It’s probably a literary no-no to quote yourself. But we begin today with words we wrote last November not because we admire our own work, but we because we meant it then… and it’s becoming a reality today.

No matter which way you measure it, unemployment among Americans aged 16-24 is now at a post-World War II high. As typical in these kinds of stats, we’re seeing numbers all over the place… the NY Post reported yesterday that the rate has “exploded” to 52%, while the government’s latest tally (set to be revised this week) has it closer to 25%. Neither stat includes students not looking for work.

Both ends of this spectrum still mark the highest youth unemployment rate since at least 1948, when the government started keeping track. That’s especially interesting given the “official” unemployment rate for the total population — a 26-year high of 9.7%.

This has the Obama administration worried enough to shell out $1.2 billion — an earmark in the stimulus bill which has (if anything) only kept the situation from getting REALLY ridiculous. In the meantime, the masses of disgruntled youth swell by the day. How dangerous is that in modern times? Ask Mahmoud Ahmadinejad.

Why do our youth have it so tough? For starters, competition for jobs is at a record high. Here’s a worthy alternative way to examine our jobs crisis:

There are 14.5 million officially unemployed people in the United States and 2.5 million job openings. In other words, for every six people looking for work, there is one job to fill — not counting those already employed who are looking for a new gig. And we hasten to add, these are Labor Department numbers… if the reality were twice as bad, it’d be no surprise.

So pity the youth. That English Lit degree might be useful one day, but not up against five other resumes with real work experience. Summer internships are over, and all that’s left are a few hourly, low-wage gigs. According to Northwestern University, half of college grads under 25 that do hold jobs are working in a position that doesn’t require a degree — also the highest portion on record.

Our biggest fear is that these jobless youths lose all hope and make the ultimate mistake — law school.

Source: Unemployed Young People are the Real Danger

In fact, when you peruse the news it’s difficult to come to any other conclusion. For instance:

• A number of key earnings reports have been much better than expected, and company executives buttressed those profit figures with positive comments about the next 18 months.
• The trading operations of Goldman Sachs Group Inc. (NYSE:GS) and JPMorgan Chase & Co. (NYSE: JPM) both just reported record profits.
• U.S. housing prices rose in May for the first time in three years. Initial jobless claims have plunged 15% since their April peak. The Conference Board’s Index of Leading Economic Indicators rose 0.7% in June, its third successive positive reading.
• And just yesterday (Thursday), the Dow Jones Industrial Average topped the 9,200 mark for the first time since November – a potentially highly bullish development for the economy, since stock prices are forward-looking.

But while many experts will look at these developments as an excuse to celebrate the looming rebound to come, I actually see them as a real cause for concern. The reality is that these reports, when viewed in concert with other data, are actually a sign of a re-inflating financial bubble.

This is actually an “Economic Recovery Trap” that – when sprung – will inflict a lot of pain on overly optimistic investors. Now that we’re sufficiently forewarned, we should re-orient our money accordingly.

Doomed by Deficits

It’s not surprising that the U.S. economy has shown signs of strength in recent weeks; it has had huge amounts of money thrown at it.

On the fiscal side, the Obama administration’s May budget plan suggested deficit for the 2009 fiscal year (which ends in September) would reach $1.83 trillion – about 13% of gross domestic product (GDP).

However, subsequently released unemployment figures have shown that the U.S. jobless level reached 9.5% in June, far above the 8.3% rate assumed in the budget. And unemployment is expected to spike further in the second half of the year.

This worsening unemployment situation strongly suggests that the true budget-deficit figures will be even worse than those already announced, a supposition strengthened by the postponement – from mid-July to mid-August – of the normal mid-term budget review. Since U.S. President Barack Obama is currently attempting to steer two difficult and expensive pieces of legislation – the cap-and-trade energy bill and the healthcare-reform bill – through Congress, he does not want unfavorable budget numbers appearing that might be used to persuade wavering legislators to oppose them.

Even at 13% of GDP in fiscal 2009 and 10% of GDP in fiscal 2010, the U.S. federal deficit is far above any previous level reached in peacetime, so it’s likely that if the economy begins to recover these deficits will prove difficult to finance, meaning the budgetary shortfalls will push up long-term interest rates.

That escalation in long-term rates, in turn, could choke off the economic recovery, which to be healthy requires a rebuilding of inventories, extensions of credit to new domestic-and-foreign customers, and a revival of enthusiasm for such large-ticket items as housing and automobiles.

With the yield on 10-year U.S. Treasuries already up from a low of 2.07% in December to a recent level of 3.60%, the dampening effect of rising interest rates may already be becoming apparent. In any case, the deficit is a dark cloud that threatens to obscure the economic outlook.

And that dark deficit cloud will be very difficult to remove.

Know Your (Real) Enemy

The other main problem with today’s economy is the likely resurgence of inflation. Even the U.S. Federal Reserve – which under central bank Chairman Ben S. Bernanke for a long time apparently maintained a fear of deflation above all else – admitted in its last meeting that the likelihood of deflation had receded.

That’s not surprising: In the last six months, core consumer price inflation (excluding food and energy) was a reported 2.4% annually. Although the “headline figure” has been low because of the sharp drop in energy prices the United States economy has experienced since last year, that effect is about to disappear, as energy prices peaked in early July 2008 and fell sharply throughout the fall. Thus, even reported consumer price inflation – on a year-over-year basis – is likely to surge in the months after this one (July).

