A Flat Day Trading Currencies

Recall, last Friday, we were waiting for the second quarter GDP print to see if any of the Fed Heads at the Jackson Hole boondoggle would comment on what I expected to see, which was GDP falling to 1.5%…

Well… I should have booked a flight to Vegas on Friday, as I darn near hit the GDP downward revision bang on! The actual number, that is if you even believe that this number is really the “actual number”, was 1.6% for the second qurarter. But, I don’t gamble, except for my annual World Series bet on the Cardinals, and an occasional neighborhood, nickel, dime poker game, so… I’ll stick to writing…

The thing about GDP is that it is so backwards looking, and if we had turned the corner already with regards to the economy, then you would just write this data off, and say it was water under the bridge… Unfortunately, that’s not the case, and at this point I can’t help but think that the final revision of second quarter GDP will be revised even lower, thus leading into the third quarter, which, as far as I can see with one eye, nothing has gotten better, things have only gotten worse… UGH!

And as far as the Fed Heads commenting on the HUGE downward revision… I didn’t hear any “real sound bites”… But… I had to laugh on Friday morning when a story headline flashed across the Bloomie… The title read: Bullard says, “If Fed needs to do more stimulus, it should be disciplined.”

Hmmm… Makes you think, or at least it did me, that what the FOMC has done previously was NOT disciplined! HA!

And Big Ben did have something to say in his speech… Big Ben said on Friday that “the pace of economic recovery is likely to be more modest in the near term than had been anticipated.”

Just two months ago he said, “the economic recovery is proceeding and that the labor market is improving gradually. The pace of economic recovery is likely to be moderate for a time.”

Yes, I don’t make this stuff up, folks… You all can read the FOMC statements just like I do; they’re all on the Internet!

And I understand that forecasting economic activity is a tough job… But if little old me here in St. Louis, Mo. can see the writing on the wall, why can’t 12 Fed Heads, or whatever the number is, and all their research “lackeys”?

So… The currency reaction to this data was interesting, for there were those that wanted to hide in the shadows of love, I mean Treasuries, and there were those that took to selling the dollar… At the end of the day, currencies had not gained nor lost ground on the day. Same for gold… I watched it pop up $5 and then lose it, and go negative $3, and then come back… It was a very volatile day, but well within a small range.

The commodity currencies faired a bit better on the day, with their moves higher not being erased with profit taking. The Aussie dollar (AUD) is closing in on 90-cents again, and kiwi (NZD) is back to 71-cents this morning.

Well… The Japanese yen (JPY) is back below 85 this morning, rally again versus the dollar, as there has been not one follow-up word or action by the Finance Ministry or Bank of Japan (BOJ) with regards to intervention to stem yen’s rise versus the dollar. The BOJ did announce that they were adding 10 trillion yen ($118 billion dollars worth) in liquidity injections…

I find this all to be like rearranging the deck chairs on the Titanic… Monetary Policy isn’t going to stop this yen strength… Even “bad” monetary policy like this!

Long time readers know all too well, that I’ve said that the US was following Japan for years now… Recall the Vapors’ song “Turning Japanese”… The reason I bring this up again, is the that you see Japan 15 years after their meltdown, and 15 years of economic doldrums, still attempting to “stimulate the economy”… Is that a glimpse into our future?

I don’t know the answer to that, all I know is that everything Japan has done for the past 15 years, is being duplicated by the US.

One thing that really caught my eye from Jackson Hole was a presentation by Carmen Reinhart of the University of Maryland. She said that in the decade after a severe financial crisis, the median employment rate was 5 percentage points higher than normal in advanced countries. Following 10 of the 15 crises she studied, unemployment never fell back to its pre-crisis level…

And ECB President, Trichet said, “the debt overhang bears the ultimate responsibility for slowing down the economic recovery”…

Think about that, folks… Japan ran their national debt to levels not seen before, and their economy never has fully recovered… The US has run their national debt to levels not seen before in this country… Will that be a drag on any economic recovery? You bet your sweet bippie it will!

Yes… Let’s see… Ahhh… Swiss francs (CHF) are back on the rally tracks, after having been derailed in May… The franc is back above 97-cents, which is the first time it has seen this lofty level since January! And wouldn’t you know it, just about the time the franc gets rolling down the rally tracks, the engineer slows it down… The engineer in the case would be the Swiss National Bank (SNB), who sent out a communiqué saying that they were following the franc’s exchange rate “closely”…

The SNB had been in the markets earlier this year to stem the franc’s rise, especially versus the euro… But then they backed off the intervention, and said they no longer were concerned with the franc’s level… So, this latest spanner in the works which was provided by the SNB, is a surprise to the markets…

HEY! The 10-year yield is 2.59%, still way to low for the risk, but about 15 BPS higher than the low of 2.45% we saw a week or so ago… Is this an indication that investors are bailing on the “flight to safety”? Sure looks like it to me, but then we’ll need to see this yield rise much more before we know for sure.

Well… Last week’s data was just plain awful, but that was last week… This week, we start off with two of my faves, Personal Income and Spending… Tomorrow we’ll see the color of the latest S&P/CaseShiller Home Price Index, and Consumer Confidence, which if it prints a gain to the index, thus signaling an increase in consumer confidence, I’ll probably jump out our 7th floor window! Well, not really, the windows don’t open! Whew! And then on Friday, before the boys and girls head to the Hamptons for the Labor Day Holiday weekend, we’ll have a Jobs Jamboree… And I don’t have a good feeling about that report, folks… The weekly initial jobless claims have been ramping higher, and it doesn’t look good for the labor picture.

Then there was this from the FT

US Federal Reserve Chairman Ben Bernanke has made it clear that the central bank’s problem isn’t explaining the economy and what the bank plans to do about it, according to The Economist. The problem is figuring out what’s going on and deciding how to respond. “The recovery has stumbled and the central bank isn’t sure why,” the magazine notes. There will be more quantitative easing when Bernanke decides it is essential, The Economist concludes.

Hmmm… I guess in the end the Fed’s problem is policy, not communication… I’m laughing out loud right now, as IF that were the Fed’s only problem!

To recap… Second quarter GDP was revised downward from 2.4% to 1.6%, with another revision due before we close the books on the second quarter. Currencies and metals went back and forth all day after the report, in a tight range. There were some interesting quotes from the Fed’s Jackson Hole boondoggle, and Japan is still attempting to stimulate the economy after 15 years… Is this our future?

Chuck Butler
for The Daily Reckoning