An "Oops" Moment

Good day… I hope your weekend and Veteran’s Day was grand. Can you believe we are creeping up on Thanksgiving already? Then after that, one of my favorite times of the year comes around…Christmas. Obviously, there are other important holiday celebrations at that time of year, and I don’t mean to slight any of them at all…it’s just that I celebrate Christmas!

OK…enough of that. Friday morning I left you with the thought that the People’s Bank of China’s Gov. Zhou, had opened a “Pandora’s Box” of dollar selling with his statement about having a clear plan for currency reserve diversification. While I thought the markets got carried away on the statement, I was all for the dollar selling. But as Friday went along, I think traders began to think a little more clearly about his statements. Basically, while it would behoove China to diversify their currency reserves, they cannot allow a run on the dollar, as it would lower the value of their other holdings in dollar assets.

So…Zhou tried to do the old Texas Two Step, with a comment on Friday that said he wasn’t going to sell dollars to diversify. What? Come on Mr. Zhou, how stupid do you think we are? If you’re going to diversify, you’ll have to sell dollars. However, it’s my opinion that they can do it without creating a big mess – just a slow depreciation is exactly what is needed.

There was one funny statement that Mr. Zhou left us with. When asked if China would sell gold as a part of their diversification, Zhou replied, “No. Why would we sell gold?”

The re-thinking by traders took the luster off some of the moves the currencies had made…but it didn’t reverse the moves altogether. So we begin this week with the dollar weaker than last week. We will get to see a truckload of data this week, not only in the United States but the Eurozone and United Kingdom, too. This could be quite a volatile week, going back and forth with the data reports.

For instance, the Eurozone will report the preliminary GDP for the third quarter. I believe we’ll see some backing off from the 0.9% growth in the second quarter, but the end result should still be strong. This should underpin the euro, and bring the ECB ministers out to talk about rate hikes again.

In the United Kingdom we’ll see inflation data, retail sales, and unemployment data this week. All should be strong enough to keep the Bank of England at the rate hike table.

In the United States we begin this week with the monthly budget statement today, and then move to PPI and retail sales tomorrow. On Wednesday we see the minutes from the FOMC meeting, and on Thursday we see CPI and the Net Foreign Securities Purchased data. So, a BIG WEEK data wise for sure!

The BHI (Butler Household Index) tells me that retail sales will be disappointing once again. And it will be interesting to see how last month’s blowout Net Foreign Securities Purchased (NFSP) data is revised, and how strong it was in September. I believe this NFSP to be important, as it tells us just how strong the appetite is for U.S. assets, which if bought by foreigners, helps to finance the Current Account Deficit.

My friend, John Mauldin’s weekly newsletter had a great title this past week, “Honey, I Created a Bubble.” Boy…I could really have fun with that one. I can see Big Al Greenspan waking his wife in the middle of the night, “Honey, I Created a Bubble!” HAHAHAHA.

You can read the entire Mauldin letter by clicking here:

I wanted to highlight something in the letter though…

But first…my take. Late last week there was a discovery that there was an error in the data that was used to compute inflation. As a result, The Fed has kept rates too low for too long. Well…as a Pfennig reader, you know that I’ve held them accountable for that, long before this “discovery.”

Now, John’s take, “Talk about an ‘oops’ moment. I remember clearly writing in 2002 about an inflation rate that was below 1% and the danger of deflation. But now we find out that the published figures were about a half percent [too] low. Not seem like all that much? That is a large and critical difference in the realm of monetary policy.”

You know what? If the data wasn’t massaged and the goal posts moved all the time, things like this wouldn’t happen! That’s my story and I’m sticking to it!

I hope to catch up with John in New Orleans this week.

Currencies today: A$ .7645, kiwi .6630, C$ .8818, euro 1.2835, sterling 1.9050, Swiss .8050, ISK 68.50, rand 7.28, krone 6.3850, SEK 7.0880, forint 203.22, zloty 2.9840, koruna 21.92, yen 117.80, baht 36.49, sing 1.5580, HKD 7.7852, INR 44.98, China 7.8667, pesos 10.90, dollar index 85.15, Silver $12.73, and Gold… $622.50

That’s it for today…Another last second field goal beat our Rams yesterday. Looks like it will be another long season. I take off for New Orleans tomorrow, but will be here to get the Pfennig out first. Then Chris will have the conn on the Pfennig for the rest of the week. Thursday, we are having an art display in our office here, so if you’re a local and want to come by please do! And don’t forget that lunch next Wednesday with me, or Dinner with Frank Trotter on Saturday night. If you need more information…call:

802-253-4681 ext. 2138, today is the last day to RSVP. Have a great Monday and week!

Chuck Butler
November 13, 2006