Moreover, the reported inflation figure may be low. Each month, the U.S. Bureau of Labor Statistics “seasonally adjusts” consumer price statistics to remove normal seasonal patterns from the data. That seasonal adjustment process is thoroughly opaque, and is subject to manipulation. In the early months of 2008, for example, when reported inflation was high, the downward seasonal adjustments were consistently much larger than the average of the decade 1998-2007. The process was then reversed late in the year, when reported inflation was negative, but the upward seasonal adjustments made it less negative. For the year as a whole, “seasonally adjusted” inflation was 0.5% below unadjusted inflation, which shouldn’t happen, except by bizarre rounding effects.

In the first six months of 2009, the negative seasonal adjustments have re-appeared, to the extent that total seasonal adjustments for the six months were minus 1.2%, compared with a 1998-2007 average of minus 0.61%. If the seasonal adjustments are indeed wrong, and should have been at only the average level, then “core” price inflation in the six months to June would have been 3.6% annually.

Not only is that not deflation; it suggests accelerating inflation.

Money Supply Moves

Another reason I wouldn’t be surprised by a reappearance of rapid inflation is the big increases in the money supply we’ve seen over the last year.

According to St. Louis Fed data, the M2 money supply has increased by 8.8% in the last year. The St. Louis Fed’s own Money of Zero Maturity (MZM) – the best measure of the broad U.S. money supply available since the central bank ceased reporting M3 in 2006 – jumped 10.2%. And the overall monetary base zoomed an astounding 92.8%.

In addition, the Federal Reserve has bought $300 billion of government bonds, always an inflationary warning signal since it monetizes the deficit. Furthermore, the Fed and the government together have engaged in rescue, stimulus and guarantee programs totaling an astounding $23.7 trillion, according to Neil Barofsky, inspector general for the government’s Troubled Assets Relief Program (TARP). A “gross” number if ever there was one, that figure is nearly twice overall U.S. GDP.

Let’s face reality: We’re going to be paying this bill for decades to come – almost certainly largely through resurgent inflation. In those circumstances, the recovery in the stock market is based not on reality, but simply on a bubble – an assertion that’s already been vindicated by the extraordinary afore-mentioned profitability of the Goldman Sachs and JPMorgan Chase trading operations, which typically benefit enormously when bubbles are inflating and there is too much money sloshing about.

The near-bankruptcy of CIT Group Inc. (NYSE: CIT), and the losses recorded by the commercial banking sides of Citigroup Inc. (NYSE: C) and Bank of America Corp. (NYSE: BAC), demonstrate that even in a period when short-term rates are exceptionally low, conventional commercial banking is not currently a moneymaker.

Other then Goldman Sachs shares (whose prosperity is likely to be short-lived), it is clear that our investment dollars should be concentrated in two areas:

• Conservatively run overseas economies.
• And inflationary hedges such as gold and silver.

Let’s look at some investment opportunities in each category.

First, we should buy moderately priced shares in countries where “stimulus” has been limited and in which monetary and fiscal policies are close to balance. The two largest such countries are Germany and Brazil, so you should look at the Germany ETF iShares MSCI Germany Index (NYSE: EWG) and the Brazilian iShares MSCI Brazil Index (NYSE: EWZ).

Second, you should make sure that a substantial portion of your assets are in inflation hedges such as gold and silver, either in the metals directly through SPDR Gold Shares (NYSE: GLD) and iShares Silver Trust (NYSE: SLV) or through gold mining shares, the exchange-traded fund (ETF) for which is the Market Vectors Gold Miners ETF (NYSE: GDX).

Source: Beware of the Obama Stimulus Trap

“Of the June total,” reports the Labor Department, “1,235 mass layoffs were reported in the manufacturing sector.”

“All the indicators in the real economy,” said Bill Bonner in his final speech at the Agora Financial Investment Symposium in Vancouver, “are actually getting worse.”

And is it any surprise? What exactly does America make anymore? We have been a nation of consumers for the past decade, spending and borrowing to buy the gee-gaws and gadgets that our friends in the Far East have been so busy producing. But now, consumers are saving…they aren’t buying flat-screen televisions…or new cars…or much of anything for that matter.

And it goes without saying that since the housing bubble has popped, the one sector that was actually producing – the building of residential and commercial real estate – is failing miserably as well.

Caterpillar (NYSE:CAT) announced its results for the second quarter too. Profits were down 66%. In other words, while the banks were making money speculating with taxpayer’s money, Caterpillar was trying to make things and selling them to customers. Caterpillar not only makes things; it makes things that help other companies make things. Things with motors…big things…things that make noise and give off exhaust…things you use to dig holes and move dirt…things you need if you’re going to have a real economic recovery. Unfortunately for CAT, these things aren’t selling.

So what does this tell us? Well…it suggests that there is no real economic recovery at all. The real economy is suffering…sinking…and shutting down.

The banks are not earning their money helping Caterpillar expand. They’re making their money not because of a recovery, but because there isn’t one. In other words, they’re profiting from the financial stress of the early stages of a depression. There’s a post-crash bounce…and the government is sending a lot of money their way.

As for a real recovery – forget it. There’s no evidence of it. Unemployment is getting worse. Housing is still going down. Profits are going down. Those aren’t the things that presage a recovery…they herald a deeper, darker depression.

The depression darkens because people are not just being laid off – their jobs are disappearing. They do not get called back to work. Instead, they stay unemployed until they run out of unemployment benefits…and then the statisticians in Washington drop them off the unemployment rolls. Currently, the first batch of those people to reach the end of their benefits came this week. Last we looked, the Pennsylvania legislature was passing a law so they could continue drawing benefits for a few weeks more.

