Obsessing Over China

Good day… And a Happy Friday to one and all! A GREAT Friday for yours truly, as I begin my vacation tomorrow… Whoever came up with the idea of vacations needs to receive a Nobel Prize! Unfortunately, the currencies aren’t having a GREAT Friday – at least not yet – as the dollar continued its rally all day yesterday and overnight.

We watched the euro tick down all day yesterday, and by the end of the day, I was feeling somewhat exhausted with it all, when I had a V-8 moment! Yes! (Slap to the forehead!) This is the “slowing down” I talked about needing last week! Just shows to go you, that you should be careful what you wish for! I was all for a “slowing down” and now that it’s here, it puts me in a foul mood! But then, I think about all those people that drug their feet and are just now buying euros, sterling, Aussie, Sweden, and other currencies… They are certainly buying at better levels, eh?

We will end the week with a truckload of data here in the United States… You had better sit down to record all this! Right out of the starters blocks this morning we’ll see that stupid, trumped up, massaged, and cooked, Consumer Price Index (CPI) or consumer inflation. It is expected to have ticked up 0.2% in November… However, the media likes to pin its colors to the “Core CPI” which excludes food and energy… (As if we don’t use those things on a daily basis!) And here, the annual year-on-year figure of 2.7% is expected to remain unchanged.

Now doesn’t that number of 2.7% annual inflation rate illustrate by claims that this is a stupid, trumped up, massaged and cooked report? The government is telling us that we have experienced a 2.7% rise in inflation this year… What a crock!

Anyway… We go from CPI to the Net Foreign Security Purchases (NFSP) for October, which are expected to continue to show that we barely attract enough net investment each month to cover the current account deficit and net foreign direct investments, which run about $70-75 billion each month. The experts have October’s NFSP pegged to come in around $70 billion. I’m not convinced that we’re doing a good enough job here, but until either interest rates/yields on treasuries or the dollar makes a major move downward, we’ll remain right here on the cusp of danger… And as long time readers have heard me say many times – given the choice of raising rates so high that it squashes the economy like a bug, or debasing the currency, the government will always choose debasing the currency.

Before the smoke clears on those two pieces of data, we’ll get one of my faves… capacity utilization, which is expected to have remained around 82% in November. Along with capacity utilization, we also get to see industrial production, which is expected to remain flat. Nothing dollar friendly here!

So… Lots O’Data today. Basically, CPI is the wild card. It’s a worthless piece of data in my opinion, but the markets believe that the Fed watches this like a hawk. So… The dollar’s direction to end the week will be determined by CPI.

In Sweden this morning, the Riksbank did, as I expected, raise interest rates 25 BPS to take their internal rate to 3%. These rate hikes this week by Norway, Switzerland and Sweden haven’t helped to support the currencies of each country… But then, we’ve had this dollar rally going on. I look at it like this… Remember when you were a kid and having a snowball fight? You would prepare your ammunition and have the snowballs all ready for the right time to use the… Rapid fire! Well… These rate hikes are being collected and put on hold until the time is right to use them rapid fire like versus the dollar… And that will come as the Fed begins to cut rates in 2007.

And just like the Central Bank Governors from Norway and Switzerland, Sweden’s Riksbank Gov. Mr. Ingves said “the repo rate will need to be increased further, roughly in line with the market’s expectations.” Talk about being clear about what’s going on at your Central Bank! I just read an article by Caroline Baum, author, and contributor to Bloomberg, regarding this exact thing. Ms Baum, does a great job showing how the Fed’s communications are still in the “dark ages”, while other Central Banks are clear about their intentions…

Ty Keough pointed out to me yesterday that one of my faves, William Pesek, had an article on the Bloomie regarding China, and Paulson. I read it, and as usual Mr. Pesek makes great points about how Paulson is obsessing over China, while he should be focusing on Japan, and fixing problems at home. Here’s a snippet of his report…

“The Treasury secretary’s focus on China is distracting him from the other big problem: U.S. households need to save more.

“The U.S.’s trade imbalance is far more homegrown than officials in Washington admit. Zero savings aren’t stopping households from consuming; loading up on debt takes care of that problem. So have the Federal Reserve’s low-interest-rate polices of recent years; they made servicing household debt less painful.

“Consumer spending accounts for about 70% of the U.S. economy, and so White House officials have been out in force talking about how wonderful things are and how the jobless rate has dropped to 4.5% from 4.8% since [February first]. Yet the [United States] is living unsustainably beyond its means, as evidenced by its huge current-account and budget deficits.”

If you would like to read the entire report… Click here…

Paulson’s China Obsession Misses the Big Picture

Before I head to the Big Finish, and my vacation, I wanted to point out that there has been a tent revival for the emerging currencies this week, as I believe investors see the dollar weakening and want to expand their horizons to other currencies other than euros. (As long as it is speculative money, I’m OK with that.) Currencies from Iceland, Mexico, South Africa, and India have all had strong performances this week. If this can continue, it would indicate to me that an overall general weakness in the dollar is now in place. Good Show!

Currencies today: A$ .7810, kiwi .6880, C$ .8655, euro 1.3125, sterling 1.9580, Swiss .8210, ISK 68.93, rand 7.03, krone 6.22, SEK 6.9050, forint 193.25, zloty 2.88, koruna 21.17, yen 118.10, baht 35.25, sing 1.5420, HKD 7.7730, INR 44.69, China 7.8275, pesos 10.78, dollar index 83.89, Silver $13.73, and Gold… $625.45

That’s it for today… Sunday is my good friend, and colleague, Jennifer’s birthday… Jen takes over the trading for me whenever I’m out, and has worked with me since 1994! And Ty Keough celebrates a BIG Birthday number 50! Way to go Ty! Tonight at sundown, Hanukkah begins… And, as I head out the door this afternoon, I’ll be wishing everyone here a Merry Christmas… But before I do that… I wish you, dear readers, a very joyous, peaceful and Merry Christmas! I hope Santa brings you what you have on your list! Vacation time here I come! Have a great Friday and weekend, Chris Gaffney has the conn on the Pfennig until I return on Dec. 27th!

Chuck Butler
December 15, 2006

The Daily Reckoning