

OK... Well... Yesterday, after signing off and hitting the "send button" for the Pfennig, I saw a story that shot across the desk, and then a follow up was sent to me by Don Ries later in the morning. The story was about the Brazilian Gov't imposing a 2% tax on capital inflows... This was done in an attempt to slow down the Brazilian economy by slowing down the "hot money" that's going into the Brazilian stock market by foreigners... Talk about throwing a cat among the pigeons!

This news was like a shot to the heart and you're to blame, for the Brazilian real... Talk about pulling the rug from underneath the real! The loss for the real was 3.5% for the day! WOW! We had a reader call and accuse me of not writing about this story in yesterday's Pfennig, because I didn't want to water down the BRIC MarketSafe CD sales... WHAT? First of all, I didn't know about it until after I sent the Pfennig out... And second of all, What's a tax today that may not even be in place 6 months from now, have to do with the real's value in 3 years from now? Besides, this is good news for those that are buying the real now, for they get to buy it 3.5% cheaper! I shake my head and repeat... HOGWASH! Accusing me of hiding something!

Any way... My colleague on the Currency Capitalist newsletter, Ashish Advani, had this to say about the tax announcement in Brazil...

"Frankly, I think this move to restrict capital flows is a pointless exercise at best. It's simply a waste of time to think that they can control the strengthening Brazilian real."

OK, back to me... In addition, to Ashish's thoughts... I tend to think there's something up Bullwinkle's sleeve here... Recall that about a week ago or so, I told you that Brazil's Central Banker had mentioned the need to raise interest rates 200 Basis Points (or 2%)... So... The Gov't sees the real responding to that comment, and thinks, "Oh my God, we've got a big problem when rates really do go up 2%, for this real will skyrocket! What's a Gov't to do? Ahhh, we'll impose a tax to offset the rate hikes, thus currency neutrality"...

So... I still like the real, but this really points out what I've been trying to say for some time now... These Emerging Markets currencies are Big Swingers, when they're going good, they're really good, but when things go awry, they really go bad, fast! But, that's their game, as long as you know it, no biggie!

But like Ashish said, I see this as a short-term adjustment for the real...

OK... So, that news yesterday sent not only the real to the woodshed, but sent the Aussie, kiwi, Norwegian krone, and Canadian dollar to join the real in the woodshed! The Big Dog, euro lost about 1/2-cent, but was able to avoid the trip to the woodshed.

I also received an email yesterday from a reader that really ticked me off... And I get ticked off every time someone accuses me of this! The reader said that I was accusing the current administration with the "total deficit"... I AM NOT! I HAVE NOT! I USED TO SHOOT ARROWS AT THE PREVIOUS ADMINISTRATION FOR THEIR DEFICIT SPENDING!  I CAN NOT BELIEVE I HAVE TO KEEP EXPLAINING THESE THINGS! Look... Do the research and then point a finger at me! The research in this case would show that for over 9 years, I've harped and harped about deficit spending! Remember when the U.S. Current Account Deficit reached 4.5% of GDP in 2001, and I blasted the Gov't for doing that? Of forget about it Chuck, this is akin to talking to one of your kids... One of these days when they're adults they will talk about how smart you became in your late years!

Whew! I was really pounding on the keys there... My fingers need a rest! But as long as we're on the subject of Deficit Spending, (that's been going on for more than 8 years!!!!) Ty Keough sent me this:

The U.S. is an empire in decline, according to Niall Ferguson, Harvard professor and author of The Ascent of Money.

"People have predicted the end of America in the past and been wrong," Ferguson concedes. "But let's face it: If you're trying to borrow $9 trillion to save your financial system...and already half your public debt held by foreigners, it's not really the conduct of rising empires, is it?"

Given its massive deficits and overseas military adventures, America today is similar to the Spanish Empire in the 17th century and Britain's in the 20th, he says. "Excessive debt is usually a predictor of subsequent trouble."

OK... Here's some more Niall Ferguson... Ferguson dismisses the dollar loyalists, citing the British pound -the last international reserve currency - as his example. "These things don't last forever" but don't expect it to happen overnight. "It's a long multi-decade process," he states. Even with the dollar near a 14-month low against the Euro, he claims it's not without historical precedence for the greenback to lose "another 20%" this year.

For international investors the loss is enough to offset this year's stock market gains. Not exactly great motivation for foreigners to keep buying the almighty dollar."

Sounds like Mr. Ferguson has been a loyal reader of the Pfennig for the past 17 years!

