U.K. Retail Sales Soar!

Good day… Not much went on in the currency markets yesterday. Basically, a big fat dud! With the empty data cupboard in the United States this week, I think the markets’ participants are waiting for something earth shattering from the G-7 meeting this week. Me? I think the markets’ participants will be waiting a long time. It’s been a long time coming… It’s going to be a long time gone.

The Fed Heads, Moskow, Yellen and Bernanke will all be out on the road giving us their latest thoughts in speeches today. I find this to be interesting in that, given the void in data this week, and the focus on G-7, and the ECB/BOE rate decision meetings. It gives them a chance to speak about inflation fears, and the whole lot of “hawkish toned” words, to offset the positives that could come from overseas.

But, I’m sure it’s all on the up and up with the Fed, don’t you?

Last week, last month, last year and the year before that, and so on, I’ve been telling you about the global imbalances, and how they will all come crashing down like a house of cards at some time in the future. Well… Yesterday in the Wall Street Journal, there was a good article about the global imbalances. So, instead of having me ramble on and on and on, about this again, let’s see what the WSJ says about global imbalances!

“Globalization has allowed the teaming of China and the United States into an informal economic unit that takes the synergy between emerging and developed countries to a new – and not unworrisome – level.  The new economic unit – Chimerica – has created breaks in historical financial relationships: cost of capital [versus] labor, credit spreads, equity [versus] bond valuations.”

They went on to say, “The growing imbalances are not without risks, though both stem from policy blunders that include: A) U.S. protectionism, an increased risk given the control of Congress by Democrats, led by Schumer and Graham… and B) that China makes some type of significant mis-step in its liberalization of its financial system.”

I think that the WSJ missed something very important, and that is simply that too much of one thing is not a good thing. China has built piles and piles of dollar reserves, and at some point, this will come crashing down on the dollar. The weight is just too heavy to keep in a “legal lift” for too long!

I was all over the Wall Street Journal yesterday, as a customer called in and told Chris Gaffney that I had been quoted in the Wall Street Journal. Hmmmm… So, while looking for what probably could be the “best quote ever in the WSJ” (and why not, it would come from me! HAHAHAHAHAHA!) I came across the story above, and another story that I found relevant to the currencies.

The other story centered on the rising vacancies of homes in the United States. I know, this report normally flies under the radar screens… But wait till you see why I find it to be important to talk about now.

“Amid brightening hopes that the U.S. housing market is stabilizing, some economists are zeroing in on a piece of data that could augur badly for the consensus view: The homeowner vacancy rate. That figure, an often-overlooked measure of how many homes for sale in the country are empty, has climbed to its highest level since the Census Bureau began tracking it four decades ago. Last week, the bureau said that in the final three months of 2006 there were about 2.1 million vacant homes for sale.

“That brought the national homeowner vacancy rate to 2.7%, up from 2.0% a year earlier. Before 2006, the number had never risen above 2.0%. Like the housing economy more broadly, the measure varies by region: The South had a homeowner vacancy rate of 3.0%, the Midwest had a rate of 2.9%, the West had a 2.4% rate and the Northeast had a rate of 2.0%.”

So… All in all, the so-called recovery of housing is far from the truth. Again…too much of something is not a good thing… And too many houses sitting empty that builders probably went into debt to construct, will eventually play havoc with house prices… And that will bring about a negative wealth effect on consumers. Mark my words.

Hey! That blue light special in gold ended pretty quickly yesterday. Gold recovered almost $6, and has weathered its first profit taking session since the rebound began in earnest last October. I’ve been talking about the oil price rebound lately, and this latest cold snap in the Midwest has pushed oil prices close to $60! So… As the price of oil goes higher, it fuels (pun intended) a rise in gold.

The proof is in the pudding on this one, as the dollar hasn’t moved one iota, except last week when it was stronger. And yet gold is going higher… Why? Well… Rumored strikes at African oil companies doesn’t hurt… But higher oil prices right now fueling inflation fears again is doing the trick right now.

No wonder we brought the MarketSafe Gold CD back and dusted it off for February! Gold is on the rise again.

The currencies have gotten a tiny bit stronger since I came in this morning. It looks like the latest retail sales report from the United Kingdom has the pound moving higher versus the dollar, and the other currencies are following the pound’s lead. U.K. retail sales for January increased at the fastest pace in six months. A 3.1% gain versus the previous month’s 2.5%.

So, the beat goes on for the U.K. economy. Strong domestic demand continues, but will it be enough for the Bank of England (BOE) to go back-to-back with a rate hike this month to compliment its surprise rate hike in January? Hmmm… That’s a tough one. There’s been “no chatter” this time. Recall last month, I didn’t think the BOE would raise rates in January, choosing a February rate hike instead. But I did say that the BOE SHOULD raise rates in January! I just thought they would hold off a month.

So… I don’t know! My guess is that the BOE waits and conserves the rate hike arrows in their quiver. As long as they “talk the talk” and “walk the walk” on fighting inflation, the markets will go along for the ride, which should underpin pound sterling.

And how about that Indian rupee? I talked about this a couple of weeks ago. This currency has really been a strong performer. Stealth like… Not many people are noticing… But I am. I still think our decision to offer Indian rupee CD’s last year was a good one. But so far it has not carried that much interest. Too bad… The currency has gained 5.5% in the past six months!

Currencies today: A$ .7760, kiwi .6830, C$ .8465, euro 1.2955, sterling 1.97, Swiss .8040, ISK 68.25, rand 7.1950, krone 6.2620, SEK 7.03, forint 195.30, zloty 2.9840, koruna 21.72, yen 120.10, baht 34.30, sing 1.5320, HKD 7.8090, INR 44.08, China 7.7560, pesos 10.90, dollar index 84.94, Silver $13.68, and Gold… $655

That’s it for today… I head to Orlando very early tomorrow morning, so Chris Gaffney will pick up the ball on the Pfennig. I then get to do one of my favorite things in the world on Thursday and Friday (NOT!)… Write the Pfennig from the road. Lucky me! Maybe I could scour the archives and find enough material for a “best of”. Nah, probably not! HAHAHAHA! If you’re going to the Money Show in Orlando, be sure to stop by our booth to see us. Trust me, you won’t have to look hard to find us! Have a great Tuesday!

Chuck Butler — February 06, 2007

The Daily Reckoning