Lord William Rees-Mogg (Fleet Street Invest UK):
In the last six months there has been a rebound of 50% in the great majority of world stock markets.

There has also been a comparable rebound in the price of oil, with West Texas oil rising very close to $80 a barrel. In the oil market there has been heavy two-way trading in options. There could be a sharp spike in the oil price if speculators have to cover their positions.

At the same time the US dollar has remained weak, and now stands at $1.4886 to the euro and $1.66628 to the pound. This is close to a 14-month low on a trade-weighted basis. The poor performance of the dollar reflects the low US interest rates and the twin US fiscal and trade deficits.

The demise of the dollar

The dollar nevertheless remains the world’s leading reserve currency, with the euro in second place. Investors are naturally anxious to protect themselves against markets, including currency markets, which have shown such a high degree of volatility.

The Chinese, who have the greatest number of dollars in their currency reserves, have already suffered substantial losses.

In what amounts to a crisis of the dollar, the euro is in second place as a reserve currency, but there are potential threats to the future of the euro, due to the weak productivity of the Mediterranean economies. There is a big stretch in productivity growth between the German and the Southern European regions.

The fall in the dollar against other currencies includes a devaluation of the dollar in terms of gold, which now seems to have stabilized at a dollar price of $1,050 an ounce.

The circumstances do indeed appear to be uniquely favourable to gold.

Interest rates and therefore carrying costs are exceptionally low. The dollar is exceptionally weak. The technical market position is strong, including good demand for gold in terms of jewellery. The oil price – which is often linked to gold – is rising. Those who believe that oil is due for a further rise to $100 a barrel are likely also to be confident about holding a proportion of their investment . . .
Click here to read the rest of Lord Rees-Mogg’s article at Fleet Street Invest UK.

Americans filed over 573,000 jobless claims last week — the most since 1982.

The Labor Dept. also said the number of people collecting unemployment reached a 26-year high too, 4,429,000.

Unfortunately, we’re just getting started if a study released this morning by UCLA is accurate. The Anderson School of Management predicts we will see negative GDP for the current and first two quarters of 2009… and the unemployment rate to reach 8.5%.

If you’re mildly interested in what it’s costing for the government to “combat” this pernicious downturn, the Treasury announced yesterday the federal government spent $402 billion… for the first two months of the fiscal year.

That’s $53 billion shy of 2008’s entire historically astronomical budget deficit.

We feared we were being alarmist back in October when we forecast a $1 trillion deficit for 2009. At this rate, a trillion will be light.

The trade deficit expanded in October, too, up 1.1%, to $57.2 billion.

Quants chained to their IBMs in the basement of Wall Street’s investment banks were expecting the deficit to contract, as nations typically pull back during times of economic strife. But something curious happened. Oil and gas got a lot cheaper… and Americans used a lot more. Who would have thought that would happen? The U.S. imported almost 75 million more barrels of oil in October than in September, when the average price per barrel was $107.

Year to date, the trade gap exceeds $590 billion… on pace to pummel 2007. But not in line with 2006’s record deficit of $753 billion. Not yet, anyway.

Oil thumbed its nose at the trade number by shooting up five bucks, to $47 a barrel today.

Still, global oil demand will contract in 2009, the International Energy Agency forecast today.

The group altered their yearly outlook again this week, this time suggesting that worldwide oil consumption will decrease from 2008 for the first time in 25 years. The world will consume 0.2% less next year, they say, at an average rate of 85.8 million barrels per day.

“Global oil demand may decline, but it is not going to plummet,” notes Byron King.

“According to this week’s MasterCard Spending-Pulse data, U.S. retail gasoline demand is back to about the same levels it showed earlier in 2008.  That is, high gas prices hurt demand over the summer and into the fall. (I drove less. Didn’t you?)  But the current low fuel prices have evidently allowed demand to recover. People are driving more. It’s basic Economics 101.

