In fact, in the face of a stagnant world economy unrivaled since the Great Depression, we’re now looking at an era of competitive currency devaluations – where every country tries to keep its own currency from rising too much.

Far too many investors are either unaware of these efforts, or dismiss these currency strategies as bureaucratic wrangling. But I’ve been watching this unfold for the past eight years, and have made a significant amount of money from this insight.

And there’s still a substantial profit to be made – for those who understand just what’s happening.

When Strength Leads to Weakness

Since about 2001, whenever any currency rises too much, the local manufacturers or farmers – or anyone who lives by exporting – start to scream about it. Their local governments respond by doing all they can to lower the value of that currency, having it fall in value and thus making exports cheaper – all this in the hope that the domestic economy will become better.

Pick any period so far in this young century and you’ll see that this is true. For instance, right now you see it in those countries whose currencies have soared the most in the last few months.

Let’s focus on the recent highest-flying currencies. The New Zealand dollar soared 23.6% against the U.S. dollar from mid-March through mid-June. That’s the best three-month performance for the Kiwi dollar since way back in 1971, when currencies began floating against each other.

And over 2009, as a whole so far, the strongest currency has been the South African rand, which has soared 18.3% against the dollar since Jan.1, the best performer of all the 16 major currencies. Other currencies that have been strong have been the Norwegian krone and the Canadian dollar (both
up 13% since 2009 began) and the Australian dollar (up 14.6%).

It should be no surprise that all these countries have been making noises and taking action to try to reverse that trend. Take New Zealand. This is a country that depends on exports, especially agricultural exports. Total export prices have plunged 8.2% from 2008’s last quarter to 2009’s first quarter. This is not an annualized rate, either, but a quarter-to-quarter drop. If continued at that rate, it would mean a 33% fall in export income over the year. According toFonterra Co-operative Group Ltd., the world’s largest dairy exporter, New Zealand farmers have suffered a 12% drop in milk prices over the last few weeks. The dairy industry accounts for 20% of New Zealand’s export earnings.

As The New Zealand Herald stated in an article on June 16: “That (the plunge in income for New Zealand dairy producers) explains why Reserve Bank Governor Alan Bollard (New Zealand’s counterpart to U.S. Federal Reserve Chairman Ben S. Bernanke) last week called the exchange rate rise against the U.S. dollar ‘unhelpful’ and a ‘real risk to us‘ as the country endures the deepest recession in three decades.”

The same article goes on to quote the head of the New Zealand Manufacturers and Exporters Association, John Walley: “We don’t see any green shoots in our markets both at home and abroad. And the high exchange rate is strangling any ’shoots’ that are poking their heads up.”

The New Zealand monetary authorities are doing all they can do cheapen their dollar. That includes slashing interest rates to just 2.5%, which is a shock to those of us who remember Kiwi interest rates as being the highest in the world. They are printing money and talking about actively intervening in the currency markets to sell their dollar short. New Zealand’s finance minister, Bill English, just came right out and said that his government would prefer a weaker currency.

I could go on and on. The Australian treasury secretary, Ken Henry, just announced, in language as radical as finance ministers usually get: “If today’s high exchange rates continue, that would imply downside risk to the economy.”

However, I don’t sense as grave concern at the rise of the Aussie dollar as I do with the people of New Zealand about their currency. Thus, it would not surprise me to see the Kiwi fall versus the Aussie, or, put another way, the Aussie falling less than the Kiwi.

Additional Global Currency Concerns

Moving on to Canada, we see that its central bank just announced that the  ”unprecedentedly rapid rise” of the Canadian dollar may “fully offset” any hope for economic recovery.

South Africa’s central bank has just announced that it has a policy of buying U.S. dollars in order to cheapen the rand. That country’s version of Bernanke, Tito Mboweni, said that although he used to be against intervention in the currency markets, the soaring South African rand has caused him to change his mind.

You can see why. Exports and domestic retail sales are plunging due to the high value of the rand. South Africa’s unemployment rate is now 23.5%, the highest of all 61 countries tracked by Bloomberg. Interest rates have been slashed this year from 7.5% to the current 4.5%, but this is not enough for the Union of Metalworkers, which has threatened to strike if interest rates are not cut more.

Finally, let’s look at Norway. Here is a European country, yet it does not use the euro, preferring instead to keep its own currency. This currency has risen by 13% so far this year against both the euro and the U.S. dollar. So are they happy about it in Oslo? Not very.

