Grandpa Chuck

Good day… I will start with an email Chuck sent me last night, as he does a great job setting up the day’s events:

“Good morning, and Happy Friday to you! Here are my thoughts tonight…

“Well, the long wait is just about over for the Butler family. My darling daughter, Dawn is going to the hospital today to be induced… So, if all goes well, we will be blessed with a baby girl named Delaney Grace.

“I have to admit that besides the number one reason to fight cancer… I certainly wanted to be around to see my granddaughter!

“OK… Enough of all that… Just like every day this week, another story on the problems with the subprime meltdown hit the news wires. Here’s yesterday’s story…

“‘Accredited Home Lenders Holding Co., the subprime mortgage company being acquired by Lone Star Funds, cast doubt on the sale and said bankruptcy is possible. The shares lost more than a third of their value.

“‘”Several of our competitors have recently stopped originating loans or sought protection under bankruptcy laws,” Accredited said in a regulatory filing today. “We may suffer a similar fate.”‘

“I can’t help thinking that the dark storm clouds are forming over the U.S. economy and the dollar… But then we have the knuckleheads at the Fed and Treasury that think everything is peachy dandy.

“Think that we aren’t in tumultuous times? Get this… Gold ETF investment is at an all time high. Wednesday saw another $140 million invested in the Gold ETF. The current total is 20,193,000 ounces! Of course I personally think our pooled gold account is a better deal… You do see that investments in gold are soaring!

“The European Central Bank (ECB) and Bank of England (BOE) both left rates unchanged this week, and I don’t look for anything to happen with either of these two until September… But that doesn’t mean Norway & Sweden’s Central Banks will be sitting on their hands. I expect both Central Banks to keep the rate hikes coming, and that should help both currencies to continue their assaults on the dollar!

“And finally, today is a Jobs Jamboree Friday, and all the news pundits lately have been touting the strong jobs market. Of course, they believe all the baloney the Bureau of Labor Statistics throws around… But I don’t! And I’m going to go out on a limb here… Yes, I still need a strong limb, thanks for asking! But out on the limb I’m going to say that the jobs data for July will be disappointing. We shall see, eh? If it does disappoint, the dollar goes to the woodshed for the weekend… If not… We have another buying opportunity!

“So… Be careful out there!”

Yes, today we will get the employment data in the United States, and the expectation of all of those “in the know” is for both the number of jobs and wages to show an increase in July. Economists predict we will see an increase of 127,000 jobs, and an increase in average hourly earnings of 3.8%. If these numbers come in as expected, they will likely be high enough to convince the Fed that the economy is still moving along “just fine” and that there is no need to adjust interest rates. We all know the U.S. economy is not moving along just fine, but the Fed has its hands tied and can’t do a thing with interest rates.

While the media will, no doubt, talk about the positive change in non-farm payrolls and increase in wages; another number has caught my attention. The change in manufacturing payrolls will be reported this morning, and is expected to have dropped again in July. If manufacturing payrolls drop by 15K as expected, it will be the 13th consecutive negative number. We haven’t had an increase in manufacturing payrolls since June of 2006. I think this goes a long way toward illustrating the quality of jobs that are being created. Yes, there are some sectors that have been creating good quality jobs (financial sector for one), but manufacturing built our economy, and service sector jobs just don’t have the long term stability that manufacturing jobs have. I’m not saying our economy needs to try and compete with Asia to become the lowest cost producers of widgets, but manufacturing is a foundation, and ours has been crumbling as of late.

The currencies had a mid-day rally yesterday, but fell back overnight and are trading fairly close to the levels we saw yesterday morning. As Chuck pointed out, the jobs data will be the main driver of the markets this morning. The euro (EUR) will likely continue to get some support from expectations of a further rate increase at the next ECB meeting in September.

ECB President Trichet likened inflation to a drug, and said the bank may raise interest rates next month to keep prices stable. “Strong inflation is a bit of a drug,” Trichet said in a radio interview today. “It gives you immediate satisfaction and then you pay a high price for it.” The ECB is “in a position of strong vigilance, which is interpreted by all observers that we meant that there is a fairly high probability that we will raise rates at our next meeting in September,” he said. Is there any doubt where the ECB stands on inflation or interest rates? The U.S. interest rates will remain where they are, while rates throughout the rest of the world will be rising. Interest rate differentials were one of the props on our strong dollar, and that prop is being kicked out from under it. Look for more dollar weakness.

