Good day…The dollar continued its assault on the world’s currencies yesterday as the dollar index moved above the 74 handle. I pulled a chart off the Bloomberg on my way out the door last night, and it showed the only major currency which was up vs. the US$ yesterday was the Swedish krona, which managed a .07% increase. This dollar rally has legs, but I still question the fundamentals behind the dollars surge. Today may be the day we see the dollar finally make a turn, as the ECB will be announcing their rate decision.

It is not that I expect Trichet to raise rates, but I do expect him to sound hawkish and refocus the markets attention on Eurozone inflation and away from worries about growth. Two reports out of Germany this morning will bolster Trichet’s hawkish stance. German exports rose more than economists expected in June, defying a stronger euro and pushing the trade surplus to a record. Exports increased 4.2% from may, the most since September 2006. German industrial production also increased for the first time in four months with output rising 1.7% from a year earlier. The IMF last month rose its forecast for German economic growth this year and said the global slowdown linked to the US financial crisis was less severe than it expected.

The entire global economy has been dealing with commodity price inflation, but so far this raw material price spiral hasn’t spilled over to wage pressures. While the severe slowdown in the US economy won’t allow increases in wages, the European economy isn’t in as bad of shape. Lufthansa, Germany’s largest airline, just announced a 5.1 percent raise to settle a strike. And Lufthansa employees aren’t alone in securing inflationary pay deals in Germany. Negotiated wages jumped 3.5% in the year through April, the biggest gain in 12 years. This wage spiral will keep the ECB focused on inflation, with another interest rate increase possible. ECB council member Klaus Liebscher signaled there may be need for still higher borrowing costs in Europe, saying in a July 24 interview that “we haven’t exhausted our room for maneuver”.

The euro rallied against the dollar in early European trading on speculation European policy makers will continue to hold their tightening bias. One of the reasons for the spike in the value of the US$ has been a shift in interest rate expectations. During the past month, several currency traders have begun to speculate that the next move by the ECB would be a drop in interest rates, while they gambled that the next move by FOMC would be up. Recent data would suggest these speculations could be completely wrong. The economic downturn looks like it will continue in the US, keeping the Fed from lowering rates, while the ECB is dealing with a stronger than expected European economy, and spiraling wage pressures. A change in these interest rate expectations could put the dollar back on its long term trend down, and send the Euro back to $1.60 or above.

The Bank of England kept the main interest rate unchanged for a fourth month as they find themselves in the exact same position as our Federal Reserve. Inflation has been accelerating, and the economy is teetering on the brink of a recession. UK housing prices dropped the most in a quarter-century and UK services, manufacturing, and construction all shrank in July. So the economy is dramatically slowing while inflation is predicted to more than double the 2% target. BOE policy makers split three ways on which direction interest rates should move, so their only choice was to just leave them where they are. England’s economic situation has left the BOE as impotent as the FOMC!

As I mentioned above, the UK reported that house prices fell at a rate of 8.8% in July. This morning we will get a better picture of the current status of the US housing market. A report from the National Association of Realtors will probably show its index of home sales fell for another month. The inventory of unsold homes in the US stands at the highest level ever recorded. And according to economists, the inventory of existing homes and condos must fall by almost 50 percent for prices to stabilize. Theres is an 11.1 month supply of existing unsold homes at the current sales pace, up from 4.6 months in September 2005. Almost one of every 10 US mortgages was in trouble during the first quarter according to the Mortgage Bankers Association.

Those that want you to believe the ‘worst is over’ in the US economic downturn only need to look at the pending home sales numbers, which is usually seen as a leading indicator. The index of pending home resales is expected to have fallen 1% after a decline of 4.7% in May. As we have been reporting for some time now, the falling housing market has far reaching effects on the US economy. While the folks at CNBC have been telling everyone that the worst is over after Paulson and Bernanke came to the rescue of Fannie and Freddie, some very smart people (whom I agree with) are warning that losses will continue to mount.

