The View from Chuck's Easy Chair

Good day… And welcome to another week. Chuck is feeling better and sent me the following to pass on to everyone:

“I’ve viewed the latest sets of data, and to quote my fave sportscaster of all time, the late great Jack Buck… I can’t believe what I just saw! I know, you are quizzical right now, and saying, what? What did he just see? Ahhh… Grasshopper… I’ve just seen the color of the U. of Michigan consumer confidence report. Unbelievable! While I know that a large part of consumer confidence is derived from stock market performance, which in my opinion is irrational at the very least… One would think that consumer confidence would be linked in some way to spending, wouldn’t you? I mean, Joe Six-Pack is out there spending money on a new patio set, and he feels pretty darn good about it too!

“Unfortunately, I guess spending doesn’t play well with consumer confidence because the U. of Michigan report showed consumer confidence soaring, while U.S. retail sales showed a 0.9% drop in June, much lower than expected.

“What these people are smoking to be confident is beyond me – but then maybe they have been smoking what San Francisco Fed President Janet Yellen has been blowing. Once again a Fed Head is shrugging off the problems of the subprime mortgage meltdown. San Francisco Fed president Yellen late Thursday commented that she ‘doubts subprime mortgage woes will have a big impact’ on the overall economy. Yeah… And I’ve got some swampland for sale.

“I’m putting together some real meat on the securities that were created from the subprime loans for our monthly newsletter to customers, the Review & Focus… But here’s a bit of that to whet you’re appetite, and get you excited about seeing the letter in your mail box in August!

“Basically… When the loans were created, they were bunched together with other loans, maybe good credit along with bad credit, or all bad credit etc. These loans were then sold as ‘collateralized debt obligations’ or CDOs. These CDOs are now coming back to haunt the marketplace. Big time pension funds, hedge funds, etc. want to sell them back to the Investment Bankers that sold them, and the Investment Bankers want to sell them back to the mortgage broker that created the loans. The problem is… NOBODY WANTS TO BUY THEM!

“Now… Mark Gilbert of Bloomberg reports, ‘Moody’s Investors Service cut its ratings on $5.2 billion of bonds backed by subprime home loans this week, and put a further $5 billion of CDOs on review. Standard & Poor’s yesterday lowered its assessment of $6.39 billion of debt, after earlier putting the figure at $12 billion (which suggests S&P should spend some of its fees on new beads for the office abacus).’

“Some BIG TIME problems are going to result from this, and Fed Heads like Janet Yellen can continue to put their head in the sand and hope nothing bad happens, but it won’t stop this bleeding. The economy will suffer. And when the economy suffers… So does the dollar.

“And as I stated in the Review & Focus last month… The real risk to the dollar is when the Fed decides they have seen enough, and cuts rates… UH OH!

“OK… Enough of that mortgage stuff, it really gives me a rash! Did anyone see the nice write up on the dollar and mention of EverBank in my friend, John Mauldin’s weekly newsletter last Friday? The negative trend is really entrenched for the dollar right now. So if you’ve been on the sidelines waiting… And maybe even thinking you missed the bus… I think there’s more downside to the dollar in the future.

“John Mauldin also wrote about the Birth/Death model that the Bureau of Labor Statistics (BLS) uses in the jobs creation numbers. Long time readers know my dislike of this model interfering with raw data. It’s always on the wrong side of the trend. In a slowing economic trend it adds jobs, and in a growing economic trend it underestimates jobs! What good does this do then?

“Then in my local paper’s business section, which usually isn’t worth the paper it’s printed on, there was a story that appeared on Bloomberg by economist Caroline Baum, (who is another of my fave reads). Here’s an excerpt from that story:

‘The BLS website even prints this… “most significant potential drawback of its birth/death model is that it assumes predictable patterns and relationships and my have some difficulty producing reliable estimates at economic turning points or during periods when there are sudden changes in trend.”

‘Paul Kasriel, chief economist at Northern Trust Corp in Chicago, then tells us that “as the economy has slowed in the last year, the relative contribution of the birth/death adjustment to unadjusted payroll growth has increased to 56% (June to June) from the 31% the previous year.”‘

“Doesn’t this admission by the BLS make what I’ve been saying about this model for a couple of years now absolutely true? They are ghost jobs! And the dollar was gaining in value every time the Jobs Jamboree showed a strong figure that contained an average of 56% ghost jobs!

“Someone should be taken to the woodshed on this one… But then, as I’ve said all along, and backed up by U.S. government economist John Williams… government reports are supposed to make us ‘feel good’… So consumer confidence can soar!

