U.K. Inflation Soars!

Good day. Well, do I have a treat for you this morning! The Mogambo Guru on a Tuesday morning! I have to say that I received a big kick out of meeting the Mogambo in Vancouver and spending some time talking to him. I’m jealous of him though, because he gets to say things that I think, but can’t say since I work for a bank! (And no, I’m not looking to be fired, just in case someone thinks that’s where I’m going with that!)

OK. A dull day, currency wise. The dollar was a bit bid, but for the most part it was a narrow trading range. But since the dollar was up on the day, there’s no better place than here to give you an excerpt from the Mogambo’s Monday letter posted on The Daily Reckoning site:

“Mogambo sez: I keep being amazed every time the dollar is up for the day, as I cannot imagine why. And I am equally amazed when gold and silver end down for the day, as I cannot imagine why, either.

“It is a mysterious gift to you from just one of the many desperate, life-or-death struggles of the market manipulators and their government pimps, the Federal Reserve and all the other central banks of the world.

“So, load up on gold, silver and oil, as it is guilt free. That is, how can legally taking money from bad people be wrong? It teaches them a lesson they will never forget! They should thank you!”

He just cracks me up…while making me think!

OK. This morning, we’ve seen the color of the United Kingdom’s August consumer inflation, and the color isn’t pretty. U.K. consumer inflation jumped to the highest level in nine years during August, and the light has been turned back on for higher interest rates in the United Kingdom. In my opinion, inflation in the United Kingdom has just begun to burn a hole in pockets, meaning that the Bank of England has a lot of interest-rate work to do!

Now, let me explain what I complained about for two years with the “demented thought process.” Inflation in the United States was soaring, and the dollar was getting all kinds of accolades because interest rates would go higher to combat the rising inflation. I thought that was a bunch of bunk, because inflation was already out of control, and the Fed was playing “catch up.” Look at it now.

With the U.K., they set an inflation target of 2%. Inflation is just now 2.5%, and the Bank of England hiked rates in August. So, they are proactive in maintaining price stability. Let’s see if the markets reward the pound sterling like they did the dollar last year.

Yesterday, I told you what I thought about the price of gold falling below $600. A reporter from Bloomberg read my thoughts, and we talked a bit. I also came across a story that hit the news wires yesterday that helps explain the falling price of gold the last two months. Reuters reported that Portugal’s central bank sold 15 tons of gold in July and 20 tons in August.

You might recall that central banks all signed an agreement about six years ago that allows them to sell “X” amount of gold each year. Most central banks have stopped selling gold as the price rose, but I guess Portugal’s central bank needed some pocket cash.

Take this statement from the IMF:”A Disorderly Drop in the U.S. dollar is biggest risk to world markets.” I find it interesting in that the IMF doesn’t say: “if the dollar falls.” They are assuming that the dollar is going to drop. They just hope it’s not a “disorderly drop.”

While I’m on the IMF, the IMF has once again called for “flexible currencies.” We all know that’s directed at China, with a glancing blow to Japan. I don’t see what the IMF hopes to accomplish with these statements. Yes, they are nice to hear, but they just don’t get the job done! Memo to the IMF: GET MORE INVOLVED OR STAY HOME!

Well, today, we’ll see the U.S. trade deficit for July, which is forecast to have widened to $65.5 billion from June’s $64.8 billion. I say a large, out-of-control trade deficit is a “given.” To me, I like to sit back and make fun of the spin the media puts on the number each month when it is printed.

What the media doesn’t “get” is that the trade deficit is huge and that when it (in their words) “narrows” by those measly amounts, it really doesn’t fix the problem.

There were three Fed Heads hitting the road yesterday with speeches. None were earth shattering, and if anything, they were dovish. Chris Gaffney was reading one of the speeches and said, “Reading this, I think the Fed is going to hold rates steady this month, too.” There are more Fed Head speeches today. Again, I don’t expect anything earth shattering.

The European Central Bank (ECB) isn’t letting the Fed get all the press, as they have sent their ministers out to the hinterlands to spread the word that interest rates in the Eurozone are going higher. Inflation is moving higher, and money supply hasn’t really slowed down, so the ECB sees a threat to price stability. I still think the ECB has two more rate hikes in them before the end of the year.

To this end, I just don’t understand why euros are wallowing around in the mud of 1.27, and not heading to 1.30. Rates in the United States are holding steady. Most likely they will fall next year, while rates in the Eurozone are going higher. Based on interest rates alone, that should tell traders something, but when you factor in all the other fundamentals, the euro far outshines the dollar as far as a currency to invest in and own.

Currencies today: A$ .7540, kiwi .6415, C$ .8940, euro 1.2720, sterling 1.8755, Swiss .8055, ISK 71.10, rand 7.3675, krone 6.52, SEK 7.27, forint 215.75, zloty 3.13, koruna 22.35, yen 117.50, baht 37.45, sing 1.5780, INR 46.27, China 7.9465, pesos 11.0470, dollar index 85.76, silver $11.39, and gold $597.15.

That’s it for today. Yesterday I told you what the Big Boss, Frank Trotter, would say to my wanting to slow down on the travel next year, and sure enough, he came out of his cave, I mean office, and said, “I was going to talk to you about traveling more next year!” Then he laughed! Keep an eye on that media “spin” when the trade deficit is printed this morning. Have a great Tuesday!

Chuck Butler
September 12, 2006

The Daily Reckoning