Nouriel Roubini, the New York University professor who predicted more than two years ago that the US would fall into a recession because of the bursting of the housing bubble and rising energy prices is one who disagrees with CNBC. Ty Keough pointed out an interview with Roubini which appears in this week’s Barron’s. I would encourage any of you who are starting to ‘drink the Kool-aid’ being pushed by Paulson and Bernanke to read it. In the interview, Roubini predicts that we are in the second inning of a severe, protracted recession, which started in the first quarter of this year and is going to last at least 18 months, through the middle of next year. He goes on to say we can expect a total of $2 Trillion of debt related losses in our financial institutions. Roubini states that banks have only started to feel the effects of the housing downturn, and that consumer-credit losses and home-equity loan write offs will substantially add to their pain.

He ends the interview with this: “Leaving aside the fact that we are going to have a pretty nasty recession and international crisis, the global economy is going to grow at a sustained rate once this downturn is over. There are significant financial and economic problems in the US and that’s why I’m bearish about the US. But the emergence of China and India and other powers is going to shift global economics and politics radically, and the world is going to be more balanced in the future, rather than relying on one engine, which has been the US. ..I’m quite bullish about the state of the global economy..”

I agree with Roubini’s take on things, and the best way to protect your portfolio? International diversification. Keep a portion of your assets outside of the US$ in currencies and precious metals. Investors should view this dollar spike as an excellent opportunity to purchase currencies and metals at cheaper prices, dollar cost averaging to get your overall costs down.

Japan’s government said the economy is “deteriorating,” acknowledging for the first time that the country’s longest postwar expansion has probably ended. “There is a high possibility the economy has entered a recession,” the head of business statistics at the Cabinet office said in Tokyo today. The Japanese yen continues to come under pressure due to the weakening economy and the recent move back into carry trades. In these carry trades, investors borrow currencies at low interest rates, sell them and invest the proceeds into higher yielding investments, earning the ‘carry’. With market volatility easing over the past month, many investors have moved back into these carry trades, pushing the value of the funding currencies of Japan and Switzerland down. As in the past, these carry trades can be reversed as quickly as they are put on.

Just in, the ECB left rates unchanged. Now we just have to wait Trichet’s press conference, which will occur in about 45 minutes. Better get to the currency roundup:

Currencies today 8/7/08… A$ .9106, kiwi .7178, C$.9546, euro 1.5468, sterling 1.9517, Swiss .9474, ISK 79.83, rand 7.4390, krone 5.1734, SEK 6.0846, forint 151.84, zloty 2.0966, koruna 15.54, yen 109.45, baht 33.58, sing 1.3837, HKD 7.8054, INR 42.06, China 6.8643, pesos 9.9398, BRL 1.5775, dollar index 74.08, Oil $120.17, Silver $16.60, and Gold… $882.40

That’s it for today… Chuck traveled out to San Francisco to speak at the money show. This is the first time in several years that I won’t be there, but things are just too busy on the desk as of late. I got to see Chuck at the Cardinal game the other night, and he was excited about getting back out to San Fran and addressing the crowds. I guess Brett Favre is headed to New York. I used to really like him, but this latest move dropped him a few notches in my book. Albert Pujols hit a Grand Slam last night to propel the Cards to another win. Maybe we will have post-season baseball in St. Louis! Hope everyone has a Tub-Thumping Thursday!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837
www.everbank.com

Source: ECB to Change Dollar’s Direction?…

Courtomer, France Friday, June 13, 2008

First, a quick look at what happened in the markets yesterday.

The Dow rose 57 points. Oil held steady – but at a near record price of $136 a barrel. The dollar rose…and gold dropped $10.

The big news this morning is that retail sales actually went up last month – at 1%, twice what economists expected.

What? How can consumers continue to spend? They’re supposed to be cutting back. Maybe they’re spending those rebate checks.

Meanwhile, we find import prices up 2.3% in May, mostly because of higher oil prices. And the NY Times tells us that commodity price increases show “no let up.” Floods in the Midwest are aggravating the situation – driving up corn prices to new record highs.

“Inflation expectations rise sharply,” says the Financial Times.

The Fed’s ‘Beige Book’ tells us that the economy is “generally weak.”

We spent the week with a group of Internet marketers. The financial publishing business has gone electronic in a big way. In this business, you either learn how to publish on the Internet…or you fail.

Your editor, who grew up without air-conditioning, let alone without the Internet, finds it hard to keep up.