The strong currency has hit demand for Norway’s exports hard. In response to this, companies have cut staff, which in turn cuts domestic demand. Also, big companies laying people off is a very un-Norwegian thing to do. The world’s second-largest newsprint maker, Norske Skogindistrier ASA just announced job cutbacks. This has been something of a shock, even though the decline of newspapers should have been a warning. Newspapers just don’t want to pay higher prices for newsprint when the currency these products are denominated in has risen so much this year.

Norwegian Prime Minister Jens Stoltenberg, up for re-election this September, has said that supporting the labor market through this crisis – Norway’s first recession in more than 20 years (the last one coming when oil prices plunged back in the 1980s) – is his very top priority. He has pledged whatever money it takes to try to stimulate spending. And though, as far as I know, no one has publicly said that they want a lower krone, the central bank has cut interest rates fully seven times in the last eight months. It is now down to 1.25%, and stands ready to go lower.

One thing that’s important to remember: This is just a snapshot of those currencies that find themselves the strongest risers so far this year. At any given time in the last few years, whichever currencies have been strongest have screamed about their plight.

A year ago, for instance, with a euro at $1.60, Germany – a huge exporting country – basically said it wanted a cheaper euro. It got what it was seeking: The euro fell to $1.23 within months, but is now drifting back up. The United Kingdom wanted its high-flying pound – then at $2.10 – to fall to boost domestic and foreign demand for its goods. It got its wish: Within months the pound had plunged to $1.45. And on it has gone for a few years now.

A few years ago, Americans were angry that the Chinese had such a cheap currency and forced it to float. In the four years since that happened, China’s yuan has risen about 24% against the dollar and you don’t hear so many American threats. (Of course, this could also be because China owns so much U.S debt and America does not want to antagonize its largest lender).

Source: Global Currency Wars Reveal the World’s Best Money Plays

[Editor's Note: Part I of two installments. Look for Part II tomorrow.]

Good day… Hopefully this will reach everyone today. We have been having some computer problems causing some major delays in the delivery of your Pfennig. As Chuck always says, if you need your Pfennig, just go to www.dailypfennig.com where it is posted each morning as soon as I hit the send button. For those of you who feel the need, the website also has an archive, so you can all read what I had to say yesterday. But enough about our email problems, you all want to know what is happening in the markets.

The dollar began the day trading in a fairly tight range, but a fairly large jump in US consumer confidence sent the US$ tumbling. Yes, the old ‘opposite’ trading pattern has begun again. When we have good news regarding the US and global economies, the US$ gets sold. But when the data is bad, the dollar is purchased as a safe haven. Yesterday both pieces of data released in the US were more positive than most economists expected, so the dollar gave back some of its recent ’safe haven’ gains.

The currencies ended up with their best day in a week vs. the US$, as the commodity currencies of New Zealand, Australia, Norway, South Africa, and Canada led the way higher. Even the Mexican peso, which has been beat down as of late was able to claw back a 1% gain vs. the US$. Only the Japanese yen moved lower, (I wrote a few paragraphs on the my feeling regarding the yen in yesterday’s Pfennig which most of you probably missed).

A positive consumer confidence number has convinced traders that the US consumer is becoming optimistic again. It is believed that these higher confidence numbers will carry over to increased retail sales and a bottoming of the global recession. Yesterday’s consumer confidence numbers surprised even the most optimistic economists, coming in at a five month high of 39.2. The report paralleled figures from public opinion polls which have been indicating US consumers are feeling better about the economy, and the prospect of new jobs. A drop in mortgage rates and the bounce in equity markets during the month of March certainly helped to boost consumers feelings. But many (including myself) think the equity market bounce is probably a ’suckers rally’, and unemployment is nowhere near bottoming in the US. Not that I want to throw water on the US consumers new found confidence, but I think we will likely see reality set back in and confidence move back down in mid summer.

The other piece of data released yesterday showed housing prices declined at a slower rate in February than in the first month of 2009. The decline slowed to 18.63% from an adjusted 19% in January. The headlines mostly reported that the decline in home price slowed in February for the first time since 2007. Yes, we did see slowdown in the decline, but should we really be celebrating an 18.63% drop in housing prices? I think the optimists are being a bit too optimistic, as unemployment will continue to climb, keeping buyers from qualifying for new home loans. Unlike many in the popular media, I don’t see where we have hit a bottom in the housing market yet, and don’t expect us to find that bottom until late this year. Until then, the US economy will continue to struggle.

