Isn’t that a scary thought?

Just a couple of days after Obama touched down in Washington, China makes a very American decree. It’s telling its banks it had better shore up their capital situations or face strong sanctions from the government.

They say imitation is the sincerest form of flattery. America did it first, now the communists are following.

In case you missed the news over the past year or so, China’s economy is flat-out soaring ahead. While no figure that disseminates from Beijing is ever trusted, most analysts believe the country’s GDP is growing by a rate of 7% or so. Some even say it has eclipsed the 10% mark.

Just like here in the States, very little of that growth is organic. China’s government is just as fond of manipulating natural market forces as our friends inside the beltway.

And, of course, anytime the government gets involved, some unnatural and unexpected economic reverberations will be felt.

Just as their American brethren did over the past decade, China’s banks are taking advantage of a fixed currency and an optimal lending environment by sending all the money they can dig from the couch cushions into the streets of China.

As the economy grows, the leverage on their books multiplies. Like we learned just 13 months ago, the situation will eventually collapse under its own weight.

That’s why Beijing has stepped in and told the banks that they had better save some money for their backup coffers… or else.

This is bad, bad news for a country surviving on borrowed money (no, not us… this time). China’s economy has been artificially inflated by the government’s cash infusions. But now the leadership is starting to pull back, realizing enough is enough.

Continuing with Friday’s lead, this proves natural market forces are still alive and well. Better yet, it proves China is in for some bumpy traveling.

If you would have asked me early last week about China’s economic health, I would have told you I like what I see. But then something odd happened.

Obama visited. And it’s been downhill ever since.

*** I love it when the markets make a mistake. After some positive economic data from the consumer front this morning, the equities market put in quite a showing today. In fact, even the ultra-bearish natural gas sector followed the crowd of bulls today.

It has created another fantastic buying opportunity. Natural gas prices climbed by less than one percent, but much of the sector is up by two or even three times that figure. Investors mistakenly got caught up in the rally.

Over the next few days they are going to pay for it.

Late last week, we locked in gains of 400% thanks to the natural gas market’s recent selloff. Thanks to today’s action, investors that make their move now have yet another shot at triple-digit gains.

To find out how, read my updated report.

This is going to be a fun week for the energy markets.

*** Let’s face it, the dollar is in trouble. But so is the sun at the center of our solar system. The big question is which will implode first. Now that the dollar has slowed its decline, the race may be tighter than you think.

The dollar will eventually be tossed aside, but will it happen in the next million years?

Here’s a bit of what I told Contrarian Profit readers this afternoon:

“Is the drop in the dollar worth watching? Just like the sun will eventually shine its last ray of light, the mighty dollar will someday buy its last barrel of oil or its final container of Chinese imports.

“We all know it is going to happen, so why bother discussing it. Right?

“There is no doubt the world’s currency of choice has more pressure stacked against it than ever before. But even with $12 trillion in debt and nearly a trillion of annual interest payments due within the next decade, the greenback is still stronger than it was just sixteen months ago.

“While so many of us are betting against the dollar and calling for its demise, plenty more investors are using it as a security net, buying American treasuries to protect themselves in case the bottom really falls out.

“With the sun someday going to fade, I could sit in my basement and wait for the big day to come, or I could live my life without worry.

“It’s the same thing with the dollar. We could bet against the greenback and profit as it drops, or we could forget about the minimal return potential and keep our eyes looking forward, where the real money is at.

“Here’s the scoop. The dollar is likely to fade, at most, six percent below today’s value against the Euro. That’s major erosion for such a massively distributed currency, but six percent over a few years doesn’t stack up to a hill of beans in the grand scheme of things.

“I can list a couple of dozen stocks that are up by twice that figure today alone.

“No doubt, you should pay attention to the dollar, as a six-percent decay in the value of the world’s most important currency will change all sorts of valuations. But don’t invest in the cause, invest in the effect.” Keep reading here.

The dollar is going to fall, but you and I may not live long enough to get rich off the move. The smart money is looking somewhere else. I say we follow.

The Dow rose again yesterday – up 44 points. Gold went up too – to a new record of $1,114.

Can anything stop stocks and gold?

Trees do not grow to the sky, dear reader. And for every bounce there is a bust.

“It’s amazing, the US is doing everything that Japan did wrong,” said a friend yesterday.

Let’s see… in the 1980s Japan’s corporate leaders thought they were going to take over the world. Investors thought so too. They expanded. They wheeled. They dealed. Prices shot up and they all thought they were geniuses.

In the ‘80s, everyone wanted to be Japanese. Management consultants used Japanese words to describe commonplace insights.

For example, instead of saying that businesses always need to try to do things better, they referred to “kaizen” as if it were the secret of success.

And US economists urged the Reagan Administration to have an “industrial policy” – because that was what Japan had.

Japanese businesses were the envy of the world. Japan was the world’s second largest economy. But in growth and stock prices it was Numero Uno.

