Green Lights...

Good day… Well… As I said yesterday… Every day’s a new day… And while we saw a general appreciation in the currencies most of the day yesterday, it all turned on a dime late in the day. Yes… Late in the day, when the volume was thinned out, stocks began to get sold and once again a flight to safety (read Treasuries) was on the docket… This meant that currencies followed suit with a sell off of their own…

As I said the other day, I find this current triumvirate of stocks, currencies and commodities strange stable mates… And quite frankly, I can’t wait for them to get back to normal and head for splitsville! Strange days indeed!

The euro has recovered most of the late afternoon sell off, after May’s German Business Confidence saw a better outcome than the “experts” had forecast. Business Confidence as measured by the think tank, IFO, actually fell in May, but did not fall as hard as forecast, which means the German economy weathered the storm of a higher euro and oil price…

In addition… Inflation has bumped up above the ECB’s ceiling of 2% again… And we all know that the ECB does not take that lightly!

This makes the green light that traders have been seeing, directing them toward euros, even brighter green! And… Reinforces my call for 3 more rate hikes this year… June, September, and December!

The Asian currencies have all taken a shot to the mid-section overnight as the World Health Organization (WHO) announced a probe of the bird flu in Indonesia… This sell off has even spilled over to Aussie and kiwi. The skinny here is that the WHO believes that the bird flu was spread among families, which changes things big time, as it was previously thought that only birds carried this pandemic…

I’m hoping that this is merely a tempest in a teacup, and that the Asian currencies don’t continue to get dragged down by the bird flu.

This has also carried over to the emerging markets, which already had its own problems… Some of which are a result of political pressure to be more flexible, etc. Rand, real, lira, krona, renminbi, won, there are no emerging markets that can hide right now, so let’s hope it ends soon!

Big Ben Bernanke was speaking to Congress yesterday, and mentioned that his CNBC “episode” last month was a lapse in his judgment… HAHAHAHA! I guess Big Ben learned a lesson that night… As we all do when we have our own lapse of judgments! I just find it funny that someone of his stature would just now be learning that lesson! Let’s hope that he follows my line from a Pfennig last week when I said… Lessons learned are like bridges burned, you only need to cross them but once…

I also heard a snippet last night about something John Snow said… I can’t quite figure out what he was trying to do, other than talk the dollar down… Snow was talking about the huge truck loads of cash the oil producing countries were swimming in now, and went on to say… “Middle Eastern oil producers are poised to invest more of their windfalls from higher crude prices on schools, roads and other projects at home rather than U.S. debt.”

Of course, we all know that Central Bank financing of the Current Account Deficit by buying U.S. debt (treasuries) has kept the dollar afloat… So… If U.S. Treasury Sec. John Snow thinks that buying will wane… He’s opening the door to further dollar weakness…

I can’t believe I’m the only one that caught that statement from the Treasury Sec. and what he was trying to do! This just falls right in line with his continuous harping on the Chinese to allow their currency to get stronger VS the dollar… In essence, he’s talking down the dollar… But the media and traders continue to just let this slide by… But not me!

Well.. The U.S. data cupboard finally begins to get restocked today… First up, we’ll see April Durable Goods orders, which are expected to fall .5% after last month’s shocking +6.1% gain. Then we’ll see April’s New Home Sales, which are expected to have fallen 6.4% due to the higher cost of borrowing after 2 years of rate hikes! There’s a lot of speculation now that the housing bubble is not going to burst, but slowly deflate… I’m not pinning my colors to that mast just yet!

Tomorrow we will see a 1st Quarter preliminary report on GDP, which is expected to be a whopping 5.8%! WOW! Of course you know me, I’m always the one that picks at the report to see just how much of it was driven by Government spending… Yes, unfortunately, we have to look at such things, because the media will only focus on the number, and not tell you that without government spending the GDP would have only been “X”…

Ty Keough sent me a note yesterday regarding a letter that Bill Gross of PIMCO, you know the world’s biggest bond fund, wrote to his customers… Here’s something that I found in Bill Gross’s statement that I found to be right up our alley… “When not countered by cyclical considerations, PIMCO portfolios will likely feature increasing international diversification in foreign currency terms.”

Right arm! Farm out! Out of State! “will likely feature increasing international diversification in foreign currency terms.” That’s tre’ cool… PIMCO portfolios looking to diversify! That totally psyches me out! For… If a big bond fund like that sees the need to diversify with foreign bonds / currencies, then every individual investor should see that need too!

Currencies today: A$ .7550, kiwi .6260, C$ .8925, euro 1.2865, sterling 1.8845, Swiss .83, ISK 72.50, rand 6.65, krone 6.08, forint 204.80, zloty 3.08, koruna 21.96, yen 111.80, baht 38.44, sing 1.5860, INR 45.72, China 8.0265, pesos 11.36, dollar index 84.42, Silver $12.78, and Gold… $662.60

That’s it for today… Good stuff, as our coffee maker was fixed yesterday… Talk about bringing an office to a halt… Things like no email… And no coffee are right at the top of the list! Of course today is the day that Chris Gaffney buys us coffee from Starbucks, and he calls it Wired Wednesday! So, we’ve got that going for us today! Have a great Wednesday!

Chuck Butler
May 24, 2006

The Daily Reckoning