A Moon Shot for Gold!

Good day… Well, things look a bit differently on the currency screens this morning, as the dollar has bounced back. Trust me, it wasn’t from any of the data yesterday! No, with a lack of data the rest of this week, the markets are looking at two Fed Head speeches due out tomorrow, and buying dollars.

Here’s the skinny… Fed Heads Fisher and Yellen will speak tomorrow, and both have indicated recently that they are not happy with rising prices. So, this really gives me reason to laugh out loud. Jawboning a currency higher or lower is one thing… But this? They haven’t even begun to speak, and the markets are anticipating that they will talk about inflation pressures. So we have a new term, “Anticipation Jawboning”. Of course when I was typing the word “Anticipation” I could hear Carly Simon singing the song!

So… With traders buying dollars this morning, the euro has slipped back below 1.31. I don’t expect this dip to last too long, but while traders are buying dollars, it always seems to me to be an opportunity to sell them! If they want to buy them… I’ll sell them all day long!

On Tuesday, I promised you a special treat for Wednesday’s Pfennig, and then forgot about it altogether. But then, no one must have been paying attention in class, because I did not receive one reminder that I had failed to deliver the special treat! Anyway… I won’t let that lack of attention get in the way of a good story, so here’s one of my faves… Stephen Roach, and his take on last week’s awful showing of the TIC’s Data.

Stephen Roach, from his Monday letter:

“The U.S. Treasury’s latest report on international capital flows came as a shocker. Net foreign inflows into longer-term U.S. securities fell to just $15.6 billion in December 2006 – the weakest monthly reading in nearly five years. This stands in sharp contrast to America’s enormous external financing needs – about $3.5 billion of foreign capital inflows each business day required to fund a current account deficit that was running at close to an $875 billion annual rate in the first three quarters of 2006. Does an external financing shortfall of this magnitude finally spell trouble for the seemingly Teflon-like U.S. dollar?

“Probably not – or, at least not yet. The monthly Treasury International Capital (TIC) data are not exactly the most reliable piece of intelligence in the U.S. statistical system. The figures are extremely volatile – expect a big bounce-back next month – and quite often they do not match up well with capital flow data provided by other nations.

“Notwithstanding these flaws, the TIC data should not be ignored. Over time, the Treasury statistics do a reasonably good job in tracking the international investment transactions embedded in the U.S. balance of payments. As such, TIC reports can be helpful in pinpointing the tensions arising between America’s external financing requirements and foreign willingness to provide the requisite capital. And there can be no mistaking a worrisome build-up of tensions on several fronts: First, the United States has made no effort to reduce its chronic saving shortfall. Reflecting persistent structural government deficits and the first back-to-back years of negative personal saving since the early 1930s, the U.S. net national saving rate has held at a record low of 1% of national income over the past three years. Lacking in domestic saving, America has placed heavy demands on the rest of the world – absorbing about 70% of global surplus saving over the past couple of years – to fund its ongoing economic growth.

“Second, the rest of the world is waking up to the notion that there are alternatives to low-yielding dollar-denominated assets. That’s especially the case in the poor countries of the developing world, who collectively hold over $2.5 trillion in excess foreign exchange reserves – that is, reserves above and beyond those which would be required to pay off some $550 billion of short-term external indebtedness.

“Third, Washington continues to flirt with a protectionist response to America’s outsize bilateral trade imbalance with China.

“There are, of course, many other considerations weighing on the dollar – ranging from a likely narrowing of cross-border interest rate spreads and relative equity returns to reserve diversification strategies of Middle East and other Asian reserve managers. At the same time, the three largest surplus savers in the world – China, Japan, and Germany – are all hard at work trying to stimulate internal consumption. To the extent those efforts bear fruit – and, in my view, it’s only a matter of when – they will then draw down their surplus saving and have less excess capital to send America’s way in the form of investments in dollar-denominated assets.”

I know that the piece was long, and I even cut out some of the “boring stuff”! I hope you enjoyed that as much as I did!

Swiss National President Roth has again warned the market that the carry trade could all end in tears but, once again, the market is not listening.

OK… I’ll finish up today’s letter with a recap of yesterday’s data here in the United States. First, we had CPI, which did print at 0.2% instead of the forecast 0.1%, but still that’s nothing. The real number was probably three times that print! The markets believe, however, that this report is an indication that the Fed will remain on hold for now, and probably till mid-year.

Leading indicators were very soft in January, but December’s number was revised up. Holy offsetting data Batman! What are we to think of this? I’ll tell you what to think of this. It plays well with the retail sales, and with all the other data that we’ve seen recently. The fourth quarter was strong here in the United States, but since then, things are beginning to slide. Oh… Did you see that Toll Brothers reported that their profits in the last three months have fallen 67%? OUCH! Now that’s going to leave a mark somewhere!

And finally… The minutes of the FOMC meeting. Not much here… The Fed Heads are happy with what they’ve done so far. I think they are wearing rose-colored glasses!

I couldn’t get through this without talking about the $22 increase in gold yesterday! WOW! With all the Fed Head talk about “inflation pressures” and “rising prices”, gold traders finally pushed the shiny metal past the $670 level, and once it was past that previous tough row to hoe, it soared! Good Show!

Currencies today: A$ .7885, kiwi .7055, C$ .8615, euro 1.3095, sterling 1.9520, Swiss .8050, ISK 66.60, rand 7.07, krone 6.16, SEK 7.11, forint 192.20, zloty 2.96, koruna 21.56, yen 121.20, baht 33.95, sing 1.5340, HKD 7.8110, INR 44.11, China 7.7439, pesos 10.97, dollar index 84.49, Silver $14.25, and Gold… $678.70

That’s it for today… How about that gold performance yesterday? WOW! Sure does make you want to participate in the gold market doesn’t it? Just one week to go for me, before I head to Jupiter, and not to get more stupider! But to see my beloved Cardinals! When I was a youngster we used to celebrate this day… George Washington’s Birthday. Yep… Ol’ George was born on February 22, 1732. Now we just lump him in with other presidents. To me, that’s a crying shame! Have a great Thursday!

Chuck Bulter — February 22, 2007