An Early Morning Currency Rally

Well, it was another day where the currencies bumped higher in the early morning, but were then sold the rest of the day. I know the currency guys (and gals) are all wondering where they go from here. Which is the way that’s clear? Well… Short-term currency forecasts are proven to be wrong, most of the time… Long term? Well, that can’t be argued. The deficit spending, the money creation, and the monetizing of debt will all come back to haunt the dollar… And as Aaron said yesterday, “we’ve only just begun”. (He was telling a joke), it holds true for the US deficit spending picture…

I know, you all are beginning to think I’m becoming the boy who cried wolf when it comes to these warnings about deficit spending, and where it will take the dollar in the future. But… I was thinking about an interview I gave to the Oxford Club, yesterday… I told them that since February 2002, the dollar, as measured by the dollar index, is down around 40%, and against some other currencies that aren’t a part of the dollar index, the dollar has lost even greater amounts. And the precious metals of gold and silver? They are off the charts when it comes to their gains versus the dollar in that same time period.

And why did all that happen? Because of deficit spending… So… I’m not really the boy who cried wolf… Back in 2001, I wrote a whitepaper called “The Decline of the Dollar”. In 2002, I wrote a whitepaper called “The Year of the Euro.” So… You can see that I was warning people way back then… And what has happened in eight years? The deficits have gone off the charts! That’s what’s happened! I told you yesterday that the budget deficit is going to add (at least!) $9 trillion to the national debt, which will put us way over the $20 trillion national debt mark! UGH!

So… Go ahead and mock me… Go ahead and call me names… But, this is my story and I’m sticking to it!

OK… Now… Yesterday, the US economic data printed some pretty good-looking data. Durable goods orders (fueled by airplane orders, which won’t happen again next month), and the housing numbers shined a bright light on the US economy. In the past six months, whenever the US data was good like it was yesterday, the dollar would get sold like funnel cakes at a State Fair. But that didn’t happen yesterday… It started out that way, but an announcement by China really threw the cat among the pigeons.

China announced that they were going to prevent further excess capacity in several industries, including steel and cement. You see, China is afraid that the markets are getting ahead of themselves, and they don’t want their economy to overheat before it really gets legs under it! Pulling back on the reins if you will… And I don’t see that as a bad thing, especially for an economy that can take off at a moment’s notice like China.

Unfortunately the markets took this as Armageddon… It was the Hindenburg all over again… Oh the humanity! China is going to put a governor on their economy while the rest of the world attempts to play catch up! What a bunch of dolts, these guys are calling for an end of the global recovery because of this news… So… The currency that acts as a proxy for global growth – Aussie dollars (AUD), took one to the gut… But before the uppercut from the markets could hit the Aussie dollars on the chin… A good piece of data printed in Australia, and it blocked the uppercut… But still battered and bruised, the Aussie dollar carries on.

Private capital expenditure, in Australia, surprised significantly to the upside in the second quarter at +3.3%, which was much greater than the forecast (-0.5%). Plant and equipment components rose by a strong 5.3% while spending on buildings was up by 0.7% in the quarter. This is all good stuff for the Aussie economy… The Plant and Equipment components, I’m told, feed right into the national accounts measurements. So, one would have to think that would boost Aussie GDP!

In Germany this morning, consumer confidence followed the positive prints of investor confidence and business confidence, with a positive print of its own! German consumer confidence rose to a 15-month high, thus telling me that economic pessimisms are being chased out of town! And as I said yesterday, perception or sentiment toward an economy is half the battle, folks!

OK… You know how I always tell you that the unemployment rate – as reported by the Bureau of Labor Statistics (BLS) – has games played with it, and as a result it is too low… I’ve said as recently as last month that the unemployment rate is probably closer to 20% than it is 10%, which the BLS reports… Well… What do we have here? Ahhh… One of the Fed Heads (Lockhart) must be reading the Pfennig!

My public relations guru, Peter, sent me this overnight… Thanks Peter!

“If one considers the people who would like a job but have stopped looking – so-called discouraged workers – and those who are working fewer hours than they want, the unemployment rate would move from the official 9.4% to 16%, said Atlanta Fed chief Dennis Lockhart.

“He underscored that he was expressing his own views, which did ‘not necessarily reflect those of my colleagues on the Federal Open Market Committee,’ the policy-setting body of the central bank.”

OK… If a Fed Head thinks the unemployment rate is 16%, then the actual number is probably closer to my 20% number than he’s admitting! WOW! I can’t believe that a Fed Head had the intestinal fortitude to call the unemployment rate out as the fraud that it is!

I’m still taken aback by this admission by a Fed Head… Oh well, time to go on to other things, Chuck… No need to hang around here all day!

Well… Did you hear the news? For the first time, it has become less expensive to borrow in US dollars than in Japanese yen (JPY). Can you say… Dollar carry trade? I thought you could.

And in a follow-up from what I reported the other day, regarding the Judge demanding that the Fed disclose the borrowers of the $2 trillion in loans made, The Fed asked judge Preska to delay enforcement of the decision until an appeals court can act on the central bank’s yet-to-be-filed appeal. Yvonne Mizusawa, the Fed’s senior counsel, said financial institutions as well as the central bank would suffer irreparable damage if loan-program details were disclosed publicly.

You know… If Ron Paul’s bill to audit the Fed Reserve would get the support it needs and is worthy of, then we wouldn’t have to go through all this legal stuff… I just don’t see how a cartel that was created in 1913 as supposedly a central bank, and independent corporation, can’t be audited… They make decisions that affect you, me and the man down the street.

OK, enough of that… Every time I head down the cartel’s, I mean the Fed’s road, I begin to pound on the keyboard, and curse under my breath!

Today, the data cupboard will yield, the usual suspect of Weekly Initial Jobless Claims, but also a second printing of the second quarter GDP, which printed the first time at -1.0%. The revision is expected to show a downward print to -1.5%, which I believe will reflect the reporting of a huge drawdown of inventories during the second quarter.

That would play well with my thought that I told you about a long, long time ago… And that is whenever it is that we begin to get out from under this depression rock, inflation will be fueled by the fact that there will be consumers attempting to buy things once again, but no inventory on the shelves of corporations.

Hey! Did you see where Eurozone M3, money supply, continues to come down, printing a softer than expected 3.4% growth in July. So… You can see that the stimulus is beginning to get pulled back, here… But, before I slap them on the back for bringing their money supply into the atmosphere… 3.4% is still HIGH! And when converted for inflation, it would be way over the 2% target ceiling for inflation in the Eurozone… So, there’s more work to do, here!

So… Let’s hope the mental giants who took the Chinese announcement yesterday the wrong way, realize the error of their thinking, and reverse the direction they took the markets after the announcement.

The Daily Reckoning