"Commodity bull runs have lasted 15-20 years...We have got another nine to 17 years to go."

-- Jim Rogers

Issue #189: Wednesday, May 7, 2008

I Heard a Fed Head Say Inflation!"

Today's commentary is by Chuck Butler, President of EverBank World Markets.

Good day...And a Wonderful Wednesday to you!

One small statement from a Fed Head completely wiped out all the healing in the currency markets yesterday.

Imagine if you will that a Fed Head dared say the word "inflation." Well, one actually did. I feel like Tweety Bird here: "I saw a Fed Head mention inflation, I did, I did!"

It was the Fed Head Thomas Hoenig. He threw a cat among the pigeons this morning when he said "inflation pressures may spur a rate rise by the Fed." Hmmm, you have to wonder: Is he serious, or is he just blabbering about currency intervention, because he sees the dollar beginning to lose ground again? Well, that's the question of the day...

Does He Really Mean It?

To me, it's the right thing for a Fed Head to say if he's sincere. But if he's just trying to create some verbal intervention for the dollar, then he should be stripped of his Fed Head title and called the court jester instead!

So, the dollar is back with the hammer in its hand again. The selling has been strong again too. The euro has fallen since I came in to the office about a half hour ago.

Los Angeles Times writer Marty Zimmerman has a blog on the paper's website and he writes about Money. He called yesterday and said that he thought he saw the dollar selling off again and wanted my take on it.

I told him that the markets had probably accepted the Fed's statement last week, which ended up being quite "unsure" and vague. Meanwhile the European Central Bank (ECB) meets this week and will probably keep their rates unchanged, thus giving the euro its strong rate differential to the dollar.

But, then Hoenig came along and threw a cat among the pigeons!

Well, Hoenig's comments were fighting the euro in overnight trading. Then the euro hit another wall this morning, which now has traders selling it like funnel cakes at a State Fair.

Retail Sales in the Eurozone fell 1.6% year on year, which was much larger than the forecast slide of .7%. Sales were off .4% from the previous month. This is the first report that really slams the euro and shows a slowdown happening in the Eurozone.

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Oil Soars Past $122 a Barrel - Where Will It Go Next?

The price of oil again set another new record level, moving to $122.73 yesterday. So, if Hoenig is sincere about his inflation talk, then he should be shaking in his Hugo Boss paten leather shoes today.

But there's more to make him shake and that's all the market chatter surrounding the possibility of oil prices hitting US$200 by the end of the year. Ouch! Our "friends" at OPEC have something to say about this and OPEC's President, Khelil, warned last week that oil prices could touch that level by the end of 2008.

For a while yesterday, it looked as though gold had gotten some wind in its sails, with the wind being oil prices. But that just couldn't last, as the dollar's strength overnight and this morning has gold running for the hills again with a US$5 loss. Should US$200 oil continue to dominate the market's discussions, then I would think gold would get some wind in its sails again too.

The Canadian dollar "loonie" sure likes the look of oil prices. I did a double-take yesterday when I saw the loonie's graph. It had moved stealthily back to near parity of the greenback.

I know I've said over and over again that this dance is going to be a drag. In other words, the loonie would be pushed higher by commodity prices and pulled lower by Bank of Canada rate cuts. But if the idea of US$200 oil continues to dominate, these surging prices could push the loonie past parity once again.

Big News for the Com-Dollars!

There's a note on the Bloomie this morning. Apparently, Greg Gibbs of ABN Amro Holding NV said "the commodity currencies are where the action is."

I've never wavered on that particular concept. For the last five years, certain analysts have been trying to convince everyone that the commodity bull market is over. And meanwhile, I keep telling anyone who will listen that those calls have been wrong for five years now - and I still believe they're wrong.

Famous, well-respected (and a friend of ours) investment analyst Jim Rogers, explained a couple of years ago that in over 200 years commodity bull markets have averaged 17-22 years in length. This commodity bull market has only been going for about seven years now.

I'm a true believer of trends. So, with that in mind, commodity currencies should be where the action is for years to come.

That's it for today...I hope you have a Wonderful Wednesday!

Chuck Butler, President
EverBank World Markets
www.everbank.com

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