Sour Data Sends the Dollar Down

Good day… And a Marvelous Monday to you! I’ll come clean front and center with everyone this morning… I did not have the flu last week. Unfortunately, my latest scan showed a new growth in my body. I immediately had a very emotional reaction to the news and just had to leave the desk and couldn’t return, as the suspense of not knowing if the growth was cancerous or not just wouldn’t let me concentrate, or focus on anything but what would happen if it was cancerous.

I did not ask… How could this happen to me? As I was taking cancer drugs… And have really altered my lifestyle since last summer. I immediately went into “hunker down” mode. I went to the hospital on Thursday to have a biopsy done… The good news folks, is that this new growth was NOT on my remaining kidney! Not in my lungs! It was growing on my 12th left rib. I called and called the doctor Thursday and Friday, but they still didn’t have any results.

So… I’m OK with it all now… If it is cancer again, I’ll deal with it. Folks, I told my beautiful bride the other night that I’m too strong of an individual to allow this to go any further! So… Now I’m ready for the doctor to call, as I’m sure it is cancerous, given my situation and the fact that it wasn’t there three months ago. The additional good news is that they found it very early! So… Let’s go on with life… Thanks to Chris for taking over the Pfennig for me… You know I was not in the mood if I couldn’t even send him my thoughts each day! And thanks to all the people at EverBank who knew about this relapse, for their thoughts and prayers… As I said last June… I’ll beat this!

OK… So… As I look at the currencies… The euro (EUR) has done a good job of holding strong in the face of some weak economic news from the Eurozone. Unfortunately for the dollar, the weak economic news it received was a lot worse! And that led to dollar weakness throughout the week. For instance… The Eurozone manufacturing index rose to 52.3 in a report printed last week, while the U.S. manufacturing index is in contraction mode. We’ll see more of this kind of data as we move along… The Eurozone will show a slowing down… But that won’t be as bad as the backward moving United States.

So… We start this week fresh and clean… Big Ben Bernanke will be doing his twice-yearly testimony before Congress, and this will provide us with the SportsCenter highlight for the week.

There’s a truckload of data to sift through too. Home sales of the existing and new variety are on tap – along with PPI and consumer confidence, which should shake the foundations of consumers. I’ll be looking for the Chicago NAPM (manufacturing) data that comes out on Friday. I’m sure it will be below the expansion line and into the contraction area… Just one more nail in the economy’s coffin, and another telling tale of the recession I believe we are in.

There’s other stuff… But these are the most important.

The fate of the monolines (bond insurers) continues to be the BIG STORY, and some combination of a bailout and downgrade will probably take place this week. I just can’t see a complete bailout of the businesses. Sort of like the Oscar nominated movie “There Will Be Blood”. There will be losses from this meltdown of the insurers… And those losses will continue to carry over to other things like the auction rate market that I told you about last Tuesday.

When news of a “bailout” for the insurers hit the news wires on Friday, stocks turned their losses into gains, and the carry traders were back selling yen (JPY) short, which caused yen to book losses for the week.

What proof is there that carry trades were back in play? Just look at the steroid enhanced moves of the high yielders on Friday, led by Brazilian real (BRL)! The real traded below 1.70 last night for the first time since May 1999! And Aussie (AUD) and kiwi (NZD) had very impressive moves on Friday… The only high yielder that was not in favor with the carry traders was the South African rand (ZAR).

Speaking of Aussie… If there were any doubting Thomases among you that the Reserve Bank of Australia (RBA) isn’t on a path of higher rates, the RBA meeting minutes should have settled all that! The RBA meeting minutes showed that the debate was focused on whether the rate hike should be 50 or 25 BPS… NOT if they should be hiked! Holding rates steady was certainly not an option for the RBA… And it won’t be going forward either! The positive interest rate differential Australia currently enjoys is just going to get wider… And wider… Hint, wink, hint.

And kiwi? Well… How does a currency nearing a 22-year high sound? Hmmm… Sounds like it’s on a tear!

The People’s Bank of China (PBOC), said in a statement on Friday, that they will seek to boost the role of the renminbi (CNY) in balancing the balance of payments. Now, it’s not that strange to hear the PBOC talk about allowing more flexible renminbi movements… But I found it interesting to see that they pointed to the imbalances, something that I’ve been harping about for four or five years… Glad to see they woke up to smell the coffee!