“I was talking with an economist for the American Petroleum Institute about two weeks ago.  He told me that overall gasoline demand in October was down 3%, year to year.  But diesel fuel usage was up by the same amount.  Overall U.S. oil demand is down about 8%, but that reflects the slowing use of oil in industry. Out on the road, people are still driving and trucks are still hauling.

“For all the sound and fury about the run-up in oil and fuel prices through July, and then the fall in prices after that, the aggregate demand for oil is only changing at the margins.

“Looking ahead by more than about two years, world oil demand is certainly going to grow.  It almost does not matter what we do in the U.S. or Europe. When you look at the numbers of young people who are already born and living and growing up in the developing world, the demand will be there.  Many of these young people already have a cell phone and a laptop computer.  When they finish school, they will want an apartment and a car.”

Gold is up another $20 today, to $825.

“Looks like the bulls are taking aim at $835-850,” notes Ed Bugos, “a psychologically important area of resistance. The $850 level is very important for a few reasons.  First, it is the neckline of the Jan-Jul top; second, it would reverse the bearish slope of the downtrend.

“Driving the market is a bunch of things, including the dollar’s waning momentum and the prospect of an oversold bounce in the commodities markets. However, as usual, all eyes are on the Fed’s upcoming meeting.  Speculators are looking for the Fed to make more unconventional moves, such as the targeting of long-term interest rates, or this idea of ‘quantitative easing,’ which is but a euphemism for ‘madly inflating.’

“I expect some [gold] profit taking on the news and I think we’ll see another correction before the market breaks out.  If Wall Street likes the Fed’s inflation-driven bailout package, the stock market may start to rally, which may even boost the dollar in the short term if sentiment turns in the other direction from whence it is heading now.

“So be cautious in the short term. The waters are likely going to stay choppy until the new year when a new trend emerges. But, on the other hand, the ticker tape is looking sharp right now, as it should, and I don’t expect the pullback to be extraordinary.”

In the U.S. equity market, the Obama buzz seems to be slowly wearing off. Thanks to “Barack the Builder” and his promise to beef up U.S. infrastructure, stocks have surged this week. We saw some of that enthusiasm in markets yesterday, but it was more tempered… materials and energy players led major indexes to roughly 1% gains.

But then, Barack also promised to nuke Iran this morning, if they don’t get their beady little eyes off Israel.

The Dow opened down about 100 points.

On the other side of the world, we note I.O.U.S.A.’s brand of monetary enlightenment continues to spread. South Korea cut its main lending right by a mighty 100 bps overnight, to 3%, its lowest level ever.

The Federal Reserve has given the green light to the state-owned China Construction Bank — China’s second largest — to set up shop in the U.S. Even the CCB’s peculiar ownership structure is a worthy sign of the times… 57% owned by the Chinese government, 20% by Bank of America, 5% the Singaporean SWF Temasek and shareholders own the rest. The CCB has over $1 trillion under management.

Despite the credit crunch, the CCB is the fourth Chinese bank to expand operations in the U.S.

The largest leveraged buyout deal in history has collapsed.

The 5 reported with curiosity back in July the brave attempt of the Ontario Teachers Pension Plan to buy up Canada’s biggest telecom, BCE. The teachers, trying to set a good example for their students, borrowed $35 billion to fund the $51 billion deal.

Unfortunately, the deal fell apart yesterday when KPMG, accountant’s for the union, sent over some picky details. Turns out the telecom giant is no longer worth all the money the teachers union would be borrowing to buy it.

Of course, the broken deal isn’t without its share of winners. Citi, Deutsche Bank, RBS and Toronto-Dominion Bank won’t have to find $35 billion to fund the deal. And Canadian lawyers will be able to pay for their second (and third) homes. The breakup fee alone for this deal exceeds $1.2 billion.

