A Goldilocks Economy

Good day. Well, after two consecutive nights at the ballpark, I’m doing the classic Tommy James this morning and draggin’ the line. But I carry on. Good thing today is “Wired Wednesday!”

The currency markets remain in an unsettled frame of mind since Big Ben threw cold water on the currency rally Monday. It’s quite obvious that the markets run scared whenever Big Ben rattles his inflation saber. So, we continue to see dollar strength. However, it’s not overwhelming dollar strength, as the euro continues to remain above 1.28!

Did you see this little ditty yesterday? Standard & Poors (S&P) says the United States’ “AAA” credit rating could be hurt by pressure on budget from aging population. S&P went further to say…absent fiscal reforms, the United States’ credit rating would fall to “A” after 2015, and “BBB” by 2020.

Now, that’s what I call a “negative outlook.” Wouldn’t you? Of course, the “Deficits Don’t Matter” folks don’t want to see this news. Nor would they even give it any credence! Well, I do! But, you didn’t see this on the TV news did you? No you didn’t. I wonder why? (Don’t worry, I know why!)

The good news on the Eurozone economy this morning is brought to us by the friendly folks at Bloomberg. Yes, the Bloomberg purchasing manager’s index for May showed retail sales rising the most in two years, with consumer spending fueling the rise. So, let me see here, in the past two weeks we’ve seen strong data on the capital spending front and exports. Now, we have the trifecta! Consumer spending! This could quite possibly be the icing on the 50-BPS rate-hike cake for the ECB tomorrow. We’ll have to wait-n-see!

The Reserve Bank of Australia (RBA) did indeed keep rates unchanged last night, as expected. I really didn’t think they were on the warpath for higher interest rates, and they just raised rates at last month’s meeting. But the tightening bias remained, and that’s a good thing, especially since after the meeting it was announced that Australian first quarter GDP was stronger than expected! Very solid growth in Australia, folks.

In fact, I’m going to call the Aussie economy the “Goldilocks Economy.” It’s not too hot. It’s not too cold. It’s Just Right! Yeah, “Goldilocks Economy,” that’s the ticket! I must say that I like that! It brought a smile to your face too. Come on, admit it! You’re saying, “That Chuck, how does that guy do it? He’s draggin’ the line, but comes up with that one!” HAHAHA!

OK. I was just playing around there, sorry to all of you who don’t like it when I do that and write to me to complain.

Unfortunately though, the Australian dollar has seen a ton of selling this week, in sympathy of the sell off in metals. I can’t get my arms around the story going around about the metals “bubble” being popped. Balderdash! All I can think about is the history of commodity bull markets. For those of you new to class, through history, commodity bull markets have averaged 17 to 22 years in length of time. We’ve only been in this commodity bull market for about six to seven years! So, unless those saying the commodity “bubble” has popped know something I don’t, I would say that this “selling” is nothing more than a correction. And it’s providing some very nice levels to buy Aussie dollars!

Kiwi has been seeing a ton of selling too, as this run on the commodity currencies has gone a little too far.

Recall last week when I told you about the rising inflation in Thailand? Yes, this was from the June 1st, 2006, Pfennig: “Overnight, it was reported that Thailand’s consumer inflation rose to 6.2% in May. The forecast called for a rise to 6%, which in my opinion would be 6% too much to begin with! The Thai Central Bank needs to meet this rise in inflation with a strong rate increase, which I think they will do. But we’ll have to wait-n-see.”

Well, the Thai Central Bank met that inflation with a strong interest rate hike last night. However, it was not as strong as I would have liked to have seen; apparently the markets share my view, as the baht did not rally on the rate announcement. This was the ninth  consecutive Thai Central Bank meeting that included a rate hike. So, the central bank has been sitting on their hands, that for sure! I think the Thai baht will recover from this, and hopefully the Thai Central Bank will follow up again next month to make the markets happy!

Speaking of “unsettled markets,” the precious metals of gold and silver have seen some unsettling times recently. The threat of higher interest rates and the recent dollar strength is taking its toll on gold and silver. Gold hit a six-week low overnight and shows no sign of reversing this selling right away. But, just like I said above with the note on the commodities “bubble” above. I don’t see this move as a reversal of the trend. I see it as merely a correction. We’ll have to see, eh?

Currencies today: A$ .7415, kiwi .6260, C$ .8980, euro 1.2810, sterling 1.8630, Swiss .82, ISK 73.40, rand 6.77, krone 6.10, forint 205.38, zloty 3.09, koruna 22.02, yen 113.25, baht 38.20, sing 1.5830, INR 45.95, China 8.0172, pesos 11.31, dollar index 84.92, and the precious metals of silver $11.46 and gold $619

That’s it for today. Did you hear the sad news that the person known as the Fifth Beatle passed away yesterday at 59? Yes, Billy Preston left us way too early. He was one of my faves back in “the day.” I’m worried about my beloved Cardinals. Listless. I don’t think I’ve seen that in a long time. Plenty of time to right the ship though. Now, where’s Chris with that Starbucks for Wired Wednesday? Have a great Wednesday.

Chuck Butler
June 7, 2006

The Daily Reckoning