Some Words of Wisdom from the Good Doctor!

Good day… And a Tremendous Thursday to you! Well… The profit taking sell orders that I expected to see once the euro (EUR) hit its new all time record yesterday, failed to materialize. And without them, the euro continued to climb… First to 1.39, and then trade above that handle. WOW! Now that’s a strong move. But without U.S. data, and without any Fed Heads telling us that everything is OK, the dollar didn’t have a leg to stand on!

But we can always count on the housing meltdown to contribute news items. It’s subprime, all the time in the media. To prove that point… MarketWatch now has a daily link to subprime, housing, etc. Which is where I found this tid-bit… A dispute between the bankrupt American Home Mortgage and Freddie Mac may cause 4,547 people to lose their homes. Those mortgages don’t have the loan files necessary to pay insurance premiums and property taxes on them.

Now what kind of baloney is that? Oh well… I sure hope they get that worked out for the homeowners’ sake. Oh… And U.S. Treasury Secretary Paulson believes that what the mortgage business needs is to create new products. Wait! Isn’t that what helped get us in this mess to begin with? All the “creative” mortgage products, and Big Al Greenspan’s cut to the bone interest rates, and flooding the markets with money supply, are at the top of the list of things that got us into this mortgage mess.

So… Here we are… The euro is on its way to 1.40… Pound sterling (GBP), in my eyes, is still on its way to 2.10, and Japanese yen (JPY) teeter-tottering but still trending to 110. I sat in the boardroom of EverBank in January of this year, and told the management people that these were the levels I expected to see from these currencies in 2007. I don’t think any of them wanted to argue with me about it, but I could see from their faces, they wanted to know what I was smoking! HAHAHAHA!

What’s next? Well… At this point, and with the negativity in the dollar building so strong, I would have to say that I probably was too conservative with those numbers! Of course back in January they didn’t look that way!

We only get the Weekly Initial Jobless Claims today, which are expected to remain above 300K…. And as soon as it prints, all eyes will turn to and focus on tomorrow’s printing of retail sales for August. Now, considering the kids go back to school in August these days, one would have to think that retail sales would receive a boost from back to school shopping… And the Butler Household Index (BHI) tells me that retail sales will be stronger than previous months.

If that happens, the data will provide a backstop for the dollar, albeit a temporary one… But should the back to school shopping disappoint and retail sales are sluggish, it could very well be the last chance saloon for dollar bulls. So… retail sales are the key to dollar direction tomorrow.

I’ve had a few readers send me their thoughts about my call for a recession in the United States and that’s always fine and dandy with me as long as they don’t attack me. But, what the emails did was get me thinking about the late Dr. Kurt Richebächer, who called the tech bubble long before it burst, and was calling the housing market another bubble long before this summer. And then to my delight, Bill Bonner wrote about the good Dr. yesterday… So, I pulled something from Bill’s piece to include here… Here are Dr. Richebächer’s words…

“‘All this emphasis on statistics and calculations…’ he went on, rapping his silver-handled cane on the table for emphasis, ‘without a proper theory, it is all nonsense. And your economists seem to have no theory at all…they just think they can manipulate the system in order to get whatever outcome they want. They think economic growth comes from consumer spending and that they can control consumer spending by adjusting lending rates. It is unbelievable that anyone takes this seriously. It is capital formation that really matters. A rich society is one with a great stock of capital…one that builds capital and puts it to work to create more capital. A rich society is not one where people consume. Just the opposite. It is not what is consumed that creates wealth; it is what is NOT consumed. Yet, all the Anglo-Saxons focus on motivating consumers to consume. And now they are consuming more than they make. I tell you, in 70 years of studying economics, I have never seen such nonsense.'”

Sounds like my econ professor… He must have been from the Austrian school of economics.

My colleague, and long time friend, Ed Bonawitz and I were having a discussion yesterday, and we agreed that interest rate cuts are not going to do anything but feed more inflation, and rev up those mortgage “products” again. But don’t take our word for it… Bank of England’s Governor King said yesterday, “If central banks cut interest rates in the current environment, they run the moral risk of rekindling speculative risk-seeking, i.e. supporting the very behavior that caused the current market crisis, namely the underestimation of risk.”

And in a follow up to yesterday’s thoughts regarding how a U.S. recession would affect the global growth that’s so strong right now, the IMF put out a report on Australia’s economy. Let’s look inside the report to see what the IMF had to say, eh? The IMF projects the Aussie economy to grow by 4.4% next year, and 4% in 2009… That’s strong growth! Here’s a snippet of what they said… “The cost of funding for the Australian economy has increased, but strong profits, especially in mining, suggest that investment is not likely to be significantly effected.”

And always, always I tell you to be yourself… No wait, that’s Mr. Wizard! I always tell you that you look at a currency like the “stock of the country”… If the country has a good balance sheet, positive flow of funds, a good business plan, strong leadership and other things you look for in a “stock”, then the currency of that country should be on your shopping list.

Well, one more item before we head to the Big Finish… Oil prices really pushed the envelope yesterday, after it was reported that U.S. supplies had dwindled… Last night, there was some profit taking with oil trading near $80, which makes sense to me! I saw a couple of figures that really drove home the rise in oil prices… Oil prices have climbed 31% this year! And they have quadrupled since 2002, which also happens to be the year the weak dollar trend began! That’s nasty! Oh, but we don’t have inflation in this country do we? I mean, we can’t have inflation, the Central Bank is thinking of cutting interest rates!

Oh, and I have to add something… My colleague here, Ashish, yelled over to me yesterday to point out that the Canadian dollar/loonie (CAD) has crossed 96-cents and was moving even higher… He pointed out that I had told people months ago that the loonie would recover once oil got above $70 and gold returned to $700… And look what has happened! The loonie is now pushing 97-cents! WOW! I love it when a plan comes together!

Currencies today; A$.8410, kiwi .7160, C$ .9690, euro 1.3910, sterling 2.2075, Swiss .8450, ISK 63.70, rand 7.1340, krone 5.63, SEK 6.6810, forint 182.89, zloty 2.7180, koruna 19.7750, yen 114.70, baht 32.14, sing 1.51, HKD 7.7890, INR 40.42, China 7.5110, pesos 11.09, dollar index 79.41, Silver $12.70, and Gold… $716.80

That’s it for today… How about this flap going on with the New England Patriots? The sports news is filled with stories of how they got caught “cheating”… I find it kind of funny, because in baseball the guys on the bench are trying to steal signs all the time! It’s part of the game! These guys need to settle down on this. Sure it looks bad… And that’s what the media is all over like a cheap suit! Enough of that! I’ll send you on your way, but remember to have a tremendous Thursday!

Chuck Butler — September 13, 2007

The Daily Reckoning