One Trillion in Dollar Reserves?

Good day…and welcome to October! As we begin the 4th QTR, the dollar still hangs onto its hammer vs. the Asian Currencies, while it has given up some value vs. the European Currencies. If asked a year ago, I would have said that the Asian Currencies would have pushed the dollar into its next large downleg… I still believe that will happen, it’s just taking longer to get going than I thought!

Friday saw the Chicago Purchasing Managers’ Index take a big jump to 62 from a previous reading of 57. This report obviously showed a different side to manufacturing than the Philly report showed a week earlier. The dollar took off on this report, and ended the week on a high note. The Personal Income and Spending data sure had a different look to it, as Income outpaced spending for once in a blue moon. OK admit it, when you read the “blue moon” at the end of the last sentence you had that song go through your head…

Today, we’ll see the color of the ISM Manufacturing report, which is the national heartbeat of manufacturing in the United States. The “experts” believe that it will show some slippage but nothing to stir the markets, unless it shows something outside of those expectations. This report has been hovering above the 50 level, which is the line drawn in the sand between expansion and contraction. If the experts are right, the index will come in around 53.7. Yes…that still indicates expansion…so go have a party! Yahoo! Get some of those little snacks with the fancy toothpicks in them, and some umbrella drinks. When you’re finished whooping it up, come on back to reality…

According to Peter Hooper, a former Fed Reserve official who is now chief economist at Deutsche Bank, the U.S. economy is “decelerating fairly significantly.” Goldman Sachs has cut their forecast for 4th QTR growth to less than 2%. So…there’s the reality…

The first week of October will bring us Central Bank meetings at the Bank of England and the European Central Bank (ECB). I fully expect the ECB to hike rates this Thursday, and I am on the fence regarding a rate hike from the Bank of England. As I discussed last week, the Bank of England may be on a mission to hike rates while the inflation iron is hot. Both of these Central Banks know all too well, that the only reason inflation as backed off in their economies is a backing off of the price of oil…and they want to get ahead of inflation this time, thus preparing for a possible run up in oil prices again.

On Friday, I was reading, doing some research, and came across something that is interesting. All this talk about Schumer, Graham, China, tariffs, and junk got me thinking that China’s U.S. dollar reserves should really be something these days, given that the take in about $50 Billion every quarter. So, the number at the end of the last quarter was $941 Billion. That means simply that sometime this year; China will have in their piggy banks, 1 Trillion U.S. dollars. Do you think Schumer and Graham will like hearing about that? I chuckle, because these two have no idea what the heck they are asking for, but think it’s what their voters want to hear, and that’s what gets them re-elected.

Oh my, I really sounded cynical there, eh? But think about that for a minute…1 Trillion dollars…does that smell like the beginnings of global trade domination or what? I think it does…

Speaking of China, last Friday I mentioned that Reuters was reporting that China would make a statement regarding their currency policy, but then China denied that. Well, over the weekend, the People’s Bank of China’s Gov. Zhou, did talk to reporters about the currency policy. Zhou said that the Central Bank would rely less on the use of a basket of currencies to determine the renminbi’s valuation, and rely more on investors placing fair value on the currency. Hmmm…again…as I always bring up with these Chinese statements is the fact that they don’t ever say, “AND THIS WILL BE CHANGED TODAY” Or “THIS WILL CHANGE BY xxxx”

China is on holiday all this week, so the renminbi won’t change this week. The first time we’ll see if market forces have more ability to move the renminbi is next Sunday night.

While talking about Asia…last night Japan printed their latest Tankan report, which measures the heartbeat of the business sentiment. The Tankan was expected to show some wear and tear, but instead showed a hefty expansion of the business sentiment. This is very good news for my rate hike expectations this quarter… Unfortunately, it did little to help the yen – right now anyway.

Before I get to the Big Finish…I want to bring to your attention the New Orleans Conference, which will return this year, and is always the BEST investment conference I attend. Nov. 15-19, 2006 – featuring Steve Forbes, Jim Rogers, Marc Faber, Dennis Gartman and dozens of the world’s top gold experts…and a scintillating debate between Newt Gingrich, Doug Casey and Susan Estrich. Plus…many other speakers that you know and love! Just click on this link for more information….

Currencies today: A$ .7455, kiwi .6545, C$ .8940, euro 1.27, sterling 1.8750, Swiss .80, ISK 70.25, rand 7.7275, krone 6.55, SEK 7.34, forint 216.55, zloty 3.12, koruna 22.28, yen 118.15, baht 37.60, sing 1.5860, HKD 7.79, INR 45.97, China 7.9041, pesos 11, dollar index 85.92, Silver $11.57, and Gold… $601.70

That’s it for today…except to congratulate our Cardinals for their winning of the Central Division, that’s six of the last seven years! Good luck in the playoffs! And how about those Missouri Tigers? We haven’t been 5-0 since 1981… I’m still leery though, I’ve been let down too many times in the past…my little buddy’s flag football team won both their games Friday night, so it was a good sports weekend! Let’s hope it keeps going! Have a great Monday and week!

Chuck Butler
October 2, 2006

The Daily Reckoning