Trade Deficit Narrows

Good day… And a Wonderful Wednesday to you! Tuesday saw more volatility in the currencies as the dollar went back and forth, but well within a trading range. The euro (EUR) has melted down to the 1.49 area, where it seems to have found some breathing room. The trade deficit for June shrunk, but the budget deficit widened… Again, the fundamentals in the U.S. continue to point to recession. All this and more in today’s Pfennig, so grab a cup o’ java, a chair, and let’s go!

OK… Front and center this morning, I want to talk about the trade deficit, which in June showed a narrowing from $59.8 billion to $56.8 billion, which looks good, right? Well… As I told you in yesterday’s Pfennig, you have to be careful what you wish for. This drop in the trade deficit pushed the dollar higher yesterday morning, and got me thinking… (I know, that can be dangerous, but stay with me here…) A stronger dollar will not play well, share toys, and keep its hands to itself, with exports… And exports have been nothing short of amazing with the dollar being weak. In fact, exports have accounted for the largest contribution to GDP in the past 5 quarters! (With U.S. consumer spending drying up, this is possible!) Add to that, everyone getting goose bumps regarding a global slowdown. If the world slows down – like the dollar bulls are claiming it will, thereby propping up the dollar – then U.S. exports will slow even more!

You know… The fourth quarter of 2007’s “revised” GDP came in at negative -0.2%, and we were just getting started on the road to recession, folks… And now, just when U.S. consumers have their tax stimulus checks to spend, and prop up GDP, the dollar gets strong, and exports take a ride on the slippery slope. It’s all over now, Baby Blue…

I was being interviewed by a newspaper reporter from Buffalo yesterday and I told him the same old song and dance that I told you yesterday about how this can’t be the end of the weak dollar trend. He then asked me what would be the signs that this dollar rally could continue… Ahhh grasshopper… Sit, and listen…

1. First and foremost, the current account deficit has to show a willingness to correct the imbalances that exist.

2. That the U.S. data reports (housing, employment, financials) begin to show marked improvement…

3. A sign that the Eurozone economy is “really” in deep dookie, not just a slowdown….

4. Net Purchases of Securities by foreigners begin to show marked improvement…

OK… The budget deficit widened to $102.8 billion for July… The trade deficit may have narrowed, but the budget deficit widened! UGH!

Today, we’ll see the color of July’s retail sales, which is the first “hard piece” of data for the third quarter. The Butler Household Index, BHI, tells me this could be an interesting report. You see, there was a shopping trip to Chicago in July, but other than that, the BHI was null and void of an increase in spending. (August is another story after the shopping spree in San Francisco! UGH!) So… The “experts” have retail sales pegged to show a negative -0.1%. I say it could go either way… But what it won’t do is show strong spending, even with the stimulus checks in the hands of consumers. Remember, in July, the price of oil hit the ceiling.

So much for a “marked improvement” in U.S. data reports, eh?

Norway’s Norges Bank, is meeting this morning, and after raising rates at their last meeting in June, I don’t expect them to move rates at this meeting. With inflation running higher than the Norges Bank would like to see, I think interest rates will move higher at least one more time before year-end. That is, as long as Norway doesn’t experience any major “shocks” in their economy, which I don’t expect them to come across. And this should underpin the krone (NOK), going forward.

In Australia overnight, consumer confidence rebounded, which is the first good thing to print or happen in Australia in what seems like a month of Sundays! The news though, did not help the Aussie dollar stop the bleeding it has seen in the past three weeks. One thing that is really on my mind here is the fact that so many Japanese bought Aussie dollars for the high yield, which got me thinking that maybe they are the reason the Aussie dollars fell so far so fast. If Japanese buyers sold, this could be the reason for the sell off… But, here’s where I get edgy… What if the Japanese buyers of Aussie dollars “haven’t” sold yet? What happens if they decide to sell? Well, you know that I know that you know that I know, that won’t be pretty… But if there’s one thing to hold onto here it’s the fact that the Aussie dollar still has yield, and a much higher yield than can be booked in Japan!

In the United Kingdom this morning, the Bank of England (BOE) cut their growth forecast. BOE Governor King, said that inflation would fall back to the 2% ceiling, if the BOE would keep rates at 5%. Keeping rates unchanged should have been a good thing for pound sterling (GBP), but… It was not enough to offset the cut in growth forecast, and… An awful employment report, which showed the biggest monthly increase of jobless claims since 1992!

Here in the U.S. the housing meltdown continues… Toll Brothers, the largest U.S. luxury homebuilder, reported a fall in earnings for the ninth consecutive quarter… Not a good “sign of the times”. And now there’s word that it’s not subprime, not Alt A, but prime loans that are going belly up… Here’s what Bill Bonner had to say about this in The Daily Reckoning yesterday…

“Another sign of the times: ‘prime’ borrowers are defaulting on their home loans at increasingly high rates. Last month, reports, JP Morgan Chase CEO ‘called prime mortgages “terrible” and suggested that losses connected to prime may triple. For the second quarter, the bank reported net charges of $104 million for prime rate delinquencies, more than double the $50 million recorded three months earlier.’

“WaMu reports similarly disturbing losses and it is clear that this latest trend is doing nothing to help the already struggling housing sector on the road to recovery.”

When will this all end? I guess there hasn’t been enough “tears” shed… But apparently there will be when it’s all said and done… But, I look back and remember people laughing at me, and telling me there was no “housing bubble” and that if there was it wasn’t going to burst. I tried to warn people in this journal and the Review & Focus… I had the tears of a clown, and no one would listen…

Just like Pagliacci did
I try to keep my surface hid
Smiling in the crowd I try
But in a lonely room I cry
The tears of a clown

Ahhh, Smokey Bill Robinson… You’ve gotta love that voice!

Currencies today 8/13/08: A$ .8685, kiwi .6955, C$ .9350, euro 1.49, sterling 1.8755, Swiss .9175, ISK  82.22, rand 7.8165, krone 5.3825, SEK 6.3070, forint 159.70, zloty 2.2125, koruna 16.09, yen 108.90, baht 33.60, sing 1.4050, HKD 7.8077, INR 42.62, China 6.8580, pesos 10.17, BRL 1.6220, dollar index 76.40, Oil $113.25, Silver $14.65, and Gold… $815.60

That’s it for today… It was good to see my little buddy Alex yesterday, albeit for a short time before he ran off to football practice. Did you see that we lost Bernie Mac and Isaac Hayes in the same week? Who is the man… (Admit it, I got you singing, Shaft!) That Michael Phelps is really something, eh? The most decorated Olympian of all time! Did you see his daily schedule while at the Olympics? And I thought I was busy! “Team Redeem” (U.S. men’s basketball) is on a roll, too! Time to hit the send button, hopefully, I won’t write this, and forget to send it like I did yesterday morning! Hey! I was still working on fumes! So… I hope your Wednesday is Wonderful!

Chuck Butler
August 13, 2008