I Love it When a Plan Comes Together!

Good day… And a Tub Thumpin’ Thursday to you! Well… It’s the third day of the show today and I’m beginning to hit the wall. I’m draggin’ the line, as Tommy James used to sing. The people here at the show have been great, stopping by to see how I’m doing, and so on. We had a great Town Hall Meeting for EverBankers yesterday, and today, I finish up my duties here, as I am the moderator of a panel this morning.

The currencies remained in a tight range with a bias to sell dollars yesterday and in the overnight markets. The euro (EUR) received a boost when Eurozone GDP printed stronger than expected, coming in at +0.7 or 2.2% annual. At the same time Eurozone inflation was reported to register a 0.3% increase or 3.3% annual. These reports will ease some of the pressure on the European Central Bank (ECB) to call off the dogs – (interest rate hikes).

I was talking during the Town Hall Meeting yesterday, and emphasized to anyone listening to me that a central bank that is willing to stick to its guns, and fight inflation to provide price stability is the kind of central bank you want the currency you own to have! There’s no two ways about it folks. Inflation is a baaaaaaaaaddddddd thing… And I believe we will all rue the day that the Fed turned its back on inflation here in the United States. But Hey! That’s just me! Don’t let me get in the way of a “feel good” party.

The New Zealand dollar (NZD) received a smack in the face overnight as they printed an extremely weak first quarter retail sales report. Retail sales in the first quarter fell 1.2%, six times worse than the forecast for a negative 0.2% (see how I used that new math to figure that one out?) I think this could mean a sea change in New Zealand interest rates by this summer. This has worked for the Reserve Bank of New Zealand (RBNZ). They had tremendous growth and inflation that the RBNZ fought with aggressive rate hikes… Now, the growth is slowing and inflation might soon follow, which would indicate to me that the RBNZ could be easing rates by the end of this summer. That won’t be a good thing for kiwi, as its strength is derived mostly from the high interest rate it sports.

In Japan, March Machine Orders printed worse than expected at a negative 8.3%… But, a funny thing has happened on the way to the forum lately for yen (JPY). As has become the norm lately, yen simply ignores the data and has its fortunes decided by carry trades, which in last night’s case, showed carry trades being unwound. So, that means that yen gets some lovin’ today.

This data update can get a little boring so stick with me here as we’re almost to the end…

U.S. industrial production printed much worse than expected this morning… Production for April fell -0.7% (versus -0.3% forecast), and the prior report was revised lower from +0.3% to +0.2%. The declines were broad based, with auto production collapsing -8.2%! This print was so bad that a look back to see if we’ve had anything like this before shows me that since 1990, worse prints than this one have only occurred around Katrina, the start of the Iraq War, and during the 1990 recession.

So… Doesn’t it look more and more everyday that I was bang on with my call that we’re in a recession now?

And then finally… The TICs data… You know, the net foreign security purchases that are used to finance our current account deficit… As I’ve been explaining to people for months now, the United States has experienced a shortfall when it comes to the financing of its deficit, which requires about $80-85 billion per month in foreign investment in U.S. assets. To relieve that shortfall, the government has chosen the lesser of two evils by allowing a debasement of the dollar, which is used to purchase the assets at a discount, rather than aggressively raising interest rates.

This move has paid off, at least for March (remember that’s when the euro was knocking on the door to 1.60). The total for the TICs in March reached $80.4 billion, up from the nearly $65 billion attracted in February. The trick here is to keep the dollar weak to allow the deficit to continue to be financed! I love it when a plan comes together!

So… Gold has finally caught some wind in its sails. Gold has gained almost $16 today. My friend, and writer extraordinaire, David Galland wrote a piece on gold that was featured here in The Daily Reckoning a few days ago, and he’s soooooooo good that I thought I would treat you with a snippet of his thoughts on gold…

“The current correction is not yet exceptional: Since the current bull market began in earnest in 2001, there have been 9 corrections in excess of 8%.

“During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of those corrections is 13.6%, so the latest, which touched 18% at its worst, is only marginally worse than average.

“Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

“And if it does, rest assured that, just as they did when gold moved down by that percentage in May of 2006 – falling from $725 to $567 – analysts will line up to say that the back of the gold bull has been broken. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have missed a rebound of close to 100%.

“I mention this to stress that the fits and starts we are currently experiencing are nothing unusual. Quite the opposite, they’re the norm for any sustained bull market. In the 1970s’ sustained gold bull market, a similar pattern occurred.”

Time to head to the Big Finish… Thanks to David Galland for his thoughts on gold! Be sure to check out his full article here.

Currencies today 5/15/08: A$ .9370, kiwi .7575, C$ .9990, euro 1.5480, sterling 1.9445, Swiss .9490, ISK 77.70, rand 7.6075, krone 5.0760, SEK 6.02, forint 161.20, zloty 2.19, koruna 16.19, yen 104.70, baht 32.35, sing 1.3775, HKD 7.80, INR 42.59, China 6.9940, pesos 10.49, BRL 1.66, dollar index 73.21, Oil $126, Silver $16.93, and Gold… $883.10

That’s it for today… Can’t wait to get home and off my feet! I hear that my little buddy Alex didn’t fare too well in his baseball game last night… Tough night at the plate… That’s OK, there’s always the next game! An old Mark Twain Bank colleague dropped by the booth to say hi and catch up yesterday. It was good to see Mark Elmore again! Mark was our assistant back “in the day”, and now he’s doing quite well trading bonds, so I like to think that I taught him well! HA! I’ve gotta get out of this place… If it’s the last thing I ever do! Can’t wait to get out of here, this place is just too spread out for me! So… Let’s get the last day of the Show over with, and I hope you have a Tub Thumpin’ Thursday!

Chuck Butler
May 15, 2008