Another Record Trade Deficit

Good day…and a happy Friday to one and all! A Friday the 13th…oooooh…scary, eh? The weather here in St. Louis has turned cold! YECH! Not as cold as my beloved Cardinals’ bats were last night though! UGH! The currencies remain in a Tupperware-like tight range…even a new record monthly trade deficit couldn’t get any movement from traders. Don’t know what they’re waiting for, but it must be something good!

OK…the United States trade deficit widened 2.7% to $69.9 billion from the previous record of $68.0 billion in July. The jump in the deficit surprised the “experts” who thought the trade deficit would “narrow” to $66.4 billion. Recall last month when the $68 billion (record at that time) printed and those dolts wrote that it was going to be a “temporary budge”?

So, I began to look around to read what the dolts were writing about this new record amount. Again it was blamed on oil prices…and again it was looked at as a temporary budge. OK, I’ll give them the thought that with oil prices falling, the September report should have a better look to it…but let’s face the facts here, it’s not all oil related! As I always tell you, we don’t import oil from China and Japan!

Here’s another fact that the markets haven’t taken into consideration…the “hit” that GDP will take in the 3rd QTR from a trade deficit of this magnitude. So all those “happy campers” that have been making investment decisions based on the calls that economists have made about “stronger GDP” in the 3rd QTR, will have to rethink those decisions, because I’m thinking that GDP will be less than 2.5% in the 3rd QTR.

Well, I was really not going to get into the trade deficit like that, because if the markets don’t care about it, then why should I? But you know me…I couldn’t let a brand spanking new record trade deficit pass by without saying something!

Today, we’ll see the color of September’s retail sales in the United States. As I said the other day, the BHI tells me this will be a non-event…the “experts” believe retail sales posted a 0.2% gain in September…so we’re both on the same page. We’ll also see the U. of Michigan Consumer Confidence for the first two weeks of October…of course this will show a gain in confidence, how could it not? The people they survey don’t care about anything but what’s going on in their own little worlds…and there, they’ve seen a pause in interest rate hikes, oil prices fall over $20, and the DOW reach a new record almost every day…Wahoo! Let’s boogie down!

Sorry to have gotten carried away there, it’s just that these stupid surveys are about as useless as a broken crutch.

Recall last week when I told you that China’s dollar reserves would probably hit $1 Trillion by the end of the year? Well…they must be getting close, because their total currency reserves hit $988 billion at the end of September…and we all know that dollars make up a very large piece of that total! Get this statistic…China’s currency reserves grow at a rate of $30 million an hour! WOW! I wonder what lawmakers Schumer and Graham are thinking these days.

And recall last week when I talked about looking for credibility from the Fed Heads? Well…that means singing from the same song sheet…otherwise people get confused, and can’t tell what it is the central bank is going to do. So last week, Big Ben’s speech wasn’t as hawkish as Kohn’s, and this week, Poole’s wasn’t as hawkish as Lacker’s…in fact, Poole went out on a limb by hinting at a rate cut! Let’s go to the tape!

Poole (traditionally a hawk) spoke last night and had a very dovish tone. He said “inflation risks have receded in the last 8-10 weeks” while “the danger to growth and jobs has grown”. When asked about the possibility of rate cuts, he said, “They would be ‘highly appropriate’ if all economic news broke to the downside.”

Well…the good news is that Poole isn’t a voting member. He’s out there though, isn’t he?

Interest rates were left unchanged by the Bank of Japan at last night’s meeting. However, Bank of Japan Gov. Kukui said, “a rate hike this year cannot be ruled out and that the timing of the next hike depends on the economy and price.” That’s all fine and dandy, but it doesn’t give the yen anything to crow about. I would have thought that Fukui would be out there intervening to support yen…aren’t the Bank of Japan Governors always talking about how excessive moves in the yen are “undesirable”? They certainly knew how to sell yen when it was pushing the envelope versus the dollar a couple of years ago…is this not a two way street, Mr. Fukui?

N. Korea said yesterday, that it felt compelled to prove its nuclear capacity to “protect its sovereignty and right to existence from the daily increasing danger of war from the United States.” So, they vow to continue nuclear detonation tests. They’ve warned the United States about sanctions…and they’ve warned Japan…

Last night, my beautiful bride said to me, “Chuck, I remember you saying before the Iraq war, that you were more concerned with N. Korea than Iraq.” I was surprised that she had heard me then, and that she had listened to me now…but she had! Maybe I’m getting through to somebody!

Currencies today: A$ .7520, kiwi .6595, C$ .8825, euro 1.2550, sterling 1.8610, Swiss .7875, ISK 68.15, rand 7.5325, krone 6.73, SEK 7.3740, forint 211.55, zloty 3.0970, koruna 22.52, yen 119.25, baht 37.42, sing 1.5830, HKD 7.7875, INR 45.43, China 7.9015, pesos 10.89, dollar index 86.86, Silver $11.40, and Gold… $580.40

That’s it for today…another weekend chock full of sports for yours truly, with my beloved Cardinals all weekend, my beloved Missouri Tigers in a big test tomorrow, and the Rams on Sunday…but I’ll probably miss quite a bit of all that, as I head out to San Francisco tomorrow morning. Oh, and I can’t forget my little buddy’s football game this evening! The Pfennig will be later than usual next week, as I will be on the west coast, 2 hours difference from here. Have a great Friday and weekend!

Chuck Butler
October 13, 2006

The Daily Reckoning