Inflation and Jobless Rate Soars

Good day… And a Happy Friday to one and all! It’s been three weeks since I last started a Friday with that note. I hit every red light this morning on my way to work, which led me to think aloud in the parking lot, that this isn’t going to be a Fantastico Friday… And when I turned on the currency screens, after reaching my desk, I could see why I thought those negative thoughts… It’s getting ugly.

Yesterday, I was busy with my head down working on something, when Chris Gaffney yelled across the trading desk, “Hey, Chuck, what happened to the euro?” I looked up to see the euro (EUR) had lost 1-cent in a matter of 20 minutes… But that’s not the end… This morning, the euro has given up another 1-cent, and now trades with a 1.47 handle. Just what the heck is going on here?

The only thing Chris and I could find was a statement by Goldman Sachs that said, “The dollar has bottomed”. You take a BIG firm like Goldman, and all their customers that own currencies, and when the firm says something like that, you get selling. This, just when it appeared the euro had applied a tourniquet on the bleeding it saw last week. In fact, the Big Boss, Frank Trotter (whom I had not seen since Vancouver three weeks ago) stopped by to catch up yesterday, and I told him that the euro was settling in around 1.49. I guess I was wrong… I was so wrong I was almost right! Seriously, folks… This is looking so much like 2005, all over again… Dollar props are everywhere and the green/peachback is getting all the love.

I explained the other day the four things that would have to change, in my opinion, to really point to an end of the weak dollar trend… None of those have come into focus, so… Let’s batten down the hatches.

The data in the United States yesterday wasn’t anything to write home about… But, then, you’ve got these mental giants in the markets these days that think that rising inflation, with rising unemployment and falling economic growth, is a “good thing” for a currency! SERENITY NOW! OK, you may say, “Oh, come on Chuck, is that what’s really happening?” Ahhh grasshopper, it is. CPI hit a 17-year high in July of 5.6% (annualized). For once, the media, or at least the Wall Street Journal (I was too busy to see what the cheerleaders on CNBC had to say), called it like it should be called, and didn’t report the “X-food and energy” number.

So, inflation is soaring, and we all know that it probably is “really” around 11%, and then the Weekly Jobless Claims reported 450K for last week and revised the previous week’s total to 460K (from 455K)… And the Jobs Jamboree meltdown has been reported for months here… So, you can see that this is all happening as I said it was… But the mental giants are buying dollars.

While we’re talking about data… Today, we see the TIC Flows for June. For those of you new to class, TIC stands for Treasury International Capital and the “Flows” refer to the flow of funds into U.S. assets. This is important, as foreign investment is how we finance our current account deficit. And for the last year, we haven’t been doing a very good job of attracting enough foreign investment to finance our deficit, and thus the weak dollar.

For a long time (before August 2007), the U.S. didn’t have any problems attracting enough foreign investment, and that led people who should know better to say things like “deficits don’t matter”. I’ve said this before, and I say it in all my presentations, that when I hear people say that, they remind me of the guy standing on top of the Empire State Building, and he decides to jump off… As he passes the 56th floor he says, “so far… So good!”

But the ability to attract foreign investment to finance the deficit came to an abrupt halt last August, when the subprime meltdown hit the streets leading to a liquidity and credit crunch. The credit crunch led to a drying up of the Corporate Bond and Commercial Paper issuance, which is what the foreigners loved to buy because those vehicles normally had a nice “spread” over U.S. Treasuries and stocks.

Here’s what I think is beginning to happen though… The U.S. has done a great job of pulling the wool over everyone’s eyes, including foreigners. The U.S. keeps telling anyone who will listen that “everything is beautiful” and all is “right on the night”. The mortgage bill has passed, and that’s the end of all the misery, folks. There you have it right there in a nutshell! That’s what government officials want everyone to believe. And right now, everyone is taking the bait, hook, line and sinker! And… That’s leading to U.S. stock market strength, which is probably being fueled by foreign investment, and that’s all good for the dollar.

This could work… In 1995, the dollar had been sold for 10 years, and the fundamentals weren’t anything to get excited about, but a guy by the name of Robert Rubin, then U.S. Treasury Secretary, began a campaign to “prop up the dollar”, with his insistence that a “strong dollar is in the best interest of the United States.”  Not this weak-kneed, yellow belly, able to kick sand in the face of Treasury Secretary Paulson, “the U.S. believes in a strong dollar policy, but wants the Chinese to allow their currency to get stronger versus the dollar” stuff!

