Flag Day 2006

Good day. Well, another day of range trading with the dollar still being touted as the ‘flight to safety’ currency, even though the Fed chairman himself is running scared of inflation. I really like what Bill Bonner says in his Daily Reckoning about this “flight to safety.” He says that investors are “lining up at the wrong gate!”

The one thing I keep coming back to is the thought that 16 rate hikes, and a 17th one on the way in two weeks, has got to eventually take a toll on economic growth, but that hasn’t ever gotten in the way of a good inflation story with the Fed Reserve! They created this mess, and by golly they are going to get us out of it, right? I’ll stop there, because I’m actually in a good mood this morning and don’t want to ruin it!

Yesterday, U.S. PPI was a non-event. The wholesale prices gained 0.3%, with a forecast of 0.2%. So, it did come in a bit higher, but it really is not the piece of data the Fed is looking at. Oh, yes, we learned in Economics 101 that wholesale pricing gains leads to consumer pricing gains, which eventually equals inflation. And really, when you come to think about it, capacity utilization has been inching higher. I would think that more emphasis be placed on PPI.

We also saw retail sales, which as the BHI reported, did disappoint with just a 0.1% posting for May. I thought the slowing in retail sales would be expected, given high energy prices and rising mortgage rates. But you never really know for sure with the U.S. consumer! There’s a general feeling in the market place, that looks as though it is spilling over to the public, that the U.S. economy will slow down in the second half of this year, and when that feeling gets into the fabric of the U.S. consumer, I would suspect retail sales to really suffer!

Today, we’ll see the inflation data that everyone and their brother is looking for. May CPI will print first thing this morning and is forecast to come in just a hair below 4% annualized. To borrow a phrase from one of my favorites, The Mogambo, that’s 4% freaking too much! But, that’s for another time and place. Right now, we have to deal with a Fed that has picked a fight with inflation, and we’ll see who lands the punch today!

I suspect that anything lower than the 0.4% monthly gain in CPI would be a detriment to the dollar, and anything at 0.4% or higher will be dollar friendly.

Geez, Louise, did the metals take a blow to the mid section yesterday or what? That was awful watching Gold fall $40 bucks at one point. You have to be totally convinced that this is just profit taking and a correction to remain with the shiny metal, eh? I’m convinced, but that didn’t change the fact that the tourniquet needed to be applied to gold and silver, yesterday. This is the end of the first phase for gold.

Did you see this in The Daily Reckoning yesterday? But Richard Russell, of the Dow Theory Letters, suggests that this consolidation might still have a while to go. His conclusion? “Best to ‘go away’ and not look at gold for another six months to a year. As far as I can see, the first phase of the gold bull market is over. Accumulation time for the second phase lies ahead. And that’s going to take time.”

OK. Go away? I don’t think he means don’t take advantage of these cheaper prices of gold and silver. I think he simply means, quite looking at it every day and calculating your gain or loss. Which leads me to say that our MarketSafe Gold CD will fund next week, and obviously the buyers of this month’s issue will get an awfully cheap gold price – hint, hint. Oh, there’s still time to get into this month’s funding, too!

The Canadian dollar/loonie finally succumbed to the pressure on the commodity currencies and gave way to the greenback, yesterday. Still, the loonie didn’t lose as much as the other commodity currencies of Australia, New Zealand, and South Africa have this past week!

The euro really bounced off the 1.2550 level, yesterday. I had read that option players would support the euro at 1.2550 to protect their option positions. Yesterday really put that support to a test, but for now, the level held.

Unemployment in the Eurozone took a hit in the first quarter, as employment rose 427,000! This is proof in the pudding that the Eurozone economic recovery is really gaining traction! And gives the ECB another arrow for their rate-hike quiver!

Well, the Chinese renminbi finally took the plunge below the figure eight last night. Yes, as I check the screens this morning, the new rate of 7.9985 really caught my eye! It still has a way to go before hitting my 2006 target for the renminbi of 7.50, but at least it’s heading in the right direction again!

China also posted a very strong manufacturing report for May. Manufacturing grew at the fastest pace in two years. And, where are the “China naysayers” now with their “Oh the Humanity, China will slow down” talk? OK. I was about to go off on a tangent there, but caught myself! The point here is that this strong manufacturing tells me that Chinese trade surplus will continue to rock-n-roll, which will lead to further pressure on the Chinese to allow more flexibility in the renminbi! You know, the thighbone is connected to the knee bone, the knee bone’s connected to the shin bone – etc. etc.

The risk aversion continues in the markets, with all the emerging markets getting taken to the woodshed daily. This won’t turn around until the markets stop focusing on the Fed’s 17th rate hike, and the dollar’s fundamental and financial stresses come front and center again.

Currencies today: A$ .74, kiwi .6255, C$ .8995, euro 1.2580, sterling 1.8420, Swiss .81, ISK 76, rand 6.8375, krone 6.2380, forint 213.44, zloty 3.20, koruna 22.55, yen 114.90, baht 38.35, sing 1.5950, INR 46, China 7.9985, pesos 11.47, dollar index 86.20, silver $9.78, and gold $565.83

That’s it for today. CPI rules the day, so be prepared! These are the days that make traders like me lose their hair! Which way will it go, which way will it go? It’s Flag Day! Fly those flags! It’s also the day that I use as a checkpoint regarding my beloved Cardinals. Flag Day and the Cardinals are in first place. That’s a good sign! Have a great Wired Wednesday!

Chuck Butler
June 14, 2006

The Daily Reckoning