Comparing Unemployment Numbers…

Good day… Whew! That was quite a crazy first business day of the year! I know that not everyone was back at their respective desks due to the National Day of Mourning for former President Ford. But the currencies sure traded like everyone was in place again. Oh, one thing I forgot to mention yesterday is that 2007 begins my 16th year of writing the Pfennig… That’s a lot of years, eh?

And in those years I’ve seen the last weak dollar trend, and the strong dollar trend that went along with the go-go years of the tech stocks. So…when people question me about why I just talk about the dollar weakening, I know that they are not long time readers!

OK… Lots of bumps and grinds yesterday, but the currencies traded within a range for the majority of the day. In the overnight markets, the dollar has bounced back a bit on profit taking… But just when the profit taking began to push the dollar higher, the latest report on German unemployment surprised the markets with the strength of the labor market, and the euro has bounced back.

German unemployment dropped the most since unification (in 1990). The December German unemployment rate fell to 9.8% from 10.1%, and although that may seem outrageously high to you… Remember that if we didn’t cook the unemployment books in the United States, the unemployment rate would probably be closer to 12%!!!!!! Yes… That number is what I use in my presentations, and is taken from, once again, one of my fave economists, John Williams, and his Shadow Statistics website.

As far as 2007 is concerned… I see a continued weakening of the dollar, albeit not as pronounced as in 2003 and 2004… That is unless the Chinese pull a rabbit out of their hat! If the Chinese change their currency policy to allow greater flexibility of the renminbi, the Japanese yen will follow, and then that opens Pandora’s box of bad things that happen to the dollar. But… If the Chinese sit on their hands and allow the renminbi to gain a feeble 3% again this year, then we will see the slow downward grind in the dollar… That’s my story and I’m sticking to it!

So… In case you missed it in the last paragraph… I’m hinting that unless China changes their currency policy, the Japanese yen will have a hard row to hoe versus the dollar in 2007… And while I still believe in my heart of hearts that yen is so undervalued and should be trading around 100 versus the dollar, if we see something south of 110 this year, we ought to be smiling like a Cheshire Cat!

Back to the data cupboard today with the printing of the ISM Manufacturing Index for December… Recall, that in November the index fell below the line drawn in the sand at 50. For new readers, this index measures manufacturing with an index. Any number above 50 represents expansion in manufacturing, and any number below 50 represents contraction… There have been many, including me, that believe this is a better measurement of how well the economy is doing than GDP, given the Government influence of the GDP number.

Anyway… November’s index fell below 50 to 49.5, and the dollar would be sold instantly should last month’s performance be duplicated… However, the experts believe that manufacturing will have inched up to 50… Now, this is no great shakes, and in my mind continues to show the rot on the vine of manufacturing… But if the markets get all lathered up over a 0.5 rise in the index, then let them! It’s just a silly phase they’re going through… And if I call you, don’t make a fuss… No wait! No time for 10CC this morning, Chuck!

We end the week with a Jobs Jamboree Friday, and that should hold the markets’ attention for, oh let’s say, ten minutes! HAHAHAHAHA! Seriously though… Right now the experts are forecasting only 115K jobs created in December. That’s sickly job creation, don’t you think? We should be at least 150K each and every month to maintain the economy’s growth… But I guess that’s not happening, given the last GDP was only around 2%.

But I’m not here to bash that growth… Economic growth is good, no matter how weak it is… It is far better than negative growth, eh? What I am saying though is that with growth only around 2%, and the labor picture so wishy washy, one has to believe the Fed is finished with rate hikes, and their next move will be downward. Hmmmm…. I can hear you saying right now… “But Chuck… Didn’t you say that you believed the Fed would have to come back for one more rate hike in 2007 due to stubborn inflation?”

Ahhh grasshopper… Yes I did say that! And it still might be in the cards… But as of right now, the markets don’t believe that will happen, and are betting on rate cuts in 2007… And as long as they believe that… The dollar will be on the hot seat.

When I left for vacation a couple of weeks ago, the Emerging Markets were rebounding and it looked as though investors appetites had opened up the purse strings and become a bit less afraid of risk. However, by year-end risk aversion was back in swing… But now, (that I’m back, HAHAHAHA) the Emerging Markets of South Africa, Mexico, Iceland and others are staging yet another run.

One Emerging Markets currency, the South African rand, has really been putting on the Ritz lately with a very strong move versus the dollar. I’ve always shied away from the rand because of its volatility, and nothing’s changed there… But I did want to say that the weakness it saw last year probably was justified due to the imbalances of the South African economy… But, as we head to 2007, those imbalances have started to correct, and that should give the rand a lift… But then, you never know what the South African Reserve Bank and the Government have up their sleeves… As we’ve seen in the past, these two can knock the stuffing out of the rand at any time… So… The volatility remains.

Someone asked me to talk about the Icelandic krona. Well… Iceland falls in with the Emerging Markets… So… If investors are losing the risk aversion hat… Iceland should benefit… Inflation continues to weaken in Iceland, and if the aluminum plants that have been built begin production this year, the krona should be underpinned… But, all it takes is a return to risk aversion, and all the good things happening there are thrown out the window!

Iceland should continue to be looked at strictly as a “speculative” investment… In my opinion of course!

I have to end this with a good feeling story… So… I’ll head to the South Pacific, where the Aussie dollar has risen to a 20-month high versus the greenback! Investors are flocking to the Aussie dollar on thoughts that the Reserve Bank of Australia (RBA) will raise rates again, thus making the interest rate differential to the United States even wider… Of course, I told you all that months ago… But I won’t get in the way of this “new feeling” by investors.

The RBA doesn’t meet in January, so this build up to the February 6-7 meeting will intensify, especially if a strong fourth quarter inflation report is printed later this month on the 24th… But… Right now… It’s all good for the Aussie dollar…

Currencies today: A$ .7943, kiwi .7040, C$ .8555, euro 1.3230, sterling 1.9615, Swiss .8190, ISK 70, rand 6.93, krone 6.22, SEK 6.8150, forint 190, zloty 2.89, koruna 20.76, yen 119.25, baht 35.60, sing 1.5320, HKD 7.7850, INR 44.36, China 7.8050, pesos 10.79, dollar index 83.59, Silver $12.91, and Gold… $634.40

That’s it for today… I tuned into our St. Louis Blues hockey game last night and lo and behold the camera was focused in on Chris Gaffney and Mike Meyer! Too bad they didn’t have EverBank hats on, like the one I wear EVERYWHERE I go! HAHAHAHAHA! I’m glad it’s a Wired Wednesday, because I’m tired this morning! Have a great Wednesday!

Chuck Butler, January 03, 2007

The Daily Reckoning