Trade Deficit Grows 10.4%!

Good day… And a Happy Friday to one and all! Well.. The Trade Deficit grows by 10.4%, the Bank of England raises interest rates, and the European Central Bank tells the markets to get ready for a rate hike next month, and guess what? The dollar comes out of the woods smelling like a rose!

That’s right! I have no idea what these traders are doing… All I know is what I feel right now, and that is traders are setting up the dollar for a big fall… Because the longer the dollar remains just “weak”, and doesn’t get weaker, with all this bad data flying around it, the harder the fall is going to be! Well… That’s my opinion anyway for whatever that’s worth…

OK… Remember last month when I talked about the Trade Deficit falling to roughly $58 Billion, and pointed out that if February had 30 days like most months it would have been the usual $60 Billion plus… So, let’s skip ahead to March’s numbers… UH-OH… $63 Billion! That’s an over 10% deterioration from Feb.’s number…

Oil is to blame for the bulk of this move higher… I have to tell you that I filled my gas tank yesterday and I remember when I could have a great night out on the town for what it cost to fill my gas tank! Oh, and it’s just going to get worse folks… Refineries are working at 90% capacity… And none of those refineries have been updated in years… And the production? Ahhh grasshopper, it’s falling… At least in Mexico it is…

The Bank of England really laid an egg yesterday… Yes, they raised interest rates but opted for 25 BPS instead of kicking inflation in the guts with a 50 BPS hike. The market pundits are already writing stories about how the BOE will have to raise rates again in June, going back-to-back like Pujols and Rolen USED to do!

I shake my head in wonder… Why do Central Banks tend to be so STUPID? I just don’t get it!

However, rates will be going higher in June in both the U.K. and the Eurozone, so we have that to look forward to! I read where the Bank of Japan (BOJ) doesn’t like this “preparing the markets for a rate move” that the ECB employs… However, the ECB should tell the BOJ to mind their own business, and I can’t agree more! If the BOJ doesn’t like that, then maybe they should show the ECB “how to do it!” and surprise us with a couple of rate hikes in the next few months, eh?

There are stories all over the screens this morning that “traders are unwinding Carry Trades”… Hmmm… I would have to see some real evidence of this happening… What most likely is happening is that traders are “paring back” Carry Trades ahead of the report on currency manipulation, which is due out this month. In other words, not going head first into the pool that might be filled with sea bass wearing lasers! BTW… I hear that there will be a new Austin Powers movie next year… YAHOO!

This story ranks up there with stuff that makes Chuck laugh! China’s Trade Surplus more than doubled in April from March… That’s a total of $16.87 Billion for those of you keeping score at home! Imagine what the U.S. Trade Deficit will look like when they get around to printing April’s results… But then the markets don’t seem to care… But I do! And I believe you should too! I’ve said this before but this Deficit Debacle is going to bite us in the rear before it’s all said and done…

As you drive down a icy road, and you begin to spin out of control, you know in your heart of hearts that your Chevy is going to make contact with that guard rail… Well… It’s the same with the deficits spinning out of control.

Anyway, I really went off on the deficit tangent there didn’t I? What I thought was funny about the China Trade Surplus story is that they printed it about a week to 10 days before U.S. Treasury Sec. Paulson and Chinese Vice Premier Yi, meet… Nothing like flaunting their big old Surplus in Paulson’s face, eh?

The report lit a fire under the renminbi… I think traders are scared to death of the U.S. lawmakers and the protectionism bills that are already in the pipeline… That means, that renminbi should continue to move higher VS the dollar, adding to its nearly 8% rise since dropping the peg in July of 2005.

Currencies (except renminbi) are ending the week on a sour note, falling to levels they haven’t seen in a couple of weeks… UGH! That may change today, as Retail Sales for April will print, and I just don’t see it as dollar friendly.

First of all the Butler Household Index (BHI) is flashing a “disappointing sign”… And second of all… Retailers reported yesterday that April was largely a sales disaster for most of the nation’s biggest retail chain operators. The retailers reported that consumers pulled in their purse strings after March’s spending spree and as they faced rising prices at the gas pump as well as a slumping housing market.

Uh-Oh… If U.S. consumers are really pulling in their purse strings, the economy could be in some deep dookie… But don’t let that get in the way of what probably will be a “feel good” media spin on the data!

The funding period on our Japanese REIT and Gold MarketSafe CD’s ends next week… Just a friendly reminder from your friendly neighborhood Spider Man!

Currencies today: A$ .83, kiwi .7310, C$ .90, euro 1.3490, sterling 1.98, Swiss .8210, ISK 63.90, rand 7.05, krone 6.06, SEK 6.85, forint 184.60, zloty 2.80, koruna 20.98, yen 119.60, baht 33.30, sing 1.5180, HKD 7.82, INR 41.32, China 7.6750, pesos 10.85, dollar index 82.28, Silver $13.08, and Gold… $668.70

That’s it for today… Last week’s trip to Panama was well received by the people there, so much so, they have already invited me to speak again at their November meeting in the Bahamas! (I bet the Big Boss, Frank Trotter will want to arm wrestle me over that one!) I also was just asked to speak in my fave city, San Diego next month… Thank goodness it’s Friday… I’m spent! Sunday is Mother’s Day… If you can… Give her a big hug… I wish my mom was still around to hug!

Chuck Butler — May 11, 2007

The Daily Reckoning