Leading Indicators Fall!

Good day… And a Happy Friday to one and all! Yesterday did indeed turn into a Tub Thumpin’ Thursday for the euro (EUR), so let’s hope today ends up being a Fantastico Friday!

Well… The game of “your economy is worse than mine” backfired on the dollar bulls yesterday, as the Leading Indicators printed an awful number. I said yesterday that it was too bad that the markets normally ignored this data… But they didn’t yesterday, as the number was so bad, they couldn’t ignore it… Sort of like that spoiled rotten bratty kid, throwing himself to the floor of the grocery store, and throwing a temper tantrum because you said he couldn’t have a candy bar! If you’re next in line to check out at the grocery store, you want to ignore the child, but you just can’t because it’s so obnoxious! Well, that’s how it was with Leading Indicators yesterday… Here’s the skinny…

U.S. Leading Indicators, (which is exactly what they are!), fell 0.7% in July (consensus was for a fall of 0.1%), with 5 of the 10 indicators falling… The Conference Board that measures this data said that this data pointed to “slow growth the rest of the year, and possibly an economy grinding to a halt.” Of course Pfennig readers already knew this, but it’s nice to see the rest of the crowd coming to the same realization. I’m not crowing here because I was right… I live here, work here, etc. I don’t want to see us in a long protracted recession, but as long as it’s there, I want everyone, including the un-dynamic duo of Bernanke and Paulson to admit it! Along with the markets of course!

“If there’s a second-half recovery, it’ll be the second half of 2009,” said Ken Goldstein, labor economist at the private research organization. “The recent decline in gas prices isn’t enough to overcome all the negative momentum that’s been building up.”

On a side bar… One of the indicators that was positive was consumer sentiment… What? People are confident, just because oil drops for what looks like a short-term drop? Geez Louise… What are people thinking? Maybe Addison Wiggin’s movie I.O.U.S.A. – which I hear is selling out theaters all over the country – will get people to stop feeling confident because they just bought a big, flat screen TV!

OK… So, this data really brought the problems of the U.S. economy front and center, and sent the dollar to the woodshed for the first time in almost a month!

My friends over at Turtle Hollow Inc., who do a fabulous job of tracking business cycles, tell me that with the awful printing of Leading Indicators today, they now feel that the recession will be “more severe”. I’ve been using their business cycle model for a couple of years now, and they are fabulous!

So… Was yesterday the end of this dollar run? Well, all I can say is that if the dollar’s run didn’t come unglued at the hinges yesterday, then we at least saw that things are becoming less secure… In that I mean simply that the dollar bulls were very confident that the dollar had gotten up from its deathbed and was a healthy specimen, only to have the rug pulled out from under it yesterday. The dollar bulls aren’t so confident this morning.

Commodities were soaring; gold, oil, and the base metals were kicking sand in the dollar’s face again… And the commodity currencies basked in the glow of the warm sun yesterday. I guess all the pent up concerns with Fannie and Freddie (a financial institution back in the news), and then the awful data, just created the Perfect Storm…

But today is a new day folks… And what happened yesterday is now history. The attitudes could change in a NY minute, and the dollar could be back in favor. This is what I’m talking about when I say things are less secure. Wishy-Washy market sentiment leads to very volatile markets, and that’s what we saw yesterday. Now, let’s move on to today, and see what Bullwinkle has up his sleeve. Hey Rocky, wanna watch me pull a rabbit out of my hat?

Well… This time every year, central bankers from all over the world, (bankers and journalists also get invited) meet in Jackson Hole, Wyoming for the Fed’s boondoggle. These meetings normally leave a lot of sawdust on the floor, but little in the way of direction for the markets. The meeting gets kicked off this morning, with the opening comments by Big Ben Bernanke. Big Ben will speak about “financial stability”… Geez Louise, I would love to be in the audience to heckle him for that one!

I had to laugh at a report that printed yesterday on Canadian inflation. Seems that inflation in Canada is rising… July’s inflation rate was 3.4%, which was the fastest monthly rate since 2003! I bet the Bank of Canada (BOC) is wishing they hadn’t followed the lead of the Fed Reserve and cut rates so low! Of course, in Canada, they like to play the “remove food and energy from the data” game like we do here in the U.S. to make inflation look muted… But that dog won’t hunt with me!

The thing to think about with this report in Canada is the market mentality that exists these days that reward currencies from countries with rising inflation. Strange but true… And thus, the Canadian dollar rallies!

Recall the earlier this week I told you about a story that Reuters printed that cited an agreement between Brazil and Japan? I said at the time that this could be huge for the real (BRL), if Japanese investors flocked to Brazil like they did to Australia and New Zealand in the past. Well… That looks like it could be coming to fruition, as the real racks up a two consecutive days of gains versus the dollar.

I read an interview with one of my fave economists, Nouriel Roubini, last night. (Yes, I was able to come home and not fall asleep!) Man… Like my old fave, Dr. Kurt Richebächer, he tells it like it is, and doesn’t worry about what the “mainstream media” is saying. I used to joke when I would get my Richebächer newsletter, that it was time to “put away the sharp objects”. You find yourself doing the same with Mr. Roubini… But, in Nouriel Roubini’s defense, his forecasts are usually correct! Anyway… What I was going to talk about here is that Nouriel Roubini continues to say that the United States is in a recession that will be a long protracted recession, and that the problems that sprung up from the housing debacle/bubble will continue to plague the U.S. economy.

I was doing an interview yesterday, and the interviewer asked me to look to next week and project what the dollar would do. I said, “Well, we have a slew of housing data due to print next week, and that should weigh heavily on the dollar”… After I said that, I thought, but then with the markets having become comfortably numb on U.S. data, the housing data might get swept under the rug. Maybe the wake up call from Leading Indicators got the focus back on what it should be focused on… The rot on the U.S. economic vine!

The second revision of second quarter GDP in the U.K. printed a zero this morning, and that has pound sterling (GBP) on the run, which hurts the euro in the crosses. But for the most part, this is a “sell pound sterling” story only.

Yen (JPY) is back above the 109 handle after spending yesterday in the 108 handle. (Remember, yen is a European priced currency, so the lower the number, the greater the value in dollars). There wasn’t any news from Japan that squelched that rally, so it had to be profit taking.

Currencies today 8/22/08: A$ .8740, kiwi .7140, C$ .9565, euro 1.4850, sterling 1.8590, Swiss .9150, ISK 81.50, rand 7.6710, krone 5.3475, SEK 6.3150, forint 157.60, zloty 2.2225, koruna 16.4350, yen 109.40, baht 33.94, sing 1.4080, HKD 7.8060, INR 43.42, China 6.8335, pesos 10.10, BRL 1.6090, dollar index 76.40, Oil $116.07, Silver $13.61, and Gold… $828.60

That’s it for today… The end of a very long week didn’t get here soon enough for yours truly! The doctor visit went well yesterday, I am scheduled for two scans in September, and if they are clean, I will be finished with my treatments. YAHOO! Of course I can’t count my chickens before they are hatched, but just thinking about the end of these treatments is like manna from heaven! The kids from the office here that were all in Orlando for training this week, came back sooner than expected and will be in the office today. That’s a good thing! Florida is getting hammered with rain from Hurricane Fay; our thoughts should be with those folks. Our Jacksonville branch offices are going to be closed today. Maybe I should re-consider my thoughts about buying beach property! The Big Boss, Frank Trotter, just called (on his way to play hockey this morning) to see how I’m doing. It’s late, so I had better hit the send key… I hope your Friday is Fantastico!

Chuck Butler
August 22, 2008

The Daily Reckoning