It Was Central Bank Intervention

Good day… And a Tub Thumpin’ Thursday to you! While I’m not out of the woods, I’m feeling more human this morning, and that’s a good thing, considering where I’ve been earlier this week! So, I’m going to go out on a limb and proclaim this will be a Tub Thumpin’ Thursday! I’ve got my banana, and bottle of Gatorade at my side, so… Let’s get to the Pfennig!

Front and center this morning I have to talk about the blip that we’re going to see that happened in the second quarter due to the stimulus checks. It all goes back to the stimulus checks and the first sign of this came (besides retail sales) yesterday in the form of industrial production. Remember yesterday when I told you that industrial production is a second tier piece of data that gets ignored by the markets, but I think it’s important so I talk about it? Well… Just like last week, when I described the bratty spoiled child throwing a tantrum on the floor of the grocery store as being something you can’t avoid paying attention to… The growth in industrial production was the same…

Industrial production for July came in strong, and rose 1.3% in the month compared to expectations of no change. The June increase was revised up to 1.3% from an initially estimated gain of 0.8%. And… The good news about this data is that the growth was led by non-defense spending! WOW! When was the last time that happened? Anyway…. The stimulus checks have their fingerprints all over this report.

And so too will they have their fingerprints all over the second quarter print of GDP today. I told you Monday to expect a blip up in GDP, which will stir the interest rate hike pot once again, and probably give the dollar some love. One thing to think about here, because the dolts in the media won’t even think about it, they’ll just drool all over the size of the GDP growth, is that I expect exports to have contributed to the second quarter GDP by a sizeable margin, for what was happening to the dollar in the second quarter? It was getting sold like funnel cakes at a State Fair, and getting weaker, and weaker, which just made exports look cheaper and cheaper, thus giving them a huge boost.

But what’s happened since the end of the second quarter? The dollar has rallied, so don’t look for that boost to GDP in the third quarter… And don’t look for the boost to GDP in the third quarter from the stimulus checks… Those have already been spent! So… The second quarter is going to end up being a blip on the recession chart when the historians look back on this period of time. But… That means, dollar strength, folks… Because, even though the markets normally are “forward looking” they will get so caught up in this second quarter GDP growth that they will lose their focus.

OK… When the dollar made huge strides at the end of July and beginning of August, my colleague and long time friend, Chris Gaffney, Pfilled in for me with the Pfennig, and wrote that he believed the dollar’s reversal to be central bank intervention… We received a few emails from people asking us to follow up on that thought, but we couldn’t… Until now!

The Bloomie is reporting this morning that “finance officials form the U.S., Japan and Europe, in mid-march drew up plans to strengthen the dollar following troubles at Bear Stearns.” The story which originally appeared in Nikkei English News went on to report, “the intervention designed by the U.S. Treasury Dept., Japan’s Finance Ministry and the European Central Bank, called for the central banks to purchase dollars and sell euros and yen, with Japan providing the yen needed for the currency swap if the greenback’s value dropped significantly.”

The three groups, which considered making an emergency statement through G-7, did not stipulate a specific exchange rate for the potential intervention, nor did they detail the amount of money to be used.

So… Now we know! There was no way the dollar turned on a dime like that without something like this happening. The fundamentals are so anti-dollar strength, and yet the dollar was gaining strength. Well, we know that the Bank of Japan has a treasure chest of yen that they have collected over the years… And they have an even bigger treasure chest of dollars (most of it held in dollar denominated Treasuries), but now they have even more dollars! I bet they are just happy as pigs in slop to own all these dollars!

OK… What’s going on today with the currencies? Oh! That’s what this is all about, eh? The currencies, led by the euro (EUR), have rebounded nicely the past two days, with only a brief sell-off yesterday morning after the industrial production number printed. I think the markets got that out of the system and went back to the speech by ECB member, Weber, yesterday. Recall, that Weber said that there was “no scope for interest rate cuts”. Keeping that in mind, the distinct interest rate differential between the euro and the dollar came back into play, and thus a euro rally began, and continued overnight and through the early part of the European session.