Unemployment, trade, defaults, foreclosures, bankruptcies, prices, manufacturing…you name it and you have to go back to the end of WWII to find similar numbers. Of course, at the end of the war, the wartime economy shut down. Millions of people who have been in uniform…or making tanks and airplanes…were suddenly out of work. Economists thought the economy would go right back into the Great Depression. Instead, it boomed.

But what was normal for so many years is not normal any more. Now, consumers are paying off debt faster than any time since 1952. The government, however, is making up for them. Goldman may no longer be able to push more credit onto the public; but it can push one heckuva lot of debt onto the public sector. Wall Street firms helped households ruin themselves in the Bubble of 2003-2007. Now they’re doing the same for the government, helping the feds raise money on a scale never seen before in human history.

The above is just an excerpt from Bill’s standout essay from this week. You can read it in its entirety here.

Bill also made the final speech at the AF Investment Symposium on Friday. “I’d like to start by thanking all the DR readers here,” he said to the audience, “you have my sympathies. You have to read 1,500 pages a year – and in ten years it’s been 15,000 pages.”

That’s right. The Daily Reckoning recently celebrated a birthday – our little publication turned 10 this month. We celebrated by “roasting” Bill at an intimate gathering at the Pan Pacific Hotel in Vancouver this past Wednesday night.

Addison Wiggin, started working on the DR in the early days of the Internet Age…when they weren’t quite sure how this ‘daily e-mail’ thing would work – but they knew it was something they had to try. Addison fondly recalled that in those days, he and Bill shared a tiny desk in an office in Paris, and every time Bill got up from the desk, he would knock the power cord out of Addison’s computer, erasing all the work he had done that day.

But the DR has come quite a ways since then. We have figured out the ins and outs of Internet publishing (for the most part) and we now have five international versions. Sometimes we are right, and sometimes our forecasts and musings are wrong…but that won’t keep us from publishing these daily reckonings. We hope you enjoy them.

Here’s to ten more years,

Kate Incontrera

Source: The Real Economy is Getting Worse

Good day… And a Tub Thumpin’ Thursday to you! It was 95 here yesterday, and forecast to be even warmer, or should I say hotter, today! WOW! Like overnight, it turned to summer, after the coldest, most wet, spring I can ever recall… I know, I’ll get 100 emails reminding me that summer doesn’t officially start until next week… I’m just talking about the summer-like weather!

The currencies remained in that range I talked about yesterday, with a slight bias to sell dollars, but not much of one. Crude Oil prices moved higher on the day and overnight, which doesn’t play well with a dollar rally, and therefore, has pushed the dollar down a bit… But again, we’re talking minor moves. It’s as if someone (traders) are waiting for something BIG to happen with data, the Fed, the Treasury, before taking one direction.

Did you hear about the Gold vending machine in Germany? I saw this yesterday morning, and thought it to be a hoax… Then someone in the office brought me a print out of a story in the U.K. Telegraph… OK, so maybe it’s not a hoax… Any way… Here’s the skinny… In Germany, they’ve come up with a vending machine that can update prices of Gold every few minutes, and… Dispense 1 gram Gold wafers, 10 gram Gold bars, or coins… There’s about a 30% increase in the market price! WOW! Imagine that, you need some Gold in your pocket just for GP, and you simply walk up to a vending machine and buy some, as simple as getting that Zero bar, or Snickers!

OK… What gives a guy this kind of idea to make a vending machine that disperses Gold? It’s all about taking advantage of the times, folks… I may have told you this in the Pfennig before, I don’t recall, but I use it in my presentation for Gold… Investment in Gold increased 427% last year… To put it into Tonnes of Gold, retail investment purchases of Gold reached approximately 108 Tonnes of Gold in 2008, up from 36 Tonnes in 2007, and 28 Tonnes in 2006!

I was talking with the Big Boss, Frank Trotter, who, by the way scored a goal from about 30 yards out in his soccer match the other day… Ty Keough, our one-time national team player, and long time pro, was quite impressed, and that says a lot, because Ty has seen some soccer in his years… You may know Ty or heard of him… But do you know his dad? His dad is a soccer legend, playing on the U.S. national team that beat Great Briton in the World Cup in the 50’s, and then went on to be the winningest college coach, with multiple national championships at St. Louis University…

Oh, I digress, there, I’m so sorry… But once I got talking about soccer, of which I played a ton of in my youth, I just started typing… UGH! Any way, I was talking to the Big Boss, Frank Trotter, the other day, and Frank mentioned that he was concerned that Gold could be the next bubble… I assured him that I didn’t see it that way, not until my neighbors are asking if they can buy Gold at $1,200 oz! (I tried to get them to buy it at $800 oz, to no avail!)

Remember when we were kids? No wait, we wouldn’t all have been kids at the same time you dufus Chuck! OK, when I was a kid… We used to have these bomb shelters in our schools, and we would practice going into them… It was a different time, the cold war was strong, and the fear was put in all of us toward Russia… I had a teacher, many moons ago, that told the class that it was a good thing that Russia and China didn’t see eye-to-eye… Well… I wonder what he thinks about the news that China and Russia have agreed to use each other’s currencies and eliminate the use of dollars in their trade?

It kind of feels like Russia and China are ganging up on the dollar!

