A Pfennig For Your Thoughts

In this issue…

  • CPI falls .6%
  • Is the carry trade over?
  • German Business Confidence jumps!
  • The “wave” gets started again!

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And Now… Today’s Pfennig!

There’s No Inflation! HAHAHA!

Good day… And a Happy Friday to one and all! My last day of waking up at 4 for a week! Chris will be sitting tall in the saddle next week in my absence. Today is actually the last full week of trading for the year, as next week, the liquidity will dry up like a northerner on their first trip to Arizona, as we head toward Christmas, and then New Year’s Eve the following week…

Well… According to the Gov’t, inflation has gone away… What? I know, I can hear you saying… “Chuck, just what the heck are you talking about… We’ve got inflation everywhere we look… Medical, insurance, tuitions, energy, just what the heck are you talking about?” Ahhh grasshopper… I said… “According to the Gov’t”… Here’s the skinny…

Yesterday, the Gov’t reported that CPI (consumer inflation) fell -.6% in November… Now how’s that for a fantasy? Anyway, I’m not going to spend the whole morning ranting over this bogus report… But based on this report, one would think that the Fed is going to pause… Right? Well, not so fast, Tim! I think foreign investors are the only ones swayed by this report, judging from the Net Foreign Security Purchases (NFSP) data from October… Yes, that report said that NFPS was $106.8 Billion in October… So… Apparently, they believe there’s no inflation in our economy, for if they did, who would be buying to the tune of $106.8 Billion worth of dollar denominated assets?

The other data from the U.S. yesterday was a bit stronger than forecast with Industrial Production ticking up to .7%, Capacity Utilization finally reaching 80%, and that stupid Empire Manufacturing Index adding 10 full points…

Today, before I head out the door for my Friday morning latte’, we’ll see the color of the 3rd QTR Current Account Deficit… It is expected to climb to $205 Billion… I still find the fact that the Current Account Deficit continues to get financed somewhat of a mystery… But, as even Big Al recently said…”rising deficits cannot persist indefinitely… At some point investors will balk at further financing U.S. imports, especially if returns on assets outside the U.S. begin to outperform those in the U.S.”

Couldn’t have said it better myself! But then, I don’t want to go around spread a rumor that Big Al and I agreed on something!

OK… Enough U.S. data! Geez Louise, that stuff can begin to give me the willies! This morning, Business Confidence in Germany as measured by the IFO, rose to a 5-year high! This is just another in the line of reports from Germany that suggests the economic recovery is in full swing, which is a good thing for the euro!

The currency story of the week is the Japanese yen… It’s been 6-years since the yen moved (the right way) this much in a week VS the dollar… When I checked the news from Japan last night before going to bed, it was widely thought that Bank of Japan (BOJ) Gov. Fukui would signal an end to the zero interest rate policy… But in the end, his comments were just fluff… “the economy is achieving a well-balanced recovery”… And stuff like that… No, high and inside, brush back, Bob Gibson style pitch… However, his lack of “stuff” didn’t throw too much cold water on the yen, although the markets were disappointed, and did sell some yen…

I’m concerned about the “carry trade”… Selling yen, at a low rate of interest, and buying a high yielding currency… I alluded to this yesterday with yen and kiwi… But there are other currencies that have been on the other side of that carry trade… And with rising interest rates in the U.S…. The dollar has been a very good candidate… If, and that’s a big IF, the carry trade is going to begin to unwind in 2006, and interest rates rise in Japan, we could finally see that Asian currency rally… But it will also bring out the BOJ and their intervention, and cause wild swings in volatility… And… I’m afraid that a lot of “little guys” are going to get hurt, as the big players get out first, leaving the little guys holding the bag…

The “wave” for the euro received another participant yesterday. Joining Royal Bank of Canada, HSBC, Merrill, and Lehman Bros, is Barclays… Everybody stand! For new readers, I’ve said that the kick starting of the euro again reminds me of those few people at the ballpark that want to get the “wave” started… They stand up, and hope everyone follows their lead… And if they don’t… They try it again, and again, until the whole ballpark is participating… Royal Bank of Canada and HSBC were first to tell their clients that they should begin to “scale back into euros”… But the euro didn’t soar… Then came Lehman Bros and so on… Eventually, they will start the “wave” for the euro!

Currencies today: A$ .7440, kiwi .6905, C$ .8655, euro 1.1990, sterling 1.7690, Swiss .7755, ISK 62.29, rand 6.44, krone 6.65, forint 211.44, zloty 3.23, koruna 24.18, yen 116.15, baht 40.95, sing 1.6680, China 8.0735, pesos 10.77, dollar index 89.87, and Gold… $504.80

That’s it for today… Since I’ll be gone next week, I wanted to pass along a very warm wish for the holidays to everyone… If you’re traveling next week to be with family, please be careful and arrive safely… Here’s hoping that you get to spend that time with your family! Peace on Earth, my friends… Have a great Friday, and weekend! I…. Am… Outta… Here!

Chuck Butler
EverBank World Markets