Shootin' Up Some Crude

Good day… A terrific Tuesday! Well… Thanks so much to all of you who wrote a “welcome back” email to me yesterday… I’ve said it before, and I’ll say it again… You Pfennig readers are the Best!

Well… U.S. retail sales were modestly firm in July, just as the BHI had predicted once again! With oil prices coming back down this summer, it only makes sense that retail sales would be stronger… However, as I said, they were no more than “modestly firm” coming in at 0.3%.

The data gave further strength to the dollar bulls to continue buying dollars, and the currencies all lost ground during the day. And here’s where I’m going to say some very important words to you all… I’ve been sitting here watching the subprime meltdown extend its ugly tentacles around the globe, and I did a V-8. Wow! I could’ve had a V-8! And I should have seen this long ago!

With the subprime meltdown going global, it’s no longer just a problem for the United States and the dollar. And after this huge run-up this summer in the currencies, I see a consolidation on the horizon. The currencies are consolidating at this time, and we should look for them to back off versus the dollar for a short time, before heading back up again later this year.

Does this mean to sell? Not in my opinion… We bought currencies to diversify our investment portfolio, and to provide a hedge. And this is what it’s doing! A consolidation is what it is and nothing more… It’s not an end to the weak dollar trend! It does provide cheaper levels does it not?

And why do I believe the currencies will rebound later this year? Because I’m a believer that the Fed is going to cut rates, probably this fall, to help the mortgage meltdown. It will probably be a case of “too little, too late” but what else do we expect from the Fed that brought about this mortgage meltdown to begin with? And at that point, the dollar will return to the woodshed… So… Patience is required here.

OK… Onto other things… Recall yesterday I talked about how the European Central Bank needed to remember that all that liquidity they were injecting was nothing more than money supply, which would lead to higher inflation in the future.

Well… The Reserve Bank of Australia (RBA) is already admitting that their inflation level will reach the top of their target of 3%. The RBA issued this statement… “Core inflation will quicken to 3 percent by December and remain there next year.” This after previously announcing that inflation would remain in the 2.5% range.

I think that the RBA’s work regarding their fight against inflation has more rate hikes in their future. Economic growth is still strong, and as I will tell you in the next paragraph, so too is that of China, and we all know what affect China’s demands for commodities have on Australia’s growth! And so… While the Aussie dollar (AUD) may be consolidating right now, I fully expect it to recover later.

Also yesterday, I mentioned that commodities had sold off last week. Then later in the day I read that copper traders believed that the sell off was overdone, and that China’s trade surplus soared 67% last month (versus last year)! Think that China’s economy is still slowing down? July’s total was $24.4 billion. Unbelievable!

The point here is that China has been the straw to stir the commodity bull market, and with no sign of slowing down, the commodity bull market should remain in tact.

Switching gears… I was glad to see that the Government said “NO!” to Fannie and Freddie. You might have heard that these two home-loan finance giants had requested that the Government ease their investment limits. At least someone finally had the intestinal fortitude to “JUST SAY NO!”

Another item to follow up on from last week is the “about face” that TV stock guy, Jim Cramer, did on the subprime mess. Yesterday, our public relations guru, Peter, sent me the latest from Cramer and he has really done a number on saving face with the public. Here’s a snippet from his recent email letter…

“The subprime-lending crisis is worse than you think, and could crush financial and real-estate markets for years.

“You’re losing money right now. This very minute. You’re losing money if you own an apartment. You’re losing money if you own a country home. You’re losing money if you own a stock or bond mutual fund. You’re losing money if you have a pension plan. You’re probably losing money here or there, you’re probably losing money everywhere (except maybe from your savings account and wallet). But this is no Dr. Seuss story. It’s more of a John Steinbeck tale, and we are the victims, a new generation of Tom Joads, and it’s the damn bankermen who broke us. No, there won’t be a police officer to investigate, and the government, at least this federal government, won’t save us.”

Whoa there JIMBO… You’re going to have a heart issue if you keep this up! At least he has come around with the pack, eh? Too bad it took him so long to come around while little old me and a few others were out there on the limb beating the drum about the problems this subprime mess was going to cause.

So… Today we will see the color of June’s trade deficit, which is expected to increase to $61 billion, up from May’s return to the $60 billion club! I know, more and more people shout from the rooftops that “Deficits Don’t Matter”… And as I used to tell all my audiences, these people remind me of the guy standing on top of the Empire State Building who he decides to jump off. As he passes the 56th floor he yells… “So far… So good!”

It’s the same way with these geeks that keep talking about how deficits don’t matter… They are passing the 56th floor… But what happens when they hit the pavement? Ahhh, grasshopper, that’s for another day…

So… The currencies are weaker, and most likely will get even weaker… But nothing like the summer of 2005. UGH! That was ugly! No, this is just a consolidation, forming a new base before heading higher in the fall. So… If you like, you can turn off your computers and not pay attention to this noise, and I’ll see you in September. See you, when the summer’s through.

There could be one currency that benefits from this consolidation besides the dollar. And that is the Japanese yen (JPY). If there are trades unwound, they will lead back to covering yen. So there’s an idea.

Remember the old Beverly Hillbilly’s song about old Jed shootin’ up some food, then up from the ground came a bubblin’ crude… Oil that is… Black gold… And so on? Well… If oil is “black gold”, then milk must be “white gold”! Recall about a week ago I told you that the price of a gallon of milk had surpassed the price of a gallon of gas here in St. Louis, and wondered if we should begin to drink gas!

Well… A reader sent me a note about this and it got me thinking. It just keeps getting worse for the price of milk… Or should I say, white gold? And, what does this have to do with currencies or economies? Ahhh grasshopper, it’s easy… As the price of milk and other produce goes up, so does inflation… And inflation is kiss of death to any currency!

Ok… On that uplifting note, we’ll head to the Big Finish…

Currencies today: A$ .8395, kiwi .7325, C$ .9460, euro 1.3585, sterling 2.00, Swiss .8276, ISK 65.65, rand 7.23, krone 5.8640, SEK 6.8650, forint 187.10, zloty 2.79, koruna 20.60, yen 118.30, baht 31.70, sing 1.5210, HKD 7.8210, INR 40.75, China 7.5810, pesos 11.03, (no dollar index) Silver $ 12.80, and Gold… $678.60

That’s it for today… It will be interesting to see how gold holds up during the currency consolidation. I would think it would also see weaker levels, due to dollar strength… But you never know with the shiny metal! That’s why it’s important to own it without the chance of market loss… How does one do that you might ask? With our MarketSafe CD’s, that’s how! Simply visit our website or call 1-800-926-4922 for information! Geez Louise, look at the time! I’m late, I’m late, for a very important date! Talk to you tomorrow… Have a Terrific Tuesday!

Chuck Butler
August 14, 2007

The Daily Reckoning