The Birth/Death Adjustment Revisited

Good day. Well, the German investor confidence fall really weighed on the euro yesterday during the U.S. trading session, and at one point had given back more than one cent on the day. I told you on Monday that the euro would have this gauntlet to run through this week, and the gauntlet looks to be a bit more difficult than first thought!

Tomorrow, the second leg of the gauntlet will be on display with the IFO business sentiment report for Germany. Again, this report should allow us to see some good buying opportunities. But that should be it for weighing on the euro, as Friday CPI will print, and the focus once again will be on the need for the ECB to hike rates, thus shining the spotlight back on the euro.

Most of the currencies followed the euro’s lead yesterday and weakened versus the dollar, except the old Belle of the Ball…the Canadian dollar/loonie. Yesterday, Canada printed a stronger-than-expected inflation report, and suddenly the loonie was back in favor with traders. Recall the loonie began to weaken and show signs of fatigue last month when the Bank of Canada left rates unchanged (even though I believed they should have raised them). Now, it looks like the Bank of Canada can’t leave the rate-hike machine in their rear view mirror. Welcome back to the rate-hike table my friends; I sure believed you should have never left!

I was reading Dr. Richebacher’s latest letter yesterday, which is something you don’t want to do when you have sharp objects laying around! I kid around here because the good Dr. is always on top of whatever it is he is talking about. Anyway, I think he did a great job this month explaining the Bureau of Labor Statistics’ (BLS) Birth/Death adjustment. Recall that I’ve talked about this stupid practice and have even called them “ghost jobs” in the past.

Anyway, the thing I wanted to highlight, as proof that the U.S. economy is going south quickly, was this observation by Dr. Richebacher, “Over the three months April-June, the BLS reported the creation of 329,000 non-farm jobs. But this has come about with a stunning contribution of 657,000 from the net birth/death model, accounting thus for about 200% of the total job creation. Without this adjustment, reported employment would have slumped. Please note that these net birth/death jobs would, if annualized, add up to more than 2.6 million new jobs.”

Wow! I hadn’t checked on the “ghost jobs” lately because, quite frankly, as Dieter says, “I had grown tired of the babble, we dance now!” Seriously though, I had beaten that topic to a pulp, and still nobody cared. Well, now that the Dr. Richebacher is talking about it, maybe someone will take notice! Of course, that’s not cut in stone. The markets seem to want to pick and choose data that they want to focus on. But, I think they will rue the day they failed to do the math on the “ghost jobs.”

Well, I heard on the radio on my way into the office this morning that Iran has agreed to start nuclear talks. That takes the “scared out of my bejeebers” level down a notch. And, I think it will slow down the risk aversion that I talked about yesterday, at least until Iran balks. This will help the South African rand, Icelandic krona, and Mexican pesos among the emerging-markets currencies that we offer.

Today, we will see the color of the July existing home sales data, which is expected to show sales cooling. That won’t help the dollar any. For sometime now, I’ve been warning people about the housing bubble, and using phrases like: “the housing bubble is floating around the room waiting for a pin to pop it.” Yesterday, I told you about the letter that the nation’s largest mortgage lender was sending to its customers regarding payments rising.

Well, Credit Suisse First Boston issued this report recently, “The portion of adjustable-rate mortgages that were at least 90 days past due has climbed 140% this year. And, according to a UBS study: About $137.5 billion face resets this year and about $524 billion face resets over the next four years.”

There are so many reports coming out about the economy. We all know that the housing boom drove the economy, but now that the boom is becoming a bust, we’re hearing related stories like Wal-Mart reporting a drop in sales for the first time in 10 years. And in Newport Beach California, record foreclosures are being recorded.

I gave you those two stories to show you that the economic slowdown is beginning to hurt everyone. But, the most important thing to take from all of this is simply that the dollar looks to be vulnerable with all that is going on, and if you haven’t taken steps to protect yourself, you might want to do something about that!

OK. I was kidding about Dr. Richebacher, but look who is sounding “gloom and doom” now? Why it’s little old me! HAHAHAHA! Little? Yes, like the state of Texas is little! HAHAHAHA!

Enough of all that! How about something uplifting? Down in the South Pacific, the Aussie dollar has been holding steady, Eddie, waiting for the next move by the Reserve Bank of Australia (RBA). Last week, RBA Governor Ian Macfarlane testified before the House of Representatives Standing Committee on Economics, Finance and Public Administration, and basically told them the need to raise interest rates again. This puts a rate hike on the calendar for November as I see it.

Currencies today: A$ .7660, kiwi .6405, C$ .8995, euro 1.2825, sterling 1.8940, Swiss .8120, ISK 70.14, rand 7.09, krone 6.27, SEK 7.1725, forint 214.75, zloty 3.04, koruna 214.80, yen 116.20, baht 37.55, sing 1.5730, INR 46.52, China 7.9698, pesos 10.8275, dollar index 85.01, silver $12.42, and gold $625.60

That’s it for today… The Existing Home Sales data will give the direction to the trading day today, so prepare for that printing… A tough loss for my beloved Cardinals last night, but then we’ve gotten used to those tough losses this year. I just don’t know if they have it in them to reach the playoffs this year, but I won’t give up on ’em! Next week, I’ll be in Vermont a few days, and Chris will take over the Pfennig again, so I’ve got that going for me! Have a great Wednesday!

Chuck Butler
August 23, 2006

The Daily Reckoning