Kristin Kuchem, who made my day by bringing me a latte yesterday morning (THANKS KRISTIN!!), sent me the following quote regarding the housing data: “The number of vacant homes — including foreclosures, properties for sale and vacation properties — jumped to a record 19.1 million in the first quarter as the recession sapped demand for real estate, the U.S. Census Bureau said in a report Monday. The number of homes that stood unoccupied rose from 18.6 million a year earlier. The U.S. financial crisis and falling prices have shattered the confidence of homebuyers. The percentage of people who said they plan to buy a home in the next six months dropped to a 26-year low in March, according to the Conference Board in New York, Bloomberg reported.” Hardly a sign that the housing market has bottomed!

Data released later today will give us a picture of how the US economy did over the first quarter. 1st quarter US GDP is scheduled to be released later this morning, and is expected to show the economy plunged close to 5%. This would be better than the 6.3% contraction in the last three months of 2008, so I expect the media to spin it just like they did with the housing data yesterday. We will hear all about how the US economic slowdown is turning, and we will undoubtedly hear several predictions of a rebound by the end of 2009. But with another negative GDP number in the 1st quarter, the recession which began in December 2007 will be the longest since the Great Depression. And not to sound overly negative (which I seem today) but the employment data scheduled for release tomorrow morning will likely show further deterioration in the US job market – not a good sign for the near term future of the US economy.

One piece of data which would lend support to these predictions of a rebound is the personal consumption figure which will also be released this morning. Consumption is predicted to show a slight rebound during the first quarter, after dropping at an average of 4.1% in the last half of 2008. Consumption probably ticked up as mortgage rates and gasoline prices fell. US consumers were obviously in a positive mood during the first quarter, but will their optimism continue?

Later today the FOMC will be releasing their rate decision. Economists expect the US central bank to announce a move down of just .125% in the benchmark rate. But the Fed will have to walk a fine line with the accompanying announcement. They will want to try and relay confidence in the rebound of the US economy, but if they sound too positive, they could push up longer term inflation expectations. Bond traders are still nervous (as they should be) about all of the money supply the Fed has pushed out into the markets. If the Fed makes a case that the economy is starting to recover, bond yields will likely jump up as investors increase inflation expectations. This increase in rates is exactly what the FOMC wants to avoid, as they have been buying US Treasuries in an attempt to keep rates down.

The Fed surprised the markets in March by stating that it would buy longer-term Treasuries as part of their ‘quantitative easing’. The Fed’s purchase of mortgage backed securities has been credited with helping to manufacture another mortgage refinance boom, and hopefully beginning a rebound in the US housing market. But I don’t expect the Fed to drop any additional bombshells with today’s announcement. In fact, they will likely be happy to just have their announcement be a non event, as the markets seem to be moving in their desired direction.

The Euro bounced up a full 2 cents vs the US$ overnight, benefitting from the general sell off of the US$ and a bounce in European confidence. The stimulus spending by European governments, along with slowing inflation, have boosted the mood of Europeans. An index of executive and consumer sentiment rose for the first time in nearly a year, the EC reported this morning. Another report showed European retail sales declined the least in 11 months in April. European consumer spending has been resilient in the first quarter and is definitely being helped by government stimulus.

Finally, a report released by the German Economy Ministry predicted the German economy will return to growth in 2010, helped by fiscal stimulus spending. The report also predicted the German economy would contract by 6% this year, much more than the previous estimates. The Ministry is predicting a global recovery beginning at the end of 2009, which they say will help propel the Eurozone back out of recession in 2010.

The Mexican Peso gained slightly as the concerns over a global swine flu pandemic eased. Many now believe the swine flu will be contained in the next few weeks as governments across the globes have aggressively moved to stop the spread. But health officials in the US say the swine flu is likely to rear its head again this fall/winter which is the traditional flu season. Tourism to Mexico isn’t likely to recover quickly, as many vacationers have canceled plans and aren’t likely to change them again. I wouldn’t look for a sustained rally for the Mexican pesos, and wouldn’t suggest speculation in this currency.