It turned out, as it always does, that Japan did not have the secret to everlasting success. Instead, what it had was what comes before a fall.

Click here to read the rest of Mr. Bonner’s article.

“The Chicago Fed’s national activity index,” notes our macro adviser and fellow data dork Rob Parenteau, “continues to point to a second-half 2009 real GDP recovery. With the September release, investors focused on the index — a composite of more than 80 monthly indicators that provides a reasonably good proxy for real GDP momentum — slipping to -0.9 from -0.46 the month before. We have never seen this index climb consistently straight up after a recession month after month, and this decline is well within the range of monthly variation we tend to observe in this series.

“To be sure, growth above the long-term real GDP trend is not signaled until this index crosses the zero threshold. Typically, it takes until year two of a recovery to get there. Right now, all we are shooting for is growth, rather than recession. As displayed below, year-over-year growth at a 1.5-2% real GDP pace is within reach by year-end, given the sharp V-shaped recovery in the Chicago Fed index to date. We believe this will be sufficient to bring actual inventory accumulation into view in Q1, which can carry the economy in to midyear 2010 or so, at which point the unwinding of the fiscal stimulus becomes more of an issue.

“We continue to believe that is much more of a second-half 2010 concern, when the fiscal tide starts to go out, revealing a U.S. private sector that will still be leery of adding to its existing debt and will still be very keen on keeping spending growth below income growth.”

Source: We’re Back to Growth… For Now

Still, this is the fourth consecutive official drop in GDP — the longest U.S. economic losing streak since records began in 1947. The economy has contracted 3.8% since then, the deepest pullback since the Great Depression.

Paging through the fine print, there’s only one outlier — one segment of blockbuster growth while the rest of the economy muddles through, at best: federal government spending, up 11.4%.

“In some ways, the whole GDP discussion is irrelevant,” says Chris Mayer. “As investors, we care about markets, and not GDP growth. There is a great fallacy out there that if the economy does well, stocks should do well (or if the economy does poorly, stocks should do poorly). Hence, too many so-called investors waste an inordinate amount of time talking about recovery, or lack thereof.

“It’s possible that GDP does expand strongly. But investors could still lose. We have one glaring historical example: From 1964-1981, GDP grew 370%. And the sales of the Fortune 500 more than sextupled. Yet the Dow Jones industrial average went from 874 on Dec. 31, 1964, to 875 on Dec. 31, 1981.

“As Warren Buffett once wrote: ‘Now, I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.’

“For investors, it is all about the price paid. The really relevant question is not one of whether or not the economic recovery is real. The question is are stocks cheap enough? To answer that, you have to look at stocks and compare them with the alternatives.

“My answer is some stocks are cheap and some are not. It is hard to generalize. In my view, investing is a craft of the specific. It is in the picking of the trees in which investing skills pay off the most, not in assessing the forest. There are, undoubtedly, specific stocks that will prove nice investments over the next few years. Finding them is what we are all about.”

Source: US GDP is Irrelevant

I was in Manhattan last week attending Grant’s Fall Investment Conference. The U.N. General Assembly is meeting there, and the streets were blocked off in places. The NYPD was out in full force. I heard one passerby complain about the inconvenience of it all to one police officer. He responded, “Don’t blame the NYPD, blame the General Assembly.”

With the General Assembly in Manhattan and the G-20 in Pittsburgh, government has taken over the headlines this week. It seems half the world is mostly preoccupied with telling the other half what to do. No doubt, bossiness is in a bull market.

At Grant’s conference, I heard presentations on gold, the dollar, oil, real estate and more by a slate of luminaries, including John Paulson. Paulson is one of the best hedge fund managers in the world. There were many others, including Grant himself, who has created something of a stir lately.

Jim Grant, the host and editor of Grant’s Interest Rate Observer, has turned bullish on the recovery. In a Wall Street Journal piece on Saturday, the great bear turned in his claws and picked up the horns of a bull.

In a phrase, Grant’s thesis runs this way: The sharper the decline, the stronger the rebound. For this, he finds ample evidence in the historical record. The economy bounced back strongly after each sharp contraction — such as those in 1893-94, 1907-08, 1920-21 and 1929-31.

In the current recession, GDP (a rough measure of economic activity) contracted nearly 4% from peak to trough, which is a sharp recession as these things go. So, Grant reasons, the rebound will follow the historical pattern.

Grant loves to challenge the consensus. And the consensus this time around is that the recovery will be weak. I loved the quote he pulled from economist A.C. Pigou: “The error of optimism dies in the crisis, but in dying it gives birth to an error of pessimism. This new error is born not an infant, but a giant.”

Grant makes an eloquent and thoughtful case, as he always does. He goes on to conclude in his editorial: “The world is positioned for disappointment. But in economic and financial matters, the world rarely gets what it expects. Pigou had humanity’s number.”

