Hy Minsky on a Thursday

Good day… Well, back in the saddle again this morning. I hear from Chris that his daughter, Lauren Gaffney, went through the surgery yesterday with flying colors… So that was good news! Speaking of coming through with flying colors, I see my colleague, and long time friend, Jennifer, got through a very busy trading day in my absence. I’ve only got her for another month before she goes on maternity leave, so I had better book all my travel now!

Long time readers know how much I like to quote a former Nobel Prize winning economist that used to give me one on one lessons in economics – Hy Minsky. The reason I’m bringing up Hy Minsky today is because another colleague and long time friend of mine, that used to work with me at Mark Twain Bank, Ed Bonawitz, reminded me of something Hy Minsky taught us years ago regarding the Central Banks’ appetite for overseas investments; or as I was talking yesterday, about how foreign Central Banks now had 80% of Treasuries in the 3-10 year maturity range. Here’s Ed, on Hy Minsky:

“Hy Minsky helped me understand why these central banks will eat until they burst with this illustration. Now picture Professor Minsky, with those eyebrows that looked liked hedgerows about eight inches from your face saying, ‘These central banks are like a convicted man on the gallows faced with the dilemma of which fate is worse, the ever tightening noose of U.S. Treasury debt in their coffers or the sudden release of demand for their products, that trapdoor their all standing on.’ They all choose the slow strangulation for they are politicians at heart, and their job is to not create a panic, and snap the neck of their economies.”

OK… Onto what happened yesterday…

Yesterday morning as I was signing off and heading out the door, I mentioned that the Chinese had tripled their transaction tax to stem the inflows of foreign investment money. This news sent shock waves through the stock markets, and for a little while, had the emerging markets on their heels, it even slipped over to the runaway train called the U.S. stock market. But that didn’t last long.

I was totally confused when I got back home and read the news stories. The NY Times said that the Fed minutes that were printed yesterday gave mixed signals… While a story on MSN said the stock market soared on the rosy picture from the Fed minutes. So… I had to go read those minutes!

What I got from the minutes shouldn’t have helped anything or anyone, except those of us who have diversified our investment portfolios! The Central Bank admitted in writing, that they acknowledged underestimating the U.S. housing recession! They said, “The correction of the housing sector was likely to continue to weigh heavily on economic activity through most of this year.”

Oh, then they hemmed and hawed about “persistent inflation”, and a pick up of what they still want to call “moderate growth” (even though it only posted a 1.3% gain in the first quarter!) But admitting their ignorance of the housing situation should have taken the dollar to the woodshed. A currency that gets no love from the Treasury Department, or the Administration, now has a Central Bank with a credibility problem! Geez Louise, when are these dollar buyers going to wake up and smell the coffee?

The dollar did lose a little ground on the day to the currencies, but the trading range was so small, there was little there to be happy about!

The Japanese fundamentals continue to mount up on the positive side of the ledger… Just yesterday the Japanese announced that the jobless rate unexpectedly fell to a nine-year low in April and consumer spending increased for a fourth month. In addition, the Weekly Japanese Capital Flow-Net flow into Japan increased three-fold. For the week ending 25 May, the total net flows into Japan increased from JPY 320.8 billion to JPY 1188.6 billion.

So… Once again, this highlights that the Japanese economy is doing well, could use higher interest rates, and that the yen (JPY) is highly undervalued, due to the carry trade. Now, I’m not saying that I know something that someone else doesn’t, but the conspiracy blood in me keeps telling me that the Japanese government is the behind the carry trade, to keep their currency weak, without intervening in the currency markets. But, they wouldn’t do that would they?

There was a great story on Reuters yesterday afternoon regarding the fall in U.S. productivity.  Here you g

“A slowdown in U.S. productivity growth poses a long-term challenge to the U.S. dollar and is adding to the difficulty of financing a gaping trade deficit. The dollar has fallen to a record low against the euro this year, weakening against most other currencies along the way, as U.S. economic growth slows and economies in Asia and the Europe motor ahead. Signaling that the dollar’s woes may be far from over, U.S. productivity growth, the bedrock of a strong U.S. economy and dollar in the 1990s, has slowed for three straight years and is showing some signs of a permanent downshift.”

But… We’re confident right? According to U.S. consumers we are. I’m not, but don’t let that get in the way of yet another “feel good story”.