“Oh well… I’m getting all worked up here, as I sit in my chair with my trusty walker next to me. Yes… In the personal department… In the words of Chicago… I’m feeling stronger every day. I just can’t say how strong you all made me feel with all of the notes of thoughts and prayers on my behalf. I’m so lucky…no… Blessed to have so many people praying for me. And it works! No… I’m not completely out of the cancer woods yet… But I’m fighting it with everything I’ve got. My doctors were great, and did their jobs, now it’s up to me and the medicine that I will take once my hip is completely recovered.

“Thanks again for everything. You Pfennig readers are the BEST!”

It’s great to get a good dose of Chuck this morning; and he even threw in some song lyrics! I think you can tell he is feeling better and continues to recover.

As Chuck mentioned, the confidence numbers released Friday were well above expectations. But this was the only good data released Friday. Retail sales declined 0.9% and even the less volatile ex-autos number was down 0.4%. Business inventories were up, as were import prices. So according to the data Friday, we have a slowing economy with rising inflation; the worst-case scenario for the FOMC!

Currency traders weren’t fooled by the rise in consumer confidence and continued to sell the dollar versus just about all of the major currencies. Today we only get the very volatile empire manufacturing number, so I would expect more weakness from the U.S. dollar. Tomorrow is a better data day in the United States with the release of the PPI numbers for June along with the TIC flows, industrial production, capacity utilization, ABC consumer confidence, and the NAHB housing market index. Wednesday is almost as busy with the release of the CPI numbers, housing starts, building permits, and Bernanke’s report on the Economy and Fed policy.

The data that holds the most interest for me will be tomorrow’s TIC flows. International investors bought a net of $16.2 billion a month of U.S. treasuries on average in the first four months of this year, compared with $28.2 billion a month in 2005. These flows of capital have been one of the major props for the dollar, and data tomorrow will likely show that this prop is getting kicked out from under the greenback. Bernanke’s report on Wednesday will also be closely watched by currency traders and could initiate another round of dollar selling if he finally admits to the housing problems in the United States.

Inflation in Europe remained below the ECB’s 2% ceiling for a tenth month in June, increasing just 1.9%. But don’t expect the ECB to become any less hawkish with regard to their inflation fight. Food prices have seen their fastest increase in at least a decade and fuel prices don’t seem to want to ease. Both the ECB and BOE have been aggressive on their fight against inflation, and I don’t expect them to ease off any time soon. This will keep both the euro (EUR) and pound sterling (GBP) reaching for new records versus the U.S. dollar.

New Zealand is expected to raise interest rates next week after a report today showed inflation accelerated faster than expected. Consumer prices gained 1% from the first quarter, outpacing the central bank’s 0.7% estimate. This inflation report follows a report last week that retail sales rose more than economists forecast in May, adding to signs that domestic demand isn’t going away. New Zealand’s central bank Governor Alan Bollard doesn’t want to raise rates for fear of moving the kiwi (NZD) even higher; but price stability is his primary concern and the latest figures demand that he continues to move rates higher. Good news for the New Zealand dollar and the other commodity based currencies.

The Japanese markets were closed today, so the yen remained in the 121 handle. The Chinese were open for business though and the renminbi (CNY) was allowed to appreciate again. A news story caught my eye this morning that predicted China would allow the renminbi to trade freely after Beijing hosts the Olympic games next year. The story got my attention because this is exactly what we had predicted all the way back in 2005 when we first started offering renminbi deposits. At the time, we predicted the Chinese government would keep tight controls on the currency until the 2008 Olympics at which time their economy would be able to better withstand the effects of a free floating renminbi. Holders of the Chinese currency need to continue to be patient, it is not a matter of if the currency will be free floating, but when.

Currencies today: A$ .8756, kiwi .7928, C$ .9560, euro 1.3795, sterling 2.0391, Swiss .8329, ISK 59.92, rand 6.9560, krone 5.7272, SEK 6.6340, forint 177.96, zloty 2.7188, koruna 20.4485, yen 121.66, sing 1.5160, HKD 7.8198, INR 40.3712, China 7.5655, pesos 10.7665, dollar index 80.481, Silver $13.06, and Gold… $668.28

That’s it for today… As Chuck mentioned, John Maudlin gave us a mention and the phones were busy this weekend with several requests for information on currency investments. This is also the last week for investors to take advantage of our Japanese REIT MarketSafe CD investments. If you want to participate in this unique opportunity to gain from the boom in Japanese real estate, your funds need to be in our offices by tomorrow.

On a final note, did you see where the Cardinal bats came alive yesterday to hand the Phillies their 10,000th loss? Six home runs, including a couple by Albert Pujols who has been unbelievable in Sunday contests. Just wish we could spread all of that firepower out over a few more games instead of bunching it all up. Hope everyone has a great weekend!

Chuck Butler — July 16, 2007

The Daily Reckoning