I hope Grant is right. It is an appealing case, but I don’t buy it. Too many of the problems of the prior boom remain unresolved. There is still too much leverage and debt in the system. And on a more basic level, business is not good across a spectrum of sectors. The contraction is still ongoing. I’m inclined to remember the old bearish refrain that things are never so bad that they can’t get worse.

It’s All About Markets

It’s true we’ve had a sharp contraction, but there is no rule that says we can’t contract more. A nearly 4% decline in GDP could turn into an 8% contraction when all is said and done. The move from 4% to 8% would be painful, indeed. Even then, we would be a far cry from the dark woods of the Great Depression.

In some ways, the whole discussion is irrelevant anyway. As investors, we care about markets, and not GDP growth. There is a great fallacy out there that if the economy does well, stocks should do well (or if the economy does poorly, stocks should do poorly). Hence, too many so-called investors waste an inordinate amount of time talking about recovery, or lack thereof.

It’s possible that Grant is right: GDP does expand strongly. But investors could still lose. We have one glaring historical example: From 1964-1981, GDP grew 370%. And the sales of the Fortune 500 more than sextupled. Yet the Dow Jones industrial average went from 874 on Dec. 31, 1964 to 875 on Dec. 31, 1981.

As Warren Buffett once wrote: “Now, I’m known as a long-term investor and a patient guy, but that is not my idea of a big move.”

For investors, it is all about the price paid. The really relevant question is not one of whether or not the economic recovery is real. The question is: are stocks cheap enough? To answer that, you have to look at stocks and compare them with the alternatives.

My answer is some stocks are cheap and some are not. It is hard to generalize. In my view, investing is a craft of the specific. It is in the picking of the trees in which investing skills pay off the most, not in assessing the forest. There are, undoubtedly, specific stocks that will prove nice investments over the next few years. Finding them is what we are all about.

Sincerely,
Chris Mayer

Source: Are the Bears Turning Bullish?

Stock market bulls aren’t concerned about the inevitable acceleration in bank failures — at least for now. Even though deposits will be insured against loss, the loss of local banks will still have a depressing effect on hundreds of small communities. These communities are going to lose their only access to business credit when their local zombie banks — loaded with toxic construction or commercial real estate loans — are liquidated or merged into other weak banks.

Meanwhile, the latest monthly figures show that commercial bank balance sheets are shrinking at a fairly rapid rate, due to a combination of several factors: loan charge-offs, older loans are being paid back at a faster rate than new loans are being made, and regulators pressuring banks to build larger capital buffers.

So credit-fueled growth in consumption or investment is not occurring. Combine this with stagnant or declining wages and corporate profit margins and it becomes hard to imagine how GDP will rebound on a sustainable basis. GDP is the stat that every money manager fixates upon — despite the fact that GDP does not accurately measure true economic progress; it’s like evaluating a stock purely on sales growth, without thinking about what’s driving sales, and whether these sales are sustainable or accretive to wealth.

Nominal GDP is calculated as “consumption + investment + government spending + exports – imports.” Then, government statisticians subtract a highly doctored CPI figure from annualized changes in the above variables to get “real GDP growth.”

Note that all the variables in the GDP equation can be pumped up by excessive credit growth. As I mentioned in the Sept. 4 alert, if GDP is growing at the expense of degraded balance sheets, the end results are never happy. Japan’s GDP stayed higher than it otherwise would have been in the 1990s despite the incredibly wasteful spending on bridges to nowhere. Its policymakers reacted to a huge misallocation of capital into real estate in the 1980s by misallocating capital into government projects and subsidies to favored industries.

U.S. policymakers are following this playbook even faster, only without acknowledging one crucial difference: Japan had a high household savings rate to finance its government deficits, while the U.S. does not. Plus, the U.S. has already “dollarized” the rest of the world, and there are signs international demand for dollars has reached its saturation point.

The gold and commodities markets are reacting to this unpleasant reality. These markets are starting to discount the fact that the Fed will be the aggressive buyer of last resort for all types of debt securities. We’ve likely only seen the beginning of growth in the Federal Reserve’s balance sheet. As long as it can get away with it, the Fed will keep creating new money out of thin air to finance the U.S. federal deficit. Plus, via its liquidity facilities, the Fed and the megabanks will keep swapping Treasuries for legacy toxic securities marked at fantasy levels.

A few wild cards could disrupt this benign “reflationary” environment we’ve been in since the March stock market bottom, resulting in the stock market taking another nasty leg down:

1. If the “audit the Fed” bill were to pass and result in more handcuffs on the Fed, it would help to slow the reckless debasement of the U.S. dollar. But if it put an end to the Fed’s exotic lending facilities, which would force the owners of toxic securities to retain and mark them down sooner, then we could see a return to the January-early March 2009 stock market environment — only most of the damage would be contained to the financial sector as equity of insolvent institutions gets wiped out or diluted.
2. Contraction in the real economy and state governments could easily overwhelm expansion in the “federal government economy.”
3. International holders of trillions in paper U.S. assets could accelerate the rate at which they diversify into real assets. That’s how we could see a spike in “money velocity” that the deflationist camp says is a necessary condition for the CPI to rise. Most of the price pressure will be felt in oil prices, especially later in 2010 and 2011, when today’s underinvestment in new oil projects leads to tight international supplies.