The U.S. House of Representatives passed a bill that would extend a $14 billion loan to the Big 3 U.S. automakers. Now it’s off to the Senate. We know how this story ends, don’t we? Hank Paulson’s bank bailout metastasized 450 pages and several hundred billion dollars when it got treated over in the Senate earlier this fall.

“About this bailout,” Agora Financial’s managing editor, Chris Mayer wrote this morning,  “I keep thinking of Frederic Bastiat, the old 19th-century economist, and his idea of the “seen and unseen.”

“Most people look at the government’s bailout of Chrysler in 1979 as a success simply because the company recovered, paid off the debts and survived. But what they ignore is the unseen. What if Chrysler had failed? Perhaps GM and Ford would have gotten the pick of the very best of Chrysler’s workers. Perhaps a good chunk of the sales that would have gone to Chrysler instead would have gone to GM or Ford. In both instances, GM and Ford would be stronger.

“Maybe, just maybe, GM and Ford would have avoided the sad fate of begging for money in 2008. If so, then the Chrysler bailout was very expensive, indeed. Old Bastiat would have a field day with the stuff going on today. Lots of people ignoring the unseen consequences of bailouts in general.”

“Remember the Yugo in the ’80s?” asks a reader.

“We loved to make jokes about it, and it was our favorite example of a poor-quality communist product.  Well, I wonder if 10 years from now people in Asia and Europe will be laughing at the cars that the Big 3 churn out if our government keeps them on life support.  Obviously, some people are laughing already.”

“A sign of tough times,” writes a reader adding to our list, “one of our neighbors was driving home early Saturday morning from working a night shift. As he turned in to our neighborhood, he found a truck parked next to the three model homes, with a man apparently ‘working’ on the fence.  As soon as his car approached, the man jumped up, hopped in the truck and sped off.  He left behind his power tool and five gaping holes in the fence. He stole the 8-by-4 foot wrought iron fence sections, apparently to sell at a scrap dealer. I guess he didn’t realize that scrap iron prices peaked near 40 cents per pound in July and then plummeted nearly 80%, to 8 cents per pound, today.”

“Jupiter moved into Saturn’s sign earlier this week,” writes another reader, boldly making a forecast of his own “and he will be there for about two-three years. Amazing how such ticks in the court of the planets can cause such drastic swings in the stock market. But… it should, or could, be good for natural resources, actually.

“Maraka is the sign of the sure-footed goat climbing up the rocky mountain, followed by the sign we call Aquarius today. Aquarius was the polestar sign at the top of the dome of the sky when the floods occurred many years ago that swamped the equatorial nations.  It brought vast and mighty changes in the world organization, with four or 10 major cities going under the tides — India, Japan the North Sea and, of course, old Noah and his boat around the Caspian. I think that caused droughts and water shortages most places, as well, on land. More water in the sea means less rain and less drinking water. I’m just brainstorming.

“When Jupiter is in Leo, it certainly does cause gold to advance in daily monetary value. But why worry?  Gold is money and always has been. Hope we get more to bury in the backyard, or under the mattress.”

The 5: Hmmm… we’ve been having difficulties with our e-mail broadcast system of late too. Do you suppose this has anything to do with the alignment of Venus, Jupiter and the moon?

We’re just brainstorming too.

Source: Another Jobs Record, Huge Deficits, Oil and Gold Forecasts, The Auto Bailout and More!

We finally had some data releases here in the US which look to steer the markets, so I’ll just get right to it.

The dollar continued to strengthen yesterday after another round of bad weekly employment figures. Initial jobless claims increased to 516k during the first week of November, and last weeks numbers were revised up to 484k. The employment picture continues to darken here in the US, and it doesn’t look like it will improve any time soon. This is just what the US consumers don’t need right now. Not only are most consumers living paycheck to paycheck, but now many of those paychecks are being ripped out of their hands.

