Losing Credibility?

Good day. Heeeee’s Baaaaaaack! Well, I tried to get caught up on my reading and the market goings-on a bit this past weekend, but I failed miserably! So, I’m starting fresh this morning. Yes, I had a wonderful vacation, lots of R&R and great times with my family.

Well, what do we have here? The Fed did go ahead and pause last week. And now, they have to see the color of the CPI on Wednesday. This could really all just blow up in their collective faces, for if CPI does post the 0.3% rise for July, which the “experts” are forecasting, then the Fed has egg all over its collective faces, and the credibility factor takes a great big hit.

So, in the end, the dollar is going to lose a prop in the rate hikes, or it will take a hit, because a shaky credibility in the central bank. Recall, back in 2000 and 2001, I talked about how shaky the credibility was in the European Central Bank (ECB), basically because it was so new. But nonetheless, it was shaky, and that was a prime reason for the euro’s decline in its infancy. Once the ECB President, Wim Duisenberg, convinced the markets that the ECB would follow the Maastricht Treaty’s edict that they provide price stability. That shakiness went away, and the euro has not looked back!

I know that Chris mentioned this last week, but what did you think of that revision to the trade deficit that everyone ballyhooed when it was first printed as “narrowing?” What a bunch of bunk! Just for the record, the May deficit was $65 billion. And June’s pre-revision number was $64.8 billion. Show me the narrowing!

Right before I left on vacation, the ECB and the Bank of England (BOE) had raised interest rates. I think the data since then has given them a shot in the credibility arm. This morning, it was announced that the second-quarter European economy grew at the fastest pace in six years. And in the United Kingdom there were reports that not only did retail sales grow at a 13.8% clip versus a year ago in July; they also reported that factories were raising prices for a seventh consecutive month. There are more rate hikes to come from these two central banks. And while they may not be something that you can count on every six weeks, like the Fed carried on with for two years, they will, in my opinion, keep coming.

Speaking of rising retail sales, the United States sure did post a strong figure last Friday for July. I didn’t get to forecast it with the BHI (Butler Household Index), but I don’t know that I would have thought the number to be as strong as it printed! July’s retail sales grew 1.4%. Pretty strong stuff, but then again with schools starting so darn early these days, I would have to think that a bulk of that was “back to school” shopping.

Everybody’s doing it! Retail sales in New Zealand also grew in June, thus keeping those interest rate cut fears at bay for another month. This news has given a boost to kiwi, which has been inching back very slowly in recent weeks.

In China, the “experts” (you know the ones that have telling us China’s economy was going to slow down for the past three years) tell us, yet again, that China’s economy will slow down due to the central bank using rate hikes instead of allowing the renminbi to appreciate versus the dollar. Hmmmm. Seems to me that this is just another boy crying wolf. And if they do accomplish a slower economy, does that mean it grows only 9% instead of 13%?

Anyway, the renminbi took a hit overnight on that forecast of a slowing economy. No biggie. I still believe that the renminbi will be trading around 7.50.

Gold has lost about $25 since I left town 10 days ago.  The U.N. ceasefire goes into effect today. And oil has given back some of the gains it made with the B.P. Alaska fiasco. And commodities, as priced by the D.J. AIG commodity index, are softer. Of course, it’s all my opinion only. But, I would think that these are temporary moves backward, thus providing better buying opportunities!

There’s no data printing in the United States today, but tomorrow will start a big couple of days of data with July’s PPI, followed up on Wednesday with July’s CPI. These inflation reports will go a long way toward the direction of the currencies this week. But, like I always tell you, this is short-term noise. The long-term direction of the dollar is still pointing downward. World markets customers who receive the monthly Review & Focus got a glimpse of that downward move by the dollar since 1971, in last month’s edition.

OK. I see by the time on the computer screen that I’m running late. Already! First day back, and running late! That’s what I get for starting fresh!

Currencies today: A$ .7640, kiwi .6325, C$ .8880, euro 1.2730, sterling 1.8875, Swiss .8050, ISK 71.17, rand 6.8350, krone 6.28, SEK 7.23, forint 214.50, zloty 3.04, koruna 22, yen 116.60, baht 37.40, sing 1.5810, INR 46.62, China 7.9790, pesos 10.7860, dollar index 85.57, silver $11.84, and gold $626

That’s it for today. Thanks again to Chris for picking up the ball on the Pfennig last week while I vacationed. My next trip isn’t till after Labor Day, so I’m tall in the saddle for a few weeks. It looks like it’s really the Dog Days of August for my beloved Cardinals; they are at a new low. Ugh! Can you believe they are playing football games already? Soon, I’ll get to talk about my disappointment with my Missouri Tigers again! Oh well, on to the week ahead! Have a great Monday and week!

Chuck Butler
August 14, 2006

The Daily Reckoning