Carry On

Good day… Things were absolutely crazy on the desk yesterday with a flood of mail from the extended holiday weekend and a flurry of investors calling to get into our November MarketSafe CDs. The dollar was down vs. most of the currencies, with the biggest gains going to the currencies with the most stable economies. The Carry trade looks like it is creeping back into the markets as some of the high yielders rebounded and the yen lost some ground. Chuck sent me these thoughts late last night:

“OK… The Carry Trade came back to life again yesterday… UGH! Yen lost ground and Aussie, kiwi, Iceland, etc. all rallied… What brought it back? Stocks rebounded… But is that a dead cat bounce? I’m not even your last choice as a stock analyst, folks… So I won’t go there…

Today, we will see the color of October Retail Sales… I have to say that I wasn’t really paying attention to the Butler Household Index this month… So I’ll have to go with my gut feeling and that is that Retail Sales will disappoint, and it will be looked back upon in the future as the beginning of the end for Consumers… I think they are spent! Maybe they have a dead cat bounce in them still… But when we look back, I’m certain this will mark the end…

If I’m right… There’s goes the neighborhood! And there goes GDP growth!”

Thanks to Chuck for getting me those thoughts after what was a pretty late night out last night (more on that later). Chuck’s gut is agreeing with the experts who predict a slow down in October’s retail sales due to rising fuel prices and falling property values. The median estimate is for a .1% increase in purchases, the smallest increase in four months. Another report today may show higher energy costs pushed up wholesale prices. Americans will have to start reigning in their discretionary spending in order to pay their energy bills this winter. This consumer spending slowdown during the very important Christmas season could have dire consequences for US economic growth in 2008.

While the US retail sales are slowing, China’s retail sales rose at the fastest pace in eight years. This report is further illustration of the dichotomy of our two economies. Both China and India have been growing at near double digit rates for the last few years. And while this growth has been on the back of exports, these high growth rates have contributed to a burgeoning middle class in both of these countries. Retail sales in China increased 18.1% in October from a year earlier. Sales of clothes, electronics, and automobiles jumped more than 30%. Consumption will continue to increase as more of the wealth is distributed to this new middle class.

The world’s economy is growing less dependent on the US consumer. A dramatic slowdown in the US economy will not have the impact on global growth that it once had. This is a good thing for the global economy, but not such a good thing for the status of the US$ as the world’s reserve currency. Another illustration of why investors should diversify their investment portfolios out of the US$.

Reports released in Europe this morning are further proof the global economy is doing just fine. Economic growth in Germany and France, the euro region’s two largest economies, accelerated in the third quarter as consumers stepped up spending. German gross domestic product increased .7 percent in the third quarter from the second, when it expanded .3 percent. In France, the economy expanded at the same pace in both quarters. These strong numbers will boost the possibility of another increase in rates by the ECB as inflationary pressures increase. Good stuff for the euro!!

In the U.K. November CPI numbers should have put the kyboshes on a December rate cut, but the Bank of England followed the report with a signal there is room to cut its benchmark rate at least once next year. The CPI numbers showed inflation came in at 2.1%, slightly above the BOE’s target. The BOE believes the inflation rate will settle back to the bank’s 2 percent target in 2009 after rising above it next year. The markets focused on the BOE’s signal of the possibility of lower rates in 2008, and the pound sterling sold off.

The Australian $ bounced back of its recent lows and is trading back above .90 this morning. Chuck noticed the bounce back and sent me the following note late last night:

“The Reserve Bank of Australia will find it hard to get out of the rate hiking game as inflation has really jumped over their 2-3% target hitting 3.25%… Knowing the Reserve Bank as I do… I expect them to take the view point that they have more work to do, with regard to interest rates… And that thought alone could help Aussie get back on track toward the high 90’s!”

Finally, I will end today’s Pfennig with some predictions. Before our lawyers speed-dial my number to admonish me for making currency predictions, I will let you know these predictions come from the currency ‘experts’ at Bank of America. BOA cut its forecasts for the dollar yesterday and now believes the euro will trade to $1.48 by year end compared to a previous forecast of $1.44. It also expects the US currency to end the year at $2.11 per British pound and 108 yen, compared with previous forecasts of $2.05 and 112 yen.

Currencies today: A$ .9054, kiwi .7631, C$ 1.0467, euro 1.4687, sterling 2.0672, Swiss .8929, ISK 59.82, rand 6.69, krone 5.388, SEK 6.2947, forint 172.89, zloty 2.4803, koruna 18.184, yen 110.99, baht 31.45, sing 1.4460, HKD 7.7895, INR 39.305, China 7.4253, pesos 10.87, BRL 1.7482, dollar index 75.57, Oil $92.19, Silver $14.88, and Gold… $808.90

That’s it for today… A little shorter than usual today, but I have got to get working as we are short handed on the desk again. Chuck will be back in the saddle tomorrow, after flying home late tonight. Sounds like he has had a great trip to Florida, and he sent me the following story about the pretty awesome night he had last night:

“Our friend, Steve Sjuggerud, who happens to be such a great person, and surfer, and investment analyst, and from what I found out tonight… A great guitar player!

I had one of the best nights of my life tonight… Steve Sjuggerud came to dinner with us EverBankers, and in each hand he carried a guitar case… In those guitar cases were vintage, and very expensive Martin acoustic guitars… He handed me a 1930’s Martin that sounded like a symphony.. I had never played such a beautifully sounding instrument in my life!

Steve and I then sat down on the stage in the restaurant and began playing guitars together… He was incredibly good, and quite frankly I was just along for the ride… But I carried out the songs, and belted them out too… Those two guitars carried the room, and didn’t need microphones, etc! As for my singing… Well… Let’s just say I was rusty! But I sat there playing this awesome guitar with Steve Sjuggerud and it didn’t matter… I was in heaven!

So… The next time one of you see Steve, ask him about this night…”

Chris Gaffney
November 11, 2007

The Daily Reckoning