As I stated in the opening section, both the Australian and New Zealand dollars rose overnight, ending two days of losses. Both currencies have moved back up fairly close to the levels they were trading at prior to the swine flu scare. While I would expect the Aussie dollar to hold on to these recent gains, the New Zealand dollar could be subject to additional selling pressures. New Zealand central bank Governor Alan Bollard will probably decide to cut rates by 50 basis points on Thursday, narrowing the interest rate differential of the kiwi vs. the US$ and euro.

Gold has moved back up along with all of the currencies, approaching the $900 level again. As I stated yesterday, these moves lower by the precious metals are, in my opinion, nothing more than excellent buying opportunities. Once the global recovery begins, inflation will spike and the price of these metals will likely spike up with it.

Running a bit long today, so I’ll end it there.

Currencies today 4/29/09: A$ .7196, kiwi .5703, C$ .8308, euro 1.3263, sterling 1.4751, Swiss .8798, rand 8.5424, krone 6.5851, SEK 8.1015, forint 218.14, zloty 3.3336, koruna 20.14, yen 96.88, sing 1.4856, HKD 7.7504, INR 50.09, China 6.8245, pesos 13.71, BRL 2.1846, dollar index 84.528, Oil $50.74, Silver $12.62, and Gold… $899.22

Hope everyone has a wonderful Wednesday!!

Source: Dollar Falls as U.S. Consumer Confidence Increases

Good day…It was actually a Great day for the currencies yesterday as the dollar index dropped another full point. The Euro moved past $1.35 and then blew through $1.36 to end the day over $1.37. And the Euro wasn’t even the best performer, as the New Zealand dollar rallied over 2.1% vs. the US$ to take the title of best performing currency against the greenback. The South African rand was the only currency turning in a negative performance yesterday with the other commodity driven currencies of Norway and Brazil just barely holding their ground vs. the US$.

The currency rally caught Chuck’s eye and he fired off the following email for me to include this morning:

“Quite a day in the currencies again… Looks like that Santa Rally for the currencies that I first mentioned on December 8th, is coming to fruition. Of course “I didn’t know this would happen” I was just giving market commentary on what looked like was happening!

So… 1.37 and change for the euro, the move from 1.27 and change has been swift and fast. And why not? I’ve said all along that the dollar’s rally was just a bear market rally. Now, we’ll have to see if this can continue, which I believe it will, or if this was just a false dawn.

Well… It’s Christmas time, so the giving is going on… And it looks like we’ll see the Gov’t “give” more once the calendar turns to 2009. What was once a $150-200 Billion stimulus package that would be sent through in January when the new lawmakers take their oath, now looks as though it will be in the neighborhood of $600 Billion, that is according to Nancy Pelosi who made that announcement yesterday. Shoot Rudy! What’s another $400 Billion among friends?

By my calculations, that will put us nearer to $3 Trillion in bailouts and stimulus packages… There’s a total of over $8.5 Trillion that has been allocated with funding facilities, but the actual output of cash is around $2.5 Trillion before the next deal in January gets done.

No wonder the dollar is getting pummeled once again!

I did a 1 hour interview yesterday… It was a “the world according to Chuck” interview… Long time readers all down about what I probably had to say, but it was cool getting to go “free form” and just let it all hang out. I will go to my darling daughter’s (Dawn) kindergarten classroom tomorrow and read to them… Dawn has always been a fan of the way I read, The Night Before Christmas… And her kids always get a kick out me doing this, most of them think I AM Santa Claus!”

Chuck loves the holidays, and I think reading to the kindergarten class is one of his favorite parts!

Today the markets will be awaiting the FOMC rate decision and the accompanying statement which should be released around 1:15 CST. As I stated yesterday, a cut of 50 basis points is already cooked in, but noise from the street indicates we could actually see a 75 basis point cut. The market is currently trading Fed Funds at .125%, so a drop of 75 basis points would move the target very close to where the market is trading. But as we have said in past Pfennigs, the FOMC has almost used up all of their interest rate ammunition, and will have to look for other ways to try and steer our economy out of the recession. The markets will be looking at the accompanying statement for any guidance as to the direction the FOMC will take next. ‘Quantitative Easing’ will be the big buzz words of the next few weeks. We will just have to wait and see just how creative our Fed is going to get.

The Fed will start to use its balance sheet as the key tool for monetary policy. Since he can’t cut rates much further, Ben Bernanke will likely start channeling credit directly to businesses and consumers by further enlarging its $2.26 trillion of assets. Bernanke and his compatriots will have to try some new experiments to manipulate the supply of money to try and prevent the worst recession in a quarter century from turning into a depression.