I’d like to bring to your attention one more thing about today’s investing climate, because it’s being used so often lately in the media to justify today’s nosebleed stock valuations: the “money on the sidelines” fallacy. Growth or contraction in the current balance of $3.5 trillion in money market funds depends on how much companies look to borrow in the commercial paper market — not on the level of the stock market, as so many seem to believe.

Those who point to the $3.5 trillion in money market funds as if it’s a bucket that can be “poured” into the stock market bucket to keep the rally going do not understand that money does not go “into” or “out of” the market, but through the market. Trader A sells every share bought by Trader B. Once this transaction settles, cash goes one way and shares the other. The price at which the transaction takes place depends on how badly Trader B wants to own shares, not how many money market shares are in his account.

Also, money market fund balances represent very liquid short-term loans; they reflect an amount of money that’s already been spent in the economy and will be paid back over a very short time frame. John Hussman — one of the best mutual fund managers, in my view — refutes the “cash on the sidelines” fallacy best. It’s worth reading and remembering the next time you hear a talking head arguing that the rally can keep going because of liquidity.

Washington Federal Closes Offering; Now We Wait for Earnings

Yesterday, Washington Federal (WFSL) announced that its secondary stock offering would generate net proceeds of $333 million. This works out to a per share price of $13.79, including underwriting discounts and expenses and assuming full exercise of the underwriter’s overallotment. Here is an example of cash going “into” stocks, because these are newly issued, rather than existing, shares in the secondary market.

As I noted in Monday’s flash alert, I expect the offering will be necessary to absorb a mounting wave of net charge-offs in the future. It’s possible that this offering plan became a necessity after a friendly suggestion from regulators to raise more capital.

On Wednesday, WFSL stock rallied on high volume, but did not reflect organic demand for the stock. JP Morgan (NYSE:JPM) was the sole book-running manager for the Washington Federal offering. Knowing that it would likely receive a few million WFSL shares as a form of compensation in the underwriters’ overallotment, JPM’s trading desk probably established a short position that it plans to cover by delivering the shares it will receive upon the closing of the deal. This likely explains the bizarre trading moves in the stock this week: When institutions were more interested than expected, resulting in a higher offering price of $14.50, JPM likely covered some of their short position.

As for the analyst reaction to the offering, the two analyst notes I saw might as well be corporate press releases, because they expect this new capital to be deployed into an FDIC-assisted rollup of lots of zombie banks in the Pacific Northwest. Also, these analysts cite WFSL’s “strong” capital ratios without adjusting for future credit losses. One might suspect that these analysts have not even read the asset quality footnotes in Washington Federal’s SEC filings.

The big losses WFSL will take on construction loans are obvious, no matter how long management claims it will be able to sit on them. But what’s not obvious to the market — yet — is the rapid future loss formation in its $6.7 billion mortgage book. Management has set aside practically zero allowance for loan losses against its mortgage book. See the chart below for the allocation of WFSL’s allowance by loan type.

WFSL carries a mere $18.8 million loss allowance against its $6.7 billion book of mortgages — a ratio of just 0.28% of assets. The harsh reality of the mortgage crisis tells us that this $6.7 billion asset value is overstated, along with capital ratios (or equity); it should be marked down by far more than $18.8 million. Yet WFSL’s accounting translates as follows: Management does not expect more than $18.8 million in cumulative credit losses in mortgages (defaults, net of recoveries after foreclosure) through the rest of this credit cycle, despite the fact that the majority of these mortgages are now underwater and the job market remains weak.

As you can see in the chart, the ratio of loss allowance to nonperforming loans (by category) has shrunk dramatically. In December 2007, WFSL’s residential mortgage loss allowance was $13 million, and its nonperforming mortgages were also $13 million. As of June 30, this loss allowance had been built up to $18.8 million, but nonperforming mortgages had grown to $119 million (and will keep growing). This loss coverage ratio has shrunk from 100% to 16% over the past six quarters (as shown in the chart’s blue line) and needs to be built back up to a respectable level. And the only way for WFSL to build it up is to book large credit provision expenses in future income statements.

Washington Federal’s “strong” capital ratios are a function of hopeful accounting. I expect the market to come around to this view — not only for WFSL, but also for the entire banking sector. Ever since the loosening of mark-to-market accounting rules last April, the creators and users of financial statements have collectively chosen to deny reality and bury their head in the sand about the future direction of market values for collateral backing loans — and the value of the loans themselves.

