Visiting China…Again!

Good day. Well, day two after Labor Day, and no currency movement to speak of. I do have a quickie on the yen though, and some data from Europe to talk about. Other than that, I can’t think of much else going on, except a pennant race in baseball, and the start of the NFL season!

OK. Recall yesterday that I told you how yen had moved stronger versus the dollar on the thoughts that Bank of Japan (BOJ) Governor Fukui would indicate that more rate hikes were coming later this week when the BOJ meets? Well, last night those same investors, traders, and anyone else that decided they would change their collective minds about selling yen on thoughts that Fukui wouldn’t signal additional rate hikes.

Tomorrow, tomorrow, I’ll change my mind tomorrow; it’s only a day away! What a bunch of dolts! Do they really think that with all the growth and inflationary pressures building in Japan that the BOJ was just going to raise rates one time and quit?

As I’ve said before, go ahead short yen. Just don’t come crying to me when the currency becomes so expensive to short!

Alrighty then, I had better go on to another subject, and get off this soap box before somebody gets hurt! Namely me!

Some offsetting economic data this morning from the Eurozone had the euro bouncing around, albeit range bound. First, retail sales from August fell, but factory orders for July rose an incredible 7.5% YOY, versus 4.9% forecast. So, those two offset each other, with the variable coming from ECB council member Axel Weber, who wanted everyone to know that the ECB hasn’t decided to stop raising rates once December comes around. Of course, I have to stop and think about that for a minute. He didn’t say they were going to keep going with rate hikes either!

It’s just one of those little tid bits that keep them coming back for more!

I received a note yesterday from a reader that cracked me up. He said that he had heard a radio talk show guru say, “Since oil is so high, this acts as an anti-inflationary effect on the economy.”

Oh! Come on! We’ve got inflation coming out our ears, and the price of oil is a big reason why! It’s not the only reason, but think about all the things that use oil besides our cars. Think about how the high price affects all these things! Some time ago, I told you about John Williams, the economist that wrote about “Shadow Statistics.” Don’t just take my opinion about inflation as your only guide, here’s John Williams from his Web site:

“Although purposely suppressed in the ‘official’ data (PPI and CPI), there is an inflation problem. It is driven by oil, and increasingly, it also is being driven by dollar woes. These are factors separate from strong economic activity that commonly is viewed as the source of inflation. Fed tightening – designed in theory to slow the economy in order to slow inflation – will do little to cool the current problem. Moreover, current Fed activity has been the reverse of the jawboned inflation fighting, aimed at stimulating liquidity, not killing it. While short-term interest rates have been increased, broad money growth also has been soaring, at least prior to its reporting cut-off. Excessive money growth tends to be an inflation stimulant, not a retardant.”

Oh…by the way, I was recently interviewed by Consumer Reports about inflation, and I told them that if computed correctly it would be greater than 8%. That’s just my opinion. But, think about that one for a minute!

Today, we’ll see the color of the second quarter productivity report. I strongly dislike this report, and the use of it by the Fed. I’ve given my reason before, but in case you missed class that day, productivity is simply a measure of how much harder those that have jobs are working! But, the Fed likes to think of it as a measure of computing inflation, because if we’re all working harder, no jobs are being created, thus no wage inflation pressures. I just don’t like it used that way, but the markets look at the number, too. And the forecast is for a rise in productivity.

Of course, you could almost predict that, given the rot on the job-creation vine.

And, if productivity is rising, there will be additional pressure on the dollar, as it will just be another nail in the Fed’s rate-hike-cycle coffin.

That euphoria over kiwi that existed last week has all but faded, as Standard and Poors has once again warned New Zealand authorities that a downgrade in the country’s debt rating is still on the table. This warning first came to the table because of New Zealand’s large current account deficit, and now that S&P doesn’t feel enough has been done to correct it, the warning has been given once again. The kiwi is feeling the pinch.

Well, it’s about that time again. The United States will be sending their newest Treasury secretary, Henry Paulson, to China. And once again, he will tell the Chinese that they need a more flexible currency, just as his predecessors have done. And once again, the Chinese will smile, tell him they will do just that, and in fact have a press conference to announce this new currency policy. They will pat him on the back as he leaves town, only to remain steadfast in their current currency policy.

This time might have a new twist to it though, as China’s Premier, Wen Jiabao, said last night that the currency will gradually become more flexible. That’s before Paulson gets there! Maybe they are just trying to head him off at the pass – John Wayne style! It’s all humorous to me – this cat and mouse game. They need to stop sending Treasury secretaries to China for a boondoggle, and leave the Chinese alone. The Chinese need to feel as though the pressure has been removed and do something about the snail’s pace of renminbi’s move versus the dollar.

Currencies today: A$ .7690, kiwi .6485, C$ .8995, euro 1.2825, sterling 1.8890, Swiss .8085, ISK 69.25, rand 7.21, krone 6.3550, SEK 7.26, forint 215.18, zloty 3.09, koruna 22, yen 116.40, baht 37.30, sing 1.5670, INR 46.13, China 7.9443, pesos 10.89, dollar index 85.14, silver $13.03, and gold $636.50.

That’s it for today. I’ll be away for the rest of the week, so Chris will once again take over and drive you into the weekend. Then I’m home for a month before heading to the San Francisco Money Show in October. I really like San Francisco; it’s a very cool city. I guess, as usual, I thought of a few more things to talk about today, eh? Have a great Wednesday, and I’ll talk to you again next Monday.

Chuck Butler
September 6, 2006

The Daily Reckoning