Back to Reality

Good day… And a Marvelous Monday to you! Well! How about that dollar? Or… How about those dollar bulls that were dancing in the streets last week after Big Ben Bernanke finally woke up and smelled the coffee… I mean inflation? Where have all the flowers gone… Long time passing. The dollar euphoria of last week was wiped out by… 1. ECB President Trichet, 2. Fed Vice Chairman, Kohn, 3. A fourth consecutive month of negative jobs, 4. The unemployment rate jumping to 5.5%, and 6. Saber rattling in the Middle East.

Reality strikes! Yes, the reality of the awful U.S. fundamentals hit the dollar bulls right smack dab in the nose! So… The dollar sank like a rock in water, which helped the price of oil set a new record at $138 (that’s an increase of $16 in the past two days! UGH!) It all started with European Central Bank (ECB) President Trichet on Thursday.

Since we’re talking about reality… The reality after Trichet talked is that his words had more pull on the markets than Big Ben’s. Folks, this is what you call credibility. Trichet and his cohorts at the ECB have it… Big Ben and the Fed Heads don’t… Why would Big Ben have it anyway? He’s been so wrong about this whole mortgage meltdown… And his buddy over at the Treasury, Henry Paulson has the same report card.

Oh… And here’s another piece that lacks credibility… The Bureau of Labor Statistics (BLS) and their birth/death model… I’ve gone over this many times in the past, and I still don’t know why the government uses this model. It’s always going against the grain. When an economy is recovering, it penalizes the job growth numbers, and when an economy is slowing or in a recession, like I claim we are in now, it rewards job growth that isn’t really there.

The job loss last month was -49K. The BLS added 217K jobs (out of thin air, I would argue). So the job loss was much worse than reported. Let me give you a piece that proves how bad this report is. Construction jobs were negative for the month, which makes sense doesn’t it? But the BLS added 49K construction jobs. That makes about as much sense as putting a hatchet in your head to get attention!

Continental announced lay offs of 3,000 on Friday, and then there was this from a reader in Ohio… “In Ohio they passed a law that will close ‘payday loan stores’ – the stores people go to because their credit cards are maxed out and they have no other place to go. 6,000 jobs will be lost, but more importantly, there will be less cash to spend.”

OK… Enough on that! I shake my head in disgust at all of this, but we carry on despite the shortcomings of the BLS! Oh… And how about the Cheerleaders on CNBC? I can’t let this one slip by. Those knucklehead cheerleaders on CNBC were doing their best to play spin doctor and make this jobs report look good. As I always say, you can dress up a pig, you can put rouge on a pig and you can put lipstick on a pig… IT’S STILL A PIG!

So… The dollar was sent to the woodshed, and the euro (EUR) led the currencies from the abyss they were heading to on Thursday morning. Well… Most of the currencies. Japanese yen (JPY) was weaker, even with the DOW losing 400 points on Friday. When I turned on the currency screens this morning, the euro was trading above 1.58! You just can’t keep a good currency down! “I get knocked down, but I get up again, you’re never gonna keep me down…” That must be the euro’s theme song.

The price of gold also saw some sunlight with the weak dollar, and climbed back above $900. The price of oil backed off a bit in the overnight market, as North Sea production rose. But that didn’t last long… It’s right back to $138 as I write!

Recall last week the rumors of Lehman Brothers posting their first quarterly loss? Well… This morning they finally reported that loss, and the color of it was red. When the dust settles the loss should swing to about $2.8 billion. I’m waiting for the total write-downs to be posted. Might not see them until later, so I’ll just move on… Nothing to see here.

This week… We’ve got some additional data that will continue to point to recession and weigh heavily on the dollar. We’ve also got the Fed Heads on the speaking circuit this week, and I’m sure they will attempt to do some damage control. Big Ben and Geithner speak today; Fisher (recall he’s the Hawk) speaks tomorrow; and Kohn speaks on Wednesday. Then, also on Wednesday, the Fed’s Beige Book gets printed. No great shakes with the Beige Book, but still, you never know!

The data cupboard will yield April’s trade deficit tomorrow, and the budget statement will print on Wednesday. The Big Kahuna this week (Thursday) is May retail sales, which should print better than last month’s -0.2%, given the rebate checks that started going out at the beginning of May. The Butler Household Index (BHI) has seen lots of deliveries of purchases, so given the BHI’s great track record, we’ll say retail sales will be stronger… But then, it would be hard NOT to be stronger given the awful -0.2% in April!

Then on Friday, well… The stupid CPI… Which by some magic of smoke and mirrors, is supposed to tell us that inflation is below 4%. And the “core”, which removes food and energy (which is absurd to me), is expected to remain at 2.3%. I can’t believe these people really believe that we’ll all just “accept” this number and go about their desire for us to go out and spend. Oil was setting a new record level almost every day in May, folks. CPI is a joke! (If you are a customer of EverBank World Markets, you receive the monthly Review & Focus. In the June edition, I go into detail on the changes that were made to CPI in the mid-’90s, by request of one Big Al Greenspan.)

The Canadian jobs data wasn’t as bad as the U.S. data, but then there weren’t any great shakes to speak of. 8,400 jobs were created in May, less than the 10K that were forecast. The Canadian dollar/loonie (CAD) is trying to recover from last week’s sell off of oil before the oil turn around on Thursday and Friday. I think we’ll see the Canadian loonie trade in a range with the top end just above parity… But then if oil goes to $150 like T. Boone Pickens says it will, the loonie will have plenty of fire under it to go higher.

A reader asked me to talk about what’s going on in India with the rupee (INR)… Well… Nothing’s changed really. The rupee was doing quite nicely and feeling stronger every day (I know I’m alright now). But that was hindering exporters… So the government stepped in and sold rupees. I’m really surprised the markets didn’t challenge the Bank of India on this to test their mettle… But they didn’t, and the Bank of India got its way with a weaker rupee. But I truly expect this to reverse itself, and it has slowly begun to do so in the past 10 days.

The Chinese renminbi (CNY) hasn’t had any big moves lately… So, I’ll go back to what I said last week regarding the lawmakers that usually bang on China, being tied up with other things this election season, therefore allowing China to back off the aggressive renminbi appreciation… For now at least…

Currencies today 6/9/08: A$ .9630, kiwi .7675, C$ .98, euro 1.58, sterling 1.9785, Swiss .9835, ISK 75.30, rand 7.8620, krone 5.0250, SEK 5.9150, forint 156.40, zloty 2.1430, koruna 15.60, yen 105.50, baht 33.26, sing 1.3610, HKD 7.8080, INR 42.88, China 6.9230, pesos 10.37, BRL 1.6330, dollar index 72.36, Oil $136.75, Silver $17.43, and Gold… $903

That’s it for today… Great HOT weekend here, but it started off on Friday with some really strong storms, tornados, hail, etc. There are more of those expected this afternoon! Cards take two of three from the Astros again… You gotta love it! I got to spend some great time with old friends yesterday. Years ago, we used to live next door to each other, now we see each other once or twice a year… Strange how that happens! Did nothing but relax this weekend; got some of the recent swelling out of my leg and ankle… Well… Mike is here, and now Mary… I must be late!, better hit the send button… I hope your Monday is Marvelous!

Chuck Butler
June 9, 2008

The Daily Reckoning