The ADP data “supports the view that payrolls will post a larger decline in June than they did in May,” said economists at RDQ Economics.

“The U.S. dollar reacted negatively to the ADP report, contributing to the sell-off in the greenback that began in overnight action as risk tolerance remained high on buoyant equity and commodity prices,” said Michael Woolfolk, senior currency strategist at The Bank of New York Mellon.

Also today, reported Marketwatch.com, “European Central Bank president Jean-Claude Trichet will begin speaking about officials’ monetary policy and economic outlook. Analysts will also look for any comments on the ECB’s new covered-bond purchase program, the central bank’s answer to quantitative easing programs out of other central banks.”

“If Trichet suggests that he has done enough, which we expect him to do, the euro-dollar could extend its gains,” said Kathy Lien, director of currency research at Global Forex Trading. “If he openly talks about extending the size and scope of program, it would be bearish for the euro.”

Looking ahead, risk appetite is likely to remain the key driver in the currency markets in the near term, though light, summer trading volumes could make for choppy price action well into next month, wrote currency strategists at Standard Chartered Bank.

Source: Dollar Weakens

This is a good analogy for the economy and markets. Our capitalist society is a beautiful thing that rewards entrepreneurs and intelligent risk takers and investors. But for the past few years, we’ve got ourselves into quite a tangle with the housing bubble and credit contagion.

And with such a big mess, it will be a while longer before we can straighten it all out and see an economic recovery. Here are the key areas to keep an eye on for clues as to when we’ll emerge on the other side…

An End To The Recession This Year? Don’t Bet On It…

A recent survey showed that the vast majority of economists believe we’ll come out of the recession in the second half of this year.

I’m not convinced. I think that’s a little too optimistic.

But regardless of my opinion, there are three crucial factors that will tell us that the economy is back on solid footing, regardless of the “technical” definition of recession.

Look To These Three Areas For Signs Of An Economic Recovery

~ Jobless Claims
Last week, the number of initial jobless claims fell to 631,000. While that’s certainly better than the 643,000 the week before, it’s still a horrendous number.

The national unemployment rate stands at 8.9% – and if you take into account the number of people who’ve given up looking for work, or those who are under-employed, that figure nearly doubles.

Speaking of the latter, while at Starbucks (Nasdaq: SBUX) last week, I heard the girl behind the counter tell a friend that she’s making one-third of what she made at her last job. At that rate, she’s probably just barely keeping her head above water, yet she isn’t counted in the official unemployment figures.

Stories like this are everywhere – people who’ve been able to keep their jobs, or stay employed somewhere, but needing to take a pay cut to do so.

It’s quite simple: The economy won’t be meaningfully better until those numbers come way down. At the very least, we need to see jobless claims under 500,000 before it looks like we’re even headed in the right direction.

But in the end, though, we want to see jobs created, not just fewer jobs eliminated. If people don’t have jobs, or don’t feel secure in their jobs, the economy isn’t going to get the injection of consumer spending (keep in mind that this accounts for about two-thirds of economic growth) that it needs to recover.

~ Housing Prices
As long as U.S. real estate prices are falling off a cliff, taking homeowners’ equity with them, consumers will feel poorer.

In March, for example, the average national home price collapsed by 18.7% from a year earlier. A CNBC story actually tried to put a positive spin on it by saying, “Some relief appeared to be in sight as, for the second month, prices did not slide at a record rate as they had been doing since 2007.”

Are you kidding me?! An 18.7% decline is relief? That’s like saying banging your head against a wall is “relief” after hitting yourself in the head with a Louisville Slugger.

Unlike the job market, we don’t necessarily need housing prices to rise to lift the economy… just to stabilize. If people have a sense that their largest asset is not going to decline in value, that should help ease anxiety. Until then, homeowners will be skittish.

And finally…

~ The Stock Market
The stock market is a forward-looking indicator and typically leads the economy by about six months.

Having climbed by 40% from the lows in March, it’s at a crucial juncture where it now needs to stay up. As I’ve said before, I don’t believe it will, but if it does manage to hold these gains and build a base, that would be a good indicator that things are turning around.

On the other hand, a decline to recent lows would suggest that the economists are wrong once again.

Good thing we don’t take our lead from economists. The best way to gauge the economy’s health right now is to look at these three simple, common sense data points. And so far, two of them are pointing in the wrong direction.

Marc Lichtenfeld

Source: When Will The Economy Recover? These Three Key Areas Will Tell You…

“Home prices fell more than forecast,” reports Bloomberg. They’re still going down at a 19% rate. Unemployment is still rising too.

The state with the biggest economy in the nation is going broke. So is the nation’s biggest manufacturer. Profits are falling. And the government is racing to put in place a form of state-sponsored socio-capitalism much like Mussolini’s Italy… or Peron’s Argentina.

These do not sound to us like ideal conditions for a bull market.

