Japanese GDP Surges

Good day…I’m a little late getting started this morning, as there was still some packing for my trip to New Orleans to do. But now, all my bags are packed, and I’m ready to go. OK…I won’t bore you with that old John Denver song. Oh…and before you tell me that he didn’t sing that song…he wrote it!

I see from the advertisement above that today is the last day to buy this month’s MarketSafe CD’s (Resource and Gold). Let me warn you right here, right now, that next month is it. We’ll close them out in December. So, if you have been dragging your feet, you’ve got one more chance!

Yesterday, there was more re-thinking of Mr. Zhou’s statement from Thursday regarding having a clear plan for diversification of China’s massive currency reserves. For anyone new to class…China’s currency reserves mainly consist of U.S. dollars, and therefore when he made that statement, traders took the dollar to the woodshed. But as time goes by, these mental giants realize that China isn’t going to hold any blue light specials on dollar sales.

But here’s the thing I continue to think about regarding the Asian Central Banks. Imagine if you can, it isn’t hard to do…all the Asian Central Bankers are sitting around the table, and staring at each other, sweat dripping from their foreheads, and hands clinched in fisted rage. They are looking for a sign in one of their brothers-in-cash that will indicate that one of them is going to begin selling dollars, because they don’t want to be the last one out the dollar door. Shoot, they don’t even want to be the second one through the dollar door, but it beats the alternatives!

So the bias in the currency market yesterday was to buy back some of the dollars that were sold last week. No biggie, but that was the bias on the day. No currency escaped the bias either.

Overnight, however, it was a different story, as Japan printed their 3rd QTR GDP and it grew at twice the pace the economists forecast! The 0.5% 3rd QTR growth puts the annualized growth at two percent. This is HUGE for Japan! The yen has rallied, but with the governor that’s been placed on yen kicking in, the rally has been a mini rally. Sort of like a “mini-Ditka” or “mini-me”! Of course, you have to be fans of the old Saturday Night Live skit “The Super Fans” or the Austin Powers movies to know what I’m referring to here!

Anyway…my apologies for going off on the “mini” tangent. The Japanese economic growth is not surprising to your Pfennig writer. I’ve said all along that their economy was growing faster than thought by the mental giant traders that keep selling yen. Wow! I’ve taken a swipe at traders twice already this morning. And since I’m a part of that fraternity, I have to be careful! But come on! Japanese yen is sooooo undervalued!

So does this surge in GDP bring the Bank of Japan (BOJ) back to the rate hike table before year-end? In my mind it does, but then in my mind I’ve been saying that it looked like yen should rally for two years now.

Yesterday, the data cupboard brought us the U.S. Monthly Budget Statement, which is about as useless as lipstick on a pig, since it doesn’t include the costs of the wars in Iraq and Afghanistan. Anyway, it came in about as expected at $47.3 billion. We’re making great strides in bringing this under control, aren’t we? Yeah…and my first wife was a young Elizabeth Taylor. Yeah, that’s the ticket!

Today, we’ll see PPI, which for those of you new to this stuff is the Producer Price Inflation, which is basically inflation at the wholesale level, which will eventually come through the pipeline and become Consumer inflation, which we’ll see on Thursday! I don’t pay much credence to PPI and CPI for two reasons: 1. Because of how the media jumps all over the “minus food and energy” number like we don’t use those things everyday, and 2. The fact that CPI is bogus. It is moving goal posts with regards to the items in the basket of goods that is used to determine inflation, and the items that are not included in that basket.

However, the markets follow CPI, and I follow the markets, so…I have to report and deal with this bogus piece of data. The real piece of data today will be retail sales for October. As I said yesterday, the BHI (Butler Household Index) that I use to give me an indication of how the national retail sales number will come through, indicated that retail sales will be disappointing. Now, before you go and Google the BHI, save your time. The BHI is simply my view of how retail sales are going, by observing the number of shopping bags that come into the Butler house during a month.

Retail sales have been disappointing for a couple of months now, and I believe that indicates that the use of a consumer’s home as an ATM may be waning. However, the Big Boss Frank Trotter showed me some data yesterday that indicated that home equity withdrawals are still strong. Even stronger than before! Yikes! What are these people spending that money on? Oh well, that’s their problem.

Today will also be interesting in that the big three carmakers have finally cornered President Bush and will talk to him today. You don’t think that the weak Japanese yen will enter into the conversation do you? Of course it will! This weak yen has been on the minds of the big three for some time now. So…strap the seat belt nice and snug across your lap…cause if the big three get Bush to make even a slight remark of support, the big three could…and let me repeat…”could” spark a nice yen rally. We’ll have to wait and see…but this should be an interesting meeting, eh?

Just when it looked like it was safe to get back into the Icelandic krona waters, the Fitch ratings agency brings its undertow. Remember back to February of this year, when Fitch caused a 20% loss in the currency? Well…they just didn’t like the fact that the Icelandic krona had been the best performing currency versus the dollar for the last three months, and decided it was time to take the currency to the woodshed once more. Fitch didn’t do any downgrade this time; they just reminded everyone that the economy could still overheat. Thanks Fitch. Funny, I never see you taking your switch to the U.S. fundamentals.

Anyway, the currency lost some ground, but at this time it hasn’t been near the bloodbath of last February. So…as long as the “carry trades” are in vogue, the currency should be underpinned. Interest rates are off the charts, and inflation there has been falling. I don’t see what Fitch sees…but then I’m not a rating agency!

The Indian rupee saw some weakness yesterday for the first time in a month of Sundays. It is widely expected that the Indian Central Bank stepped in to intervene, and slow the currency’s progress. Let’s hope this isn’t a re-occurring event!

Currencies today: A$ .7655, kiwi .66, C$ .8780, euro 1.2825, sterling 1.8980, Swiss .8040, ISK 69.15, rand 7.2710, krone 6.40, SEK 7.0725, forint 201.60, zloty 2.9775, koruna, 21.89, yen 117.60, baht 36.40, sing 1.5560, HKD 7.7850, INR 45.17, China 7.8669, pesos 10.86, dollar index 85.27, Silver $12.85, and Gold… $624.40

That’s it for today…Heading to the Big Easy today – my first visit since the hurricane. I have a full house for my luncheon tomorrow, and I just got word that the Big Boss will also be in attendance! And I was in error yesterday when I said Chris would have the conn on the Pfennig the rest of this week…I’ll be writing from the road…and you know how much fun that is for me! NOT! Anyway, tomorrow from the Big Easy. See you there if you’re going to the New Orleans Investment Conference! Have a great Tuesday!

Chuck Butler
November 14, 2006

The Daily Reckoning