Personal bankruptcies are heading into record territory, and job losses will only make this worse. While the total size of the consumer credit market is dwarfed by the size of the mortgage market, with home loans there is an underlying asset providing some base from which banks can work. Credit card debt is different, the banks and investors who hold this debt have no underlying assets to fall back on. This fact has not been missed by the current administration, and Treasury Secretary Paulson is now looking to spend some of the bailout package to try and help out the consumer lenders. Unfortunately it looks like we will be taking another step into the deep dark area Chuck has continually talked about.

This morning we got the retail sales numbers here in the US which showed a further deterioration. Retail sales less autos were down 2.2% in October, almost double economist’s expectations. This fall is the largest monthly drop ever, and is just one more sign the US economy is heading for a doozy of a recession!

We did get some good news yesterday morning as the trade deficit narrowed somewhat, a result of a stronger dollar and lower oil prices. But even after the narrowing, we are still running a deficit adding to our need to attract foreign investments. Chuck let me have a sneak preview of December’s Review and Focus the other day before he sent it to the printer. In the latest issue, he talks about our need to finance the twin deficits which the US continues to amass. This financing need is one of the factors convinces me the US dollar will have to get weaker. The current dollar strength will not last, and once the ‘flight to quality’ buying of US Treasuries subsides, we will see the US currency return to its long term decline.

As I said earlier, the dollar continued to strengthen yesterday morning as the stock market fell. But both reversed course early in the afternoon after Paulson started talking. The Treasury Secretary said the big 3 auto makers should receive some government help, but he isn’t willing to take any of the funds already approved by congress to help them. Instead, he urged congress to come up with additional funds to help the car makers. He also said he would look to try and spend some of the already approved rescue package on ‘non-traditional’ lenders who give loans directly to consumers. Looks like Paulson is finally realizing what we have been saying for a while now, that the next big crisis is the consumer credit crunch.

Anyway, just after the news came across the wire about Paulson’s remarks, the stock market jumped 400 points and the euro bounced up over two cents in the matter of a few short minutes. The dollar has really become a contra indicator for the risk appetite in the market. The dollar index and the stock market have moved in opposite directions 88 percent of the time since the beginning of September. As investors feel more comfortable with risk, they sell the short term dollar holdings and invest them into other markets. The Europeans have started to take the dollar back up this morning, but it remains lower than at this time yesterday.

The Europeans are taking the euro down after it was confirmed that the European economy fell into its first recession in 15 years during the third quarter. Germany had already reported a third month of negative growth, and the European Union confirmed the GDP shrank .2% in the 15 euro nations during the third quarter. France, Europe’s second largest economy, unexpectedly grew in the third quarter as consumer spending gained and exports rebounded. I am still convinced that while things are bad across the pond, Europe’s economies are still in better shape than the US economy. And while some here in the US have given the ECB trouble about not lowering interest rates as quickly as the US; I believe they have done a better job navigating the current crisis, and Europe will be able to recover more quickly than the US.

And finally, the RBA was in the markets protecting the Australian dollar again. Lately, the RBA is intervening to hold the AUD$ up while there are rumors the Bank of Japan may start intervening to stop the appreciation of the yen. Officials at the Swiss National Bank have also been complaining about the rise of the Swiss franc. Both the Japanese yen and Swiss franc continue to strengthen as investors reverse carry trade positions. So we have a couple central banks intervening to hold their currencies down, and others who are intervening to try and keep theirs from falling further. Crazy Times!!

Currencies today 11/14/08: A$ .6585, kiwi .5595, C$ .8188, euro 1.2671, sterling 1.4738, Swiss .8409, ISK (No Quote), rand 10.152, krone 6.890, SEK 7.894, forint 213.42, zloty 2.9408, koruna 20.015, yen 96.39, baht 34.97, sing 1.5184, HKD 7.7501, INR 49.01, China 6.8250, pesos 12.97, BRL 2.30, dollar index 86.89, Oil $58.25, Silver $9.65, and Gold… $747.24

Source: Data Shows Just How Bad Things Are

The same is not always true when we talk about trade deficits. Like the falling dollar itself, it’s worth asking the question: How does it affect you, the individual?