I spent yesterday at a love fest with the Canadian dollar/loonie (CAD), and once you start you just can’t stop! Yesterday, Canada’s current account surplus widened in the first quarter to $6.5 billion from an upwardly revised $4.6 billion in the fourth quarter (originally reported as $3.0 billion). The overall improvement largely reflected the merchandise trade balance rising $2.1 billion. This resulted from exports surging $4.5 billion, and guess where this came from? Give up? Energy products!

I’ve talked about energy for over a month now, which comes in handy when you’ve just produced the latest product to join the EverBank World Markets Index CD family. On May 1st, I talked about the World Energy CD… Here’s what I had to say then…

“OK… So, if energy prices are really on the rise, and our wallets know that to be true… Then the currencies of the countries that produce energy should benefit, don’t you think? Well… you knew it wouldn’t take me long to try to put something together that would attempt to take advantage of rising energy prices.

“Therefore… I am proud to announce our newest in the family of EverBank World Markets Currency Index CD’s… The World Energy CD.

“This new index has a $20,000 minimum, just like all our other Index CD’s, and will contain equal weighting of the following:

“Pound sterling – for their Oil & Natural Gas from North Sea

Canadian dollars – for their Oil & Natural Gas, uranium, and don’t forget those tar sands!

Aussie dollars – for their coal and uranium

Norwegian krone – for their Oil & Natural Gas

“The simple interest rates will be 4.25% for both three and six months, or 4.32 and 4.30% APY respectively.”

Today, we’ll see the color of the personal consumption data from the first quarter. Along with a revision to first quarter GDP, this personal consumption (PCE) is the real deal for the Fed Reserve when trying to gauge inflation. And the forecast is for PCE to increase to 4.1% from the previous quarter’s 3.8%. This will bring the rate hike campers out of the woodwork once again, and give some strength to the dollar.

Hopefully smarter heads will prevail, and prevent any dollar strength from happening, because they know the Fed remains between a rock, and well… Another rock. They can’t raise interest rates without bringing the economy to its knees, even though it sure looks to me as though we’re headed in that direction anyway!

But – as I’ve said all along – the Fed is far from “out of the woods” concerning inflation. They just have their hands tied on this one, and they have to hope that the housing debacle that they created slows spending. They just want it to slow… Not stop. They can’t have a recession on their résumé’s!

The currencies are a bit stronger this morning… But we’ll have to sail through the rough waters of the PCE before we get too excited about currency strength today… So, get your coat and grab your hat, and be prepared for a volatile day.

Then tomorrow, we go into a Jobs Jamboree Friday… And here’s the Big Kahuna according to market pundits… The pundits claim that “strong labor markets” are keeping the economy afloat. However, I just don’t see a “strong labor market”. Let’s review the facts… Last month we saw a measly 88K jobs created… And year-to-date, 517K jobs have been added, which is 129K per month. Isn’t that less than what we’ve learned over the years to what’s needed to maintain a strong economy?

Oh, and don’t get me started on the ghost jobs that have been created this year. Oh, I mentioned it, I might as well throw it out there… 388K jobs that were created by the Bureau of Labor Statistics with their birth/death model, so far this year… Strong labor market? I highly doubt it!

Oh… And Manufacturing jobs? You would have to go back to June of last year before you found a month that didn’t have a negative job creation for the manufacturing sector.

The Big Boss, Frank Trotter, sent me an email late last night, saying, “you’ve mentioned retirement twice this week”… Simply a coinkidink, Frank. I had one long time reader respond to my note yesterday about doing this in retirement. So… I’ve got one reader that will pay!

Currencies today: A$ .8250, kiwi .7335, C$ .9350, euro 1.3445, sterling 1.9790, Swiss .8160, ISK 61.60, rand 7.1625, krone 6.0410, SEK 6.90, forint 186.20, zloty 2.8420, koruna 21.08, yen 121.50, baht 33, sing 1.53, HKD 7.8090, INR 40.63, China 7.6460, pesos 10.7450, dollar index 82.38, Silver $13.33, and Gold… $657.90

That’s it for today… I did a nice interview with the Oregonian from home yesterday afternoon, so hopefully that will get people in the Northwest interested! Speaking of the Northwest… I’ll be heading to Vancouver in July, which is simply a wonderful time to go there… I gave you the info on the Agora Wealth Symposium last week…

I’ll also be in San Francisco briefly about the same time in July. Before that I’ve got an in-and-out in San Diego in June… And guess what? Then I’ve been asked to come back to Panama in October! Crazy… Which automatically had me singing the Patsy Cline (written by Willie Nelson) fave. OK, now your singing it too, aren’t you! Have a great Thursday!

Chuck Butler — May 31, 2007

The Daily Reckoning