“You’ve got to understand the semantic dynamic of the bot-driven crawlers,” said one of the speakers. We had no idea of what he was talking about, but the others present nodded their heads in approval.

That is just one of the problems with growing older; you grow wiser…but wiser about things that no longer exist. When the car is slow to start, for example, we naturally think we need to clean the carburetor or check the points. Then we realize that there isn’t a carburetor and there aren’t any points. The cars have gone electronic too.

The other thing that has gone electronic is money.

In our decaying wisdom, we’re suspicious of the new electronic money. The old paper money was bad enough. Given the opportunity, central banks would print it up…far more of it than they should. Soon, there would be a lot more pieces of paper than there were things that it would buy. Now, the authorities who control money don’t even have to get ink on their hands. They can create money electronically. In fact, there is no limit on how much they can create – theoretically. Just add zeros. Add them electronically. The sky’s the limit.

But real wealth is not created so easily…

Real wealth is not electronic. It’s not just 1s and 0s – not just digital…not just phantoms that disappear when the power goes out. Real wealth is physical…things you can touch, eat, drive around in, and live in.

Real wealth and “money” are connected. But this new electronic money has plenty of stretch in it. Houses, for example, are real wealth. But in money terms, their value varies. In the ten years – 1996-2006 – for example, the price of America’s houses almost doubled. Of course, they were essentially the same houses…a little bigger perhaps…with a few more marble countertops, but otherwise not much different. What had happened that made them more valuable? Well, they weren’t really more valuable…just more expensive. America’s elastic money had stretched out to make them more expensive.

But now the elastic is snapping back. Houses are down 13% – according to Case/Shiller – from a year ago. And now an analyst at JP Morgan says they’ll probably go down about 30% before the snapback is finished in 2010.

This, he says, will cost Wall Street about $1 trillion in losses on mortgage-backed securities. It will cost the nation $4 trillion in “lost access to capital.”

Whoa! That’s the trouble with stretchable money – when the elastic snaps, it can hurt.

*** The other trouble with these new electronic systems is that they are hard to fix. When your car wouldn’t start in the ’60s, you lifted the hood…took off the distributor cap and checked for sparks. Or, you removed the carburetor and made sure it was working properly. Even when you didn’t know what you were doing, skinning your knuckles once or twice seemed to cure most minor mechanical problems.

But when an electronic system breaks down, it’s hard to figure out what is wrong…and almost impossible to fix. When money is in paper form, it is pretty easy to understand how it works. Simply count up the bills in circulation. If the supply is going up…prices are likely to follow. But this new electronic money has most people stumped. The Fed sends an electronic credit to the Bank of America, which in turn gives an electronic credit to its credit card holders. Now, they can go out and buy things. Do they have “money?” How much “money” is in circulation?

Then, the American shopper buys something made in China – where else? – so that the Chinese producer ends up with a credit in his account in dollars…which he trades with the Bank of China for yuan. The BoC doesn’t want the yuan to go up…so it creates more yuan, electronically, to trade for the electronic dollars it has received.

This was the ‘great money machine’ – an electronic machine – that was responsible for creating so much of the world’s liquidity…and the world’s bubbles.

But as we said yesterday, this machine seems to be slowing down…maybe even breaking down. America’s trade deficit is shrinking. In fact, it seems to us that the elastic currency is snapping back in America’s face. Its import prices go up…while its major asset – housing – goes down.

The import that people care most about is oil. It’s causing the highest gasoline prices Americans have ever had to pay. And it’s calling into question the whole ‘car culture’ society. In America, much more than in Europe, people live in individual, standalone houses – which are much more expensive to heat and maintain than row houses or apartments. They also live far from their work…their schools…their restaurants…and their shops.

Here in Europe, big shopping malls have become common. The small shops couldn’t compete with them on price or choice. Still, now that the price of oil has gone up so dramatically, the latest reports tell us that shoppers are turning their backs on the big malls; they prefer to walk out to neighborhood stores.

But in the United States, there are few neighborhood stores left…in fact, there are few neighborhoods. Instead, in many areas, houses were flung out like confetti from a parade float. They may have fallen a mile from a major shopping mall…or the wind might have carried them 50 miles away.