The trade deficit – the excess of imports over exports – has a direct and serious effect on the value of our dollars. As long as we continue having big trade deficits, it means we’re spending more money overseas than we’re making at home. Our manufacturing profits are lower than our consumption. If your family’s budget has a “trade deficit” of sorts, you’ll soon be in trouble. If your spouse spends $ 4,000 for every $2,000 you bring home, something eventually gives way. This is what is going on with the trade deficit.

In fact, the trade deficit is one of the most important trends in the economy, and the one most likely to affect the value of the dollar. Combined with our government’s big budget deficit, the trade deficit only accelerates the speed of decline in our dollar’s value.

Speaking in terms of spending power of the dollar, the trade deficit is the third rail of the economy. Here is what has been going on: The United States used to produce goods and sell them not only here at home, but throughout the world. We led the way, but not anymore. The shift away from dominance in the production of things people need has allowed other countries (most notably China and India, and with Colombia, Russia, Brazil, and Mexico not far behind) to pass us up, and now the U.S. consumer has become a buyer instead of a seller.

This international version of conspicuous consumption 1 is financed not from the profits of commerce, but from debt. Let’s think about this for a minute. If we were buying from domestic profits, the trade deficit wouldn’t be such a bad thing. It would mean we were spending money earned from domestic productivity. But this is not what is going on. We are going further and further into debt to buy goods from other countries. Our wealth is being transferred overseas and, at the same time, we are sinking deeper into debt. This is taking place individually as well as nationally. Consumer debt (you know: credit cards, mortgages, lines of credit) is growing to record levels, and the federal current account deficit is moving our multitrillion – dollar national debt into new high territory.

Sure, we should be concerned about retirement income from savings, investments, pension plans, and Social Security. But a bigger danger is that, even with a comfortable retirement nest egg by today’s standards, what if those dollars are worthless when we retire? What then?

The big question today is, how long can this debt-driven economy continue? If you quit your job and refinance your home, you could live for a while on the money. The higher your equity, the longer you would be able to spend, spend, spend. But then what?

This is precisely what is going on in the U.S. economy, and, at some point very soon, we are going to have to face up to it and change our ways. The trade deficit is the best way to track what’s going on. Returning to the analogy of quitting your job and living off of your home equity, you may stay home all day and order an endless array of electronics, furniture, toys, computers, and the like; in other words, you could consume goods in place of working. But remember, you didn’t win the lottery; you are financing this new plan with borrowed money. The lender will want that repaid. So this individual version of a trade deficit (the deficit between generating income and spending money) is what is happening on a national level in the United States.

This is the problem that is directly affecting the value of the dollar; and the situation is getting worse. We know that the dollar is in trouble because we see it depreciating against the floating currencies of other countries.

The United States has a lot of wealth, but that wealth is being consumed very quickly. History shows that no matter how rich you are, you can lose that wealth if you’re not productive. Meanwhile, the dollar’s value falls and – in spite of the Fed’s view that this is a good thing – it means our savings are worth less. Your spending power falls when the dollar falls, and as this continues, the consequences will be sobering.

The dollar’s plunge has taken many people, currency experts of banks included, by surprise. For many of them, it is still impossible to grasp. Some talking head on CNBC said that he was at a complete loss to understand how such weak economies as those seen in the European Union could have a strong currency. For American policy makers and most economists, the huge trade deficit is no problem.

They find it natural that fast-growing countries import money while slow-growing economies export money. At least, that is the recurring theme. So Americans traveling abroad may continue to complain that “it has become so expensive to travel in Europe” as though the problem were somehow the fault of the Europeans. But in fact, it is the declining spending power of the dollar that is to blame, and not just the French, the Italians, and the residents of the so-called chocolate-making countries.

