A Greater Emphasis On Deficits?

Good day. And a Happy Friday to one and all! It’s also a Mother’s Day weekend, so we’ve got that going for us! Well, the currencies are soaring against the dollar this morning, as somehow, some way, the markets have decided that today’s trade deficit reading in the United States is “important!” Wow! Took them long enough to come around, eh?

Yes, it did. All that talk last year about how “deficits didn’t matter,” made my skin crawl. My friend John Mauldin used this line a month ago, and I’ve been using it in my presentations, but think it needs to be used right here, right now; there’s no better place I’d rather use it! To all those “deficits don’t matter” campers that believed the dollar would not succumb to the deficits, I’m reminded of the man that jumps from the top of the Empire State building. As he flies past the 52nd floor, he says, “So far so good.”

Well, that man is getting closer to the ground, because the euro, which had fallen back to 1.2720 yesterday morning, has tacked on over two cents within 24 hours! Wow! It’s a moon-shot! Like I said yesterday, this negative momentum for the dollar is reminding me of the last three months of 2004. And, you may recall that I’ve been saying the euro would return to 1.30 this year. Well, who knows the depth of this negative momentum? To me, it looks as though the euro will return to revisit its previous high versus the dollar. And beyond that? Those are un-chartered waters!

The dollar’s demon overnight, has been the thought that the trade deficit for March will take back February’s gains, and post a wider deficit of $67 billion. The one quote that I saw made me chuckle: “There’s a greater emphasis on the deficit now.” Hmmm. So, “the plan” is playing out. What plan? Ahhh, grasshopper, sit down…while I tell you this. You’ll slap your forehead and say, “Why, yes, I have heard this before!”

Recall that my plan for 2006 was that the Fed would begin to slow down or even stop the rate hikes, thus taking away the second pillar of the reason the dollar was so strong in 2005. We had the HIA repatriation act expire on 12/31/2005, and once the markets got the scent of a Fed slow down, the markets would return to the overall fundamentals for the United States. This would mean the twin deficits would come into play, thus taking the dollar to the woodshed. And lo and behold, look what’s happening. I love it when a plan comes together!

Speaking of the twin deficits, I have to tell you what a dolt I was yesterday, reporting the monthly budget statement as a deficit. It was a surplus! How could I have been so blind? It was April! It was tax receipt time! You know, not making any excuses, but I was so used to reporting the monthly budget statement as a deficit, that I just reported the number as such. What a dolt! However, the budget deficit for 2006 remains close to $400 billion – even with the April surplus!

OK, back to the currencies. The Japanese yen has climbed into the 109 handle overnight, leading the way for the Asian currencies. I was pleased to see that Thailand’s currency reserves remained unchanged in the face of the baht’s 8.81% rise versus the dollar this year. I think that the Asian countries need to use Thailand as a proxy for what would happen should they too decide to raise interest rates and attract foreign investment. The rise of their currency versus the dollar needn’t be a shot to the heart.

The Chinese have kept the renminbi above the eight figure the past two days, when the normal trading pattern would have moved it below the figure. I think the Chinese are afraid of the pressure the currency will receive to get stronger, once the figure eight has been taken out. However, long ago and far away, I told you that I believed the renminbi would be trading 7.50 versus the dollar, this year. So, patience is required when dealing with the renminbi!

Speaking of moon-shots, how about the price of gold? Yesterday, it ran up in price during the late morning hours, but then sold off when there was a rumor that Iran had announced they would agree to negotiations regarding their nuclear program. However, that was soon forgotten about overnight, when the dollar began to fall versus the euro and yen. The weaker dollar has given gold a chance to run to $730!

And, this weaker dollar is just what the doctor ordered for gold. The weaker dollar will allow gold to take the next step higher. So, are you ready? I am!

In addition to the trade deficit for March, we’ll also see the University of Michigan consumer confidence for the first two weeks of May. It is forecasted to have weakened. Why, I’m surprised. I can’t imagine why consumers would have lost confidence. Of course I’m being facetious! I harp and harp on the increases each month to consumer confidence.

Yesterday, the retail sales figure for April was good at 0.5%, but fell far below what was expected, and at 0.5%, it was actually below March’s figure! This is one of those reports where you try to get something out of it, but it leaves you scratching your balding head. No wait, that’s me. I have no idea what everyone else does when a report like that prints! Nevertheless, it did show U.S. consumers are still spending. Of course, it was probably money they borrowed, but at least they’re still spending it, right? Again…facetious.

The Norwegian krone is about to leave the six handle and trade into the five handle for the first time since 1992! Wow (lot’s of WOW’s this morning, eh?)! This ought to be a real pain in the neck for the Norges Bank (Norway’s central bank) who have been trying to keep the krone weaker for a couple of years now, with low interest rates and jawboning. I would certainly think they will be trying once more to do whatever they can to keep the krone weak. But, as I always tell you, Lucy: No! You can’t go to the club! Ahem, I mean, I always tell you that the markets have much deeper pockets than a central bank, so I would continue to look for the Norwegian krone to gain versus the dollar, keeping in step with the euro.

Currencies today… A$ .7760, kiwi .6260, C$ .9080, euro 1.2930, sterling 1.8975, Swiss .8335, ISK 70.70, rand 6.18, krone 6.007, forint 205.39, zloty 3.0, koruna 21.86, yen 109.50, baht 37.68, sing 1.5625, INR 45.01, China 8.006, pesos 10.98, dollar index 83.79, silver 15.03, and gold $730.

That’s it for today. Don’t know for sure when you’ll get this, as I’m having trouble connecting to the server this morning, but I carry on despite the problem! I’d like to give a great BIG congratulations to my beautiful bride’s parents who will be celebrating their 50th wedding anniversary tomorrow. Congratulations, Larry and Kathleen! A Big Party is on the docket!

OK. Sunday is Mother’s Day. For all of you who still have a mother around that you can give a big hug to, please do so for me! I think of my mother, who I lost eight years ago, nearly every day, but especially on Mother’s Day! Have a great Friday and Mother’s Day weekend!

Chuck Butler
May 12, 2006

The Daily Reckoning