The Calm Before the Storm?

Good day… And a Happy Friday to one and all! The big news on the trading desk yesterday was that our little Christine had a 9 lb 2 oz baby boy! Mom and baby are reported to be doing well. Congratulations Christine, and hubby Matt.

The other big news was the speech by Big Ben Bernanke to lawmakers on “the Hill.” Big Ben decided to throw all caution to the wind, and take a page out of Aaron Neville’s song book, to “Tell it like it is”… I know you are on the edge of your seat right now waiting for the Big Ben words… So… Here you go!

Referring to official forecasts that project the budget deficit to moderate over the next few years, Bernanke said this was simply “the calm before the storm” for the deficit.

Of course, we all know that if the government were required to use the same generally accepted accounting practices that it requires U.S. corporations to use, this budget deficit would really be a horse of a different color! And it is so distorted from the government’s printing that you have to wonder what the government bean counters are smoking!

Anyway… Here’s Big Ben’s response to those reports that the budget deficit had shrunk.

Bernanke said this number presented a misleading picture because it doesn’t capture long-term government obligations. Spending on entitlement programs, such as Social Security, Medicare and Medicaid, will begin to climb quickly over the next decade as baby boomers retire, likely leading to rising budget deficits and record levels of federal debt, he told the Senate Budget Committee.

By 2030, entitlement obligations will rise to 15% of gross domestic product, from roughly 8.5% in fiscal 2006, according to the Congressional Budget Office.

Uh-Oh! Somebody spilled the beans! Somebody besides yours truly, Bill Bonner, Addison Wiggin, Doug Casey, John Williams and others, are pointing out the deficits and not to believe that line of you know what that Cheney and others tell us all the time, that “Deficits Don’t Matter”… Yeah, right.

So… Once Big Ben finished, the euro rallied on the day… Not a huge rally but at least it rallied, which is more than can be said for the single unit in the past two weeks!

In the United Kingdom this morning, there was more evidence that the rate hike last week surely wasn’t the last arrow in the Bank of England’s quiver. U.K. December retail sales rose the most in 18 months. Of course, just like I said about the U.S. retail sales for the same period… IT WAS THE CHRISTMAS SHOPPING SEASON! Like I said the other day… I wouldn’t be surprised if the Bank of England came back to the rate hike table again in February, and if not then, March.

All this strength in consumer spending, and inflation moving to a high for the decade, has underpinned pound sterling, and propelled it to outperform the euro and other currencies… I just don’t see this ending any time soon.

The Canadian dollar/loonie received some news yesterday that might be enough to keep the loonie above 85-cents even with oil falling below $50. The Canadian government said that their economy was operating at or just above its production capacity. They also reported that inflation remains above their target of 2%.

So… With an economy running at capacity, and inflation not falling below 2%, the Bank of Canada should allow the dust covers to remain on the rate cut machine… At least for now… And that’s good news for the loonie. Look, the loonie has had to weather the Royalty Income Trusts taxation, and a weaker gold and oil price in the past six months. However – as I’ve said over and over and over again – this dance is gonna be a drag. No wait! A little Dave Clark 5 for your Friday morning! But, what I’m trying to say without breaking out in song, is that unless gold rallies back to $700, and oil to $70, the loonie will struggle.

Another day chock-full-o-data reports yesterday, which left the markets wondering just what direction this economy is going to take. First off the government’s trumped up version of consumer inflation came in a little stronger than expected for December. The annual inflation number according to the government is 2.5%. Do you agree with that? Do you think that inflation has only affected your wallet by 2.5% in the past year? I say this number is hogwash! Why won’t someone besides, oh, never mind, I don’t want to list the same names as I did above for this too! I just wonder when the public will turn into a bunch of Popeyes and say… “I’ve had all I can stands, and I can’t stands no more!”

Housing starts and building permits both surprised on the upside, and I have to think that the December weather was warmer than usual, which would certainly help these two. That warmer weather certainly has given way to winter weather.

And finally the Philly Fed Index rebounded from an awful December showing of negative 4.3 to 8.3 this month. But in the end… None of this data mattered once Big Ben started telling it like it is to lawmakers!

We’ll end the week today with the latest U. of Michigan consumer confidence, which will probably give the dollar some love, due to the continuing stock market performance and the falling price of oil.

So… I personally don’t think the Fed is out of the woods with regards to inflation… Do you? Well… If the actual inflation were reported, I KNOW they wouldn’t be out of the woods!

Gold and silver have performed nicely this week. As I’ve been saying, I find this quite impressive in the face of the dollar strength and the falling price of oil. Yesterday, Reuters reported that two Indian mutual fund companies are set to launch gold exchange trade funds within months of gaining approval from stock market regulations. The likely success of a gold ETF in India should be good new for gold.

Currencies today: A$ .7880, kiwi .6955, C$ .8520, euro 1.2965, sterling 1.9745, Swiss .80, ISK 69.40, rand 7.15, krone 6.455, SEK 7.035, forint 194.25, zloty 2.97, koruna 21.40, yen 121.20, baht 35.20, sing 1.5365, HKD 7.81, INR 44.27, China 7.7750, pesos 10.93, dollar index 84.93, Silver $12.75, and Gold… $630.60

That’s it for today… Sunday is “Championship Sunday” with both the NFC and AFC games being played to determine who goes to the Super Bowl, should be good! Chris Gaffney will have the conn on the Pfennig Monday and Tuesday, as I’m heading down to the “BIG HOUSE”… The home office in Jacksonville… That is if I get out of here on Sunday, as we’re supposed to get a snowstorm this weekend in St. Louis. Have a great Friday and weekend! Try to stay warm!

Chuck Butler, January 19, 2007

The Daily Reckoning