The other “new kid on the block” Brazil, is joining in with Russia and China… But that news didn’t help the Brazilian real yesterday, as it saw one of its worst days in weeks! But that’s the real… I watch it trade some days, and your eyes grow very wide open in amazement of the wild swings in this currency. It will move 2-3% in a day, either way, in a heartbeat! Which tells you that the “number of players” in real, is smallish when compared to the second most liquid currency in the world… The euro! So… If you’re going to own reals, you need to be aware that it has these wild swings!

Speaking of the euro… It’s getting a boost this morning from an improved outlook for risk today, as U.S. stock futures are stronger. The “Big Dog” looks a little tired of chasing the dollar, and then being pulled back on to the porch over and over again recently… But, as always, always I tell you tutor turtle, be yourself… No wait! I always tell you that all this is “noise”… Investment portfolio diversification into currencies and precious metals is a long-term relationship… The dollar didn’t lose over 90% of its value overnight! The euro didn’t gain over 50% VS the dollar overnight! These things are long sweeping moves, and you have to drown out the “noise”… Otherwise, you’ll become a currency and metals “trader”, and chasing these assets all over the board!

Pound sterling is getting hit on the chin this morning, as retail sales fell in May, which was the first drop in 3 months… Retail Sales fell .6% in May, and pretty much squashes those so-called “green shoots” that have been talked about for the U.K. economy… I think you can expect to see stuff like this for the next year… Up and down, in and out, green and brown shoots… And… Like I’ve said before, if it’s happening in the U.K. it won’t be long before we experience the same, as the U.K. just seems to be ahead of the U.S., time-wise…

The Swiss franc is stronger this morning than recent trading sessions as the Swiss National Bank (SNB) met, left rates unchanged, and made a statement that has given a green light to franc traders to buy… The SNB announced that they were not targeting a specific exchange rate for the currency. You may recall that the SNB had previously stated that they were not happy with franc strength, and had intervened on occasion to keep the currency from strengthening… I would be careful here, as this could be a “trap” Oh, you don’t think Central Banks set traps for traders? OK, well, maybe they don’t really set a “trap”, but they do send mixed messages that cause losses!

Big Al Greenspan was famous for these “mixed messages” that were called “Greenspeak”… After reading two books on Big Al, I can tell you that I personally think that “Greenspeak” was gobble-de-gook! Confuse everyone so they think you are some sort of messiah! Right Big Al? When… In reality, he was just “a guy”, who really screwed things up!

Today, we will see the Weekly Initial Jobless Claims, which for me has turned into watching the “Continuing Claims”… This part of the data tells me if unemployed people are being re-hired… I haven’t see that happening, as Continuing Claims have continued to grow larger in numbers… We’ll also see the Philly Fed Index, (manufacturing)…

The real meat (where’s the beef?) will come from a testimony before the Senate Banking Committee by U.S. Treasury Sec. Geithner, on the President’s plan to overhaul the U.S. Financial regulatory system… I doubt these Senators will understand what Geithner is talking about, and will “rubber stamp” the plan… Which means, folks… That the Gov’t gets its foot in the door further…

I know, I know, I get quite a few emails from people that take exception to me getting upset with the Gov’t getting more involved in the markets, etc. as they say, “Yeah, Chuck, and you think the “markets” have done a better job?” Well… The markets are the markets, folks… If left alone, they will act as markets should… What? You didn’t like the fact that the Mr. Market, as my friend, Bill Bonner, calls it, turned the whole credit, and deficit spending on its ear? Mr. Market was just trying to correct what was wrong… Getting the Gov’t involved is just plain, wrong! One foot in the door… Then next it’s the next thing, and the next, and pretty soon, the Gov’t is completely in the door, and hanging out on your couch!

Please… These are just my opinions… If you don’t like them, you have that right! It is still a free country for speech! Just delete it and go on with your life! OR… You didn’t pay anything for all this, that I’ve been giving to people since 1992…

In Norway yesterday, the Norwegian Central Bank, The Norges Bank, surprised me and the markets by cutting rates 1/4% of 25 BPS… I did say the other day that the Norges Bank was the only Central Bank that was meeting this week, that had some room to cut rates… The Norges Bank did say in their press conference after the rate announcement that rates were at the “bottom” and that they were looking toward the first quarter 2010 as the timing on the first rate hike!

Well, with traders so forward looking, this was good news for the krone, as the rate cuts was quickly put in the rear view mirror, and now everyone is looking forward to higher rates!

And under the heading of “dirty float”… The Reserve Bank of Australia (RBA) is reported to have sold the most A$’s in the month of May, since February 2004! Now, go back to May and recall the move in A$’s… The currency gained almost 10% in the month… So, the A$ would have gained even more if the RBA had not sold A$1.4 Billion A$’s in the month! I personally think the RBA was just trying to smooth out the trading the A$, which given this information would have been moving up the charts with a bullet in May!

I don’t think the RBA would get involved if the move was a slow, general appreciation of the currency… So, I don’t look for future intervention to keep the A$ from gaining the ground I believe it will gain rest of this year, as inflation fears grow stronger and stronger…

And on that positive note… I think I’ll head to the Big Finish!

