09/01/10 St. Louis, Missouri – Front and center this morning, Australia printed a moon-shot second quarter GDP report, that has the risk aversion campers running for cover this morning. All currencies, except the risk aversion currencies of dollar, yen (JPY) and francs (CHF), are getting sold, and the Aussie dollar (AUD) has gained 1 1/2-cents!
So, since the Aussie GDP report is what kicked sand in the face of the risk aversion campers, I thought we would spend a minute or two reviewing the report. Aussie GDP grew at the fastest pace in three years, during the second quarter, and when you compare it to last year’s second quarter, it’s a moon shot! Second quarter GDP grew 1.2% (versus a forecast of 0.09%), with domestic demand very strong, and exports of iron ore and coal to China highlight the report.
OK… I said that the Aussie dollar is rallying this morning, but we have to stop and think for a minute, is it overdone for a one-day move? I guess it depends on what your views are for the Reserve Bank of Australia (RBA) to return to the rate hike table… Does this strong GDP report bring them back? I have to think not… Remember, that during the first and second quarter this year, the RBA was hiking rates… I think the RBA is content to sit back and let the rate hikes filter through the economy… A prudent thing, in my mind… They’ll be back eventually – not because of this report, but because of a ton of reports that indicate inflation is present in their economy.
Well… Now… Let’s get to the things on my mind from yesterday… First…
Yesterday’s printing of the S&P/CaseShiller Home Price Index, which I said I thought would be disappointing… Well, Chuck, you were wrong! What a dolt I was! I simply forgot to check the time period for the report! This report was for June! UGH! Of course home prices didn’t slide in June; that was the last month that the government’s hand was in the cookie jar, helping the housing market… Let’s go back to last week’s more current data, and see that existing home sales were down -27%, and new home sales were down -16% (at least that’s how I remember them printing)… I would have to say that July’s Home Price Index will reflect on those awful numbers, eh?
But, shoot, not that I’m upset that I was wrong… Well, wait a minute, yes I am upset that I was wrong! I still believe that a 10% drop in home prices will happen before we hit bottom…
And my reoccurring theme of: “An Inconvenient Debt”… I saw these numbers yesterday, and thought you should see them…
From the Treasury monthly Bulletin:
Outlays for 2010 through July… $2.9 trillion
Receipts for 2010 through July.. $1.7 trillion
Deficit for 2010 through July.. $1.2 trillion… And we’ve got five months to go!
That’s a monthly number $171,000 and change.
So… Using an average, what will the 2010 total deficit be? $2,052 trillion…
Now… The administration said $1.6 trillion; I said it would be higher… The CBO said it would be $1.4 trillion; I said it would be higher…
Maybe the both of them should check out their own Monthly Treasury Bulletin! Because I do!
And this is from Richard Russell…
“It’s obvious to me that Barack Obama is following precisely in the footsteps of FDR. One item that Time magazine left out of their special issue is that through a series of gold-related actions, which culminated in the Gold Reserve Act of 1934, the US realized a dollar devaluation of 41%, when the government officially raised the price of gold from $20.67 to $35 an ounce. On the economics, Obama can’t pull off an official devaluation of the dollar, but by spending trillions of dollars in his plan to defeat the bear market recession, he is de factor devaluing the dollar against other leading world currencies.”
I first presented that quote by Richard Russell – a man that everyone should read – about a year ago, but it still holds true… Just look at the numbers above that came from the Treasury’s Monthly Bulletin!
I truly believe that this is what the US is attempting to accomplish once again, but only through the devaluation of the dollar. This isn’t a “present administration thing” either… It’s been spread out for a long time, but, the present administration, and Congress… have certainly accelerated the whole process, eh?
I mean, go back and check the old Pfennigs and see where I banged and banged on the previous administration and Congress for $450 billion deficits… And now they’re in the trillions? I’d call that acceleration… Maybe you call it something different, but it is what it is…
So… I’m doing some research that goes back 80 years to the goings on of the 1930s… I don’t have the time or space to bring that research to you here in the Pfennig… So… It will be a big part of next month’s Review & Focus, the monthly letter sent to customers of EverBank World Markets… It’s great stuff, and you won’t want to miss it!
Meanwhile back at the ranch… Or current day that is… Here was the heading I saw flash across the screens yesterday…
US consumer confidence rose in August on improved outlook
Improved outlook for what? The stock market has lost ground for four consecutive months… We continue to see a meltdown in labor and housing, and let me remind everyone we’re still fighting two wars! And people believe the outlook improved? Well, wrap me up in cellophane and sell me down the river! This makes about as much sense as Dracula volunteering to go out on a Sunny Day! (That was my friend, David Galland’s line, of which I borrowed!) I shake my head and wonder just what the heck people are thinking…
It’s not that a gloomy outlook does anyone any good, but come on! You’ve got to be realistic! Otherwise you live in a Pollyanna world, where reality doesn’t exist, right Christine?