Everyone is waiting and hoping for a miraculous rebound in housing prices and the labor market, when we have yet to see the bottom in either. When reality sets in, this will not end well for owners of bank stocks, REITs, and other financial stocks. These stocks are claims on assets that are marked to fantasy levels.

Mark-to-market suspension has slowed the rate at which losses are recognized, but this self-delusional accounting practice cannot make the losses disappear, and will likely make these cumulative, stretched-out losses even bigger in the future by rationing credit to the healthier parts of the economy.

Regards,
Dan Amoss

Source: GDP’s Debt to Credit

So I say, “I was just wondering, because it looks like the economic slowdown has shown up in the Dow Jones Transportation Average, which has made so little money in shuffling goods hither and thither that a share of all the companies in the index earned a total of 82 cents, which is down from the $170.63 they earned at this time last year.”

He looks at me and asks, “Who cares? And what in the hell is a hither and thither?”

So I grab him by the arm and say, “Well, as a self-employed person yourself, and as any self-employed person can tell you, there have always been times when earnings drop to 82 cents! Sometimes less! Like that time when ‘word of mouth’ got around about me and nobody would engage my professional services because everybody had heard that I was incompetent and pretty stupid, and there were long, long stretches where I did not make even 82 cents because I was, like they said, incompetent and stupid.”

Then he says, “You saying I’m stupid? You looking for trouble?”

Suddenly, being the professional that I am, I could see that we were not going anywhere with this conversation, probably because he was prejudiced against smelly, drunken old men coming up out of the smoky darkness of a low-class strip club and grabbing his arm, yammering about economics.

Thus forewarned, I cleverly I reply, “Do I think you are stupid? Is that what you are asking me? Well, answer me this… Do you think that it is Beyond Freaking Insane (BFI) that the Federal Reserve is creating so much money and credit so that the federal government can borrow and spend the money, plunging us even farther into debt so that the total national debt, now at a terrifying 80% of GDP, will rise to 100% of GDP and then so horribly, terribly much more? Is this, in your trucking opinion, the Totally Wrong Thing (TWT) to do, and that the only Smart Thing To Do (STTD) would be to buy gold, silver and oil as protection against the complete ruination of the buying power of the dollar thanks to such oversupply of dollars and crushing debt?”

I figured he was going to say “Huh?” so when he looks at me quizzically and says “Huh?” I shout, “Exactly! And normally I would not even remark upon it except to seize the opportunity to ridicule the morons who own the stocks in the transportation index because, as I write this, they have bid the index up to a closing price of $3,705.92, making the price-to-earnings ratio soar to an unheard-of, laughable, impossible, ludicrous 4,493! Hahahaha! A P/E of 4,493! Hahaha! The normal range of P/E ratios is from about 4 or 5 up to 21, with the average being about 12 to 14! But the Transports are at 4,493! Hahaha!”

Again, he looked at me and said, “Huh?”

Before I could tell him that after due consideration, yes, I think he is an idiot who should be buying gold, silver and oil, both our attentions were diverted as the beautiful Miss Angela Divine began taking the stage.

As she slithered her hip-grinding way to the pole, gyrating to the beat of pulsating rhythm of the primal music, I noticed that she was wearing a gold G-string bikini! That’s my girl!

Source: A Truckload of Bad Data

The euro has received some additional love this morning, as the Eurozone’s economic growth printed better than expected, albeit still negative… But… Germany and France showed growth, which I must say is very unexpected! That means that both Germany and France have exited the recession… Well, that is at least for now! For those of you keeping score at home, Eurozone GDP fell -.1%, which is far better than the -.5% that was expected… Oh! And this is for the 2nd QTR… You would have to think that data like this would be very good for the euro, and from the looks of it, that’s exactly what’s happening!

Whenever the Big Dog, (euro) gets off the porch to chase the dollar down the street, all the little dogs get to chase too… And so, the usual suspects have posted gains since yesterday morning, like Norway, Switzerland, Aussie and so on…

The BIG news yesterday was from the FOMC meeting, where the Fed Heads left rates at near zero, but were kind enough to tell us that their Quantitative Easing would remain in place through October… That’s all nice and sweet, eh? So… What, are they going to do here, Buy some Treasuries out in the open and say see we told you we were going to do this, and then go back to the dark, smokey room and buy some more from the Primary Dealers just for GP? That just ticks me off! But there’s not a darn thing I can do to stop them!

What I would like to do is to start a movement to abolish the Fed… OK, who’s with me? I just had a chuckle, because that reminded me of the Will Ferrell Old School movie when he’s trying to get people to streak to the commons… Come on now, if you’ve seen that movie, you know you’re laughing right now!

I had a guy one time tell me, I know of no one that can talk serious one minute and go right into some funny thought, sing a song, or whatever the opposite reaction would be to the serious thought, like you do, Chuck… I thanked him!

