Good day… And a Thundering Thursday to you! Well… The markets are still “hooked” and flailing about in the water over the Big Ben comments Tuesday, which were then followed up on Wednesday. What did he say this time? We’ll get to that in a minute.

But, first… Front and center this morning, we need to talk about the dollar strength that is prevalent in the currency markets right now. This all started a couple of weeks ago after the euro (EUR) hit 1.60. OK, too far too fast, right? And after an initial weakening to 1.54, the single unit recovered and all was right on the night again as it approached 1.58. Then the Big Ben Bomb…

The euro is the Big Dog of currencies, so you can use it as a proxy for the rest of the currencies. Sure, there are times that other currencies outperform the euro, but they didn’t do it alone. It takes the size and offset to the dollar capabilities of the euro to get the ball rolling. I talk to a lot of people that still don’t believe the euro is a viable currency. Well, it is. It’s here to stay… No matter what the pundits will tell you about Italy and Spain. As I’ve aid at least a dozen times, Italy and Spain should be thanking their lucky stars every night that they were asked to join the euro!

OK… So, dollar buying is on the agenda these days. Let’s just go with that, and then talk about how that might continue. Well… More jawboning by the Fed would help… So would Fed rate hikes… But come on, do you really believe the Fed is going to raise rates now, or in the near future with the economy teetering on the edge of a deep dark recession? Not a snowball’s chance in you know where! So, that leaves us with jawboning, because the economy isn’t going to be a reason for people to buy dollars… And the jawboning is where we circle back to Big Ben.

Yesterday, Big Ben was talking about inflation, and how it was too high… Oh my gosh! Isn’t this what I’ve been screaming at the walls about? Anyway, folks… That’s jawboning the dollar higher, because the markets read any talk about high inflation as a wink and nod that interest rates are going higher. Well, that may be the case in countries that have central banks that really care about fighting inflation… But that’s not the case here! This central bank has no intention on fighting inflation. They look at inflation and thank their lucky stars that it’s not deflation! Big Ben is just jawboning.

And in my opinion, and that of one of my fave economics professors, Big Ben is doing all this jawboning in an attempt to lower oil prices. He has nothing else to work with here to accomplish lower oil prices, so let’s jawbone the dollar!

It’s working, Ben… The dollar is stronger, and oil prices are weaker. But, there’s a fly in the ointment here, Big Ben. Oil prices may be weaker, but gas prices aren’t budging! That’s right; gas prices aren’t budging. Uh-Oh… You forgot about that part didn’t you, Big Ben?

So… I have to follow up on the rant I gave yesterday regarding Big Ben, at this point. So again, if you don’t want anything to do with my soapbox antics, just skip ahead to the section marked “***”.

OK… After my rant yesterday, I came to a couple of conclusions (with the help of readers!) First of all… Tell me, dear reader, wasn’t Big Ben the guy who talked about the Fed having a printing press to print as many dollars as needed to avoid deflation? And wasn’t he the one that talked about throwing those printed dollars out of a helicopter? (Thus his nickname: Helicopter Ben) Now, I know that my college economics classes are not nearly on par with those at Princeton, but come on, you mean to tell me he didn’t think that printing all those dollars was going to cause inflation? I learned that in Econ 101! At Meramec Community College!

And then there’s this, and I’ll leave it alone (I promise!)… With the markets believing that his comment means the Fed will intervene in the currency markets, I think this leaves him exposed. What if the markets decide to test Big Ben’s will, and he doesn’t have the arrows in his quiver to back up the threat of intervention? Uh-Oh! And I don’t believe he has a “war chest” to defend the dollar, like the Bank of Japan has to defend the yen… Or sell it, like they did in 2003.

***

Unfortunately… Right now, all the momentum – along with the investors jumping off the bandwagon of the weak dollar trend – has the dollar in favor. Look… If the dollar had the fundamentals to back this up, I would be telling you so… But it doesn’t!

And the economy isn’t going to shine for the dollar either! Look… The economy has survived the past few years on consumer spending… But where is the consumer going to get money to spend now? The dotcom busted… The House ATM busted… The housing market busted… And now credit cards are maxed-out.

The Big Boss, Frank Trotter, and I were talking yesterday, trying to come up with something that would keep the consumer spending. We’ve gone through all that above… We’ve put two people to work in households… We’ve maxed-out hours worked… The gains from the technology phenomenon have hit the ceiling… It’s been a tough row to hoe folks… But you would think that it’s all seashells and balloons! And that’s exactly what the government wants you to think. Everything is beautiful in its own way, like a starry summer night, or a snow covered winter’s day.

Two recent surveys tell a lot about the U.S. consumer. One says that 9 out of 10 Americans are making lifestyle changes to cope with rising energy costs… And 4 out of 10 Americans are considering moving closer to their place of work.

