Don't Forget Those Positive Balance Of Payments!

Good day… And a Happy Friday to one and all! It’s a Memorial Day weekend to boot! The liquidity in the markets will dry up early today after London heads to the pubs. The New York traders will be closing the books and heading to the Hamptons for the first holiday weekend of the summer. More on Memorial Day in the Big Finish…

Another day of playing solitaire till dawn in the currencies… The bias on the day was for a stronger dollar, but the trading range was so small that one could barely tell what the bias was. We had a ton of stuff happen yesterday with regard to data releases, and the former Fed Chairman was getting his hands in there and acting like he knows what’s going on. So, let’s go to the tape, eh?

First off, let me tell you that the German economy got yet another great report card this morning when it was reported that German consumer confidence rose to a five-month high! It was reported that falling unemployment is really boosting consumer confidence. And why not? I’ve spent a ton of time lately extolling the virtues of the German/Eurozone economy as a reason for a strong euro (EUR)… But it was pointed out to me yesterday by a currency strategist that I talk to periodically, that I keep forgetting that the Eurozone has a positive balance of payments.

And he is right! At the end of 2005 I did an interview in which I was asked about what currencies would perform well in 2006, and I immediately highlighted the countries with a positive balance of payments (or trade surpluses). I argued that these countries wouldn’t have deficits dragging down their economies going forward… And those were… Norway, Sweden, Switzerland, the euro, and all the Asian countries. And that thought came front and center when the dust settled on the best performing currencies of 2006. (You have to excuse Japanese yen (JPY), and Swiss francs (CHF) when talking about best performing currencies due to the fact that they are the funding currencies of the carry trade.)

So… Back in 2005, I was talking about it, but somehow got off on the stronger economy track and left the positive balance of payments at the station… Tsk, Tsk…

OK… Yesterday we saw the color of the U.S. durable goods rise by a softer-than-expected 0.6% in April, with the experts looking for a more robust 1% gain. However, March’s gain was boosted to 5% from the earlier estimate of a 3.7% increase. So, in the end, there is no real indication of which way this data is headed, much like a lot of the U.S. data has been recently.

We also saw new home sales soar 16.2% in April to a seasonally adjusted annual rate of 981,000 units. WOW! That’s an awesome number right? Not so fast there, Tim! Before the streamers and confetti can be brought out to celebrate an end to the housing debacle, let’s look at home prices. The sales gain was helped by a record price drop! Talk about stepping on the trap door! With building permits at their lowest level since 1997 and the NAHB housing market matching a low not seen since 1991 in May, the housing debacle is far from getting out of the woods!

Here’s the problem with these home price drops… Your home’s value will drop too… And when you go to get cash out of it like an ATM what will that drop have done to your equity? Oh, and there’s also the fact that the home builder makes less on the home sale, which carries over to the profits of the company… For instance, Toll Brothers reported a 79% drop in second-quarter profits Thursday. OUCH! Now that’s going to leave a mark!

Former Fed Chairman, Big Al Greenspan, decided that his name hadn’t been in the news in a while, and decided to change that! Big Al says that the Chinese stock market rally is unsustainable, and will have a meltdown. Hmmm… Let’s see in 1994, I believe, Big Al told us that the U.S. stock market was showing “irrational exuberance”. It took six years for that to come to fruition… How long will it be before the Chinese stock market meltdown, now that Big Al has placed a marker on it?

Ok… On of my fave reads each day is the Daily Reckoning, by Bill Bonner. Yesterday, Bill was talking about money supply, and how the United States has really been turning the crank on the printing press lately. Let’s tune in to something Bill said that I thought played well with our daily talks. Here’s Bill:

“American emissions of paper money cause a kind of chain reaction of debasement. No country wants to see its own currency fall faster than the dollar – and especially not America’s major suppliers. (We used to refer to them as ‘trading partners,’ but the term seems sadly out of date, since the trade is almost only in one direction). The dollar-receiving countries rev up their own printing presses…layering various colors of ink onto sturdy pieces of paper so that they may use it to buy America’s currency.

Result #1: more paper money everywhere.

Result #2: lower interest rates

Result #3: huge liquidity boom.

Result #4: big run-up in asset prices…m&a activity…global bubbles some clown pays $71 million for a Warhol,

Surely there is a Result #5.

What? At the very least, it will be – as Mr. Greenspan suggests – a correction full of drama in the most affected markets. At the very worst, it will be something that mimics the four horsemen of the Apocalypse: worldwide depression, revolutions, wars and rumors of wars.”

OK… I can’t end a week, and begin a Memorial Day weekend with a depressing note! Let’s see, where is a “feel good” story that I can pull out of Bullwinkle’s hat?

Swiss National Bank President, Roth, was warning the markets yesterday about inflation, and how the Swiss franc should be stronger based on fundamentals to help fight inflation. I doubt the markets listened, or that Roth was even on their radar screens… But I think he was setting the markets up for a rate hike. Higher interest rates in Switzerland could put the kyboshe on using the franc and a funding currency for the carry trade!

Currencies today: A$ .8190, kiwi .7260, C$ .9215, euro 1.3440, sterling 1.9860, Swiss .8150, ISK 62.20, rand 7.13, krone 6.0250, SEK 6.84, forint 186.40, zloty 2.84, koruna 21, yen 121.70, baht 32.70, sing 1.5280, HKD 7.8220, INR 40.59, China 7.6520, pesos 10.81, dollar index 82.40, Silver $12.94, and Gold… $655.66

That’s it for today… A great day at the ballpark yesterday! I just absolutely love day baseball games! OK… This is a Memorial Day weekend, which kick starts the summer! But it’s more than a three-day weekend, bar-b-ques, and swimming pools. It’s more of….

A time to pay respect to those

Who rallied to the battle cry –

Who gave their lives for liberty –

Those freedoms for you and I.

(taken from a poem by Abe Jones)

That’s right… I humbly and with pride thank all those men and women, and their families.

Have a great Friday and Memorial Day Weekend!

Chuck Butler — May 25, 2007