Day Two for Risk Aversion

Good day… And a Terrific Tuesday to you! Well… The reigniting of fears really caught some wind in its sails yesterday… And why not? You see, Lehman Brothers was rumored to announce their first quarterly loss since going public, and will seek additional capital to shore up their balance sheet. I keep telling people/anyone that will listen, that we’re not even close to being out of the woods, and the losses, if being honest, will continue to mount.

Did you see the news yesterday that Wachovia’s CEO was asked to resign? Or that Washington Mutual also announced a change at the helm. It wouldn’t surprise me one iota if long after Lehman announces their loss that another “change” is announced.

So… The risk aversion has a two-day win streak going. It will be interesting to see if the Lehman story comes to fruition, and if it does, what it will do to the risk aversion move. Or… Was it a case of sell the rumor, buy the fact? We’ll have to wait and see, eh?

With the two-day win streak for risk aversion, the currencies have seen some lovin’ once again. Forgotten but not gone, the euro (EUR), yen (JPY), and franc (CHF) all posted nice gains yesterday and overnight. I’m seeing a little dollar strength right now, as the euro was 1.5606 when I turned on the screens, and it’s now fallen back below 1.56.

Eurozone Manufacturing posted a better than expected number yesterday, remaining above the 50 level. So… Economic growth hasn’t slowed as much as the pundits have been going around talking about. Inflation remains the bugaboo for the European Central Bank (ECB) and ECB President Trichet.

I had a reader send me a very funny note yesterday regarding the Eurozone’s inflation problem. “A suggestion for the Eurozone. If they’re worried about rapid rising inflation stats, they should hire the U.S. stat calculation folks and they can moderate those nasty numbers and give them the great peace we have here in the USA!”

Now that’s funny! Whoa! We just had a streak of lightening outside my window here that was too close for comfort! It made me jump! The rain is falling so hard that it sounds like a train on our roof! Yikes! I’m sure glad I made it here before this all started! WOW!

Speaking of Manufacturing reports… The U.S. ISM Manufacturing Index, did improve in May, but remained under the 50 level that marks the dividing line between contraction and expansion. These data reports lately don’t really say anything but confirm my friend, John Mauldin’s description of the economy: “muddle through”.

Speaking of John Mauldin… I’m going to be speaking in Dallas in September, and I’m going to catch up with John then. I’m looking forward to that!

Yesterday, I reported that the Australian retail sales shocked on the downside, but warned not to take one soft report and make a slowdown of it… Then came word that the soft retail sales could be explained. Let’s listen in on the explanation from the folks down under…

“Retail trade fell by 0.2% in April, well below expectations for a rise of 0.2%. However almost all of this decline is due to the early timing of Easter, which caused unusual volatility in food retailing.

“Ex-food, retail trade has been flat for the last two months. Moreover, sales in some discretionary areas, such as household goods and clothing are holding up quite well.”

Like I said yesterday, I don’t see anything here that makes me change my thought that the Reserve Bank of Australia will hike rates two more times this year… Oh, and one thing to think about here is on July 1st, income tax cuts set in, and I would expect this to spur economic activity like retail sales.

There are lots – and I mean lots – of people jumping off the weak dollar trend bandwagon these days, and most have very good reasons for doing so… At least that’s what they think! I prefer to think of this as a “pause”, not a reversal… Sort of like 2005, when the currencies got ahead of themselves at the end of 2004, only to spend 2005 in the correction mode, before going bonkers in 2006 & 2007.

The euro had moved very quickly from 1.44, at the end of the year, to 1.60… In less than five months. Can you say, too fast too soon? A “pause of the cause”, is what it looks like to me. As I said yesterday, the fundamentals in the United States are absolutely awful! And since we’re dealing with nothing but fiat currencies these days, the “attitude” toward a currency can dictate the performance. But eventually, that “attitude” will come back to the underlying fundamentals.

So… In other words… The “attitude” may be changing toward the dollar… But, it’s not a trend reversal; it’s a pause… Eventually, the underlying fundamentals will come home to roost!

