Foreign Purchases Rebound

Good day…one of the things that works in my favor when I’m on the road in the West is the fact that, since I’m two hours behind my normal schedule, I get to see some of the data print that normally prints after I’ve pushed the “send” button.

One of these is the Net Foreign Security Purchases (NFSP), which you may recall fell to its knees in July at $32 billion, far below the needed $72 billion each month to finance the deficit. August’s number came in at a record $116 billion this morning! WOW! That’s incredible! That triples July’s figure! But something smells fishy to me. How can the NFSP be at dire straits one month, and then turn around and triple the size the next month?

OK…so, here’s how I would look at this number. If you add July and August together, and divide by two, you get $74 billion – just barely enough to cover the $72 billion needed each month to finance the deficit. There’s no room for error there.

Another piece of data that has already been printed is PPI, which has come in stronger than the markets expected. The headline number decreased 1.3%…but the core number, which the markets get all lathered up about, gained. Pipeline inflation is strong, and plays right along with my call that the Fed would return to the rate hike table to tweak rates one more time. Inflation is much higher than the CPI report tells us, because the CPI report is a JOKE! And I think someone at the Fed with some brainpower has figured that one out!

The dollar should be taking back some of the lost ground it suffered during yesterday’s trading session. But for once…its not! Unbelievable! For once these mental giants that have been rewarding the dollar for having high inflation (that has been getting chased down the street by the Fed) have reversed gears, and are seeing things the way I’ve seen them the whole time!

Inflation is NOT good for a currency; it erodes the value, and the holder of the dollar has less purchasing power. But aside from myself, and my friends the Mogambo Guru and Bill Bonner, no one else has tried to point that out repeatedly! Wouldn’t it be nice if we could wake up in the morning, and never have to spend the rest of the day trying to figure out what the mainstream media and traders think? Shouldn’t it be right in line with fundamentals? I think so!

Yesterday I told you about the Russian Central Bank Deputy (Dawg) that said the Russian Central Bank was prepared to start buying Japanese Yen with their currency reserves (read dollars). Well…in the past, those types of statements usually brought a Japanese official out of the wall to strongly suggest that they will not tolerate any strong moves in yen – this is a part of the manipulation of the currency.

However, last night, Japanese Finance Minister, Omi, said that Japan would “welcome Russia’s decision to raise yen exposure in their currency reserves.” How about that? Pretty cool, eh? Oh, and yen has really picked itself up and dusted itself off, and has proceeded to rally on this news! Remember that old Grand Funk Railroad song, “We’re An American Band?” In it, there’s a line that says…”come on dudes, let’s get it on.” I can hear the Japanese saying that to Russia, right now!

In Germany this morning, the German economic sentiment survey as prepared by the think tank, ZEW, disappointed once again. You see, the Germans know that in 2007 a three percent VAT (value added tax) will be put into place, and they see themselves having to “batten down the hatches” a bit.

But don’t think that this is going to get in the way of the European Central Bank (ECB) raising rates in November or December. As I’ve explained many times before, the ECB looks not only at inflation data; they also look at money supply to make rate decisions…economic growth is but a minor player in their goal to provide price stability. Besides…the ECB will most likely look toward the other pieces of economic data to say that there are real activity signals right now!

Over in the United Kingdom, the members of the Bank of England’s Monetary Policy Committee (MPC), which makes all the interest rate decisions, are probably kicking themselves for leaving rates unchanged during the last meeting. Since that meeting, we’ve had reports that house prices are soaring, and inflation is moving higher. Another report, that’s due out any day now, will probably show wage inflation pressures. So, as I’ve said, even before these reports are printed, the MPC will hike rates in November…I can feel it in my bones!

Gold and silver have really turned around (again), and look to be well bid these days. Yesterday, I spent a lot of time in my presentation talking about how I did not believe the bull market for commodities was over. I saw a blip yesterday that showed that three major players in the markets – Citigroup, J.P. Morgan, and Goldman Sachs – were all forecasting the price of gold for 2007 above $700…quite interesting, eh?

The Bank of Canada has just announced that they are leaving their official interest rate unchanged. The statement that followed showed that the Bank has lowered their economic growth forecast for the remainder of this year, and into 2007. I’m just not getting that warm and fuzzy feeling about Canada these days. The belle of the ball is sitting over in the corner, and no one is asking her to dance! Obviously, if oil and natural gas prices increase again (and I’m a believer that they will), the belle of the ball will be back out on the dance floor…but for now, Canadian dollars/ loonies are not high on the hit parade of traders.

The currencies are rallying right now versus the dollar, something we haven’t seen since the bombshell that was dropped on the markets by the BLS, and their 810K “found jobs”! So…I think I’ll head to the big finish on that happier note.

Currencies today: A$ .7540, kiwi .6645, C$ .8790, euro 1.2550, sterling 1.8710, Swiss .79, ISK 68.25, rand 7.5929, krone 6.7625, SEK 7.3760, forint 212.14, zloty 3.09, koruna 22.60, yen 118.60, baht 37.35, sing 1.5775, HKD 7.7812, INR 45.28, China 7.9082, pesos 10.87, Silver $ 11.96, and Gold… $598.60

That’s it for today. My presentation went well yesterday. I have to say though, that the conference attendees are reminding me a lot of 1999 and 2000…they are all more interested in stocks and stock programs that tell them how to make money in the stock market. I can’t help feeling that this stock market rally is no more than a “sucker” rally, and all these people will get hurt again. Anyway, the Cards and Mets saw another rain out last night, so they will pick it up tonight. Have a great Tuesday!

Chuck Butler
October 17, 2006

The Daily Reckoning