The data released yesterday continued to indicate the US economy is faltering, as the Empire manufacturing and Industrial Production numbers showed pretty large losses. Industrial Production decreased by .6% during November, as US manufacturing output continues to fall. Production has now decreased 7 out of the last 11 months, and the more important Capacity Utilization number also fell. We won’t be seeing the manufacturing sector pull us out of this recession any time soon, as the utilization number shows we are only using 75% of our manufacturing capabilities.

The manufacturing numbers were bad, but these negative numbers were largely expected. The surprise of the day came as the Net Long-term TIC flows for October were released. TIC flows were expected to be right around $40 billion, just slightly below what is necessary for us to fund our deficits. But the actual TIC flows were barely positive at just $1.5 billion. Could the rest of the world finally be tiring of our US Treasuries? Actually, foreigners continued to purchase treasuries, but sold a record amount of debt issued by mortgage-finance companies Fannie Mae (FNM) and Freddie Mac (FRE)  and other agencies, offsetting the treasury purchases.

So investors were shortening up the duration of the US$ holdings, selling longer term securities to buy short term treasuries. This has to have the Fed shaking in their boots, as no investor buys short term paper at near zero rates with a plan to hold them. This money is being parked short term, and will move out of the dollar as soon as the markets start to calm down. China remained the biggest foreign holder of US Treasuries, after its holdings rose by $65.9 billion to nearly $653 billion. Japan is the second largest holder with nearly $586 billion of US debt.

For those of you who may be wondering why the TIC data is so important, this is how we finance our deficits. As Chuck reported last week, the US trade gap unexpectedly widened 1.1 percent in October to $57.2 billion. Yesterday’s numbers show we only were able to attract $1.5 billion of foreign capital to finance this gap. So the remaining balance had to be financed with additional debt. It seems we just keep digging the hole deeper and deeper!!

The Euro was helped out by ECB President Trichet who indicated he would pause interest rate cuts in 2009. Trichet told journalists in Frankfurt that ECB policy makers want to “concentrate at this stage on getting what we already decided to be really operational.” He went on to say there is a limit to how far the bank can cut rates. “Do we have a feeling there is a limit to the decrease in rates? At this stage certainly yes.” Sounds like the ECB doesn’t want to follow the US into the zero interest rate environment. Maybe Trichet and his colleagues realize just how dangerous a zero rate policy can be with regard to future inflation.

Data released this morning caused the euro to back off its high of $1.3737 as reports showed European manufacturing and service industries contracted at the fastest pace in at least a decade. These reports showed the Eurozone faces some of the same challenges as the US, but in my opinion, their central bank has done a better job of dealing with the slowdown. With the FOMC cutting rates today, and the ECB indicating that they are going to pause, the Euro will likely continue to gain back some of the losses of the past 6 months.

The Australia and New Zealand dollars both rose for a second day on interest rate differentials. The Australian dollar extended gains after the central bank indicated it would slow the pace of further rate cuts. The Reserve Bank of Australia trimmed its forecast for inflation to 2.5 percent from a November prediction of 3 percent. Policy makers have a target range of 2 and 3 percent for Aussie inflation. With inflation in their target range and a simulative monetary policy, the RBA doesn’t need to do much more with rates. Commodity prices have hurt both the AUD and NZD, and any increase in commodity prices during 2009 would have a big positive impact on both these currencies.

Any hope for commodity prices will center around the rebound of the Chinese economy. China’s central bank Governor Zhou Ziaochuan continues to call for aggressive action to keep China’s growth rate from dropping below 8%. The Chinese govt. pledged last week to boost liquidity after cutting interest rates last month by the most in 11 years to spur lending and consumption. China’s economy has slowed, but will likely grow at 6 percent during 2009. This is still an excellent growth rate for the world’s fourth largest economy, but below the 8% rate many believe is necessary to avoid social instability.

Currencies today 12/16/08: A$ .6694, kiwi .5589, C$ .8102, euro 1.3659, sterling 1.5246, Swiss .8661, ISK 218, rand 10.3118 krone 6.9629, SEK 8.0583, forint 195.84, zloty 2.9716, koruna 19.319, yen 90.01, baht 34.78, sing 1.4781, HKD 7.7502, INR 47.91, China 6.8457, pesos 13.3631, BRL 2.39, dollar index 82.16, Oil $45.02, Silver $10.49, and Gold… $832.77

Source: Santa Rally for the Currencies

If you’re looking for what stocks to buy, you have over 13,000 publicly traded stocks to choose from right now.