Oh, United Airlines is cutting up to 1,600 jobs and cutting flights… But don’t look for those 1,600 job losses to show up in the Bureau of Labor Statistics Jobs Jamboree. They’ll just create some ghost jobs and everything will be beautiful, in its own way.

OK… The Bank of England (BOE) and European Central Bank (ECB) are meeting as I pound away at the keys. I don’t expect a move from either of these two central banks, but what I am looking for is some strong Hawkish statements from ECB President, Trichet… Let’s see if he can jawbone the euro back up.

The Reserve Bank of New Zealand (RBNZ) met last night, and left rates unchanged. Unfortunately for kiwi (NZD), RBNZ Governor Bollard had some damaging words in the press conference afterward. Bollard mentioned that the RBNZ would entertain a rate cut this year. That news hit kiwi hard, and before anyone had a chance to bail, kiwi was off 1%, and not looking very good.

What’s more, that result gave a majority to the center-right government of Silvio Berlusconi. Berlusconi, a media billionaire, is pro-U.S. and strongly pro-capitalist. While the forces preventing free-market reform in Italy are extremely strong, he should at least be able to make some improvement in Italy’s economic position, with consequent benefit to the local stock market. While sensible investors have in the past avoided Italy, with Berlusconi in office, it might be worth taking another look.

There’s no doubt that Italy has some weaknesses. By European standards, it is fairly corrupt, ranking 41st on Transparency International’s Corruption Perceptions Index, below the other major European countries (but above such investor magnets as China and India).

Italy has a budget deficit of 3% of Gross Domestic Product, with too much government spending at 50% of GDP, and far too much government debt at 105% of GDP. The country had relatively slow economic growth of 1.9% in 2007.

The home to Rome also has a declining population – not in itself a problem, but since its social security system is generous it creates difficulties in funding Italy’s pension system. It has suffered badly in the past few years from expensive government and expensive labor costs, particularly as it is a member of the euro, which has almost doubled in value against the dollar since 2002.

All this would make you think Italy was a basket case, except for one fact: it has enjoyed very considerable economic growth in the decades after World War II and again in the 1990s. It’s a wealthy country, nearly as wealthy as Britain, France and Germany. And it is famous for high-end design in the clothing and home furnishings industries. Some of Italy’s medium-sized family-owned companies are the best run in the world.

From time to time, investment in the right Italian companies has made international investors a lot of money. With expectations low – the Milan 30 index trades only 30% above its level of five years ago, and on a price-earnings ratio of a mere 11 – and with Berlusconi likely improve the outlook for Italian business, this may well be such a time.

There are only a few Italian companies with full American Depositary Receipt (ADR) listings in the United States – most of firms choose to concentrate on the London market for their foreign capital – but at least a couple of these would appear very interesting investments.

A list of the companies easily investable by US individual investors is as follows:

ENI SPA (E): This firm is Italy’s entry in the Big Oil stakes. Because of Italy’s neutral foreign policy posture, it has the advantage of being able to operate in countries like Kazakhstan, Libya and Venezuela where U.S. companies often have difficulty. On a price-earnings ratio of only 8.4% and with a yield of 5.6%, it currently offers excellent value. Strong buy.

Gentium SPA (GENT): A small loss-making drug company, which has lost investors 67% of their money in the last year. Better pass.

Luxottica Group SPA (LUX): A manufacturer of sunglasses with worldwide operations, Luxottica is a quintessential way to buy into Italy’s superlative design skills. On 14.7 times historic earnings, 13.1 times prospective earnings and with a dividend yield of 2.7%, the firm is also reasonably priced. The only caveat would be that a worldwide recession could badly hit sales of even lower-priced luxury goods. Still, we think it’s a buy.

Natuzzi SPA (NTZ): A medium-sized leather furniture manufacturer, Natuzzi is currently booking losses and pays no dividend, so maybe not.

Telecom Italia SPA (TI): Italy’s main fixed line and mobile integrated telephone company, with a P/E ratio of 11.3 and a historic dividend yield of 10%. However, as those ratings would suggest, earnings dropped 19% last year on price cuts and heavy competition and the dividend is now uncovered. There is also talk of a merger with Spain’s Telefonica. Speculative.

iShares MSCI Italy Index (EWI): And finally, you can buy the Italian market as a whole through this exchange-traded fund (ETF), which has a reasonable market capitalization of $340 million, a price-earnings ratio of 11 and a juicy yield of 5.04%. If you’re excited by the possibility of economic improvement that the Berlusconi election victory offers, that is an attractive alternative. Buy.

Good day… Well… Front and center this morning, I have to tell you that Eurozone inflation came in higher than expected (more in a minute), and that news has the euro (EUR) pounding the dollar into submission.

