Falling Short on Financing

Good day… And a Marvelous Monday to you! This week is shaping up to be much like a college fraternity pledge “hell week”, as we will be as thin as a razor swim suit, with many people out… All I can ask of World Markets customers is that they be patient when calling this week, the wait could be long.

OK… Friday saw some ups and downs but all-in-all, a range-bound day for the currencies. I’m not going to stick my foot in my mouth again and say that it looks like the euro (EUR) has applied a tourniquet to the bleeding, like I did last week! I’ll simply say that it held 1.47, and has added to that in the overnight trading.

I’ve repeated several times now for customers, Pfennig readers, the radio, the newspaper, and even last night in the Review & Focus, that the dollar may have gotten up from its deathbed, but the soft economy (actually recessionary economy) will limit the recovery time. Friday, we saw some data that had mixed reviews. The TICs data showed once again that the United States is having a difficult time attracting enough foreign investment to finance the current account deficit. The Net Security Purchases by foreigners in June totaled only $51 billion. Shoot, that doesn’t even cover the trade deficit, much less the foreign direct investment and interest that is added to get the current account!

On the good side of the U.S. ledger, we saw Industrial Production post a 0.2% gain in July, adding to June’s 0.4% gain. This is a good sign for the economy, but one that gets overlooked by the markets. In addition, Capacity Utilization inched up to 79.9%. If you went by these two pieces of data alone, you would think that the U.S. economy is doing well… Unfortunately, that’s not true.

The NAHG Housing Market Index is the only piece of data we have printing today, but get ready for PPI, Housing Starts, and Building Permits tomorrow!

Oil has been beaten about the head and shoulders now for about a month… Does anyone else get the feeling that this is something the U.S. government is spearheading to achieve an election-time price that most voters feel is “better than it was”? I do… And hey! If the government can bully the oil price down, I’m all for that! But, why couldn’t that have been done before it got to this level, or to this time before the election? And doesn’t it make you wonder if it wasn’t an election year, would they have gone down this road? I don’t think so! But, bully for them! Anything to alleviate the pain at the pump!

But, just when you thought it was safe to get back in the water… An article in the Wall Street Journal quoted Iran’s OPEC governor as saying the oil cartel may decide to cut oil production at its September meeting. Great! Oh, we can always depend on our “friends” (NOT!) at OPEC to help us out, eh?

The falling oil price has had a lot to do with the sell-off in gold… So, you have to ask yourself, “Do I believe that the price of oil has peaked, and that we’ll see better times ahead?” I’m just as perplexed in this oil price fall leading to a sell-off of gold as everyone else is… But… I just can’t get my arms around the idea that the price of oil will continue to fall. Instead, it might continue to fall through the elections, but then watch out!

That means there could be more hard rows to hoe for gold… But, again, I think that in the end, and all the dust settles, we could be experiencing some unbelievable buying opportunities in the shiny metal… Of course that’s just my opinion on this, I could be wrong.

In the overnight trading, the euro actually rallied to the 1.48 handle, but then saw a quick sell-off after the latest trade data printed. The Eurozone trade balance has turned to a deficit, folks… We’ve seen this before, only to see it turn back to positive. The Eurozone trade balance printed at a negative -3 billion or $4.4 billion in dollar terms. I’m not worried about this move into negative territory, as the slowdown of the Eurozone economy will dampen imports.

Speaking of the Eurozone slowdown… The Bundesbank (Germany’s central bank), which in the old days, I used to call “Bubba”… Issued a statement this morning saying that Germany didn’t need any economic stimulus packages, and that slower growth may not suffice to curb inflation. Which is central bank parlance for “interest rates are not going lower”. Now, anyone that doesn’t believe that the Bundesbank doesn’t hold a big stick over the European Central Bank (ECB) is not thinking correctly. The Bundesbank has the ECB’s ear, BIG TIME!

The Eurozone will have some data to deal with this week too, as the German ZEW prints tomorrow, along with flash estimates of Eurozone manufacturing for this month.

Did you see where Mexico’s central bank raised interest rates late last week? The peso (MXN) has really responded well to the last two rate hikes by the central bank, and while I’m not a fan of pesos, they do have a track record of performing well when their interest rates are at a level that provide a “risk premium” for investors. You see… Investors have been burned in Mexico for years… It was just over 10 years ago that the Mexican government chose to move the decimal in their currency price… So… When interest rates are high, they provide a “risk premium” for investors. Their internal rates are now over 8%, and I think one more rate hike here will finally get back to providing that risk premium. The peso also has a track record of better performance when the dollar is rallying… So, something to think about… But again, I’m not a fan… So you won’t see me running out to buy pesos, but for those that think the risk premium is there…

How about that story in the Wall Street Journal from Friday regarding the Fannie and Freddie bailouts? Here’s the skinny… “Chances are better than [ever] that government money will be used to prop up Fannie Mae and Freddie Mac, according to economists in the latest Wall Street Journal forecasting survey, and a nearly one-in-three said the institutions should be nationalized.”

OK… I’m not for nationalizing… But thought it important to show what economists are thinking about with regards to Fannie and Freddie. It’s also important to read that “government money” is in reality “tax payers money”! Meanwhile back at the ranch… These economists went on to say more about the economy, so here’s more of the WSJ…

“Uncertainty continues to permeate the economists’ forecasts, as they remain almost evenly split for the third month in a row on whether the U.S. is currently in a recession. They expect the economy to slow to a crawl in the second half of this year, registering just 0.6% growth at an annual rate in the fourth quarter. At the same time, the forecasts call for continued job losses and elevated inflation, with oil prices above $100 a barrel well into next year, though down from current levels.”

Well… When I came in, about an hour ago, the euro was 1.4735, after trading higher overnight… But as I’ve typed away here, the single unit has edged down further to 1.4705… And not looking as though it will hold 1.47…

But, Hey! Everything here in the U.S. is just peachy keen, so buy dollars, right? Geez Louise, SERENITY NOW!

Currencies today 8/18/08: A$ .8725, kiwi .7125, C$ .9435, euro 1.4705, sterling 1.8660, Swiss .91, ISK 81.85, rand 7.7735, krone 5.4130, SEK 6.3615, forint 161, zloty 2.2725, koruna 16.68, yen 110.25, baht 33.87, sing 1.4130, HKD 7.8130, INR 43.48, China 6.8790, pesos 10.18, BRL 1.6380, dollar index 77.02, Oil $114.25, Silver $13.05, and Gold… $795.70

That’s it for today… While in Vancouver last month, I was given a private screening of the movie that my friend Addison Wiggin spearheaded. I.O.U.S.A. And was blown away! It’s a great documentary that will be premiering at a theatre near you this week! Here’s some info on the movie that you might find helpful…

Speaking of Addison Wiggin… He’s book Demise of the Dollar is still available… The foreword for that book was written by yours truly! And right there on the cover of the book is my name! WOW!

The Olympic swimming events are finished, and we now turn to Track and Field, Basketball, and other things… What drama on Saturday night with Michael Phelps and that “wonder woman” Dara Torres! My beloved Cardinals just can’t get on a roll and put together a long winning streak… And it will be difficult to catch the teams in front of them if they don’t go on a long winning streak! But hey! 12 games over 0.500 this year is pretty darn good for a team that was picked to finish last this year! OK… I’m feeling a little shaky again this morning, but better than last Friday! So, onward and upward as we head into this Marvelous Monday!

Chuck Butler
August 18, 2008

The Daily Reckoning