Severely Damaging Trade Relations?

Good day… So much for the love the dollar received from the Jobs Jamboree, despite the fact that Europe was on holiday… Only one day back, and the euro is back above the 1.34 handle, and the dollar is being sold on all corners of the earth.

There’s news this morning that confirms the rumors I talked about yesterday with regard to China’s trade surplus… And the rumors I talked about last week, regarding the United States filing a complaint versus China on copyright violations. OK… First the trade surplus did indeedily-do almost double in size versus the same period last year, which already had Schumer and Graham’s shorts in a bind. For those of you keeping score at home, at this point last year China’s trade surplus had put $23.3 billion on the tote board. This year? Drum roll please… $46.4 billion!

Obviously, the U.S. consumer isn’t finished buying flat screen TV’s from Wal-Mart! Not as long as the credit card companies keep sending out credit cards to every Tom, Dick and Harry that may or may not have the wherewithal to pay back what he borrows, without even a hint of a credit check!

But, I’m not going there this morning. I messed up something in my hip over 10 days ago, and it’s still hurting like the Dickens, so I don’t also need a pain in my side talking about credit card companies, the borrowing habits of the U.S. consumer, and China-West (a.k.a. Wal-Mart).

Oh… And this just in, as the United States heads to the World Trade Organization with their complaints, China’s commerce ministry has issued a statement that says the U.S. complaints will “severely damage” trade relations… Uh-Oh!

I’ve received a ton of emails lately with this question: “If the United States goes into a recession, as you say it will, won’t that hurt the economies of the European Union?” Well… The answer in a nutshell is yes… But, when you break open that nutshell, you will see that the damage to the Eurozone economy will be muted in my opinion.

And the reason? Ahhh, grasshopper… One of the main reasons the European Union was formed was to promote easy trade amongst themselves – and the last time I checked, 80% of trade in the Eurozone is amongst European Union members. So, 20% of their trade is done outside the Eurozone…and that’s not all done with the United States. With that said, there would be some collateral damage, but not a direct hit on the Eurozone.

That’s why you don’t hear Eurozone ministers complaining about the euro’s strength. They all sing from the same song sheet (well, except those knuckleheads in Italy, who have played musical chairs with their leaders for years), and that song sheet tells the ministers that a strong euro helps to keep inflation down.

Last week I said that the Canadian dollar/loonie was within spittin’ distance of 87-cents – and lo and behold, the loonie is back above 87-cents this morning! Base metals, are really getting commodity investors all lathered up again… Energy has become a real “buzz word” among investors, and they can’t seem to get enough of energy based economies… Australia… Canada… Norway… The United Kingdom.

OK… I’m not saying that the loonie can get back to last year’s lofty 94-cent level, but who knows how far this base metals/energy interest goes? As the one tough Dominican, Joaquin Andujar used to say his favorite word was… You never know! (Andujar was a star pitcher for the Cardinals in the 80’s in case you were wondering.)

Today, is “Ask Chuck” day in the Pfennig!

Yesterday, several people asked me to explain the birth/death model that the Bureau of Labor Statistics uses, and while I have done so in the past, I’m reminded that there are new readers all the time, and since this is an important piece of information, I will explain it (hopefully) again.

The BLS uses a model that assumes (remember what we learned early in life about when you assume something) that dying businesses have their equivalent in newborn businesses. In other words, the higher the death rate (of businesses) when the economy turns down, the higher the report birth rate.

I can say that among all the absurdities that the government uses, this could very well be the worst!

So, each month, the BLS reports jobs created from their birth/death model. It’s all hocus-pocus in my opinion. Employment data is always backwards looking… But let’s use an example from a period of time last year.

Since most new jobs are created by smaller businesses, let’s look at the National Federation of Independent Business (NFIB) that tracks data like job creation for 600,000 small business owners. Last year during the period of April through June, the NFIB reported in their Small Business Economic Trends that the outlook for expansion and sale expectation had fallen off a cliff.

But the BLS added 329,000 jobs during that period using their birth/death model. Makes sense, right? I HOPE NOT!

I hope that helps!

The Bank of Japan left rates unchanged last night, thus giving the green light to “carry trade” investors to just keep on keepin’ on! So… The “high yielders” are going to get move love thrown their way. So look for high yielding currencies like Aussie, kiwi, sterling, Iceland, and others to see the light continue to shine on them.

I think the Bank of Japan is so wrong on this rate hike business.

The European Central Bank (ECB) meets this Thursday, and while I would like to see them raise this week, I’m certain that the ECB wants to wait until next month, so as not to give the markets any reason to believe they have discovered a pattern with ECB rate hikes. I’ve been writing the Pfennig since 1992, and back in those days before the ECB, there was Germany’s Central Bank, the Bundesbank. The Bundesbank Governor at that time was Hans Tietmeyer, and he had a penchant for surprising the markets with rate moves. Now, I don’t think that the ghost of Tietmeyer lives in now ECB Governor Trichet, but there is certainly a legacy there that hasn’t worn off!

Gold is up over $6 this morning to $677.80, and silver is within spittin’ distance of $14 again. The precious metals are really following the lead of the base metals, and that’s much better than following the ups and downs of the oil market! But, in the end, it’s really the fortune of the dollar that lends itself to gold performance.

Currencies today: A$ .8240, kiwi .7272, C$ .8720, euro 1.3420, sterling 1.9730, Swiss .82, ISK 66.90, rand 7.15, krone 6.0450, SEK 6.9175, forint 183.30, zloty 2.86, koruna 20.7925, yen 119.10, baht 32.50, sing 1.5180, HKD 7.8130, INR 42.8150, China 7.7350, pesos 11, dollar index 82.76, Silver $13.87, and Gold… $677.80

That’s it for today… It’ll be good to see the currency markets back to full liquidity this morning – and it’ll be good to see everyone on the desk again! The interest in our newest MarketSafe CD, featuring the Japanese REIT market continues at a very high level, along with our old fave, Gold MarketSafe CD. I’m working on another type of MarketSafe, and when I have something more concrete I’ll share it with you. My beloved Cardinals received another injury blow yesterday, as our Ace pitcher, Chris Carpenter, was placed on the 15-day disabled list. Every year we have to deal with something like this. Rolen, Pujols, Edmonds…they’ve all been bit by the injury bug! UGH! But they carry on with the players they have! Time to hit the send button, so have a great Tuesday!

Chuck Butler — April 10, 2007

Chuck Butler is the senior vice president of EverBank World Markets. He oversees the trading desk and operations for over 12,000 individual and corporate clients, both in the United States and abroad, who look to EverBank for FDIC-insured World Currency Deposit Accounts, and Single-Currency and Index CDs .

Chuck is the author of The Daily Pfennig, which is reposted here at The Daily Reckoning. His respected analysis is frequently quoted in or referenced by: the Wall Street Journal, U.S. News and World Report, CBS Market Watch, USA Today, CNNfn, the Chicago Tribune and many other publications.

The Daily Reckoning