The TICs Data Goes Negative

Good day… And a Wonderful Wednesday to you! Well… Did you miss it yesterday? It sure went on without any fanfare here. I’m talking about National Boss’s Day! What silliness! Next week we’ll have National Lefthander’s Day! Of course that would make my great neighbors, Kevin and Lisa happy, as both are left-handed! Not that I want to spend all morning on this, but Bill “The Spaceman” Lee, (a left-handed pitcher) used to say, “we use the right side of our brain to control our left side, and the left side of the brain to control the right side… Therefore Lefthanders are the only ones in their ‘right mind’!”

OK… Sorry… That really got of control there! Well… The TICs data printed yesterday and if it weren’t for the month they represented, the dollar would be in a free fall right now. Here’s the skinny… The Net TICs (net foreign security purchases) turned negative in August. That’s right, NEGATIVE! But, let’s go back to August and remember what was going on. First, liquidity came to a halt, and then the credit crunch, that I spent most of the day talking about yesterday. There were basically no securities/assets to buy!

Of course that’s all changed, not that we’re out of the woods by any imagination with regard to ending the credit crunch. However, risk takers have come out of the woodwork again, and things are easing… With that said though… I would think that even in a normal month, the August numbers would have been awful. It’s just the way the data series has been trending this year… Down.

The markets wanted to take the dollar down after the report printed, but immediately saw that it was for August, and the numbers had to be skewered. So… When it was all said and done… The trading range was small on the day.

The Bank of Canada (BOC) did leave rates unchanged yesterday, as expected. The Bank said that “against a backdrop of robust global economic expansion and strong commodity prices”, Canada’s “economy is now operating further above its production potential than had been previously expected.” They went on to warn about the risks of a global slowdown.

Makes you wonder why they kept the dust covers on interest rates, eh? Well… I think I explained all that yesterday, so I won’t get into it again… But, the BOC is walking in tall cotton right now, and they had better be careful… Runaway inflation could hit their economy in a NY minute.

So… With the BOC warning about a global slowdown, the commodity currencies got sold. So… On Monday, the high yielders got sold, and on Tuesday the commodity currencies, many of which are also high yielders, got sold. One would expect a move similar to this given the strong upside move of the commodity currencies recently. So… Hold on tight, use your seatbelt, and keep your arms and legs inside the vehicle at all times!

The folks over at UBS AG seem to think that the dollar’s weakness is “unsustainable.” Apparently, they’re new to covering currencies. The dollar has been on a downward slope of weakness since it was bounced out of the Bretton Woods Agreement in 1971! So, what’s so “unsustainable” about this? I guess with a statement like that, UBS has been telling its customers to buy dollars. Now I know where all the dollar buying has been coming from! HAHAHAHA!

This is probably the place and time to talk about the upcoming G-7 meeting, since UBS seems to think that G-7 will produce a communiqué’ that demands dollar strength… I don’t think so! I’m going on record as saying that while the Eurozone ministers would love for the dollar to strengthen… They will most likely take up the fight with Japan and China, for their respective currency weakness… But I guess there’s always a risk that something could be said that moves the markets to buy dollars.

If that happens… I don’t see it as trend changing.

OK…  Pound sterling (GBP) has held onto to most of its recent gains, and has not gotten caught up in either the high yielder or commodity currency sell offs. It was a recent report, which showed that housing prices are still moving higher, that has kept pound sterling from falling victim to those sell-offs.

There’s been lots of talk recently that the Bank of England (BOE) will move to cut rates next month. Those talking that talk must not be listening to BOE Governor King, for Mr. King has been as hawkish in his recent speeches as ever! Maybe it’s just a trick in an attempt to throw the markets off the scent of a rate cut. But I think it’s something more… I think the BOE doesn’t want to cut rates. They see oil prices going to the moon, and inflation pressures… So, it will be interesting to see when, in fact, the BOE does cut rates.

Speaking of inflation… Today, we will see the color of the latest (stupid) CPI for the United States. If this report doesn’t reflect the fact that oil and food costs have experienced a moon shot, then I give up complete hope of ever understanding how or why the government prints the stupid report! CPI continually prints little or no inflation results, which you and I know is garbage… So… With some hard facts on skyrocketing inflation in hand, we had better see it reflected in the report.

Right now the experts have inflation forecast to jump to 2.8% from 2% (remember, of course, I don’t use the ex-food and energy number that the media and Fed uses). This is quite a jump, if it actually prints as such! So… Even if the Fed doesn’t use the headline number, they’ve got to see that kind of jump and wonder, who? Who wrote the book of love?… No, wait, seriously here now… They’ve got to wonder if they made a mistake in cutting rates last month.

I know that I came out very aggressively and called that rate cut weeks before they did it, and I also called for two more rate cuts before year-end. And, I’ll remind you that this call for rate cuts wasn’t what Chuck would do… It was simply what I saw the Fed doing, and I know their propensity to throw floatation devices to the economy, and damn inflation.

But, even a blind squirrel would see this jump in inflation as something to worry about! However, we must keep in mind here that Big Ben Bernanke is still talking about the slowdown in the economy from housing. That certainly sounds as if he’s still more worried about the economy hitting a recession than he is about rising inflation. As you know, I’m not one to worry about recessions. We’ve had them in the past… They didn’t kill us, they only made us stronger! We need recessions to clean out the excess of the previous booms… And we didn’t get that chance a few years ago, because the Fed, and Big Al Greenspan cut interest rates to the bone, and printed dollars out the yin-yang.

So… The longer you postpone the inevitable, the harsher it will be eventually be! But… Big Ben is still worried about a recession.

Oil prices have settled in at $87.60, after hitting a new record price of $88.20 yesterday… But the Fed and media remove oil prices from inflation, so this is nothing to worry about… There’s nothing to see here… Move along… HA! There certainly is something to see here, and it’s called inflation!

We’ll also see the latest rot on the vine from the housing sector, when September housing starts print this morning.

Currencies today: A$ .8895, kiwi .7475, C$ 1.0210, euro 1.4180, sterling 2.0350, Swiss .8465, ISK 60.50, rand 6.8255, krone 5.4120, SEK 6.4540, forint 176.84, zloty 2.6170, koruna 19.4120, yen 116.70, baht 31.40, sing 1.4660, HKD 7.7520, INR 39.50, China 7.5150, pesos 10.80, BRL 1.8150, dollar index 78.17, Oil $87.60, Silver $13.70, and Gold… $764

That’s it for today… Congratulations to the Colorado Rockies for making their first appearance in the World Series. A year ago, that was my beloved Cardinals reaching the World Series! Kristin asked me yesterday if I needed help with my presentation in New Orleans… It hit me then that it was only a week away! YIKES! I don’t need help… I just need to sit down and work on it! Now that the Review & Focus for November has been put to bed, I’ll find the time. It will be a funny feeling up on the podium again… Last year, I spoke for over 30 times… This year, because of my illness, it has been greatly reduced. Anyway, it will be good to get back speaking again… From now on, I’ll have my trusty cane to bat away the objects that are thrown at me! HA! I hope you have a Wonderful Wednesday!

Chuck Butler
October 17, 2007

The Daily Reckoning