But getting back to the thought of abolishing the Fed… Think about this for a minute… What good are they? Have we not had dozens of recession and one Great Depression since they were created? Have we not seen a 95% loss of purchasing power for the dollar since they were created? Let me tell you something else, folks… If the markets set the interest rates based on activity, we would never experience inflation or deflation…

OK, I’ll stop there, I know that I’ve ticked off a few people that think the Fed walks on water, and is here to protect us financially…

Well… In news you won’t hear on radio or TV… The U.S. Budget Deficit swelled to $180.7 Billion in July, from $102.8 Billion in June… Hmmm… Think about that for a minute folks… In June, when quarterly tax receipts should be enough to cover the expenditures, they not only were not enough, but they fell short by $180.7 Billion dollars! This is a combination of slower tax receipts because of the depression were in, and… The unsustainable deficit spending by the Gov’t. Oh! And the Budget Deficit year to date is now $1.27 Trillion… But you don’t see the knuckleheads in Washington D.C. doing anything about it, except for coming up with new things to spend more money on… I say fire them all!

Speaking of tax receipts… My friend, and writer & Marketing genius extraordinaire, David Galland, had this to say recently in one of his most excellent news letters… Here’s David…

“I like the idea of also forcing the government to stop automatically withdrawing taxes from paychecks. Instead, wage earners would be responsible for sending out their tax payments on a monthly basis. By my back-of-the-envelope calculations, it would take about two months of writing out the big checks to Uncle Sam before people came to grips with just what government (or, in this case, one slice of government) is actually costing them… and out would come the pitchforks. We cannot afford our current level of government, and the sooner we get around to cutting it back, the better. Period.” — Thanks David… As always you think on a different level than the rest of us!

The Trade Deficit also grew larger in July as Oil prices rose… The Trade Deficit moved to $27 Billion from $26 Billion… Now, the Trade Deficit is much smaller than it used to be thanks to the depression, but, the fact remains that it is still nipping at the heals of the dollar like one of those small dogs, and whenever it is that the U.S. comes out of this depression, this figure will balloon once again…

Today’s data will be dominated by Retail Sales for July, which because of the CARS program, will be stronger than usual, probably getting quite close to a positive 1% for the month… Less Autos, the data would be quite disappointing at just .1%, but, you know me… I don’t like that taking this, that and the other thing out just so things look the way you want them to look!

It’s also a Thursday, so the Weekly Initial Jobless Claims will also print. Recall that on Monday of this week I told you the data would get going again this week? Well, we’ve got it going on today for sure!

Yesterday, Norway’s Norges Bank met, and while they left rates unchanged, they became the first Central Bank to move to a tightening bias! YAHOO! And the krone was the best performing currency yesterday and overnight on that news, as it should! Long time readers know my affection for the krone due to a number of reasons, but none so important than the fact that Norway has a financial surplus, has had one, has one, and will have one for as long as I can see… Norway didn’t get involved in the sub-prime bond buying game… And they have a very strong Central Bank in the Norges Bank… Last spring, the NY Times, which I don’t read for a number of reasons, but had this sent to me, called the Norwegian krone the safest currency in the world. Now… I like it when someone other than me climbs out on that limb, especially if your going to climb that far out!

Tonight, the Gov. of the Reserve Bank of Australia (RBA), Stevens will provide a testimony to the Parliament regarding the economy, etc. I think that the A$ traders are holding their breath until he speaks, as this could be a real market moving speech! But then it could also be as dull as watching paint dry…

The A$ is back above 84-cents after spending a couple of days down in the 82-cent handle…

OK… So… We had good news from Germany, France and Norway this morning… Not so good news from the U.S. though…

Realty Trac Inc. is reporting this morning that a total of 360,149 properties received a default or auction notice or were seized last month. UGH! Foreclosure filings in the U.S. climbed to a record for the third time in five months in July. All those jobs that were cut and still being cut, are having a real negative affect on this, and personally, I don’t see this getting any better any time soon! UGH!

There’s been a lot of talk about the news the other day that China’s loan growth had seen a huge fall last month… A lot of people think that this is the end of China’s growth… I see it differently… I see it as China just taking some air out of the balloon… They saw their economy moving ahead of the rest of the world at a very fast pace, and didn’t want it to: 1. overheat, and 2. Have nowhere to go with everyone else in recession… Now, I’m sure a lot of you will say, Chuck… Doesn’t China risk the chance of popping their economic bubble altogether? Well… Yes, they do… But, they knew how to administer stimulus to make the economy click, I assume they know how to pull some if back when they need to…

And… I just think about the fact that since 2003, I’ve seen story after story by writers that thought they knew what was happening in China, say the economic growth was going to slow down… And they were WRONG!

And with that thought… No wait! I’ve got another thing from David Galland… He said that Dan Ferris sent this to him… “Members of Congress should be compelled to wear uniforms just like NASCAR drivers, so we can identify their corporate sponsors.” yeah, right on! Now that’s change that’s really change!