Did we say thinking? There’s not much thinking going on. People don’t often think… not if they can avoid it. And it’s probably better that they don’t. Who knows what opinions they might come to if they put their minds to it?

Instead of thinking, they react. And after a big drop in stock prices, they bounce. We’re now in an extended bounce which could last until mid-summer… and could take the Dow back to 10,000.

That is to say, there is nothing unusual about this kind of stock market action. Au contraire… it’s classic.

Investors are also reacting in the bond market. They’re buying Treasury bonds in reaction to bankruptcies, defaults and falling asset prices. Investors feel they can put their money into Treasuries and not worry.

But maybe they should spare a thought or two about what is really going on. Lending money to the US government is no sure thing. Far from it. In fact, under the present circumstances, lending money to the feds is asking for trouble. Recently, you could put your money in T-bills and get zero yield. “An extraordinary thing… ” said Warren Buffett, so extraordinary that he was “not sure you’ll see that again in your lifetime.”

The US Treasury market is in a bubble. Like all bubbles, it will pop.

On the numbers, the US government is the worst credit risk in the world. You determine a man’s creditworthiness by looking at his balance sheet. Add up his assets and subtract his liabilities. Do that to the federal government and you get a very big number with a minus sign in front of it. Even if they were to sell off the Capitol building and all the federal lands west of the Mississippi, the feds would still have a hole in their finances larger than any other in the entire world.

While the balance sheet looks awful, the cash-flow is worse. In the current year, the feds will take in about $1.9 trillion in taxes and spend $3.6 trillion. In other words, the feds aren’t just living beyond their means… they’re not even on the same planet. Who in his right mind would lend to a spendthrift whose outgo exceeded his income by nearly 100%?

The only way any loan can reasonably be repaid is from income. Income must exceed expenses or there will never be money for debt repayment. Lending to a corporation or an individual, the lender expects the borrower to earn his way out of debt. Otherwise, it’s a fool’s game. The debtor is soon kiting checks and going deeper in the hole. He borrows from one lender in order to pay off the first lender… In effect, he operates a pyramid scheme – depending on fresh suckers to keep giving him new money – until the whole thing comes crashing down.

The federal government doesn’t even pretend that it is going to earn its way out of debt. It presumes that there’s an endless supply of money it can borrow… and new suckers born twice a minute who are willing to lend. But this is exactly where all ponzi schemes crack up. The fed’s pyramid will fall in the same spot; where it runs out of new money.

Mr. Obama says he plans on cutting the budget deficit in half by the end of his term. Let’s see… that’s 4 years out. If he’s true to his word, that will mean deficits averaging about $1.5 trillion a year… or about $6 trillion total. Where will that money come from? What sucker has that kind of cash?

America’s savers are putting their backs into it. They’re saving about 4% of GDP currently, which could rise to 5%. They typically only put less than one percent of their wealth into Treasury paper, but let us imagine that they use every penny to buy it. Over Obama’s term that could be as much as $2.4 trillion. The other big buyer is the Chinese. If they were somehow able to continue buying at the rate of the last 6 months, that would add $2.8 trillion more. So even if both these Hollywood endings should come to pass, the show would still be a horror. There would still be $800 billion worth of Treasuries left unsold.

More likely, Americans might multiply their purchases of Treasuries by 10 times… not 100 times. And more likely the Chinese might buy another $1 trillion or so. But sooner… not too much later… buyers are going to begin to notice that there aren’t enough of them to keep this ponzi scheme going. The smart ones will head for the exits early… the slow and the dull will be crushed at the doorways.

*** Meanwhile, the price of oil remains at $62… the American peso is still trading for peanuts ($1.39 against the euro) … and gold lost about $5 yesterday; it trades this morning near $953.

Do you have your positions in gold, dear reader? We hope so. We advised readers to buy gold when we first began our Daily Reckonings 10 years ago. Back then you could have bought an ounce of gold for less than $300 any day of the week. Today, you’ll have to pay more than 3 times as much… and you could have to wait a few days to find gold coins.

You remember our “Trade of the Decade?” It was very simple. Buy gold on dips; sell stocks on rallies. We’re almost at the end of the decade. So far, we’ve got a nice profit on the gold side. And a nice profit on the stock side too.

And we’re beginning to wonder what our trade will be for the next decade.

Why do we trade just once a decade? Mostly because it’s hard to figure out a winning trade; we’re too lazy to do it more than once every ten years. But it turns out that frequent trading is a losing proposition anyway. Major trends are the only ones you can spot reliably… and they take time.

In the present case, our Trade of the Decade may turn into the Trade of Two Decades. Because neither the bull market in gold nor the bear market in stocks has fully expressed itself. The price of gold is barely higher, in nominal terms, than it was 29 years ago. Some people will look at that bit of information and conclude that gold is always a losing bet. We conclude that it is sometimes a losing bet. Other times it is a winning bet. For the last ten years, gold has been in the money. Even so, it would have to nearly triple from here in order to beat its price record, in real terms, set a generation ago.