I read a story last week that opened my eyes a little… It seems that Japan is now feeling the earth move on the mortgage meltdown in the United States. Japan actually formally recognized that the mortgage meltdown could spread to Japan, and if it did, it would hurt the economy… I wasn’t aware that the Japanese Banks had bought into such junk that the snake oil salesmen were selling last year… But apparently they couldn’t pass up yield either! If in fact this mortgage problem spreads in Japan, it will hurt the yen… But right now… It only appears to be some earth tremblings… Not an earthquake… At this time.

Fed Head Fisher said last week that he “saw slower economic growth, but not a prolonged deep downturn”. Hmmm… Like we should even take to heart anything a Fed Head says. They’ve been so wrong, they are almost right! HAHAHAHA! I can hear them singing…  If cutting rates is wrong… I don’t want to be right.

Yes… Go ahead and sing Fed Heads… Inflation followed by stagflation is coming to a theater new you!

So… For all of you keeping score at home, that’s two consecutive down weeks for the dollar, after spending most of the early part of this year on the black side of the ledger. There were just so many pundits out there talking about a “dollar rebound” in 2008, that the markets had to test the waters to see how it looked… And it just didn’t look very good! The fundamentals just aren’t there for a dollar rally in 2008… But Hey! Stranger things have happened, eh?

I still think the euro gets dented when the ECB finally comes around to cutting rates this spring… Probably in May… But where will the euro be when it comes time for its denting? When the euro was trading around 1.46, I said the denting could take it to 1.40 before turning around… But now look at the single unit… 1.48! So, obviously, the higher it goes, the less “hurt” the denting puts on the euro… That’s been my story, and I’m sticking to it! But… As my auditors tell me all the time as they smack my wrists with the ruler… “Make sure you tell them you could be wrong!”

Of course I could be wrong… I’m human aren’t I? Seems to me that when you lace something with so many disclaimers about this being the “opinion of the writer, and not EverBank” that me being potentially wrong is a given! But… Not to everyone I guess.

So… I’ll end this part on an uplifting note… NOT! Bloomberg is reporting that the proportion of economists who forecast a U.S. recession this year, more than doubled in three months to 45%. So… What’s taken them so long to see the trees in the forest? They still don’t get “it” though… Most of these “Johnny come latelys” are still in the camp of “the recession will be a ‘short and muted’ one.”

So, I remain of the opinion, along with people like Nouriel Roubini, Bill Bonner, and a handful of others that say these economists are all wrong, that… 1. We’re already in a recession… And 2. This is going to be a dooozy!

One more thing! Precious metals have really stormed back in the past week, with gold setting another new record level! And silver? High-Ho Silver! These precious metals are telling us that whomever is buying them, believes that inflation is going to be a real problem.

Currencies today: A$ .9250, kiwi .8095, C$ .9920, euro 1.4820, sterling 1.9655, Swiss .9170, ISK 66.50, rand 7.67, krone 5.3150, SEK 6.2775, forint 177.96, zloty 2.40, koruna 16.89, yen 107.70, baht 30.75, sing 1.4050, HKD 7.7980, INR 40, China 7.1540, pesos 10.77, BRL 1.7090, dollar index 75.60, Oil $99.51, Silver $18.09, and Gold… $953

That’s it for today… Sorry to have to bring bad news to the table, but I’ve accepted it now. No worries… My aspiring young guitar playing son, Alex and I had a great time watching one of my fave guitarists on TV last night… HDNET had filmed a concert by Joe Satriani, and I told my son, “come here and watch one of his songs”. He stayed put, amazed at the guitar work of Joe Satriani… Great Stuff! We had more bitter cold weather here this weekend, and along with some additional snow… This is ridiculous! I have one more week, before I head to Florida for the first of my three trips there in March! It’s a leap year Friday this week… What are your plans for the “extra day” this year? I can finally taste food again, albeit still not 100%… This week is my “good week” YAHOO! Bring on the spicy food, I can take it this week! I hope your Monday is Marvelous, and your week becomes Wonderful!

Chuck Butler
February 25, 2008

The Daily Reckoning