The Markets Become Myopic

Good day… And a Happy Friday to one and all! The Friday before St. Patrick’s Day, which is pretty cool that it is on a Saturday this year! No beating around the bush this morning, we’ve got to get to the tape, because there’s been a big move up in the euro.

That’s right… I turned on the screens this morning and what to my wondering eyes did appear, but a very strong euro and other currencies bringing up the rear! What’s brought this on? I hear you asking… I have to tell you that this subprime mortgage meltdown is really getting spread around, and people are asking the correct questions about the future of the U.S. economy.

So… Now the stories hitting the screens have people talking about a “hard landing” for the U.S. economy, and all sorts of gloom and doom. OK… Yes, we’ve had real estate bubbles pop before… Unfortunately, they never included the “crazy financing” that this one did. This one is going to dig deep into our economy. And, I think the markets are finally coming around to worry (appropriately) about this meltdown.

Reuters called me yesterday for an interview, and wanted to know about dollar/yen, and if the stock market was playing into the trading of this pair. I said sure! And so is the fact that Japan’s economy is strong, and the currency has been undervalued for several years now.

“What caused all this?” she asked. Well… It was bound to happen sooner or later, but Mr. Greenspan kick started this with his thoughts of a recession for the United States.

Speaking of Big Al… He was back on the speaking circuit yesterday. This time he wanted to talk about the subprime meltdown. As reports:

“Former Federal Reserve Chairman Alan Greenspan said he expects the fallout from subprime mortgage defaults to spread to other parts of the economy, especially if home prices decline.

“‘If prices go down, we will have problems – problems in the sense of spillover to other areas,’ Greenspan said in remarks to the Futures Industry Association meeting in Boca Raton, Florida today. While he hasn’t seen such spreading yet, Greenspan said, ‘I expect to.'”

OK… Enough from the man my friend the Mogambo Guru calls the TLS (True Living Satan). Sound harsh? Well… It was his policies that brought about the easy credit and low mortgage rates that brought about the “creative” mortgages. That’s all I’ll say about that!

So… The euro is over 1.33. Good Show! And it’s talking all the other little dogs along for the chase after the dollar. I wonder what the U.S. traders will do when they arrive this morning and see the euro trading at 1.3330? Take profits? Or panic and close out those short positions before they lose even more money.

The data in the United States was mixed yesterday with PPI moving higher, which should have supported the dollar. But the markets have become very myopic at this point, and the only thing they see is the subprime meltdown.

The U.S. TIC data, (net flows of security purchases) for January, was much higher than expected as it came in at $97.4 billion, which is more than enough to cover the monthly amount needed to finance the current account deficit, which is about $75 billion. However, before we go out and have a parade… Last month’s tepid total of $14.3 billion (for December) brings the January number back to earth. The average for the two months is (OK, I have to use my trusty math skills here… Carry the one…) a less than stellar $55.85 billion, which IS NOT enough to finance the current account deficit.

Gold has taken this dollar selling and moved higher, as one might expect. The shiny metal is back above $650, and silver is back above $13.

Here’s an illustration of the markets being myopic right now… Yesterday, Fitch (the ratings agency that deep-sixed Iceland in the winter of 2006) was back dissing the foreign exchange debt rating of Iceland, and the krona barely sold off. In fact, with the euro opening holes for the rest of the currencies to run through, Icelandic krona is right back where it started yesterday!

There was word yesterday that the Commerce Department believes they have the authority to impose duties on Chinese goods. In fact they issued the following statement… THE COMMERCE DEPT. IS PREPARED TO IMPOSE COUNTERVAILING DUTIES ON CHINESE GOODS, IF FACTS WARRANT… Oooooh, I bet the Chinese are shaking in their boots!

Right after that little ditty was announced… The Chinese reported that their February industrial production rose 18.5%. And someone was saying that the Chinese economy was going to slow down? It just goes to show you that these guys (who claim to “know” what’s happening in China) don’t have a clue!

However, in my mind, I cannot believe that the Chinese economy doesn’t have an inflation problem… Of which, a stronger renminbi would go a long way toward correcting that problem!

Norway’s Norges Bank did raise rates as expected yesterday, and made a statement following the rate announcement that keeps interest rates on the rate hike burner. Good Show! The Swiss National Bank (SNB) made a surprise rate hike yesterday, and puts the boys and girls using the franc as a funding currency for the carry trade in a real pickle!

Yes, historically, the borrowing costs of francs is still relatively low… But rates have been on the rise in the past year, and if the SNB is going to spring rate hike surprises on the markets, I’ve got to think that soon, the franc short positions are going to get expensive to hold, and that will lead to the short position being closed… And that’s a good thing for the franc!

OK, we end the week here in the United States with a truckload of data, starting with my most disliked piece of data… consumer price inflation (CPI), which is a bunch of junk in the trunk! Then industrial production will hit the screens along with one of my faves, capacity utilization. Neither one is expected to give the dollar any support today. And then finally, there’s the U. of Michigan consumer confidence, which I’ve got to expect to have fallen, given the subprime meltdown going on.

So… There’s really nothing there to help the dollar out today. So, it will be up to the NY traders if the euro and other currencies will keep their gains today.

Currencies today: A$.7960, kiwi .6980, C$ .8525, euro 1.3335, sterling 1.9490, Swiss .83, ISK 67.10, rand 7.4350, krone 6.0925, SEK 6.9450, forint 187.20, zloty 2.9250, koruna 21.03, yen 116.50, baht 32.80, sing 1.5260, HKD 7.8110, INR 44.12, China 7.7370, pesos 11.17, dollar index 83.10, Silver $13.08, and Gold… $651.70

That’s it for today… A huge water main break on the main artery road I take to work, made my drive interesting this morning. Good thing I have a lot of clearance with my car. I can’t imagine what the scene will be when everyone else tries to drive on that road this morning! Hope the first day of NCAA Basketball games didn’t ruin your brackets! St. Patrick’s Day tomorrow… BE CAREFUL!

Chuck Butler — March 16, 2007

The Daily Reckoning