Big Al's Talking Recession…Again!

Good day… Whew! Some crazy stuff going on while I was basking in the sun, watching my beloved Cardinals in Jupiter! Ok, it wasn’t sunny every day! And I’ve been keeping up with the goings on through the Pfennig, which I can now get on my cell phone. But, Hey! I WAS on a mini-vacation, right?

Anyway… Chris has given you some food for thought regarding the strength of Japanese yen, and the unwinding of the carry trade. I’m still not sold completely on this “unwinding”. You see, you only have to go back to last spring to see the same type of sell off in stocks, and commodities, and a rise in yen. That was all attributed to a flight to safety. Having said that, I’m not completely sold on “unwinding”. The proof sure has been in the pudding, as the high yielding currencies have taken it on the chin, while the low yielding currencies have rebounded.

I’ll have to see more of that though. We did see Japanese yen give back some gains yesterday afternoon and overnight, so it will be interesting to watch as the week plays out. I would have to think that this “flight to safety” could all come to an end this week should the February Jobs Jamboree data indicate strong job creation in the United States. Unfortunately, I don’t see that happening either… 100K is the forecast right now, and that’s not enough to warrant any change in trading trends.

Speaking of data… Yesterday, the ISM Manufacturing Index for February printed weaker than last month’s 59, and weaker than expected (57.1). ISM for February printed at 54.3. We’ve seen this data become quite volatile lately, but for the most part it has been weak, and will continue to go back and forth as long as the dollar remains supported…by someone! When those buying dollars finally succumb to the pressures and sell their dollars, ISM will rebound…but not until then.

OK… The Reserve Bank of New Zealand (RBNZ) meets tonight, and I’m expecting them to raise interest rates. The tracks have been greased for the RBNZ to raise rates now that kiwi has weakened. With kiwi above 70-cents last week, the RBNZ had to think that raising rates now would only push the currency higher. However, now that the markets have seen to pushing the currency lower, the RBNZ can go ahead to hike rates. A rate hike will help to underpin kiwi at this point.

I fully expect the European Central Bank (ECB) to hike rates tomorrow morning. They have all but told us that that was what they were going to do, so I think that tomorrow we’ll see some more of their “vigilant” work on fighting inflation.

The Bank of England (BOE) also meets tomorrow, and a rate hike from the BOE isn’t a “done deal” like from the ECB. Recall, when last seen, the BOE surprised the markets with a rate hike in January.

The BOE might hike based on the ample amount of money supply being created in England…and if they don’t this month, then I fully expect them to do so next month.

All this yen strength lately put a smile on my face… And why not? I have taken it on the chin with yen for two years! Yen still has quite a ways to go before it really makes me smile, but Asian currency strength is hitting on all eight right now, with yen, Singapore dollars and Thai baht all leading the way for a stronger renminbi. THIS is what we need to help correct the global imbalances… Asian currency strength!

Big Al Greenspan is back in the news with a follow up to his “recession for the U.S.” speech last week that really got the ball rolling on all this selling in stocks, commodities, etc. Now, Big Al tells us there’s a one in three chance of a recession. I guess he got the memo from Big Ben Bernanke to “cool the recession talk!” You see, according to Big Ben and U.S. Treasury Secretary Paulson, everything is just peachy dandy with the U.S. economy, debt position, and trade.

I know Chris had mentioned that maybe I would talk about the poor performance of gold lately. As I said above, this looks strangely like last spring’s sell-off in commodities. I can’t really think of anything else that would push gold so strong… But, Hey! Talk about cheaper prices to buy gold! And think about it for a minute… These types of moves are what the EverBank MarketSafe Gold CD is all about. With the averaging of prices used to smooth out these ups and downs, while protecting your principal, I would think investors would be all over it like a cheap suit!

Last week, I talked about the problems that are surfacing from subprime mortgages. I won’t go into the full explanation again, but I thought I would update the story. It sure seems the mass media is now hopping on this story… Better watch out now! Looks like the large companies that bought subprime mortgage lenders are all scrambling to sell, now that this rot on the mortgage vine has been exposed. There’s even a large California based subprime lender that is now being investigated by securities regulators and federal prosecutors.

It’s just my opinion on this whole subprime thing, but I see this as a house of cards that’s beginning to crumble. And when it does, the damage to the economy is going to leave a mark! And then I think we will see Mr. Greenspan’s one in three chance of a recession!

It’s all very scary to me. I just don’t see how Bernanke and Paulson are so blind!

Today’s data includes one of my most disliked pieces of data… Productivity. We’ll also see factory orders for January. I’m sure, that this data will just keep the ball rolling on the negative data build up for the United States. And that will eventually weigh heavily on the dollar!

Currencies today: A$ .7740, kiwi .6810, C$ .85, euro 1.3115, sterling 1.9290, Swiss .8175, ISK 67.90, rand 7.40, krone 6.22, SEK 7.077, forint 193.15, zloty 2.975, koruna 21.49, yen 116.50, baht 32.35, sing 1.5280, HKD 7.8145, INR 44.46, China 7.7450, pesos 11.1350, dollar index 84.10, Silver $12.94, and Gold… $645.30

That’s it for today… Here today, gone tomorrow… Back out the door to Orlando bright and early tomorrow morning… The Pfennig will be short-n-sweet tomorrow, you can count on that! Mary O. and Susie Q. are here, so I must be running late! Better hit the send button, and begin to look at the 400 emails in my box! Have a great Tuesday!

Chuck Butler — March 06, 2007

The Daily Reckoning