Another Recession Call

Good day… And a Thundering Thursday to you! The week of an empty data cupboard continued yesterday, and with little to drag down the dollar, like most data reports do these days, it rallied… Well… Within a tight range, but rallied nonetheless!

The boys (and girls) at Goldman Sachs came out with their forecast for a recession yesterday, joining the brokerage that owns a bull. But as my friends, Addison and Ian, over at The 5 Minute Forecast said the other day…  “According to our analysis, this isn’t even a forecast any more, but is a present-day reality.”

That’s right, because if you are a reader of this Pfennig – or The 5-Minute Forecast – you’ve heard about the United States being in a recession long before these guys in the BIG brokerage houses and their multi-million dollar research teams even had the thought cross their collective minds!

OK… I’ll remove the hand from my back now! HA! Just having a little fun on a Thursday morning…

The European Central Bank (ECB) meets for the first time in 2008 today… Well actually, they are meeting as I write this… And while I don’t expect the ECB to make any moves today, they are certainly backing themselves into a corner. ECB President, Trichet, will need to talk like the hawk he once sounded like, and not the weak-kneed yellow-belly he sounded like after the last meeting.

I know, that the United States and ECB have had “conversations” and I’m sure it was regarding how the ECB wanted the U.S. to do more to support their currency… And, I’m sure the U.S. told the ECB to stop talking like a hawk, and raising interest rates! (Of course I’m making all this up, folks; I don’t know that this happened, I’m just creating a picture, if you will.)

If Trichet decides to yellow belly the 3.1% rise in inflation, and instead do a Puss-N-Boots (from Shrek) pitiful face toward the 1.3% drop in retail sales in November, then the euro (EUR) will have to work hard to maintain the 1.46 handle. However, if Trichet returns to the hawk that he once sounded like… We could see a recovery in the euro.

Of course, I talk about a “recovery” in the euro as if it has lost major ground, which it hasn’t. The euro is still ultra-strong folks… Just think back to a year ago when it was trading around 1.30, and the year before that, when it was around 1.20 and so on.

The Bank of England on the other hand, will probably cut rates at their meeting this morning. I know, inflation is high there… But they have drank some of the Kool-Aid the Fed is serving up these days, and will probably turn their backs on inflation in favor of pro-growth. I’m going to have to remove them from the “Prudent Central Bank” CD that I created four years ago.

Oh, one thing that Goldman Sachs did say when they announced their recession forecast that caught my eye, was that they saw interest rates falling to 2.5%… That’s 50 BPS lower than my lowest level that I called for four months ago! But hey! They’ve had four extra months of bad data to view!

Down in Australia, things continue to look brighter for the Aussie dollar (AUD)… Australia posted a narrowing trade deficit for the first time in four months in November. The trade deficit shrank to less than $2 billion (in dollar terms). November saw a pickup in exports of raw materials and base metals, which had been the story behind the commodity rally the past seven years.

This plays well with my note last week about how much the CRB Index (commodities) had rallied lately. Exports increase, which drives demand, which pushes price… (And to think I used to sit in class and say, “I’ll never use this stuff again in my life!”).

Gold continues to push toward $900. It’s simply amazing just sitting back and watching this run in gold… Pinch me! Somebody wake me from this dream! I’m dreaming that gold is making a run at $1,000! No wait! I am awake! It’s not a dream! This is not my car! This is not my house! …. A little Talking Heads on Thursday morning for you!

However, after reaching $891.70 yesterday, we’ve seen a ton of profit taking. No worries… We’ve seen this over and over again with gold the past six years.

The Canadian dollar/loonie (CAD) has lost the “parity” handle once again. I find this interesting in that, commodities are soaring. Maybe this is simply a dip… Housing in December dipped, but housing for 2007 was a banner year in Canada. Let’s hope that keeps the Bank of Canada from following the U.S. Fed down the road to rate cuts… At least for now!

Big Ben Bernanke finished up the Fed Speak tour this week with a speech today… Not that I believe anything he has to tell us these days, but the markets seem to be at the edge of their seats, so I’ll pay attention. Don’t look for any clues to the FOMC rate meeting later this month either. Big Ben isn’t good at giving clues. I bet he didn’t fare well in the board game either. I think it was Colonel Mustard with the rope in the observatory!

But then… Here goes my conspiracy theory blood boiling again… What if… Big Ben and Claude Trichet have worked this all out? The Bank of England cuts, Trichet talks dovish, and then my Big Ben’s ultra-dovish talk doesn’t look so bad! Net effect on the dollar? I would think it would rally a bit. Probably down through to the 1.45 handle. That’s just conspiracy thoughts folks… But what if?

And in a move that we don’t see very often… The Chinese renminbi (CNY) lost ground yesterday and overnight, falling from its strongest level versus the dollar since the peg was dropped in July of 2005. This is not some “currency reversal” or even technical correction… It’s simply one of those things… Soon, we’ll be married, and raise a family… No wait… Although, a little Temptations singing “Just My Imagination” probably fits here… Anyway, I need to get back to the task at hand… And that is to say that soon, renminbi will get back on the “gain versus the dollar tracks” and this will feel like, just my imagination, once again, running away with me.

With the stock market rallying back at the close yesterday, the carry trade was put back on overnight. On again, off again… This action is really giving me a rash! So, before the rash becomes too annoying, I had better head to the Big Finish!

Currencies Today: A$ .8855, kiwi .7770, C$ .9920, euro 1.4690, sterling 1.9645, Swiss .90, ISK 62.65, rand 6.8750, krone 5.3350, SEK 6.4050, forint 173.21, zloty 2.4490, koruna 17.63, yen 109.75, baht 29.44, sing 1.4310, HKD 7.8040, INR 39.28, China 7.27, pesos 10.94, BRL 1.7690, dollar index 76.30, Oil $95.25, Silver $15.67, and Gold… $876

That’s it for today… Should be an interesting day with the rate cut meetings in Europe and Big Ben on the speaking trail. I got home in time to visit with Delaney Grace yesterday… What a smile! She sure loves her Uncle Alex (my little buddy) too, as her eyes follow him all around the room. He thinks that’s great now, but in a couple of years when she’s following him around, that will be another story, I’m sure! The whole family is going together to Spring Training this year. That ought to be interesting, eh? Just another Butler family adventure, I’m sure! I sure hope you have a Thundering Thursday, as I’m off to work!

Chuck Butler
January 10, 2008