While interest rates may favor the pound sterling (GBP), I think the euro is currently a better long-term bet. The United Kingdom has been going through their own housing bubble, and they are now having similar problems with their subprime loans. The number of Britons having their homes repossessed rose to the highest since 1999, as interest rate increases have hobbled subprime borrowers. But the problem is not nearly what it is in the United States. The bankruptcy figures published today show a much more positive picture on United Kingdom household finances. Personal insolvencies dropped 8.1% in the second quarter compared to the first three months of the year. While both the pound and euro will rise versus the U.S. dollar, I believe the euro will outperform the pound over the next few months.

So the subprime mess won’t be limited to just the United States. We have already heard about the Australian bank, which had invested into the U.S. subprime loans, and the U.K. is having subprime problems of their own. Now I was forwarded a piece by our corporate FX trader, Ashish Advani, from the Financial Times: Germany Rescues Subprime Lender. The rescue of IKB, a specialist lender, began on Sunday when German finance minister Steinbrück called top banking executives to discuss a bailout. So while our Treasury Secretary is trying to convince everyone the “worst is over”, the effects of this toxic debt is filtering out the global markets.

Jim Rogers, who correctly predicted the start of the commodities rally in 1999, spoke up about the housing meltdown yesterday from Hong Kong. “This was one of the biggest bubbles we’ve ever had in credit. I have been and am still short the investment bankers in America. I’m also short homebuilders.” And it doesn’t look like the worst will be over for some time. IndyMac Bancorp yesterday said it is joining rival lenders in making “very major changes” to home loan standards and charging higher rates because of a slump in mortgage securities.

The housing slump will extend well into 2008 and probably won’t turn around until 2009. “This is the only time in world history when people were able to buy houses with no money down and in fact, in some cases, the builders gave them money for a down payment,” Rogers said. “So this bubble is the worst we’ve had in housing and it’s going to be a long while before it’s cleaned up.” Jim dropped by and had lunch on our trade desk a few years ago, and it was a pleasure getting to speak with him. He was, and still is, a bull on the commodity markets and reminded us to look at the underlying fundamentals of the economies of currencies we suggest. Those with a trade surplus, and raw materials backing them will maintain their values over the long haul. He liked our commodity index CD, and I’m sure he would also like our newest index, the World Energy CD.

Speaking of the commodity markets, the Canadian dollar (CAD) has been one of the best performers this week, second only to the Norwegian krone (NOK). The Australian dollar (AUD) and New Zealand dollar (NZD) also moved up versus the U.S. dollar over the past five days. Looking at the currency chart, the four currencies that make up our WorldEnergy Index CD are the top four performing currencies this week. If Chuck were here, I’m sure he would be pointing out the five day returns to the desk and saying, “I love it when a plan comes together!!”

The latest economic boondoggle is over, as the APEC meeting of Asian finance ministers ended in Australia today. Their final statement said, “The orderly reduction in global imbalances remains a priority.” Currency flexibility is needed to reduce these imbalances in the global economy. Both Japan and China were targets of the statement. But China has made it clear that it won’t be pressured, and Japan hasn’t had to intervene in the markets with the carry trade doing all the heavy lifting for them.

I believe both the Chinese renminbi (CNY) and the Japanese yen (JPY) will continue their recent appreciation, but not because of any external pressures. China will let their currency appreciate because it is now the best thing for their economy. And the Japanese yen will appreciate as the carry trade gets unwound. The markets will take care of these imbalances; maybe not as quickly as we would like, but it will happen.

Currencies today: A$ .8564, kiwi .7662, C$ .9463, euro 1.3692, sterling 2.0356, Swiss .8296, ISK 62.40, rand 7.0695, krone 5.7875, SEK 6.7302, forint 182.90, zloty 2.7648, koruna 20.475, yen 119.14, sing 1.5180, HKD 7.8291, INR 40.33, China 7.5660, pesos 10.9415, dollar index 80.75, Silver $12.96, and Gold… $665.50

That’s it for today… Good luck to Chuck’s daughter Dawn. I remember when she was as little as my Lauren. Time sure does fly! Summer is finally here in St. Louis, temps are supposed to hover around 100 this weekend and the humidity is just about as high. Hope everyone has a great weekend, stay cool!!

Chris Gaffney
August 3, 2007