Borrowing A Phrase From The Boss!

Good day. Thanks to everyone that sent along their congratulations on my news yesterday. I truly appreciate those things! The U.S. soccer team got off on the wrong foot in the World Cup yesterday! Ugh! And the currencies? Well, a day of range trading saw the dollar remain well bid and remaining at the wheel.

You know, when the Big Boss (Frank Trotter) refers to the home office in Jacksonville, he calls it “At the Top of the House.” Well, I’m going to borrow that phrase from him and say that after last Monday’s tough talk by Big Ben Bernanke, global inflation is now “At the Top of the House,” as far as the markets are concerned. Look at the rot on the global stock market vines. Of course, inflation isn’t any thing a bond market would call “friend.” So, where’s the cash going?

Ahhh, grasshopper, interest paying bank and money market accounts, soaking up the interest rates, and stepping away from the “inflation game” for a while. That’s my take on it. Of course, there could be many other destinations, but from my view in the cheap seats…this is my opinion.

And with inflation “At the Top of the House,” guess what we get to see the color of this week? Well, if you were paying attention in class yesterday, you would now be putting your hand up in the air, Arnold Horshack style, and saying, “Ooh, call on me, call on me!” Yes, you are correct, sir! First PPI today, and then CPI tomorrow. First PPI: last month, we saw a blowout 0.9% gain in PPI. This month, we should see that reduced, but still gain 0.4%, which would bring the annualized number to 4.4%.

Then, tomorrow, we’ll see CPI, and this is the one that gets everybody all lathered up. Of course, for months now, I’ve been ranting about how this report is useless, as it does not contain things that we use everyday and spend money on. But suddenly, it is the “darling” of the markets. And so, I’ll play along. CPI is expected to have gained 0.4% in May, or 0.2% ex-food and energy. This would put the number (that I look at) at 3.9% annualized. Ex-food and energy (which the media looks at) should come in around 2.3% annualized.

I know, I know…this stuff is all about as boring as sitting in a traffic jam! But, we need to cover it. As I said, inflation is “At the Top of the House”!

So, what’s it all mean, Alfie? Well, I suspect that the markets are running scared of the fear that CPI could come in higher than 2.3%, which would really be the last nail in the coffin regarding a Fed interest rate hike on June 29, 2006. That would support the dollar, even though I would argue it shouldn’t, but we have to go along with what the markets are pushing at the time! If we would see a better-than-expected printing of CPI, say around 2.1%, then the dollar would get sold. Kind of all backwards and twisted, but we carry on!

Today is retail sales day for May. And as I told you yesterday, the Butler Household Index tells me that the retail sales report for May will be disappointing.

You know, when I’m talking about inflation being “At the Top of the House,” I’m not just talking about here in the United States. Global inflation is pushing central banks all around the globe to hike rates. The Big Kahuna, Japan, will probably raise rates for the first time in a month of Sundays, next month. When rates finally get off the snide in Japan, it won’t take long for the markets to recognize that a rate-hike cycle is in place, and that owning yen now, will be far cheaper than in the future when yen carries an interest rate!

And Europe…The ECB has gone on record with three rate hikes in the last seven months, and said that inflation is the culprit. As I’ve been saying for several months now, interest rates are going to 3.25% and maybe even 3.5% in the Eurozone. I don’t think the ECB has any eye on the euro, or even growth when it comes to raising rates to combat inflation and provide price stability.

So, as the euro rises (this is all my scenario, I have no crystal ball that says it will happen), all the pundits will be out crying wolf that the euro is too strong, and that it is hurting exports, etc. But, they won’t get any help from the ECB, at least not while inflation is “At the Top of the House!”

The euro may be under some “dollar spell” right now, but I see it as temporary. I still see the single unit trading back above the 1.30 level by year’s end. And that will be good news for the other “Euro” currencies: Norway, Sweden, Switzerland, Denmark, and even Iceland!

The Canadian dollar/loonie continues to gain favor after that robust jobs report on Friday, while the other “Commodity Currencies,” Australia, kiwi, and rands, suffer from dollar strength. Again, I’m not ready to throw in the towel on the commodities bull market. Not even close to throwing in the towel, either! So, something has to give here sooner or later, and I’m all for sooner!

It looks like Big Ben Bernanke is taking up the fight with China to provide a more flexible currency. Big Ben was quoted yesterday, sounding like Robert Rubin from the mid 90’s, saying, “It’s in the interest of China to make the currency more flexible to address global imbalances in trade.” The renminbi gained a huge chunk of ground versus the dollar overnight, but hear me now and believe me later when I say that move in the renminbi was merely a co-in-q-dink! It had nothing, absolutely nothing, as Edwin Star would say, to do with Big Ben’s comments!

I find it interesting that Big Ben has enough hours in the day to deal with something that is the charge de’ affairs of the U.S. Treasury Department.

Currencies Today: A$ .7425, kiwi .6225, C$ .9075, euro 1.2595, sterling 1.8425, Swiss .80, ISK 74.70, rand 6.8270, krone 6.19, forint 214.48, zloty 3.20, koruna 22.5180, yen 114.50, baht 38.50, sing 1.5960, INR 45.02, China 8.0034, pesos 11.4843, dollar index 85.99, silver $10.46, and gold $588.10

That’s it for today. It’s Flag Day tomorrow. I sure hope to see plenty of flags flying on my ride home tomorrow! Our little Christine/Caroline returns today. And so does Ty, so we’ll have a full desk for once! Looks like lots of travel is piling up again in my future. Vancouver, Montreal, San Francisco, and Panama are all on the docket and all within two months! So, if you’re in these areas I would love to see you! Have a great Tuesday!

Chuck Butler
June 13, 2006

The Daily Reckoning