Fed Head, Janet Yellen gave a speech yesterday, which her comments are usually good for a few quotes... And this was no exception... Fed Head Yellen said,  "IT IS TO BE EXPECTED THAT INTEREST RATE DIFFERENTIALS WILL DRIVE CAPITAL FLOWS  and that: U.S. STRUCTURAL BUDGET DEFICITS A SERIOUS PROBLEM, WILL  REQUIRE PAINFUL DECISIONS"

Well now, that's two subject that I've talked quite a bit about lately now isn't it? Interest rate differentials, and the Budget Deficit problem... And some people wonder why I say that currency and precious metals diversification is a must? Really? When your own Fed Head thinks that these things will be problems, doesn't that spell it out for you? I thought so...

Not that I'm waving the flag for the Russian ruble here folks, but I think it's important to note that I've said all along that Russia is an "oil play" and nothing more... And that the currency has rallied in step with the rise in oil prices recently... And the ruble's biggest move VS the dollar came overnight after Oil briefly touched $80 yesterday!

A few people asked me yesterday why I didn't include the Swiss franc when I was talking about Aussie and loonies going to parity against the dollar... Well, for one, I wasn't talking about that, I simply gave you a quote from Citigroup's research team. But since you asked... The franc is only 1-cent away from parity, so in my mind it's already there! I just keep thinking about the Swiss National Bank's (SNB) warning to the markets about franc strength...

But hey! What could the little old SNB do to stop the franc from going to parity against the dollar?

Well... I was wrong... There I said it! (My beautiful bride says that I never admit when I'm wrong, and I say I do, it just doesn't happen very often! HA!) I said that I thought the Bank of Canada (BOC) would lift their previous statement that their near zero interest rates would remain in place until the 2nd half of 2010... The BOC did NOT lift that statement... In fact, the BOC hung the loonie out on a line to be beaten until dry! The BOC whined about the strong loonie as working against economic growth...

So... I think the BOC did what they set out to do, and that was to: 1. stop the talk about a rate hike before their stated timeline, and 2. stem the loonie's rise... The loonie dropped about 2% on the day...

But, like most things... The pain of the BOC statement will be forgotten about in a few weeks, and I suspect the loonie to be back on the road to parity against the dollar...

And then there was this... Long time readers know my dislike of the Reserve Bank of New Zealand's (RBNZ) Gov. Bollard, due to his penchant for dissing the currency, kiwi... Well, in a turn of direction... Gov. Bollard said in a speech last night that "there is little the Bank can do to bring down the value of NZD, and that the high value of NZD is not necessarily an impediment to raising the official cash rate in order to quell rising house prices."

That's Central Bank parlance for: "I'm giving you the green light to push kiwi higher"...

U.S. Housing Starts were disappointing in yesterday's print from September, where a .5% gain was very much less than expected...

PPI (wholesale inflation) declined 0.6% in September... Which is a very strange number don't you think?

To recap... Do you know what Network Neutrality is? You had better find out! Brazil imposed a 2% tax on capital inflows to an attempt to slow the economy and the real's rise. The real reacted with a 3.5% drop VS the dollar. The other Commodity Currencies followed the real down VS the dollar. The Bank of Canada also tried to stop the loonie's rise, and the RBNZ's Gov. Bollard give the green light to kiwi appreciation!

Currencies today 10/21/09: A$ .9220, kiwi .7530, C$ .9475, euro 1.4930, sterling 1.6570, Swiss .9890, rand 7.3930, krone 5.5750, SEK 6.8990, forint 177.50, zloty 2.7960, koruna 17.33, RUB 29.17, yen 90.80, sing 1.3950, HKD 7.75, INR 46.48, China 6.8275, pesos 13.02, BRL 1.76, dollar index 75.46, Oil $78.30, 10-year 3.36%, Silver $17.40, and Gold... $1,052.70

That's it for today... I hope everyone is staying healthy, and away from the flu these days... Good luck to the best baseball player today, and best Cardinal since Stan Musial, Albert Pujols will undergo surgery on his right elbow today. Had a visit from one of my all-time fave people yesterday... Ellie Williams came by! Ellie has authored a few books over the years, and in one, that she wrote about 8 years ago, she even mentions me and the Pfennig! Ellie is a fellow cancer survivor, so we always have plenty to talk about! The Big Boss, Frank Trotter, was limping around the office yesterday, having suffered an ankle injury playing soccer (why, I have no idea!) I told him we could go to the orthopedist together, as my knee has never responded to the steroids that were injected into it. Looks like a scope is in my future! And with that... I'll get this out the door! I have an eye appt. this morning, so I need to get working! I sure hope your Wednesday is Wonderful!

Chuck Butler
EverBank World Markets

Posted 10-21-2009 9:26 AM by Chuck Butler