Currencies today 8/13/09: A$ .8440, kiwi .6795, C$ .9245, euro 1.4275, sterling 1.6625, Swiss .9315, rand 7.9675, krone 6.0220, SEK 7.1475, forint 188, zloty 2.88, koruna 18, yen 96.20, sing 1.4415, HKD 7.7515, INR 48.10, China 6.8337, pesos 12.84, BRL 1.8385, dollar index 78.50, Oil $71.64, 10-yr 3.73%, Silver $15, and Gold… $957.15

That’s it for today… I had a long time reader send me a note yesterday and tell me that I have enough to worry about with the Fed, Treasury, deficits, etc. and shouldn’t get worked up when the Cardinals lose a game they should have won… HA! Yes, that’s correct! It is just a game… And yes, I’m talking about baseball, not the Fed, Treasury and deficits! HA! Well… I go to the knee doctor today, I’m afraid of what he’s going to find… All I know, is that the pain, swelling and stiffness is much worse in this knee than it was in the right knee that I had scoped in 2003! UGH! My little buddy, Alex is home. He seemed to have grown 6 inches while at camp! OK… I must really be running late, as Mike, Suzy Q, and Mary are all here! So… Get that Tub Thumpin’ Thursday going!

Source: Germany & France Exit The Recession

With data like this? C’mon:

The U.S. economy shrank at 1% annualized rate in the second quarter, the Commerce Department estimates today. Since that’s better than the 1.5% contraction the Street had predicted, we see headlines of “The Pain Is Easing,” and “Recession Easing” left and right. True, the latest GDP number is better than that of previous quarters, but here are some of the stats that really got our attention:

• The U.S. economy has now contracted four quarters in a row, the worst streak since the Great Depression
• GDP has contracted 3.9% in the last year, the worst fall since at least 1947, when the Commerce Department started keeping track
• First quarter GDP was revised down heavily, from a 5.5% to 6.4% — the biggest quarterly GDP drop in almost 30 years
• The Commerce Department revised 2008 down too, from a 0.4% annual contraction to a 1% decline
• Consumer spending, 70% of U.S. GDP, contracted 1.2%. The retrenchment was largely replaced by government spending, up 10.9%
• Employment compensation rose by just 1.8% over the last 12 months, the slowest rate on books that go back to 1982.

But as you’d expect, the market has clung to the expectations-beating, lower-than-usual headline GDP. Thus stocks are currently holding onto yesterday’s gains and hovering around break-even.

“The modest bounce in consumer confidence last spring is fading already,” writes Eric Fry, “and that’s not a good sign for the stock market. As the chart below illustrates, consumer sentiment trends tend to lead stock market trends.

“Throughout 2007, consumer confidence flat-lined while share prices rallied. This divergence between sentiment and share prices became particularly extreme in late 2007, as share prices soared to new highs while consumer confidence plummeted. Just a few months later, share prices were plummeting also.

“The lesson is clear: If consumers lack confidence, so should investors. During the last two months, share prices have diverged once again from consumer confidence readings. This is not a promising sign.

“And yet, despite this warning sign, lots of hopeful investors have persuaded themselves that the mirage of economic rejuvenation is the real thing. We’re not drinking that sand.”

Source: Irrational Exuberance Continues

I got a call from a Reuters reporter yesterday mid morning to ask why the dollar was rallying at the same time stocks were moving higher. I quickly paged through my Bloomberg looking for some sign why both were heading higher. The trading pattern which has been established over the last few months has these two asset classes moving in opposite directions; good news for the US economy sends stocks higher and the dollar lower as investors retreat from defensive ’safe haven’ positions in the US$. The opposite occurs whenever there is data which shows the global economic recovery is faltering, stocks move lower and the dollar rallies with safe haven buying.

But yesterday morning, for a short period both were moving up. I first looked at the jobs data to see if they held any clues. The Initial Jobless claims came in slightly higher than expected, confirming our calls that the labor market will continue to be a drag on the US economy. But the reporter pointed out the continuing claims has dropped. I explained to her that the continuing claims were dropping because people are falling off the rolls. Drops in continuing claims are not due to people going back to work, but are due to people being out of work longer than the labor department’s records. So I didn’t see anything in the jobs data which would cause stocks to rally.

Unable to find anything in the data to support the short term market movements, I moved the conversation to the longer term trends which I feel much more comfortable speaking about. And by the time the conversation was over, the quick rally in the dollar had subsided, and the dollar index was moving back down. The short term market movements are very hard to call, as the currency and equity markets can move on emotion and rumor for short spans of time. But they will always move back toward the underlying trend line. Right now, the trend is for the US$ to weaken vs. the major currencies; as investors begin to look for currencies with higher yields and better underlying fundamentals.

