Plus Ten Percent Inflation…

Good day… Well, a very busy day for yours truly on the trading desk yesterday, and there’s even more in store today. Whenever this happens, I don’t get a chance to go through all my email, all the research reports, etc. That just means that I have lots to catch up on the next day.

I did notice the euro trading with a bias to strengthening yesterday, but the move was so small that it hardly registered as a mini-rally. I don’t know how long this bias will last, given the fact that Eurozone retail sales dropped in January for the first time in ten months. Of course, this was expected to have happened given the VAT (tax) that was added on January first in Germany… But still there was hope it could be overcome. Just goes to show ya’ that Germany’s economy is the cat’s meow in the Eurozone!

Quite a few of you wrote to me yesterday regarding the kiwi price that I had typed in the currency round up yesterday. Yes, my fat fingers were the culprits once again. In the future though, you might want to call us or fire off an email before you experience shortness of breath! Yes, those old fat fingers… What’s a poor newsletter writer going to do about that?

While I’m speaking of kiwi, I might as well get on with the visit to the South Pacific. Kiwi continues to be the “buy” currency of the carry-trade, and as long as that situation remains in place, the fundamentals – like a deficit that is over 9% of GDP – will be forgotten about, and kiwi will continue to the be the darling currency of high yield investors. When that carry-trade all unwinds though, you had better be the first one out the door!

In Australia, the three attempts in the past year to get through the 80-cent door are going to leave the Australian dollar bruised and battered. I think we’ll have to wait a while now before Aussie dollar investors make another run at the psychological level. I still like Australia’s fundamentals better than New Zealand’s, but right now that thought and $4.50 will get you a cup coffee (at Starbucks)! Kiwi is outperforming the Aussie dollar, because of the carry-trade… But in the long run, fundamentals will come into play.

One of the things keeping the Australian dollar from reaching the 80-cent level is the poor performance of commodities. I’m still of the opinion that the commodity bull market is nowhere close to being over… But I need to get some love from the commodity prices! Gold and silver have bounced back, slowly and steadily. Oil has bounced, but that’s about it. The base metals haven’t made a significant move up in a month of Sundays!

Gold has really been on a strange trading trip, given that the dollar had held the hammer, and oil prices were falling. Now, oil prices are recovering. Let’s hope this lights a fire under gold to move it even higher, eh?

Energy… We all need it… We all use it… So why aren’t energy prices going through the roof? Hmmm.

OK… Norway and Sweden are back on the rally tracks. Good show! I think that Norway’s Norges Bank (central bank) surprise rate hike last week woke up the Norwegian and Swedish traders, to higher interest rates and more attractive investments. I hung my hat on Norway and Sweden last year, and I’m going to leave my hat hanging on these two in 2007. The fundamentals are great, and are great alternative investments to the euro, not that there’s something wrong with owning the euro. It’s just that sometimes you need to diversify your diversification, and Norway and Sweden allow you to do just that!

From time to time I highlight the findings of John Williams, of Shadow Statistics. He’s the government economist that reads the fine print of each government data report and then applies principles he learned when these reports were not cooked and massaged to make us feel good.

Today, however, I have a treat from my friend, the Mogambo Guru, who points one of these findings out for me… This is great stuff!

“According to John Williams at, the official numbers are bad enough, in that, ‘Seasonally-adjusted PPI rose 0.9% for the month, following a 2.0% gain in November. Annual PPI inflation rose to 1.1% in December from 0.9% in November. The seasonally-adjusted December CPI gained 0.55% (0.15% unadjusted) after being reported as unchanged in November. Unadjusted, year-to-year December CPI was up 2.54% versus 1.97% in November. The annual average inflation rate for 2006 was 3.23%, slightly lower than the 3.39% in 2004, which was the highest annual inflation rate since 1991.’

“These numbers are bad enough, but the Real Horror Story (RHS) is revealed when he continues, ‘Net of the methodological gimmicks added to CPI reporting in recent decades, annual inflation for the SGS Alternate Consumer Price Measure was 10.0% in December, up from 9.4% in November. The average alternate inflation rate for all of 2006 was 10.2%, up from 10.1% in 2005, and at its highest level since 1981.'”

Again… I know that consumer confidence is closely tied to the performance of the stock market… But still… Don’t they feel this inflation eating away at their savings, disposable income? I feel it… And it makes me sick!

I guess with all the creation of money (which is inflation!) most consumers just don’t “get it”.

Hey! Recall all those times I’ve told you the European Central Bank (ECB) uses two pieces of data to set interest rates – inflation and money supply – and that even though inflation in the Eurozone had gotten down the ECB’s target rate of 2%, money supply was still outrageous, and that would keep the ECB on at the rate hike table? Well… Ty Keough was kind enough to send me a note yesterday regarding a story that addresses this!

“European Central Bank President Jean Claude Trichet said the fastest money supply growth in 17 years validated recent interest rate increases.”

Then ECB ministers also chimed in, “ECB council member Lorenzo Bini Smaghi said in an interview yesterday that the strategy of increasing rates before inflationary pressures mount ‘has proven correct, and will continue in coming months.’ Bundesbank President Axel Weber said in a separate interview on Jan. 26 that the bank needed to take ‘this process of withdrawing monetary stimulation further.'”

This is all Central Bank parlance for “interest rates are going higher”… Which should underpin the euro going forward.

Currencies today: A$ .7730, kiwi .6950, C$ .8455, euro 1.2960, sterling 1.9660, Swiss .7980, ISK 68.60, rand 7.34, krone 6.30, SEK 6.97, forint 199, zloty 3.03, koruna 21.85, yen 121.80, baht 35, sing 1.5380, HKD 7.81, INR 44.23, China 7.7750, pesos 11.10, dollar index 85.05, Silver $13.18, and Gold… $643.90

That’s it for today… That’s cold Willis! Yes, it is quite cold here in St. Louis, don’t know if I can wait to head south next Wednesday for the Orlando World Money Show! First I head to Oklahoma City this weekend. The oldest person in the world died this past weekend… Jennifer mentioned yesterday that she doesn’t think she would like to be the next person named as the “oldest person!” Have a great Tuesday!

Chuck Butler — January 30, 2008