There are good reasons to think it might. Not the least of which is the aforementioned shortage of ready cash to fund the US government’s deficits. As the supply of Treasuries increases, the supply of willing and able Treasury buyers is likely to lag. Into the gap comes the Federal Reserve, checkbook in hand. Rather than allow Treasury yields to increase – which is what happens when there are more borrowers than lenders – the Fed will do the buying itself. It will buy, not with savings but with money of its own making.

As the Fed creates more new green money, the old-fashioned yellow money is likely to look better and better. Perhaps only because it will be harder to find.

There are about $1,600 trillion worth of derivatives in the world… $125 trillion worth of real estate and business assets… $100 trillion worth of stocks and bonds secured by assets… $65 trillion worth of government bonds (rising rapidly)… $4 trillion worth of actual currency… and only between $2 and $4 trillion worth of gold and silver.

We’ll take the gold and silver… at least until the bubble in Treasury debt blows up.

Source: The Worst Credit Risk in the World

There may be a growing sense that because the stock market has enjoyed a nice bounce, credit spreads have come in and new issue activity has perked up, that somehow things are going to get better in the real economy. Not so fast. We may be out of the hurricane, but it’s still raining outside. The economy bottomed in the summer of 1932 but the Depression did not end for another nine years and as a reminder, by the end of that decade, after seven years of grandiose New Deal stimulus, the unemployment rate was still at 15%, consumer prices were deflating at a 2% rate and we still had yet to reach the pre-Depression peak in GDP.

Better does not mean good, and we must all brace ourselves for a much more frugal future. This does not mean the world falls apart. It means that lifestyles are going to change: frugality replaces frivolity, the family budget plan includes more savings for retirement and education, attitudes towards credit and discretionary spending shift, and owning the largest home on the block and the flashiest car is no longer going to be fashionable.

The MSCI World Index and the S&P 500 Index just posted their best monthly gains since April 2003, gaining 10.9% and 9.4%, respectively. Credit spreads or the difference between super-safe Treasury bonds and riskier bonds saw premiums plunge last month while 90-day LIBOR rates rallied from 1.19% on March 31 to 1.02% yesterday.

Indeed, even the most adamant bear would have to consign some flexibility to this rally, which has swallowed most asset classes since March 9. Stocks, non-Treasury bonds, most commodities and REITs have all participated in a broad-based rally over the last seven weeks.

But before popping the champagne, let’s not forget that back in early March stocks were pricing in a depression following a stunning 58% peak-to-trough collapse since October 2007. Banks have led this rally since March 9 (+76%) and the same banks will be responsible for its eventual demise.

My view remains the same since March: This is a bear market rally just like the prior three rallies that occurred from late 2007 until March. Ultimately, we might not break through the March 9 lows this year but the odds remain high that we’ll retest those lows this summer.

Wall Street analysts and many European investment strategists continue to believe that we’re in a new bull market driven by massive government stimulus, cheap valuations and near-zero global interest rates. That might be possible but, in all probability, it’s highly unlikely.

Housing prices are still declining, unemployment hasn’t stabilized, domestic consumption is way down and deflation is officially in town since March for the first time since 1955, meaning companies don’t have the flexibility to mark up their goods and services. Furthermore, no bull currently alive has ever witnessed a credit deflation; it would be unwise to underestimate the scope and duration of credit destruction and the time required to heal business and consumer balance sheets.

A long-time bear that eventually enjoyed his day in the sun starting in late 2007 is Albert Edwards of Société Général in London. According to Edwards, “The current pop in the market is not dissimilar to the many bear market rallies between 1929-1933 where signs of economic stabilization were met with strong 25% rallies, most especially in late 1929 and mid-1931. This optimism was subsequently crushed.”

The above table depicts the long sequence of bear market rallies during the Great Depression. The Dow posted a total of five false rallies until bottoming for good at 41.22 in July 1932. The length of the current rally thus far is seven weeks; from 1929 until mid-1932 the average bear market rally lasted 10.1 weeks, suggesting there’s still some juice left in this upward march. But the Piper is coming.

Back in February and March I also suggested it would be a good time for long-term investors to begin accumulating stocks following the second worst crash since 1929. I still believe March marked a good entry point to add value. Yet I don’t think we’re through the worst yet, either.

The massive up-crash we’ve seen since March has been alarming. Previous bull markets in history have typically been accompanied by some profit-taking and healthy backing and filling; that’s not happening with this rally, which has been characterized by vicious rallies almost every other day without a pause or correction. I don’t like this action.

Meanwhile, it’s hard to be a bear this spring. I find my place at the table is a lonely one as stocks and non-Treasury bonds skyrocket. Still, I’m sticking to my guns and remain heavily under-weighted in stocks; in fact, my net exposure is net short or negatively exposed to equities.

Source: Evil Lurks Behind the Shadows of 1929-1932