So the dollar continued to fall vs. every currency except the Japanese yen. The Nordic currencies of Sweden and Norway led the charge vs. the US$ with Sweden moving up over 1.5% and Norway appreciating just under 1%. As I wrote yesterday, the Swedish krona has been one of the best performers recently as their economy has begun to recover ahead of mainland Europe. Sweden’s central bank, the Riksbank, was more aggressive with rate cuts than the ECB, so they will now have more room to increase them as the global economy recovers. Like Norway, Sweden went into the global recession in a fundamentally solid position, with a good trade surplus and low national debt. But Norway seems to be a bit better positioned going forward, as they rely on commodity based exports and while Sweden is geared more toward manufacturing. Both should continue to move higher vs. the US$.

The focus today will be on the 2 quarter GDP report which will be released this morning. GDP is expected to have contracted 1.5% after a 5.5% contraction in the first quarter. If the number comes in as expected, the dollar will likely sell off as investors move back into riskier assets. But as I mentioned earlier, the currency markets have started to show signs of moving away from the safe haven / risk aversion pattern recently. Investor’s focus will eventually shift toward interest rate differentials. But I still think it is a bit too early for this shift to occur, and a stronger GDP figure will likely cause a further drop in the US$.

We will also see Personal consumption data for the second quarter which is expected to show US consumers are continuing to increase savings. Consumption is expected to have fallen .5% after rising 1.4% during the 1st quarter. In spite of government efforts to stimulate spending, US consumers are worried by rising unemployment and won’t likely loosen their tight grip on their wallets anytime soon. Finally, we will end a busy week of data releases with the Chicago Purchasing Manager’s index which is expected to show a slight increase to 43 from 39.9 reported last week. This would be a second consecutive monthly increase, a sign that the manufacturing sector is bottoming out. Even though the number continues to move higher, any number below 50 is seen as a negative indication for the economy. Even with inventories near record low levels, manufacturers will likely wait for consumers to start spending again before increasing production.

The pound sterling continued to rise against the dollar after a report showed British consumer confidence held at the highest level since April of last year. It seems the pound sterling has moved to a upward trend, after dropping most of last year.

The Japanese yen continues to fall vs. the US$ as investors sell the currency and move to higher yielding assets elsewhere. Japan’s unemployment rate rose to a six year high in June and consumer prices fell at a record pace. The Japanese economy continues to be stuck in a stagnant deflationary state and will be dependent on a global economic recovery to spark exports. Increasing growth in other Asian nations (mainly China) has sparked production increases by Japanese manufacturers. This has been the one positive sign out of Japan recently, but this one piece of data couldn’t halt the selling of the Japanese yen.

Elections in Japan will be held at the end of next month, and the opposition party is all but guaranteed to win. The ruling Liberal Democratic Party is in a shambles, and has produced 4 prime ministers in the last 4 years. The new government is expected to increase spending on government programs, but like the US administration, no one has figured out how to pay for these increases. The opposition’s spending proposals add up to 3.5% of GDP, and the party has ruled out raising Japan’s 5% consumption tax for at least 4 years. Much of the funding for the new programs will come from cutting ‘waste’ in existing spending programs (sound familiar?). Gross national debt in Japan is currently 180% of GDP and rising as the stimulus packages kick in.

Many factors in the Japanese economy are eerily similar to those in the US, and neither looks to recover quickly. Both the US$ and the Japanese yen will continue to be sold as investors move into currencies of countries with much better economic potential. The short and medium term prospects for these two currencies certainly look negative.

Two currencies which seem to be on a much different path than the Japanese yen are the Australian and New Zealand dollars. Both are headed for their longest set of monthly gains since 2004. With interest rates expected to start rising, and China continuing to consume commodities which both produce, these currencies should continue to perform well. Barclays Capital raised their forecasts for both currencies saying rising risk appetite will boost demand for them in the short term. “A better than expected US GDP result would be the final icing on the cake for July and would provide great opportunity for the Australian dollar to retest 83.38 cents,” according to the report.

Currencies today 7/31/09: A$ .8284, kiwi .6561, C$ .9269, euro 1.4139, sterling 1.6552, Swiss .9231, rand 7.804, krone 6.1628, SEK 7.2825, forint 187.92, zloty 2.9328, koruna 18.089, yen 95.70, sing 1.4405, HKD 7.7500, INR 47.935, China 6.8321, pesos 13.2126, BRL 1.883, dollar index 78.966, Oil $66.81, 10-year 3.61%, Silver $13.63, and Gold… $938.42

That’s it for today… The EverBank kickball team played or final regular season games last night and ended up victorious in both. More importantly, we were able to make it through both games without an injury! We finished in third place, so we will have a pretty good seed going into the end of season tourney. Happy Birthday to Ann Hopkins today! I have worked with Ann off and on since I started in the banking industry back in the late 80’s, and she is a real treat to have on the desk. Hope everyone has a Fantastic Friday, and a wonderful weekend!!

Source: Dollar Continues to Slide