Currencies today 6/18/09: A$ .7945, kiwi .6355, C$ .8835, euro 1.3935, sterling 1.6260, Swiss .9280, rand 8.1380, krone 6.37, SEK 7.8725, forint 204, zloty 3.26, koruna 19.16, yen 95.80, sing 1.4570, HKD 7.7503, INR 48.25, China 6.8350, pesos 13.46, BRL 1.97, dollar index 80.42, Oil $71.30, 10-year 3.69, Silver $14.25, and Gold… $938.20

That’s it for today… That’s a pretty interesting story about the Gold vending machine, eh? Here in the office we have one of those “honor snack trays”, where people pay for what they take… Can you imagine one of those that had Gold coins in it? HAHAHAHAHA! Another good win for the Cardinals VS the Tigers last night… Of course I can only watch 5 innings or so, before it’s bed time. I get up the next morning, and watch the highlights! This weekend is Father’s Day… Don’t forget your dad! More on that tomorrow… I just love this time of year when the daylight lasts until 9 pm… The daylight lifts spirits, I believe, and now spirits get lifted longer each day! HA! OK… How about making this a Tub Thumpin’ Thursday, eh?

Source: Gold Vending Machines!

Good day… And a Happy Friday to one and all! A Fantastico Friday, as we all will be heading to the Ballpark tonight to watch my beloved Cardinals! This should be a fun time by all! It’s also a Jobs Jamboree Friday, and we’re about to witness something that hasn’t been seen in 25 years… A “published by the BLS” Unemployment Rate of 9%!

OK… You know me… I think the (Bureau of Labor Statistics) BLS should just drop the “L”, as they have gone whacko with the adjustments and deletions to the statistics! So… For those of you keeping score at home, we will have a Jobs Jamboree this morning, and the “experts” believe the total jobs lost in May will be -520,000, with the Unemployment rate rising from 8.9% to 9.2%…

Me? I have to think that that -520,000 is too optimistic… But, with the BLS making adjustments, it’s just too difficult to make a call based on the data you’ve seen… Data like the ADP report that was worse than expected… Recall that last month the BLS added over 220,000 jobs to the report out of thin air, including construction jobs! Really? I shake my head in disgust! So, we’ll just have to wait-n-see, eh?

The currencies threw out their own roadblock on the dollar bulls yesterday, and wrapped a tourniquet around the wound suffered from the dollar’s rise from the canvas that I talked about yesterday.

The European Central Bank (ECB) and Bank of England (BOE) both kept their interest rates unchanged… The thing we were looking for from ECB President Trichet, (any words suggesting the euro has risen too fast) didn’t materialize, and like I said yesterday… If Trichet doesn’t mention the euro, the single unit will get to pass Go and collect $200!

The BOE announced that they would keep their Quantitative Easing (bond buying) right where it’s at, with no rise, which surprised a few analysts that follow the BOE. This non-move allowed the pound sterling to stop the bleeding, but only momentarily… The political picture in the U.K. is dragging pound sterling through the mud. A 5th minister resigned yesterday, and on his way out he urged Prime Minister Gordon Brown to do the same! There is political uncertainty underway in the U.K., and political uncertainty is a recipe for disaster regarding a currency, which in this case is the pound sterling! A huge drop form the lofty figure of 1.65 earlier this week in pound sterling, has occurred… Recall, I told you I just couldn’t get my arms around why the pound sterling was so strong…

I did an interview with the Pittsburgh Gazette the other day, (someone that wanted to talk about the dollar!) and excepts of the interview printed in yesterday’s edition of the Gazette… I tried and tried to get across the deficit thang, I even repeated the phrase… “recall the people that kept saying that deficits don’t matter? Well, obviously the do!”

Speaking of deficits… I believe that while there may be short periods of time when the dollar rebounds, especially when U.S. Treasury Sec. Geithner goes on his Magical Currency Tours, but overall, the deficits will hang over the dollar like the Sword of Damocles… And I also believe that we will return to the underlying Weak Dollar Trend for good in the 2nd half of this year… Because… By then… the U.S. Budget Deficit, which has already breached 5% of GDP (late last year), will be heading beyond 10% of GDP this year. So… Do you want to own a truck load of dollars when the markets are staring at a Budget Deficit of greater than 10% of GDP? I don’t think so!

Recall yesterday’s Pfennig, when I made a BIG deal out of what Angela Merkel, Germany’s chancellor, said? Well… Big Ben Bernanke didn’t like being taken to the woodshed like that, and said that he respectively disagreed with the chancellor… He went on to defend his actions… “The US and the global economies, including Germany, have faced an extraordinary combination of a financial crisis not seen since the Great Depression, plus a very serious downturn. In that context, I think that strong action on both the fiscal and monetary sides is justified.”

“I am comfortable with the policy action the Federal Reserve has taken,” Mr. Bernanke said Wednesday. “We are comfortable we can exit from those policies at the appropriate time without inflationary consequences.”

Really? You think so? I don’t think so! And remember I was the first to say that the Fed would begin to cut rate aggressively in August of 2007! I remember it because I was at home recuperating from my cancer surgeries, and watched the liquidity get drained out of the markets in the first round of the housing meltdown… I wrote about how they would cut rates immediately and a couple of more times before year-end… The Big Boss, Frank Trotter, called me at home and said, “are you sure?” I was!

You might also recall that Big Ben Bernanke was quick to say that the sub-prime meltdown would not filter out through the rest of the mortgage sector, or economy… It was an isolated thing… Remember? Then… The U.S. Treasury Sec. Paulson, said a month later that the housing meltdown had “bottomed”… So… You want to go to the bank on the fat chance that the Fed WILL know when to exit these policies? Not me! Their track record is awful!