You know… There have been three currencies that have done quite well holding up and in a couple of cases have actually gained versus the dollar, during this dollar strength. The Mexican peso (MXN), the Canadian dollar/loonie (CAD), and the Brazilian real (BRL)… The real has lost ground, but not the degree of the losses in the South Pacific and Europe. The Loonie is the one that makes me scratch my balding head. But then, as I stated last week, it looks like the Bank of Canada is finished with rate cuts, and the recent data there certainly points to a potential rate hike.

During the last strong dollar trend, the Mexican peso was one of the best performing currencies, but remember. At that time the peso enjoyed interest rates above 10%! While interest rates are grinding higher in Mexico, they still have a ways to go to reach that lofty rate again. I’ve long said that the peso needed a “risk premium” to attract investment, given their sketchy history with foreign investments in their country. When the “risk premium” went away, as Mexico cut rates down to 5%, the attraction went away… But they are rising again, up to 8% internally, once you can get something higher than that on a retail basis, then you’ll be talking about something… Not until then though; not in my opinion!

Gold enjoyed a good day yesterday gaining about $8… And oil is gaining in price once again, trading at $119.00 this morning. My good friends, the Aden Sisters (Pam and Mary Anne) sent out their weekly update to their readers, and since Pam gave me the green light to put their stuff in my Pfennig, I’m going to grab a piece on gold that was in their latest update. So, without further adieu, here are the Aden Sisters!

“As each day passes, the markets continue to consolidate and it looks like an intermediate bottom is forming in gold and silver, as well as their shares, the base metals and the euro.

“Gold is at an extreme. Since reaching a low on August 15, it’s bounced back above its 65 week moving average and gold (basis December) is now firm above it at $824. Once gold rises and stays above $845, the D low will be over and an A rise will begin. Keep in mind, A rises tend to be moderate. Gold, for example, could have a good-sized rise from here but not necessarily surpass the July 15 high near $989.”

So… If they’re right, and I see no reason to believe otherwise, gold has the potential to get back on the rally tracks… And if that happens, that means the dollar will be getting weaker. It’s one great big circle folks… Which reminds me of Billy Preston’s “Will it go round in circles… Will it fly high like a bird up in the sky…”

A reader sent me a note about a new “risk event” and that is the proposed bailout of the Big Three automakers… Geez Louise, let’s hope that’s not in the plans… 2008, is going to be known as the “year of the bailout”. That is, of course, unless this all continues to go sour, and it carries over into 2009, by then the bailouts could be coming fast and furious!

So it’s Thursday, which means we will see the Weekly Initial Jobless Claims today, which continue to be above 400K each week. We’ll also see the aforementioned second quarter GDP (first print). That’s it! Those two pieces of data. But, as I said, I fully expect the GDP report to prop up the dollar today… Do you smell what I’m cooking? A potential buying opportunity. I’ll have that, along with the lyonaise potatoes, some broccoli and some fresh berries for dessert!

Currencies today 8/28/08: A$ .8665, kiwi .7045, C$ .9565, euro 1.4775, sterling 1.8360, Swiss .9150, ISK 82.45, rand 7.7160, krone 5.3650, SEK 6.3880, forint 161.08, zloty 2.2625, koruna 16.69, yen 109.30, baht 34.08, sing 1.4150, HKD 7.8070, INR 43.77, China 6.8285, pesos 10.14, BRL 1.6215, dollar index 76.79, Oil $119, Silver $13.80, and Gold… $838.40

That’s it for today… A great win for my beloved Cardinals last night… Maybe the Brewers and all their macho chest pounding woke up a sleeping giant! I’m old school with baseball, and I don’t like staring at home runs, and I don’t like fraternizing players, and I really don’t like showing up the other team. Like my old coach used to say… “Act like you’ve been there before”, and “stop walking around like a 20-game winner, you haven’t won anything yet!” OK, so the Brewers had our number this year and beat us like a rented mule, that’s no reason to show up the Cardinals. I’m being visited by one of my fave legal beagles today. Alicia will be here to slap my wrists, I’m sure… But then, if I didn’t get my wrists slapped I wouldn’t be pushing the envelope, right? And if I wasn’t pushing the envelope with what I say, who would want to read this stuff? Anyway, that’s what I tell her, sure hope she keeps buying it! HA! (She reads this each day, so I’m just having some fun here). Well, my Gatorade is almost gone, so it must be time to hit the send button! I hope your Thursday is Tub Thumpin’!

Chuck Butler
August 28, 2008