Don't Worry, Be Happy!

Good day. Well, I’m really trying not to be a smart aleck this morning, but it’s difficult given the CPI results yesterday. And more importantly, the markets’ and media reaction to the results. OK. I’ll get to that and more. Get your cup of coffee, and pull up a chair, for here we go.

The seasonally adjusted all-items CPI rose 0.4% in July, which is in line with market forecasts, but the less volatile and more closely watched core CPI rose 0.2%, below the market forecast for a 0.3% increase. Treasuries kicked into gear, and the dollar got taken to the woodshed, because, once again, the markets and media have chosen to focus on the core number, which removes food and energy – like we don’t use those two everyday, right? Stop me here, before I go scream at the walls!

Of course we use food and energy everyday, so why are they removed from inflation figures? I don’t care if they are “volatile.” Instead, I look at the 0.4% all-items figure, which put the annual inflation at 4.1% – a little too high for my liking. Don’t take my view on this as the only person out there that feels this way. Yesterday, Dallas Fed Head Fisher, made some statements that tell us where he stands on this subject.

Now, before I give you Fisher’s statements, tell me if you think he sounds like he’s a Pfennig reader: “There is a definite increase in inflationary momentum. The Federal Reserve will not tolerate inflation.” He then went into this about inflation, terming it the Lex Luthor (referring to the superhero’s nemesis) to the “Superman” United States economy. Inflation “is a sinister force that has the capacity to charm and romance the heck out of you, but in the end wreaks only havoc,” he said.

OK. I give up at this point. Besides what am I so angry about? I should be singing the song “Don’t Worry Be Happy.” The currencies took the news and added another half-cent gain to the half-cent gain it made on Tuesday. Well, that’s all fine and dandy, but I look around and see inflation eating away at everything, and it just makes me angry!

Industrial production and capacity utilization fell slightly in July, as did housing starts and building permits. It’s all adding up, folks. The economy is slowly grinding to a halt. It’s beginning to look like the prediction by George Soros about the United States experiencing a recession in 2007 could become a reality.

In fact, the more I read and listen, the more it sounds like everyone’s jumping on Chuck’s bandwagon – the bandwagon that said that the Fed would be cutting interest rates in 2007. What, will that do to the value of the dollar? You know as well as I do. Interest rate differentials provided a strong crutch/prop for the dollar the last two years, and with the crutch/prop removed, the dollar has nothing, at this point anyway, to keep it from falling on its face!

Here’s an illustration of what I just talked about. The poor beaten and battered New Zealand dollar/kiwi had taken on water for months due to a high trade deficit and the dwindling rate differential versus the greenback. Now that it looks as though the Fed’s pause may turn to an actual end-of-the-rate hike cycle, and the kiwi’s yield won’t shrink any time soon, the kiwi is sitting tall in the saddle again. It hit 64 cents – a figure that once looked like it would not be seen again any time soon!

One of the strongest currencies this year has been the British pound sterling. Every time it climbs above 1.90 though, profit taking pushes it back down. This is something that I’ve talked about for years. When a currency rises to a psychological level, it will bounce off that level a few times before either finally pushing through and leaving the level in the rear view mirror, or traders will finally give up the ship, and forget about the currency.

In the case of the sterling, I have to think at this point that it will be the first scenario. Overnight, however, pound sterling got sold on news that retail sales unexpectedly fell in July. This is the first slow month of retail sales in the United Kingdom in the last six months. So, maybe, they didn’t have the “back to school sales” like we had here in the United States. Economic growth is still strong in the United Kingdom, so I’m not going to get too worried about a rogue retail sales report right now.

I’ve got a crazy story for you from Canada. Statistics Canada (StatCan) came clean on something yesterday that had us all on the desk wondering if it was an honest error, or a government plan to keep inflation indexed bonds and payments tied to inflation to a minimum. Here’s the skinny: StatCan acknowledged an error was made in the calculation of the CPI reflecting an incorrect formula for the traveler accommodation component.  The error caused the headline CPI rate to be understated by 0.5% over the last five years.

The Canadian government announced that CPI will not be revised, and levels prior to April 2006 will not be changed. Now, isn’t that just a nice and tidy error? Shame on you StatCan!

Speaking of our former Belle of the Ball, the loonie, it remains strong. It is hovering around 89 cents, which is a good sign, given all the negative press it received after the Bank of Canada left rates unchanged last month.

As I look out on the central banks around the world, I find only one that is winding up its rate-hike cycle. The Fed Reserve and all the other central banks around the world are in the middle of their rate-hike cycle or just now gearing up (Japan). Speaking of rate hikes, Iceland and Norway both raised rates yesterday. But back to my subject, given the amount of global liquidity that swept around the world the past five years, I expect the rate hikes to continue and become aggressive to pull in all that liquidity.

So, none of that spells R-E-L-I-E-F for the dollar going forward.

Today, we’ll see Leading Indicators, which, to me, should be a “watched” piece of data. However, it will probably be swept under a rug, as it will probably show more of the same rot on the U.S. economic vine.

With the ceasefire in the Middle East, gold has really backed off, but it has held steady above the $625 level. I just can’t get my arms around any idea that the bull market in commodities, especially gold has ended. So, in my mind, any drop in the price of gold represents a buying opportunity – the same with the other commodities.

Speaking of commodities, our MarketSafe Resource/Commodity CD is becoming the new Belle of the Ball, as more and more writers find out about it and tell their readers.
Currencies today: A$ .7666, kiwi .6415, C$ .8955, euro 1.2877, sterling 1.8970, Swiss .8160, ISK 69.15, rand 6.76, krone 6.2730, SEK 7.1350, forint 212.55, zloty 3, koruna 21.77, yen 115.30, baht 37.50, sing 1.5715, INR 46.44, China 7.9686, pesos 10.76, dollar index 84.71, silver $12.36, and gold $630.

That’s it for today. Day game at Busch Stadium today, and I’m not going! Write that one down in your calendar! Just found out yesterday that I’ve got another trip on the calendar. I’ll be in Stowe, VT, the last days of August for meetings. Most of September I’ll be home, and gone most of October. This travel all winds up in mid November. So, I’ve got that going for me! Have a great Thursday!

Chuck Butler
August 17, 2006

The Daily Reckoning