OK… Enough on that! So… How about that Aussie dollar? Yesterday, I told you how the Australian economy avoided a technical recession by posting a positive growth figure in the last quarter, after posting a negative figure the previous quarter. Well… Barclays Capital issued a report this morning calling for a rise to 90-cents in the Aussie dollar in the next year. Barclays believes that within the year, the Reserve Bank of Australia will be back to raising interest rates, and this will be enough to push the A$ higher and higher… (think of Sly Stone with his arms in the air… I wanna take you high-er!)

However, before you rush out and buy on what Barclays Capital has to say… You might want to read the fine print from their report that says… “We continue to expect some pullback in these currencies (Aussie and kiwi) in the near term to provide opportunities to establish medium-term positions.”

So… In other words… They’re saying to buy on the dips! Shoot Rudy, wouldn’t it have been easier for them to just say that than all those words?

Canada also prints a jobs report today… But that will take a third row seat to the U.S. Jobs Jamboree… Nevertheless, Canadian dollar investors will want to watch for any signs of the job losses to bottom out.

Speaking of Canada… I see where the folks at Morgan Stanley like the Canadian dollar / loonie, and Norwegian krone because of each respective country’s strong balance sheet… Hmmm… Sounds like the researchers there have been reading the Pfennig again! HA! But seriously… It’s nice to see other companies that spend large sums of money for research, come up with the same stuff that little ole’ me comes up with! OH! And a looooonnnnngggg time before they do!

The FDIC is calling for a shake-up at Citigroup… What? Since when does the Gov’t or its Agencies make decisions like that? Isn’t it up to the shareholders and board of directors? OH! That’s right! The Gov’t has made a LARGE investment into Citigroup… And having done so, they believe they can call the shots! What did I tell you was going to happen with all those bailouts and TARP money? It’s happening… (strike up the eerie music)…

Speaking of the Government of this country… I’ve been writing and writing about the things I see going on that makes my skin crawl… Yesterday I really went out on a limb, but that’s OK, it is MY letter, and it is FREE, so, if I want to talk about how we’re taking our republic to the brink of bad stuff… It’s OK!

Today, instead of a “feel good” Corporate story, I have something that I want to share with you… Yesterday, the Big Boss, Frank Trotter, sent me a note. He had gone to a Crosby, Stills and Nash concert the night before, and had a V-8 moment… So… As I finish out this week’s Pfennigs and head to the Big Finish, I want to give you Frank’s notes to me… There’s a loud message here folks…

.. you got to speak out against the madness . . .

I went to a CSN concert last night. The crowd was a little thin but not as thin as the hair in the auditorium. I’ll have to admit it transported me straight back into the spirit of the early 70’s. No matter what your side of an issue it was a time to speak your mind. One of the most disappointing things, and something that is indicative of the country’s reliance on “I’m from the government, and I’m here to help” is the total lack of belligerence with any side of issues today. At that time there was another war under way and after Nixon conceded that the combination of the Great Society and a foreign war was a little too much even for the greatest economic powerhouse on earth to support he took the US off the gold standard and let the dollar float. Well it’s 38 years later and a long, strange float downward it has been. Just hearing the words made me resolve to speak out against the current madness. Madness in congress for the past 10 years and at least two administrations. Madness at the Fed as Helicopter Ben spreads the good word of monetary easing. Madness of Nationalization and a trend toward Collectivism. Madness in the markets. Maybe it’s time to stop the motors of the world and head for your own personal gulch – but make it one where you can still make a difference and “Speak out, you got to speak out against the madness, you got to speak your mind, if you dare.” (David Crosby)

>>>> I’ve always told Frank that he had a gift to write… He’s got bigger fish to fry though! And… Can you see why Frank and Chuck have been good friends since 1981? I tell people when we speak that we’ve worked together so long… That when we began working together, the Dead Sea wasn’t even sick! HA!

Currencies today 6/5/09: A$ .8060, kiwi .6370, C$ .9070, euro 1.4185, sterling 1.61, Swiss .9340, rand 8.0570, krone 6.34, SEK 7.7240, forint 204.20, zloty 3.2110, koruna 19.08, yen 96.80, sing 1.4475, HKD 7.7510, INR 47.11, China 6.8330, pesos 13.22, BRL 1.9377, dollar index 79.52, Oil $68.50, Silver $15.69, and Gold… $976.95

Chuck Butler

Source: A Jobs Jamboree Friday!

Labor also said the four-week average of new claims rose by 6,000 to 630,500, also the highest level since April 18. The four-week average is considered a more reliable figure because it smoothes out distortions caused by anomalies.

Obviously, “the labor market is not responding to the so called ‘Green Shoots’,” wrote Steve Ricchiuto, chief economist at Mizuho Securities. And the layoffs at Chrysler are likely not even factored in yet.

April wholesale inflation data were in line with expectations. The figures showed a 0.3% monthly rise in the producer price index. Core PPI, which excludes food and energy prices, rose 0.1%.

“Concern over U.S. data quickly faded as market sentiment quickly reasserted its dominance over fundamentals,” wrote Michael Woolfolk, of the Bank of New York Mellon (NYSE:BK).

Source: Dollar Slightly Lower

Stress Test A Concoction By Banking Industry

In a nutshell, the banks’ stress test was really nothing more than a fantastic concoction put forward by the U.S. Treasury, the Federal Reserve and the banking industry.

Unemployment assumptions too high in the test? No problem… just amend them to a more favorable number.

GDP growth too low? Ah, no worries… just change it.