“Oklahoma’s painful car culture,” is changing the way people live, says an article on CNN Money. Out on panhandle, it is not unusual to drive 70 miles to get to work. In their big SUV and pickups, commuters might have to spend $50 a day – just to get to work. It’s not surprising that they are looking for alternatives – bikes, carpools, and buses.

Consolidation continued in the Canadian junior oil patch with Southern Pacific Resource Corp. agreeing to acquire Rochester Energy in an all share transaction worth C$22.05 million. Southern Pacific will issue up to 21 million shares for the 50,575,645 million Rochester shares outstanding and a total of 34,629,187 Rochester shares issuable upon the exercise of Rochester convertible securities. Southern ended the day up C$0.02 at C$1.07, while Rochester gained C$0.06 at C$0.36.

Potash is still hot as evidenced by shares of Allana Resources. The company announced that it has acquired 100% of Latin American Potash, which holds 154,000 hectares of potash-prospective assets in Argentina. The price tag is C$130,000 and three million Allana shares. Allana ended the day up C$0.195 at C$0.40.

New assay results boosted the 17 metre intercept running 0.2% U308 to 18.5 metres averaging 0.215% U308 at the Lac Mantouchiche prospect on the Mistassini property in Quebec for owner Majescor Resources. Majescor ended the day up C$0.01 at C$0.14.

Kirkland Lake Gold continued to get no joy despite cutting 43.37 ounces of gold over 10.4 feet at its South mine complex in Ontario. Kirkland ended the day down C$0.41 at C$9.66.

The resource-rich Canadian markets appear ripe to follow the commodity price trend and right now that appears to be lower. We will see what Friday trading has in store.
Source: Resource Stock Roundup Friday, May 30, 2008

Economic climate change…

Relentless rises in commodity price emissions is increasing the inflation content of the world’s economic atmosphere threatening the universal life force of the world economy – ie growth.

Economic climatologists aka central bankers are beavering away trying to contain the inflation content while scratching their heads about how to tackle spiralling commodity prices.

Or as Mervyn King would have it at a press conference this morning, a sequence of cost shocks is coming from abroad. No prizes for guessing what – oil, food, energy yada yada. OPEC’s not pumping enough, Indians eating too much (see below) etc. This is the increasingly heavy monkey on the back of a Bank looking to loosen monetary policy – mainly by cutting interest rates.

Dear readers looking for good news stop reading now and return in what Mr King calls the medium term, say 2010ish. By that time the economy may be growing at trend again, inflation may be back around 2%, a deflated sterling will have helped iron out the current account deficit and boost tourism and this increasingly wounded government finally will have been put out of its misery by the electorate. Recapitalised banks will be expanding their lending as they report bumper profits from the higher margin business they have been doing for the past couple of years…

Consumers will have rediscovered the wonderful bargains at charity shops and the benefits of making do. They have bought a cash ISA or two. First time buyers have returned to a more affordable housing market to snap up the bargain repos and negative equity distressed sellers. There’s a dearth of estate agents to help them out, though.

Meantime, back in the present, fasten your seatbelts say the Bank of England Inflation Report: “The near term outlook for inflation has deteriorated markedly over the past three months,” it begins. Rising prices will squeeze consumer spending and so cut growth “perhaps sharply”. Commercial property prices have fallen 16% since last summer and house prices are now falling too. Though Mr King agrees with your editor on one point on the housing market…

The ‘90s house price crash was precipitated by a doubling of interest rates he said (as a consequence of the ERM straightjacket) and a big increase in unemployment. Neither of which are present today. At least not yet. The Evening Standard reports the City is clocking up job losses at the rate of 300 a week. But are these the kind of types to linger on the rock and roll (dole) for months on end? Odds against methinks. New opportunities no doubt beckon in Dubai, Singapore and all points East. Time to follow the money.

The net net for the UK economy is the climate’s changed and we’re all affected. Or in Bank speak, the economy is “rebalancing”. It’s a process that’s going to take some time and could yet be torpedoed by Johnny Foreigner and those unwelcome “shocks from abroad”.

*** Americans should go on a diet…

They should rethink their energy policy too.

