Seeing Things Like Yours Truly!

Good day… And congratulations to the University of Florida for their huge win in the national championship game last night. The Florida Gators are the first school to hold top-level championships in football and men’s basketball at the same time! WOW! That’s impressive, as was Florida’s offensive scheme last night… Good Show!

I might as well keep talking about the championship game because the currency markets were a real snoozer yesterday. With no data to sift through, the markets were void of direction. But, even our worthless newspaper here in St. Louis will have plenty to say about the game… So, I’ll stick with the currencies!

John Kaupisch gave me an article yesterday that appeared on Yahoo! Finance. Remember Ben Stein? Yes, he once had a very funny quiz show, but this guy is also very smart. And while I cringe at most of the stuff he says, yesterday he was bang on with some thoughts about “Investing Strategies for the New Year.”

Here are some snippets… “There are some long-term trends that seem to me to likely continue… The dollar need not be the reserve currency for the world forever. The Eurozone as a whole has a large trade surplus with the U.S., and this is also making the euro appreciate against the dollar. The currencies of many emerging-market countries…are also strengthening against the dollar…as their economies run trade surpluses with the United States.”

And then finally as he talks about the decline of the dollar… “This seems like a sure thing, and in the long run it is. There will be pullbacks and losses along the way, but the long-term picture seems clear: Dollar down, euros and [other] currencies up.”

So… There are others out there that see it the way I see it… And his last thought is one that I’ve tried to get across to investors for years now. The general depreciation of the dollar is in full force, and has been since 1971 when Nixon shut the gold window, and the dollar was removed from the Bretton Woods Agreement. There are times the dollar rebounds causing short-term losses, but for the most part, the dollar losses far outweigh any gains the dollar has garnered since 1971!

There are times when the currencies spurt to big gains in short periods of time, and some investors get in to take advantage of that move. But really… Those short period moves are not the norm. The norm is a long sweeping move that takes time to develop and show positive returns.

You bought currencies to diversify your investment portfolio, and provide a hedge against a falling dollar (since 1971). When that “hedge” does produce a gain, you will then have provided a hedge to your investment portfolio without cost! And the gain? Gravy… I know that most people now-a-days don’t believe in “hedges”… It’s a “total return” game… And my friend Bill Bonner has recently been writing about how even “hedge funds” don’t hedge any longer. I say that when “hedging” is out of style, then someone is about to get hurt badly! Oh, yes… Everyone’s on the same side of the boat… Uh-Oh.

OK… Enough of the soapbox speeches. You know… The talk about China has cooled off recently, but I doubt that will continue with the new Democrat led Congress. For it is Democrats like Schumer that have introduced a bill to place tariffs on Chinese goods… And they’ll be none-too-happy to see China still growing at a 10% clip this year, and the currency only gaining 3% per year. The thing that might save China from further bashing by Schumer and others is the fact that I believe China will allow the renminbi to gain five to seven percent versus the dollar this year. That’s better, but not the stuff that really gets the warm and fuzzies going. So… Look for more of the same negotiations and whatnot in 2007, but in the end, the renminbi will probably gain five to seven percent versus the dollar!

One of the other “culprits” in the global imbalance, Japan, is going to be on my list this year… And I’m not talking about their kiss being on my list. I’m talking about how I’m not going to be nice to Japan any longer. THIS DOES NOT MEAN I’M SELLING MY YEN! What I’m talking about is really digging into this “manipulation” of the currency by the government. The Bank of Japan meets next week January 17-18, and I fully expect a rate hike from them at that meeting… And if they do hike, it will be yet another step toward removing the yen as the funding currency of the “carry trade”.

I see this “carry trade” as a real roadblock to correcting the global imbalances… So the sooner yen ends its run as the funding currency the better!

I keep seeing oil prices fall, and can’t help thinking that on one hand “that’s fine with me, who wants to pay $5 a gallon for gas!” But on the other hand… “Is this a trap?” Let me explain. There’s nothing like cheaper gas prices to get everyone feeling better about driving everywhere instead of cutting back like they did when oil was $70 per barrel. And just about the time that everyone is on board with oil again… The rug gets pulled out from under us. Pick your event… OPEC cut production again… The war in the Middle East gets out of control… Israel attempts to take out Iran’s nuclear facilities… And there are more… More than I care to even think about!

I’m not trying to be gloom and doom here… Just laying out things that could happen that would push oil prices higher again… And… If the common man/woman stopped to think about these things, those consumer confidence reports wouldn’t be so peachy!

No real data again today… So… Another day of tight trading ranges is probably in store for us. Tomorrow, we’ll see the November trade deficit. I get a kick out of the fact that they still call it the “trade balance”. We all know… They all know… Everyone knows that the “balance” is nothing other than a deficit. So, call it that! Anyway… The trade deficit has come off its highs, due to oil prices, but remains a big problem at over $700 billion per year.

Friday, we’ll see the retail sales number for December. Now, one would think that this number would be “out of the box” given the Christmas shopping season… But… The BHI (Butler Household Index) tells me that this won’t be the case! Retail sales won’t be negative… But not “out of the box”… But we have to wait till Friday for this report, so let’s just go to the Big Finish, eh?

Currencies today: A$ .7830, kiwi .6925, C$ .8510, euro 1.3030, sterling 1.9435, Swiss .8075, ISK 71, rand 7.18, krone 6.33, SEK 6.9850, forint 194.40, zloty 2.9640, koruna 21.18, yen 119.10, baht 35.90, sing 1.5355, HKD 7.7965, INR 44.38, China 7.8055, pesos 10.92, dollar index 84.55, Silver $12.34, and Gold… $611.20

That’s it for today… ran a good story yesterday on the declining dollar… I was quoted in the story, as I had a nice interview with the reporter from Forbes on Friday. You may recall that Forbes did a nice layout/story on currency investment featuring EverBank CD’s last summer… The writer, Matthew Swibel fully understands what’s going on! Have a great Tuesday!

Chuck Butler, January 09, 2007

The Daily Reckoning