Hardly a surprise then that the results are unbelievable. According to the New York Times, these were the assumptions in the test:

• The U.S. economy contracts by 3.3% this year and remains almost flat in 2010.
• Housing prices fall another 22% this year.
• The worst-case scenario for unemployment has the jobless rate at 8.9% this year, rising to 10.4% in 2010.

Here are the problems with assumptions like that…

• GDP Growth: In short, we’ll see anemic expansion at best, with little evidence of the contraction ending this year. Of course, we can hope that growth will return if the government continues to spend like a drunken sailor.
• Unemployment: The April job numbers released last Friday (if you even believe them) showed that the unemployment rate is already at 8.9%. So if that’s the “worst case,” we’re now on the mend, with the rate set to decline from here, right?

I think not. We’ll see the jobless rate in the double-digits this year, not next.

• Housing Decline: This is the only part of the guidelines that makes sense. The market is finally showing signs of bottoming at levels well below expectations – something I warned readers about in late 2006.

As An Investor, Don’t Flunk This “Stress Test”

Notice how the “secret,” yet somehow highly public results were leaked at the end of last week? It worked like a charm. Investors latched onto the result, breathed a sigh of relief that financial Armageddon had been staved off, and gleefully bid up stocks. Financial shares, in particular, rallied on the news.

Funny thing is… as soon as stocks rallied – some by multiples of 100% – the same banks that claimed to be solid suddenly began to raise capital. So far, the amounts raised (and yet to be raised) are nearing the $100 billion mark.

The critics are out in force. Yesterday, Meredith Whitney (the Mark Meeker of financial shares) was adamant that she wouldn’t buy shares here. Moreover, she stated that the stress test was a joke, with banks still under-capitalized and diminished earnings power as a result of the recession and asset sales to raise cash.

So, what’s an investor to do? Are there any opportunities out there at all?

The Best Way To Buy These Three Bank Stocks

Without a doubt, there are opportunities in the banking sector.

But that opportunity is not to buy the shares today. There’s a savvier, smarter way to do it, based on the fact that bank stocks will pull back. And it’s on that pullback that you should look to buy. How?

In my opinion, the best strategy to use when buying bank stocks should be to do it through two-year LEAP options.

Why? Because these bank stocks aren’t paying you dividends these days, why risk all your capital when you can achieve better returns at a lower cost by going long with LEAPS.

However, the options are exorbitant at the moment because volatility is so high. But that doesn’t mean you’re stuck. You just need to use a high delta strategy.

Simply put, this means you should buy deep-in-the-money LEAPS in order to reduce the outlay for time and risk premium. And you should only go for the ones with the highest volatility.

In this case, set your sights on…

• Bank of America (NYSE: BAC) – when it gets back to the single digits.
• JPMorgan Chase (NYSE: JPM) – when the stock trades in the low-to-mid $20s.
• Suntrust Banks Inc. (NYSE: STI) – when shares retreat to the low teens.

However, these banks’ current prices reflect outrageous valuations, based on earnings power and economic uncertainty.

So while the black cloud may have been temporarily lifted from the banking sector, it doesn’t mean that these companies are a sure bet for profits – not at current prices anyway.

Karim Rahemtulla

Source: Bank Stocks: Disregard The Stress Test & Consider These 3 Stocks

OK… Well, the currencies took a breather VS the dollar yesterday, and basically traded right around the currency round-up levels most of the day. Overnight, things were pretty quiet too… The markets are trying to figure out which way they are going to go with the dollar… The Deficit is growing, which SHOULD be bad for the dollar, but in recent times, fundamentals get a little hazy at times. So… Let’s go to the tape on the Office of Budget Management (OMB)

The OMB reported yesterday that they were revising the Budget Deficit for this fiscal year, which ends Sept. 30th. Get this folks… The OMB says that this year’s deficit will be 12.9% of GDP, and next year’s deficit will be 8.5% of GDP… OUCH! Now… Let me put these figures into some framework… First of all, back in 1985, finance ministers of the world met at the Plaza Hotel in New York, and were scared to death that the U.S. deficit was out of control… At that time it was 2.5% of GDP! The Plaza Accord called for a weaker dollar to deal with this, what was called out of control, deficit.

In 2001, the U.S. Deficit reached 4.5% of GDP, which historically meant that a country experiencing debt levels at 4.5% of GDP would experience a currency crisis, or at the very least a major debasing of the currency….

Now skip forward to today… 8.5% of GDP? Where the heck are the finance ministers of the world now, and why are they scared to death regarding this out of control deficit? The only country crying wolf at these figures is China! Oh… And one more thing about the 8.5% of GDP… This is the highest level our debt has been in 60 years, since the end of World War II…

I shake my head in disgust… What has become of our republic… Oh… And to add injury to insult… This morning, the Trade Deficit, which had fallen recently due to the recession, actually gapped up 5.5% in March… That makes sense to me, actually… You see, the dollar was still “stronger” in the first part of the year, thus eliminating the ability for exports to make a dent in this Deficit… The sharp narrowing of this deficit looks to be leveling off, and once again, that does not bode well for the dollar… The return of the Twin Deficits could be in cards once again, and that could be devastating once again for the dollar.