That’s the angry response from India at perceived slights from the Bush administration. Official comments appeared to lay the blame for rising food prices on India reports the International Herald Tribune.

Americans on average consume 50% more calories than Indians says Pradeep Mehta, the secretary general for the Centre for International Trade, Economics and the Environment. And if they would slim down to the weight of the average middle class Indian “many people in sub-Saharan Africa would find food on their plates.” He added money saved from the fall in liposuctions could be channelled into famine relief. Lardy Brits could no doubt chip in a bob or two on that score as well.

As to the comments, we can’t be sure but there appears to have been something lost in translation here. According to reports Bush commented in a press conference that “ when you start getting wealth, you start demanding better nutrition and better food, and so demand is high, and that causes the price to go up.” In our book that is no more than stating how it is. Basic economics.

Aggregate demand goes up; price follows it to a new place where supply can once again eyeball demand. If there was criticism in Bush’s words, it was of a subtle and coded nature which belies his plain speaking Texan reputation.

Perhaps the Indians are being a little sensitive…certainly more assertive. 300m middle class Indians is an awesome prospect. It’s the equivalent of the entire US population driving SUVs… demanding air conditioning, flat screen TVs and more calories. Their economic progress, amongst others, will prove an increasing shock to ours.

Regards,

Rob Mackrill
The Daily Reckoning

Source: Cost Shocks From Abroad 

“ Nature is rich, she is generous, she refuses to no one who will ask his share of her treasure of which she has inexhaustible reserves in the trees, in the mountains, in the sea. But one must know how to climb the tall trees, how to go into the mountains… One must know how to catch fish, and how to dive to tear loose the shellfish so firmly attached to stones at the bottom of the sea. One must know, one must be able to do things.”

— Paul Gauguin, Noa Noa

Paul Gauguin, the famous painter, moved to the South Seas in 1891. There he painted and sketched and also recorded thoughts in his journal, since published as Noa Noa, which I recently read. Among his many observations was the one quoted above. Though he is far apart from us in both time and space, I have had this thought of his in my head of late, because it applies to the current commodity boom.

The price of commodities swept higher in late February. Only two months into the year and natural gas was up 26 percent, coal up 56 percent and platinum up 41 percent. This in two months! We know there are tons of this stuff in this big ball of a planet we call home. The trouble, as Gauguin would point out, is that you have to know how to find it, get to it and dig it out. Aye, there is the rub. As global demand explodes for nature’s riches, it takes time for the market to deliver the goods.

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So, too, copper and aluminum were within striking distance of all-time highs. Believe it or not, the consensus heading into 2008 was that the unfolding global slowdown would take these metal prices lower. That certainly didn’t happen.

Some of the price rise was due to supply problems in China and South Africa. Producing these metals requires a lot of energy. Yet persistent blackouts and power issues plague producers in these countries. In any event, aluminum topped $3,000 per ton for the first time since May 2006.

Copper hit $8,500 per ton, near all-time highs, as Chinese consumption remains high. Global copper inventory covers only about three days worth of global consumption. With a market running that tight, prices remain susceptible to big spikes. Credit Suisse says copper could spike to $12,000 per ton, partly on the rising cost of sulfuric acid, which about a quarter of copper producers use to process copper ore.

But the biggest driver behind metal prices such as copper and aluminum is the huge global demand for infrastructure. Morgan Stanley estimates that emerging markets will spend $21.7 trillion on infrastructure over the next 10 years. Power plants, roads, bridges, airports…

One sleeping giant in all of this is India. I see it in ABB Ltd. (ABB: NYSE), the world’s biggest maker of electrical grids — and the world’s third largest buyer of copper. India is the fifth largest market for new orders for ABB. In the last quarter, new orders were up 42 percent in India. ABB claims its orders in India will double by 2010!

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Certainly, when you compare India’s consumption of metal on a per capita basis with that of other countries, you see enormous room for growth. (See next chart.)

This is not idle wondering. This has real merit, like mixing vodka and tomato juice. Increased metal consumption is practically a given. India desperately needs more power. (See chart below.) And India’s government will spend billions of dollars adding around 600 gigawatts of electricity by 2030:

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