More Awful Data for the U.S.

Good day… And a Wonderful Wednesday to you! A full day in meetings yesterday had me ready for the easy chair upon arriving home. The Celtics are NBA Champions for the 17th time; congrats to them and their fans, of which I was one as a kid, and through the Larry Bird era. Kind of lost track of the NBA over the years… Another full day of meetings on the docket for yours truly, can’t wait! NOT!

OK… The currencies really had a boring day yesterday. The bias was to sell dollars, but not by much. The euro (EUR) gained a little, but has given it all back this morning. The data in the United States yesterday was weak if not awful, but the markets are still hanging by a moment on the Fed’s rhetoric. Shoot Rudy, even the Financial Times is calling out the Fed and those that are getting carried away with thoughts of 75 BPS in rate hikes this year. The title of the FT article was, “Rate rise expectation overplayed, believe Fed officials”.

Yes, even Fed officials are questioning the markets’ obsession with ratcheting up the rate hike expectations… Doesn’t that tell you something? It tells me that the Fed officials are now scared to death about the market repercussions when they find out that Big Ben was only “talking the talk” and not “walking the walk”!

OK… Back to the data. First of all the current account deficit, which was higher than expected, like I said it would be, was not quite as high as I said it would be! The current account deficit deteriorated to $176.4 billion, which was much higher than the expectations of $172 billion. As I said yesterday, oil prices really played well with this higher deficit number.

Industrial production surprised by falling -0.2% in May… This number continues on a downward trajectory, and tells me that sooner or later love is gonna get you, and that eventually this feeds more unemployment… And more unemployment is the thing that keeps the light on for lower interest rates by the Fed in my opinion. I still believe they are all bark and no bite with their “fighting inflation” rhetoric, and that they will return to their “full employment” mandate.

You won’t hear that from the mass media… You won’t hear that from the pundits on the Internet, etc. But you heard it here!

Capacity utilization, my fave and only forward looking piece of data, was even weaker, falling to 79.4% from 79.6%… And let’s not forget that the rot on housing’s vine continues to be exposed. Housing starts fell by 3.3% in May and 32% below this time last year! PPI spiked, but you would have to be blind as a bat to not see that one coming, considering the spike in oil/gas prices.

In other currencies… I keep talking about the Brazilian real (BRL), and probably sound like a broken record/scratched CD (for the youngsters that don’t know what vinyl is!), but why not? Sometimes people have to hear something over and over again before they believe that they had the idea to buy! The real has racked up a greater than 10% gain versus the dollar year-to-date, and when you add in the interest… WOW! I’ve chronicled the reasons the real is gaining, so I won’t go over them again now, maybe again in a week or so… But for now, it’s important to know that the dollar may be swinging a mighty hammer, but not against the real!

The Aussie (AUD) and New Zealand dollars (NZD) really took on some water last week, but appear to have plugged the holes and set back out to sea. The more and more that time passes and the Fed doesn’t act out on their “inflation fighting” these two will recover. Investors will come to the realization that the positive yield differentials of these two currencies will remain… Especially Australia, as it has better fundamentals than the New Zealand dollar.

There are a ton of stories floating around about the unraveling of the euro because of European Central Bank (ECB) President, Trichet’s stance on interest rates. Come on folks! He’s just trying to provide price stability, and not allow inflation to eat consumers alive! I also hear that Big Ben doesn’t like Trichet’s stance. What? Big Ben, are you jealous? That’s right, jealous of the fact that Trichet had the intestinal fortitude to stand up and fight inflation, and not become another “junk bond” house?

OK, some of you might not know what I’m referring to here… But basically, the Fed has opened Pandora’s Box of bad bonds for collateral. That’s right… All that debt that the lenders and brokerages had on their books causing the write-downs has been given to the Fed as collateral, thus making the Fed a “junk bond” house.

Government watchdog, John Williams of Shadow Stats tells us, “Illiquid collateralized debt obligations – including mortgage-backed securities now total in excess of 20% of the collateral backing the Federal Reserve Notes.”

Now… I was reading the latest piece by former colleague and friend, David Galland, last night, and just thought I had to find a place for it in the Pfennig today… Here’s a snippet of David’s excellent piece… We pick it up as David is asked if he minds the huge profits being booked by the oil companies right now…

“Not at all. They are going to need all the money they can muster to replace their declining reserves and to fight off fierce competitors from the rest of the world. Competitors, it must be pointed out, unhindered by the perfect-worlders and political panderers that are now playing so effectively to democracy’s weak suit.

“Twenty years ago, which was seven years after the link between the U.S. dollar and gold was severed in 1971, oil was selling, on average, for

$13.38 per barrel. Adjusting for inflation – using the Shadow Stats and not the government’s laughable CPI – in today’s dollars that same barrel of oil would cost $124.

“That it is trading for slightly over that amount, at $133 per bbl, is entirely explainable based on supply/demand constraints, war in the Middle East and the fear of a widening conflict.

“In other words, blaming evil-eyed Middle Eastern potentates or bloodless speculators is attributing blame in the wrong direction. If you want to hit the right target, start with the fiat currency system which has systematically reduced the purchasing power of the U.S. dollar and all of its similarly un-backed peers to the level of Monopoly money.

“Unfortunately, I don’t see any new legislation on the horizon calling the Fed and the Treasury to account for their role in the higher prices now getting so much attention.”

David, is a wordsmith, and when he decides to write, I always make certain I take the time to read what he has to say!

Currencies today 6/18/08: A$ .9415, kiwi .7550, C$ .9810, euro 1.5485, sterling 1.9510, Swiss .9575, ISK 80.50, rand 8.04, krone 5.19, SEK 6.0575, forint 157.45, zloty 2.18, koruna 15.5550, yen 108.20, baht 33.28, sing 1.37, HKD 7.8050, INR 42.88, China 6.8815, pesos 10.29, BRL 1.6090, dollar index 73.73, Oil $133.80, Silver $17.09, and Gold… $885.80

That’s it for today… I just heard that it’s Paul McCartney’s birthday… He’s 66 today! My little river town (that I live in) is seeing the water rising again. We just went through a ton of flooding in March… I was giving an interview yesterday with a reporter from the Pittsburgh Gazette, and he caught me off guard… I had given an interview to this fellow before. So, before we get started he tells me that he knew I was a “smart guy” before, but he just read Addison Wiggin’s new book and saw that I had written the foreword… He then said, “I didn’t know you were ‘that’ smart”! HAAHAHAHAHA! He didn’t have to butter me up, I was already on the phone for the interview! My little buddy, Alex, hasn’t been this quiet since he could hardly talk… He had braces put on his teeth on Monday… I haven’t seen him smile since, even when his baseball team won the other night! Time to go… I hope you have a Wonderful Wednesday!

Chuck Butler
June 18, 2008