Look how long I went today without mentioning the euro (EUR)! But, don’t peak at the currency round-up, the euro is attempting to climb back to 1.28… The euro can thank the Aussie GDP report, because that was the starter’s gun that got this all going this morning…
I had a brief interview yesterday, on the Street.com, about gold… Which worked out well, given the fact that when I was talking, gold was rallying, and ended the day up $11… The shiny metal is now at $1,253, up another $5 this morning. I saw an analyst on the Bloomie TV this morning from Commerzbank, saying that gold would reach new record highs in the next couple of weeks, and then go on to $1,500… WOW! Of course, a couple of months ago, when gold hit its record of $1,266, there were analysts all over the place saying that it wouldn’t stop till it hit $2,000… Remember that? Well, they all may be right eventually… But they could very well be wrong too! Of course, readers of this letter would probably pin their colors to the mast of the former, and not the latter…
And for those of you who remain naysayers of China’s economy… Chinese Manufacturing grew at a faster pace in August after showing signs of fatigue in July. The Chinese Purchasing Managers Index (PMI… Manufacturing) rose to 51.7 from 51.2… This report is identical to the US ISM (formerly known as PMI), where an index number of 50 is the line in the sand… Any number above 50 represents expansion, while any number below 50 represents contraction…
The thing I take from this report is that China’s economy is moderating, which is exactly what I said it would do, and not collapse like many pundits said! The report was stronger than expected, but not too strong, indicating a moderation… You gotta love it when a plan comes together!
So… First we had the Chinese PMI print, and then the Aussie GDP print, and that was that, as far as the “flight to safety” was concerned last night! The flight to safety was sent to the woodshed, and remained there all night, and judging from what I’ve seen since I came in… All morning too!
Speaking of manufacturing… We’ll get to see the color of the August ISM Index this morning… I would be surprised if this Index doesn’t fall from July’s index number of 55.5… And then on the third tier data report shelf, auto sales, and construction spending will print…
And then, Canada… And the Canadian dollar/loonie (CAD), which is lagging behind the other rallying currencies this morning. Canada has seen a truckload of softer data in the past weeks, and yesterday was no different. Canadian second quarter GDP grew at 2%, which was less than forecast (2.5%), and less than the previous two quarters… UGH! Domestic demand was strong, but exports had the great big hickey… I don’t think the Bank of Canada (BOC) is going to jump to hike rates based on this report! UGH!
Then there was this… The FOMC Meeting Minutes from their last meeting printed yesterday afternoon… And while the report didn’t yield any BIG surprises, there was a bit in there that I think the markets overlooked… The FOMC is leaving the door open for more quantitative easing, (QE) but… Only “if the outlook were to weaken appreciably further.” Hmmm… Is that the trend right now? For an appreciably weakened economy? You can bet that the FOMC will mention this when they do implement more QE, that it “shouldn’t come as any surprise, for we told you back in August!”… I can hear it now, can’t you? Of course you can!
To recap… Chinese PMI was better than forecast, and Aussie GDP was stronger than forecast, and these data reports kicked sand in the face of the risk aversion campers overnight and this morning. The Aussie dollar has gained 1 1/2-cents, and the euro is back to 1.28… Case/Shiller’s Home Price Index was stronger than expected, especially by me, but I had forgotten that June still has government stimulus in the numbers, we’ll have to see what July’s Price Index brings us… I’m still of the thought that a 10% drop in home prices is in the cards before we hit bottom…
Chuck Butler
for The Daily Reckoning
Chuck Butler
Chuck Butler is President of EverBank® World Markets and the author of the popular Daily Pfennig newsletter, which is reposted here at The Daily Reckoning. With a career in investment services and currencies extending over 35 years, Mr. Butler oversees all aspects of customer service and the trading desk for EverBank World Markets. A respected analyst of the currency market, Mr. Butler has frequently made appearances or been quoted by the national media. These include the Wall Street Journal, US News and World Report, MarketWatch, USAToday, CNNfn, Bloomberg TV, CNBC, and the Chicago Tribune. Mr. Butler was previously the Chief International Bond Trader and Director of Risk Management for Mark Twain Bank, and has held significant positions in the investment industry since 1973.
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