One of those awful fundamentals is the current account deficit. A reader made a great point yesterday in an email… “Didn’t they make a BIG deal about this when talking about the deficit a couple of years ago? The reason they said it didn’t matter was that we had a healthy GDP – (4.0% at the time?). Well, how about now, with a 0.9% GDP (if you believe that number!)? Shouldn’t there now be an uproar about the deficits?”

He’s absolutely correct! Why isn’t there an uproar about these deficits? Because, to harp on the deficit would not make us “feel good”! But you know me… I like to pour salt on a wound… And that wound is the deficit! I’ll repeat what I always tell a crowd when speaking. The folks who say that deficits don’t matter remind me of the man on top of the Empire State Building… He decides to jump off the building… And as he passes the 56th floor, he says… “So far, so good!”

OK… Remember three months ago when I was speaking just about every day on some radio station about the so-called “stimulus package”? I kept telling anyone that would listen to me that this was no “stimulus package”, that it was simply another “tax” and an additional $150 billion on our already bleeding deficits! I said then that “by the time the checks get in the hands of consumers, they will be so stretched out from rising costs that they will most likely use the funds to pay a bill, pay down some debt, or save (a novel idea, eh?) but not spend the way the government wants them to do. Well…

The chickens have come home to roost on this “stimulus package”. Dave Carpenter wrote on Friday in the Chicago Tribune, “Many consumers spend rebates on cost of living”. Here’s a snippet of his report…

“But reality has interfered, in the form of ever-climbing food bills and $4-a-gallon gasoline. Day-to-day living costs have sopped up the checks for many other early recipients and spoiled their rebate fantasies. Government figures released Friday showed consumer spending inched up just 0.2 percent in April, despite widespread anticipation of the stimulus payments sent out starting late in the month.

“Based on a small but broadly diverse group of consumers who tracked their rebate spending in detail for The Associated Press, there was no mass rush to the malls for shopping sprees after the payments started showing up in bank accounts in significant numbers in May.”

I guess I could say, “I told you so”… But that wouldn’t be nice, and my mother taught me not to be cocky, and rub things in. So… I’ll just say, “Hmmm… Must be déjà vu, as I’ve heard this all somewhere before”.

OK.. Back to the currencies… The Chinese renminbi (CNY), as I told you last month, had slowed its gains versus the dollar… And this might get even slower! A report that just printed shows that China’s monthly increase in FX reserves reached a new high of $74.5 billion in April, more than triple the trade surplus and recorded foreign direct investment inflows combined in the period.

The Chinese don’t have many options here… This hot money flowing into China is causing major problems with inflation. The only thing the Chinese can really do here, is slow down the appreciation of the renminbi, to “scare” away this hot money flowing into China… Hot money is not good for a country, and usually causes major pains when the hot money leaves. So… I’m expecting a major slowdown in the appreciation of the renminbi.

Well… In the time it took me to write the Pfennig this morning, I saw the euro go from 1.5606 to 1.5590, to back to 1.5606… A tight range for sure!

Currencies today 6/3/08: A$ .9595, kiwi .7870, C$ 1.0010, euro 1.5606, sterling 1.9690, Swiss .9710, ISK 76.32, rand 7.7530, krone 5.1050, SEK 5.99, forint 155.25, zloty 2.1630, koruna 15.92, yen 104.20, baht 32.62, sing 1.3610, HKD 7.8040, INR 42.61, China 6.9250, pesos 10.33, BRL 1.6260, dollar index 72.71, Oil $127.30, Silver $16.85, and Gold… $895

That’s it for today… I forgot to mention the other day that I had visited the doctor that took out my cancerous kidney last year. He said, “Aren’t you the currency guy? I should have listened to you last year and bought the euro!” I thought that was pretty funny. It was sad yesterday to hear that Bo Diddley had died. A long day yesterday had me falling asleep as soon as I got home! Cards blow a 4-0 lead last night… That’s not good! The radio says that we should expect “severe storms” today… Oh boy! Time to go… I hope you have a Terrific Tuesday!

Chuck Butler
June 3, 2008

The Daily Reckoning