This problem is pegged not to some speculative or fuzzy economic cause, even though the concept of currency exchange rates continues to mystify. A historically large trade deficit is at the core of the declining dollar. Somebody needs to get over the notion that our economy is strong and other economies are weak, merely because this is America. In the United States, the reason for the trade deficit is not a high rate of investment as we see in some other countries, but an abysmally low level of national savings. We are spending, not producing.

A second argument offered by some is that “capital flows from high-saving countries to low-saving countries, wanting to grow faster.” Under this reasoning, a deficit country, looking at both consumption and investment, is absorbing more than its own production. But whether this is good or bad for the economy depends on the source and use of foreign funds. Do those funds pay for the financing of consumption in excess of production (as in the United States) or for investment in excess of saving? That is the key question that ought to be asked in the first place about the huge U.S. capital imports.

To quote Joan Robinson, a well-known economist in the 1920s and 1930s close to John Maynard Keynes:

“If the capital inflows merely permit an excess of consumption over production, the economy is on the road to ruin. If they permit an excess of investment over home saving, the result depends on the nature of the investment.”

The huge U.S. capital inflows (economic jargon for money coming into the country), accounting now for more than 6 percent of gross domestic product (GDP), have not financed productive investment; in fact, they are financing more and more debt. Capital grew from 5 percent in 2005 to more than 6 percent in 2006, according to a report from the Bureau of Economic Analysis (BEA), “U.S. International Investment Position.” Our net investments are among the lowest in the world, meaning we prefer spending and borrowing over actual production and growth. The huge capital inflows have not helped finance a higher rate of investment. The United States has been selling its factories and financial assets to pay for consumption.

It’s helpful to use a real means for measuring economic strength. Money coming here from overseas finances higher personal consumption. The steep decline in personal saving is a symptom of our spending, and along with that habit we have lower capital investment and a growing federal budget deficit. In the third quarter of 2005, for the first time ever, the rate actually fell into negative territory – to – 1 percent.

Unfortunately, the data does not support this conclusion. The bloated service sector added 178,000 jobs, while manufacturing shed another 12,000 jobs. What this means is that 178,000 more workers will be consuming goods while 12,000 fewer will be making them. The result will be larger trade deficits that merely compound already stretched global imbalances and exacerbate America’s inevitable day of reckoning.

A service sector can only exist so long as it is supported by a vibrant manufacturing sector. The reason is simple. People employed in the service sector consume goods but do not actually produce any of them. Therefore they must rely on others, who presumably benefit from their services, to produce goods in their stead.

As an example, suppose that ten castaways were marooned on an island. What if on the day they washed up on shore they all decided to assume the following jobs; lawyer, accountant, banker, economist, actor, philosopher, astrologer, beautician, teacher, and nurse. How long do you suppose they would all remain alive without food, water, or shelter? Someone has to provide those things or everyone will perish.

In modern America, the goods shortfall is being made up by foreigner producers, who only derive a marginal benefit from the American service sector. In December, 43,000 new jobs were added in the education and health care sectors and 50,000 were added in business and professional services. What are all of these people going to export in order to pay for all the imported goods their paychecks will permit them to consume? Is there really that big a demand for American legal services in China? Do the Japanese really need our accounting advice? Do Saudi Arabian children benefit from pre-schools in America? How many sick Germans will seek treatment in American hospitals?

The fact that the U.S dollar rose in response to today’s jobs data is further evidence of how widespread this misunderstanding has become. Currency traders bid up the dollar because they assume a stronger jobs market will engender higher interest rates, which is perceived as dollar bullish. However, they ignore the longer term implications of the larger trade deficits that those service jobs will ultimately produce, which is decisively dollar bearish.

For now, all these excess dollars are being absorbed by foreign central banks precisely because foreign private consumers have little use for them. Today’s jobs data means that the resolve of foreign governments to continue accumulating additional dollar reserves will be that much harder to maintain.

Source: More Consumption Less Production