The Deficit Just Keeps Rising

Good day. A happy Friday to one and all! We have one week to go before St. Patrick’s Day! I’ve got a great deal going on St. Patrick’s Day, next week. I’ll be in Jupiter watching the Cardinals and Yankees, wearing a green Cardinals hat! I’ll be with some very good friends, and a new friend that I can’t wait to meet in person! Hope you’re ready, Ray!

OK. Today is a Jobs Jamboree Friday, and the thoughts going around the markets are that there will be 210,000 jobs created during February, and that the unemployment rate will remain at 4.7% (yeah, right…and my first wife was a young Elizabeth Taylor! Yeah, Elizabeth Taylor – that’s the ticket!)

These numbers are being touted as enough to get the Fed to move rates higher three more times. I say, “Hogwash!” Let’s look at the real meat of this Jobs Jamboree: average hourly earnings, which is expected to fall to a 0.3% gain versus last month’s 0.4% gain (hmmmm, no wage pressures there); the average weekly hours which is expected to remain at 33.8. Let’s see, no overtime and no wage pressures – so, where’s the beef? Where does it show us that the Fed needs to hike three more times? I don’t see it, do you? Wait, let me put my rose-colored glasses on. Nope! Still don’t see it!

Oh well, I carry on despite this big pain in my neck! Yesterday, we saw that the U.S. trade deficit ballooned to $68.5 billion in January. That’s $3 billion more than was expected, and 5.3% more than last month’s record! Still, the dollar held the hammer on the day. Shopping ’til we drop, eh? Richard Iley, economist with BNP Paribas, said the trade gap’s mathematics are starting to look daunting. “With goods imports 90% bigger than exports, exports need to grow almost twice as fast as imports just to stabilize the trade balance,” Iley said. 

But the dollar bulls didn’t care; deficits don’t matter. You know, I have someone that keeps writing me and telling me that the fellows over at Gave-Kal have written a book explaining why this time it will be different, and that deficits really don’t matter. Well, to that I say: This sounds all too familiar. Didn’t the think tanks tell us in 1999 and 2000 that “this time the stock market rally will be different” and that earnings for stocks weren’t necessary?

I had a dream last night that I was standing in front of a crowd and had just received an award (let’s hope it wasn’t for being a know-nothing clown, as one reader called me). I was at the podium, with my award, and I went into a Sally Field-type acceptance speech: Oh, deficits do matter, they really do. Deficits do matter, they really do!

We’ll also see the monthly budget statement for February, which is expected to be $118.3 billion! On Monday, we’ll see the forth quarter’s current account deficit, which just might hit 7% of GDP. Wait a minute, Chuck. Did you just say 7 as in 1-2-3-4-5-6…7? Yes, sirree, Bob. It is expected at 7% of GDP, but don’t let that get in the way of a good story!

OK. I digress. Let’s get back to the rest of the story! Yesterday, I told you about the “risk aversion” going on in the currencies right now, and how the likes of Mexico, South Africa, Iceland, Brazil, China, India, and a host of others were getting taken to the woodshed. Well, you know, there are always those people that like to kick a currency when it’s down and John Kaupisch passed over a story to me that does just that! The big brokerage house that owns a bull came out with a scathing story on Iceland’s current account deficit. Well, when we get down to the nuts and bolts of this whole situation, Iceland’s current account deficit, in dollar terms, is only $2.4 billion, but as I told you the first time I ever wrote about Iceland and told you we could now offer the currency, this is a small country, with a small economy and population. It can be subjected to wild swings.

I suspect that things will get darker for these emerging market currencies before they brighten up again. My trader friend at the Royal Bank of Canada sent this note on the emerging markets to me, yesterday:

“The Institute of International Finance (IIF) forecasts that capital flows to emerging market economies will remain at near record levels in 2006 of $322 Billion, albeit down from a record high $385 Billion in 2005. The sell-off in emerging market currencies since March 2, 2006, has been overdone and we look for a correction over the next 1-3 months back to levels prior to last week’s sell-off. We believe this sell-off was not so much a reflection of an imminent ‘liquidity crunch’ but rather a rise in risk aversion and profit taking triggered by fears of a severe staving off of global liquidity, which we do not believe will materialize.”

The sell off in the Canadian dollar/loonie looks to be about overdone. I would think that all the old “longs” have taken their profits and gotten out. So, the loonie can now look to move back to previous highs. The loonie is hanging onto the 86-cent level by the skin of its teeth, but like I just said, this selling looks overdone!

I sure stirred up a hornet’s nest yesterday with my discussion of the Iranian oil bourse. There are so many people out there that think they know exactly what’s going to happen here. I’m not even your last choice as an Iranian expert. All I’m saying is that “it’s supposed to happen” and “I don’t know the extent of the dollar damage, but it can’t be good for the dollar.” So, we’ll all just have to keep our opinions to ourselves, and sit back and see what happens. I’ll be on the road making my way back to St. Louis on the 20th, the day the bourse is supposed to open. I’ll certainly try to report on it, but who knows what information I’ll have available to me from my hotel room!

Yesterday, our Corporate FX guy, Ashish, sent me a note from Goldman Sachs that has their forecasts for currencies. I haven’t had a chance to read all of it, but basically they are very bullish on the currencies in the second half of this year going into next year. So, hang on.

Currencies today: A$ .7355, kiwi .6435, C$ .8610, euro 1.1930, sterling 1.7380, Swiss .76, ISK 70, Rand 6.27, krone 6.6850, forint 217, zloty 3.27, koruna 24.17, yen 118.20 (so much for the gains made yesterday, UGH!), baht 39.02, sing 1.6270, China 8.0505, pesos 10.71, dollar index 90.67, silver $9.85, and gold $546.05

That’s it for today. A very long week for yours truly, but the weekend is here! Our little Christine will be back next week, and I leave! My Outlook keeps going into “not responding” mode, so I better wrap this up before something bad happens, and I have to write this all over again! Have a great Friday and weekend.

Chuck Butler
March 10, 2006

The Daily Reckoning