OK… Not my usual start, but I had to get that out, front and center this morning! So… A Wonderful Wednesday to you! It’s a Wonderful Wednesday for euro holders for sure! The single unit has reached an all-time high versus the dollar this morning. I’ve seen a bit of profit taking since I turned on the screens, but so far it has been muted at best.

So… Yesterday, we saw the currencies led by the Big Dog, euro, drift with a bias to sell them. I read an article in Forbes called “Demise of the euro”. Geez Louise, when will these guys give up? Sure the euro will weaken again some day… But not for reasons these guys keep dragging out of the trash bin and recycling! Spain and Italy aren’t going anywhere!

You see… For years now, pundits have written about how Spain and Italy don’t like the “one policy for all” that the European Central Bank (ECB) uses, and that would lead them to leave the euro… HOGWASH! They may not like the policy, but being a part of the euro, is BIG TIME for them, and they know it!

OK… So, back to the euro rally… Inflation in the Eurozone bumped even higher than the previous 3.5%, hitting the 3.6% level in March. This represents the fastest pace of inflation in 16 years. I don’t think the ECB is going to go forward with a rate cut in May, or anytime soon for that matter! Recall, that a couple of weeks ago, I pulled the May rate cut forecast because of this nagging inflation, and now it’s gone higher!

I don’t think it means the ECB will entertain a rate hike… But, it certainly means they will not entertain a rate cut either! And THAT, my friends, is what is driving the euro higher this morning. ECB rates will remain steady Eddie, while the U.S. rates are going lower, and lower… How low can you go? Recall, that I told you a couple of weeks ago, that I fully expect 75 BPS total of rate cuts from the Fed at the next two meetings… That would bring rates here in the United States to 1.50%. The Eurozone would have 250 BPS in their favor. I don’t have to tell you that 250 BPS represents a HUGE differential, and that favors the euro!

I find this interesting in that, I was all prepared to talk about the drifting euro this morning, and instead, I did a 180-degree turn!

So… The Big Dog, euro, isn’t the only currency with the rally hat on this morning. But it has the brightest light shining on it for sure! So… There!

Yesterday, the TIC data came in below the $80-85 billion needed each month to finance the deficit, once again. The total was a net of $64 billion, and the previous month was revised down $2 billion.

I find it strange that I keep hearing people say that “Deficits Don’t Matter”. What a bunch of dolts! The TIC Net Flows tell us that they sure do matter if you can’t finance them!

I read a report by David Walker, the former Comptroller of the United States, where he was explaining the depth of the fiscal budget alone. He estimated that balancing the Federal Budget by 2040 would require actions as large as: 1. Cutting Total Federal Spending by 60%, or 2. Raising taxes to 2X today’s level.

He also states, “Closing the current long-term fiscal gap based on reasonable assumptions would require real average annual economic growth in the double digit range every year for the next 75 years.

Keep in mind that: During the 1990’s, the economy grew at an average 3.2% per year. So… “As a result, we cannot simply grow our way out of this problem.”

Well… Now that’s something to help wake you up, eh? But deficits don’t matter; so don’t worry about what the former Comptroller of the U.S. says… HA! You won’t catch me taking that bait! David Walker is a very smart man, and has been the Lone Ranger in the Government when it comes to pointing out the problems with these deficits.

OK… Remember a few weeks ago when I tried to explain why the Fed’s stepping in to bail out Bear Stearns wasn’t a good thing in the long run? And that the Fed taking mortgage securities as collateral at the lending window also wasn’t a good thing? Well… I don’t know if this scares you like it scares me, but the Fed’s holding of Treasuries, as collateral, as fallen from 92% to 65%. Remember… These are the same mortgage securities that no one else would take as collateral! But the Fed did! YAHOO! NOT!

I don’t know where this all leads us… But it sure looks as though it will lead us to the same place it led brokerages to last summer.

And inflation in the United States? Well… We’ll see the stupid CPI report this morning… But as I’ve explained on many occasions in the past, CPI doesn’t reflect “true inflation” because of all the changes that have been made to the index over the past 20 years. And, to make matters worse, the media, and the Fed only look at the “core” rate, that excludes food and energy.

OK, I understand when the monthly numbers are pushed around by volatile food and energy, but when these two push higher and higher every single month, shouldn’t someone take notice of them? Of course they should! And right now, food and energy are what’s eating away at our wallets… Escalating food and energy costs attract global concern, and should be a source of price support for gold. Let’s hope it plays out that way, and not just leave us with escalating food and energy costs!

Supply problems also contributed to the rally. Royal Dutch Shell’s Capline pipeline, which transports crude from the Gulf of Mexico to the Midwest, was shut down over the weekend after a leak was discovered in Tennessee.

Also, Eni SpA, Italy’s biggest energy company, reported yesterday that sabotage over the weekend caused a fire at oil plants in Nigeria, resulting in a total output loss of about 5,000 barrels a day.