And Rubin’s campaign worked, and before you knew it, investment flows into the United States were like a tidal wave, and dollar buying was the end all for seven years. Of course, old “Bubbles” Greenspan had a lot to say about that with his insistence to target interest rates to help the stock market. Remember what people said then – the “Greenspan Put” would bail out stocks, so the markets traded with the perception that there was no risk.

So… I guess the question now is simply… Will the campaign to pull the wool over the market’s eyes here in the U.S. work? So far, the answer is… Yes… It’s working. But… What happens if someone balks? What happens if another bank is taken over by the FDIC, or financial institution has to be bailed out by the Fed again? Well, then the rot on the vine will be exposed, and all this dollar buying will get reversed.

And… At the end of the day, you have to ask yourself this… How does the U.S. government expect to be able to meet the future obligations of all the debt they have issued? The answer? With cheaper dollars… But that’s how I see it.

I’m really carrying on here this morning, eh? Oh well, back to the data… We’ll also see my fave, Capacity Utilization and Industrial Production today. I doubt the markets even give these data prints any recognition at all… So, let’s move on… There’s nothing to see here.

I was surprised that the markets didn’t stop to deal with the news that Pakistan’s President, Musharraf, Is leaving office in a few days… He’s been an ally of the United States in a hotbed region. I just don’t see this as a “positive” thing.

As I was leaving the office yesterday afternoon, and I was almost to my car when I heard someone yell out, “Is that you, Chuck?” I turned around to see a man and woman standing there. They had come to St. Louis for a reunion of the man’s 82nd Airborne unit. While in St. Louis, they thought they would stop by EverBank and say hi to me. They almost missed me! So, here we were standing in the parking lot, talking about all this dollar strength and the drop in the price of gold.

The man was concerned about gold’s performance. I said, “You know, there has been a change in perception of gold. It is now being traded as an offset to the dollar, and not the store of value or inflation hedge that it was being traded as”. I went on to say, “a return to the underlying fundamentals for the dollar should bring about a bounce in gold. But when we see that bounce is unknown”. I don’t think I gave him what he was looking for… But, that’s how I see it, and the big thing is unknown.

The man told me that Jim Sinclair, the famous and well-respected analyst, is still of the belief that gold will go to $1,200 in the next three months. I said, “I sure hope he’s bang on!”

OK… Chinese renminbi (CNY) has seen the worst four weeks of performance versus the dollar since the peg was dropped in July of 2005. Four straight weekly losses for the renminbi… Hmmmm… That’s strange to me, because you normally see a currency rally in a country that hosts the Olympics. But that’s not all there is to the renminbi. Bill Bonner had this to say about China, right here in The Daily Reckoning…

“While the United States may be in greater trouble than the markets realize, China may be in less. In other words, the slump in the West may not be so soft. In the East, it may not be in a slump at all.

“Retail sales in the United States are falling, but sales in China are going up at 23% per year. Even after inflation, they’re going up at 15% – the fastest pace in 9 years. Sales of gasoline are increasing at a 55% annual rate.

“Incomes are rising too – real, after inflation incomes are going up at an 8% annual rate.

“In other words, maybe China is not slowing down very much, after all.”

I’m not feeling well today, so I’m going to cut it off here and find a place to rest my head until the crowd comes in.

Currencies today 8/15/08: A$ .8630, kiwi .6965, C$ .9375, euro 1.4720, sterling 1.8590, Swiss .9105, ISK 82.30, rand 7.9760, krone 5.4140, SEK 6.3450, forint 162.80, zloty 2.2650, koruna 16.66, yen 110.50, baht 33.86, sing 1.4150, HKD 7.8140, INR 42.68, China 6.8730, pesos 10.19, BRL 1.6230, dollar index 77.13, Oil $113.38, Silver $12.84, and Gold… $782.70

That’s it for today… Another gold medal, another World Record for Michael Phelps last night… Simply amazing! My beloved Cardinals finally win a series, taking 3 of 4 from the Marlins… They need to go a roll, and maybe this series win will be the start of that needed roll! The exhibition season for the NFL has begun, and in a couple of weeks, my beloved Missouri Tigers will take the field here in St. Louis to play Illinois. My mood used to go up and down with Missouri Tigers games, but I don’t let it get to me like that any longer. I’ll be attending that first game with my family; we are all huge Tiger fans! OK, I feel better just talking about Mizzou! It’s been a long week, given that I started the week flying all night to get here… Time to hit the send button and rest my weary head! I hope your Friday is Fantastico… Mine isn’t starting out that way! UGH!

Chuck Butler
August 15, 2008