That’s a lot to weed through and it significantly drops your odds of choosing a winner. Even the best of stock pickers don’t always screen for the exact combination of things that you would look for in a stock.

However, in the currency world, there are only eight major currencies: U.S. dollar, euro, British pound, Japanese yen, Swiss franc, Canadian dollar, Australian dollar and the New Zealand dollar. So this makes about seven major pairs when paired against the U.S. dollar.

If you’re trading in the FX market, you could technically also pair these currencies with other currencies besides the U.S. dollar. But even then, you only have 15-30 pairs to choose from – compared to over 13,000 stocks.

In other words, you don’t have to watch thousands of currency pairs, because the pairs are such “macro” instruments.

This makes things simpler. All you have to do is pay attention to the most important data that comes out each day on those eight currencies. The economic announcements for a country can easily be found on an economic calendar at www.dailyfx.com or www.forexfactory.com.

Source: Why Currencies Are Easier to Trade Than Stocks

Good day… And a Terrific Tuesday to you! I hope your three-day Holiday Weekend plans went well, and you had a grand time… The weather people told us all week that Saturday and Sunday would be sunny and 80, and that Monday we could expect rain. We got rain Saturday and Sunday, while Monday was the “pick” day… Figures, eh? We put men on the moon using slide rulers, and can’t forecast the weather.

OK… Friday was a “get out of town” day for many, and the currencies were left “for another day”, which is to say… We traded within a very tight range. Yesterday, I checked what was going on, as the United States and the United Kingdom were both on Holiday. Talk about thin markets! Anyway, I checked and it looked as though the dollar was drifting lower most of the day, only to see a reversal this morning as London returned. I don’t know what’s on their minds, buying dollars… But that’s what’s happening as I write.

One currency bucking the bias to buy dollars right now is the New Zealand dollar/kiwi (NZD), which had taken a backseat to the Aussie dollar (AUD) in recent times. New Zealand has seen some better data lately that has helped kiwi to higher levels. The recent business survey was mixed, but had more “good things” than bad things. This has left some traders believing the Reserve Bank of New Zealand (RBNZ) will have to delay their first rate cut in years.

To me, I think there are too many questions hanging over New Zealand like the Sword of Damocles to outweigh the high yield offered by kiwi. The RBNZ next meets on June 5th… That will be a very important meeting, and I personally would hold off with any kiwi purchases until you know more from the June 5th meeting.

The euro (EUR) hit 1.5820 overnight in Asian trading, but has seen that move erased during the London trading session… As I said above, I don’t know what the Londoners know that the Asians don’t with regard to euros… But, they certainly have a bias to buy dollars this morning!

Inflation in the Eurozone is really making things difficult for European Central Bank (ECB) President, Trichet. Oil prices have been the main culprit here, but that’s what Trichet was forecasting as he led the ECB to raising rates, while the United States was slowing down. Those weren’t popular rate hikes, except with me, and anyone else that loves to see a central bank provide price stability.

However, now the ECB and Trichet are to the cheese that binds. The Eurozone economic growth is slowing down, and inflation is still rising… What to do, what to do? I’ll tell you what I would do if I were in Trichet’s shoes… I would turn the money supply spigot to “Off” and hike rates again! Want to nip inflation at the heels? Or do you want to take a huge bite at inflation? Doing just one of those things, nips inflation at the heels… Doing both, takes a huge bite out of inflation, and that’s what is needed here!

Brazil is experiencing some of the same problems as Australia… And it would behoove Brazilian officials to talk to Australian officials for some help in dealing with a rising current account deficit, while the trade surplus increases. Yes, this is a strange bird… But when you have a strong domestic economy, and a rising currency, you see imports grow, which eats at the trade surplus, but when you take in investments the current account takes on water.

OK… We’re not talking billions here… $1.5 billion is the Brazilian current account deficit, but, as I said, they’ll want to nip this in the bud before they start having problems with the current account like New Zealand has!