Oh…. And one more thing on the Jobs Jamboree from Friday, that I completely forgot to talk about yesterday… The jobs created were “ghost jobs”! The totally insane Bureau of Labor Statistics (BLS) added… 226,000 jobs from what they believe was “business creation”… WHAT? Are you kidding me? What a bunch of dolts! Business creation during a recession like this, that would add 226,000 jobs! I’ll tell you what happened here… The Gov’t needed this report to show some sunshine… And voila! The BLS came through! But here’s the rub… It will lead people back into the markets artificially… If losses come, then the BLS should be held responsible for this artificial attempt to make us feel good! OH… And don’t forget, in a future month, the BLS will have to take these out because they won’t materialize… And when they do… That month’s jobs data will suffer… But hey! I can hear the dolts over at the BLS now… Just push it down the road for somebody else to deal with….

I’m watching, the best I can that is, from the road, the euro go on a run here this morning, and 1.37 looks like it could very well be its next stop. The flight to safety (read Treasuries) seems to be wearing off, and I’ve told you time and time again in the past, right here, right now, that when the “BIG GUYS” grew tired of the paltry yields in Treasuries, they would unload them as swiftly as they bought them, and that would cause the dollar to be under severe pressure… I’m not saying that this is what’s happening right now… But it sure has the smell of it… Yields on Treasuries have been rising, which indicates selling, as the prices of the bond goes down with the sales… And the dollar has been teetering…

Our long-time friend, Jim Rogers, was interviewed on Bloomberg TV yesterday… And it’s always of importance what Mr. Rogers has to say… So let’s listen in to Jim Rogers!

“The dollar’s rally is set to end in a currency crisis,” said Jim Rogers on Bloomberg TV… He went on to say… “We’re going to have a currency crisis, probably this fall or the fall of 2010. It’s been building up for a long time. We’ve had a huge rally in the dollar, and artificial rally in the dollar, so it’s time for a currency crisis.”

I’m with you Jimmy! This artificial dollar rally has lasted way too long! But, if you look at the move in the currencies since March 1st, that I put in the Pfennig yesterday, then we may be on to something here… My problem is the link with stocks that currencies have held onto for a few months… I just can’t get my arms around the fact that “all’s right on the night” in the financial markets, that the recession is nearing an end, and stocks will continue to rally… I just don’t see it that way, and if the currencies hang on to this link, then that wouldn’t be a good thing… BUT! This is a runaway bus at this time folks, and you won’t see me stepping in front of that bus! So… Let’s just go with the flow!

Good news this morning from Canada, as their Trade Surplus increased to $1.1 Billion in March. The March figure was larger than expected… This is another in the list of things that have gone right for the Canadian dollar / loonie, recently… The news is tempered with the fact that imports saw big decline, which would be a representation of a slow economy. But, again, this bus is moving…

I’ve got to get going here, I speak in a couple of hours… I seem to be coughing a lot this morning, that’s got to stop before I go on stage! So… This will be a bit shorter than usual this morning… I am… On the road!

Currencies today 5/12/09: A$ .7655, kiwi .6075, C$ .8615, euro 1.3660, sterling 1.5275, Swiss .9050, rand 8.44, krone 6.4270, SEK 7.7870, forint 204.65, zloty 3.2190, koruna 19.6180, yen 96.70, sing 1.4570, HKD 7.75, INR 49.32, China 6.8221, pesos 13.16, BRL 2.0590, dollar index 82.33, Oil $59.33, Silver $14.17, and Gold… 917.20

Source: OMB Makes New Deficit Forecast

The Labor Department’s unemployment figures were the most anticipated data of the day, and they came in gloomy indeed.

Labor said that, in April, there were 539,000 jobs lost, while the unemployment rate skied to 8.9%, the highest level in 26 years. Dreadful by any standard, yet it was an improvement, representing an easing in the pace of massive job destruction that had averaged 680,000 over the previous five months.

In addition, job losses for February and March were revised higher by a combined total of 66,000.

“It is a sobering toll,” said President Barak Obama. “We’re still in the midst of a recession that was years in the making and will be months or even years in the unmaking; and we should expect further job losses in the months to come.”

“While the April employment report provides glimmers of hope, obviously, conditions are going to have to brighten a lot more to make that forecast a reality,” wrote Stephen Stanley, of RBS Securities. “This looks very much like an inflection point, and the corroborating evidence … all suggest that the pace of layoffs is finally beginning to abate.”

But analyzing the consequences, Ian Shepherdson of High Frequency Economics wrote that, “Soaring unemployment is depressing wage gains,” and that is “seriously bad news because without wage gains people can’t deleverage unless they cut spending deeply.”

Meanwhile, across the pond, the European Central Bank cut interest rates to an unprecedented low of 1%.

Source: Dollar Whacked

The common currency got a boost, as MarketWatch.com wrote, “after the European Central Bank announced minimal actions that would hurt the region’s shared currency while stabilizing the region’s financial markets and economy.

“The European Central Bank cut borrowing costs and said it would buy up to 60 billion euros ($80 billion) in covered bonds, a security popular in Europe and backed by mortgages or public-sector loans …

“As ECB President Jean-Claude Trichet discussed details of the plan’s size and timing, traders became more comfortable with the notion it was a targeted move and would not be immediate, relieving fears that it was similar to quantitative easing maneuvers that are generally corrosive to a currency.”

The euro’s gains were capped, though, after the Labor Department said initial jobless claims fell 34,000 to 601,000 in the week ending May 2. That’s an awful number, but the lowest level since January.

At the same time, continuing claims reached a new record high, adding 56,000 to reach 6.35 million in the week ended April 25. Continuing claims are a broad indicator of the difficulties of current job searching. Now, today, come April’s unemployment numbers, with most analysts expecting a slowing.

Source: Dollar Drifts Lower