Speaking of current account problems… The U.S. has a colossal problem there… And its biggest drag comes from the trade deficit. There are a couple of things to think about regarding the trade deficit in the United States. First and foremost is that with the weak dollar it has “narrowed”… However, oil has not allowed the weak dollar to really work on the trade deficit, as oil’s part of the deficit soars. Which brings me to another reason why I believe the dollar will continue to weaken in 2008.

And that is… Drum roll please… Protectionism… As I’ve explained many times in the past, the currency markets do not like any form of protectionism, and a country that puts protectionism in place usually sees the currency suffer. So, think about this for a minute… We have an election process going on in the United States that will come to a head in November, which is six months away. During that six months there will be candidates taking shots at OPEC and China (the two main “outside” culprits of the trade deficit… But we would never go after the U.S. consumer and tell him to save instead of spend now would we?). So, anyway… I see the candidates taking shots at these two “outside” culprits of the trade deficit, which will bring about thoughts of protectionism.

My friend, David Galland, has an excellent newsletter (he actually has a hand in many newsletters!) and on Saturday, he sent me a note with some great figures on oil for U.S. consumers. Let’s look at what David had to say…

“As we head into the Memorial Day weekend, Tom Kloza, chief oil analyst at the Oil Price Information Service, toted up the cost: ‘It looks as though we’ll pay about $1.5 billion to $1.6 billion each day during the four-day Memorial Day weekend, and that adds up to $6 billion to $6.4 billion in U.S. motor fuel expense,’ he said. ‘That compares with about $2 billion for the total Memorial Day weekend six years ago.’

“With consumers paying about $1 billion more each day for gasoline than they did six years ago, Kloza said, ‘You really wonder how much the U.S. consumer can take.’ And he added that the ‘more insidious increases are in the diesel segment… A back-of-the-envelope extrapolation would put diesel and heating-oil costs at about $807 million per day currently vs. about $217 million six years ago.”

“Net result: ‘We are seeing numerous bankruptcies among small and mid-sized trucking firms with more to come,’ Kloza forecast grimly.”

You can sign up for David’s daily letter here.

OK… This week the data cupboard will yield lots of home data, with the S&P Case/Shiller Home Prices data, and New Home Sales data today. Tomorrow we get Durable Goods. Thursday will see Personal Consumption, and on Friday, we’ll see two of my faves… Personal Income and Spending.

It’s a short week, and that’s fine with me! I’ve said it before and I’ll say it again… I love three-day weekends!

Before we head to the Big Finish… I want to tell you about Addison Wiggin’s new book. Addison has revised his Best Seller, Demise of the Dollar. Yours Truly wrote the foreword to the book, so that alone is worth the going price! Here’s a link you can click to find out more about the book and how to order one.

Good day… And a Tub Thumpin’ Thursday to you! Well… It’s the third day of the show today and I’m beginning to hit the wall. I’m draggin’ the line, as Tommy James used to sing. The people here at the show have been great, stopping by to see how I’m doing, and so on. We had a great Town Hall Meeting for EverBankers yesterday, and today, I finish up my duties here, as I am the moderator of a panel this morning.

The currencies remained in a tight range with a bias to sell dollars yesterday and in the overnight markets. The euro (EUR) received a boost when Eurozone GDP printed stronger than expected, coming in at +0.7 or 2.2% annual. At the same time Eurozone inflation was reported to register a 0.3% increase or 3.3% annual. These reports will ease some of the pressure on the European Central Bank (ECB) to call off the dogs – (interest rate hikes).

I was talking during the Town Hall Meeting yesterday, and emphasized to anyone listening to me that a central bank that is willing to stick to its guns, and fight inflation to provide price stability is the kind of central bank you want the currency you own to have! There’s no two ways about it folks. Inflation is a baaaaaaaaaddddddd thing… And I believe we will all rue the day that the Fed turned its back on inflation here in the United States. But Hey! That’s just me! Don’t let me get in the way of a “feel good” party.

The New Zealand dollar (NZD) received a smack in the face overnight as they printed an extremely weak first quarter retail sales report. Retail sales in the first quarter fell 1.2%, six times worse than the forecast for a negative 0.2% (see how I used that new math to figure that one out?) I think this could mean a sea change in New Zealand interest rates by this summer. This has worked for the Reserve Bank of New Zealand (RBNZ). They had tremendous growth and inflation that the RBNZ fought with aggressive rate hikes… Now, the growth is slowing and inflation might soon follow, which would indicate to me that the RBNZ could be easing rates by the end of this summer. That won’t be a good thing for kiwi, as its strength is derived mostly from the high interest rate it sports.

In Japan, March Machine Orders printed worse than expected at a negative 8.3%… But, a funny thing has happened on the way to the forum lately for yen (JPY). As has become the norm lately, yen simply ignores the data and has its fortunes decided by carry trades, which in last night’s case, showed carry trades being unwound. So, that means that yen gets some lovin’ today.

This data update can get a little boring so stick with me here as we’re almost to the end…

U.S. industrial production printed much worse than expected this morning… Production for April fell -0.7% (versus -0.3% forecast), and the prior report was revised lower from +0.3% to +0.2%. The declines were broad based, with auto production collapsing -8.2%! This print was so bad that a look back to see if we’ve had anything like this before shows me that since 1990, worse prints than this one have only occurred around Katrina, the start of the Iraq War, and during the 1990 recession.

So… Doesn’t it look more and more everyday that I was bang on with my call that we’re in a recession now?

And then finally… The TICs data… You know, the net foreign security purchases that are used to finance our current account deficit… As I’ve been explaining to people for months now, the United States has experienced a shortfall when it comes to the financing of its deficit, which requires about $80-85 billion per month in foreign investment in U.S. assets. To relieve that shortfall, the government has chosen the lesser of two evils by allowing a debasement of the dollar, which is used to purchase the assets at a discount, rather than aggressively raising interest rates.

This move has paid off, at least for March (remember that’s when the euro was knocking on the door to 1.60). The total for the TICs in March reached $80.4 billion, up from the nearly $65 billion attracted in February. The trick here is to keep the dollar weak to allow the deficit to continue to be financed! I love it when a plan comes together!

So… Gold has finally caught some wind in its sails. Gold has gained almost $16 today. My friend, and writer extraordinaire, David Galland wrote a piece on gold that was featured here in The Daily Reckoning a few days ago, and he’s soooooooo good that I thought I would treat you with a snippet of his thoughts on gold…

“The current correction is not yet exceptional: Since the current bull market began in earnest in 2001, there have been 9 corrections in excess of 8%.

“During the three worst pullbacks, gold fell 15.98%, 18.27%, and 27.7%, respectively. And the average of those corrections is 13.6%, so the latest, which touched 18% at its worst, is only marginally worse than average.

“Put another way, for the current pullback to match the sharpest correction to date, a drop of 27.7%, gold would have to fall to about $730. Could it happen, again? Sure, why not?

“And if it does, rest assured that, just as they did when gold moved down by that percentage in May of 2006 – falling from $725 to $567 – analysts will line up to say that the back of the gold bull has been broken. But if you had listened to the naysayers back then and bailed out at the bottom of that correction, you would have missed a rebound of close to 100%.

“I mention this to stress that the fits and starts we are currently experiencing are nothing unusual. Quite the opposite, they’re the norm for any sustained bull market. In the 1970s’ sustained gold bull market, a similar pattern occurred.”

Time to head to the Big Finish… Thanks to David Galland for his thoughts on gold! Be sure to check out his full article here.

Currencies today 5/15/08: A$ .9370, kiwi .7575, C$ .9990, euro 1.5480, sterling 1.9445, Swiss .9490, ISK 77.70, rand 7.6075, krone 5.0760, SEK 6.02, forint 161.20, zloty 2.19, koruna 16.19, yen 104.70, baht 32.35, sing 1.3775, HKD 7.80, INR 42.59, China 6.9940, pesos 10.49, BRL 1.66, dollar index 73.21, Oil $126, Silver $16.93, and Gold… $883.10

That’s it for today… Can’t wait to get home and off my feet! I hear that my little buddy Alex didn’t fare too well in his baseball game last night… Tough night at the plate… That’s OK, there’s always the next game! An old Mark Twain Bank colleague dropped by the booth to say hi and catch up yesterday. It was good to see Mark Elmore again! Mark was our assistant back “in the day”, and now he’s doing quite well trading bonds, so I like to think that I taught him well! HA! I’ve gotta get out of this place… If it’s the last thing I ever do! Can’t wait to get out of here, this place is just too spread out for me! So… Let’s get the last day of the Show over with, and I hope you have a Tub Thumpin’ Thursday!

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Source: I Love it When a Plan Comes Together!