Japan Shrugs Off Bad Data Once Again

Yesterday, we saw the euro hold onto gains, but the Australian dollar lose quite a bit of ground, and that continued throughout the overnight sessions. Aussie data last night were on the softer side, and that’s not what the A$ needs right now. But my favorite saying these days, it is what it is, applies here. But most of the currencies and metals that represent global growth, like the A$, the Canadian dollar/loonie and gold, saw selling yesterday after the U.S. second-quarter GDP was revised upward. I know, I know, don’t get me started on these mental giants.

I’ve finally come to the conclusion that the people in the markets, those that trade, etc., are lunatics. What brought me to this conclusion? Yesterday, the U.S. printed a revision to second-quarter GDP. It was an upward revision. But shoot, Rudy, just about anything would be upward when you start out at 1.5%! The upward revision was to 1.7%. And the markets took this as positive news and decided that the didn’t need gold anymore. What? As if 1.7% was a “good, strong number”! Get out! That’s just downright crazy to think that! But from what I read that day, any “positive news” for the U.S. is good for the dollar and bad for gold. I would add that they should have said, “Any positive news, no matter how miniscule, is good for the dollar and bad for gold.”

I could go on and on about this, but you don’t want my blood pressure shooting to the moon, and starting the day banging on the desk and yelling at the walls makes for a very long day. But I think you know how I feel about this “perception” by the markets that all is right on the night with the U.S. economy. How soon they forget about the upcoming fiscal cliff.

Time to move along. I was correct yesterday when I said that the Norges Bank (of Norway) would leave rates unchanged, as they are more fearful of what a stronger krone would do to their economy than a housing bubble that’s going on right now. What I did find to be interesting is that the accompanying statement that followed the rate announcement was clearly void of any new signals. In other words, mum’s the word. Or loose lips sink ships. And with the next meeting not scheduled until October, the markets will decide where the krone goes between now and then, and that decision won’t be based on a foreseen change in monetary policy!

It’s my opinion that the krone has been tarred with the same brush as the euro, and how the euro goes against the dollar, the krone will too. I would love dearly for this link to break and the krone to be traded on its own fundamentals — which, by the way, beat the eurozone by a mile.

Speaking of links to the euro, Denmark has a hard peg to the euro. The idea has been passed around that things will get so bad in the eurozone that Denmark will break the hard peg to the euro. Seeing the Danish economy sink further into a recession is going to add gas to the fire. Second-quarter GDP contracted -0.5% and pushed the annual level to just +0.9%. Unemployment is soaring at 6.3%, and for Danes aged 25-29, the unemployment rate is 10.6%. But even with all this bad stuff happening to the economy, I don’t believe the hard peg will be broken.

I make that statement about not breaking the hard peg, because when you get right down to it, was it the peg to the euro’s fault that Denmark has had to deal with twin housing and banking crises? Maybe in a roundabout way, but still… Denmark was not controlled by the European Central Bank and could have raised interest rates to combat the housing crisis — and they didn’t.

I saw that German Chancellor Angela Merkel was in China. And I saw comments from both the chancellor and Chinese Premier Wen Jiabao. It was as if the two of them decided that the markets needed a pep talk. Wen, while admitting that the eurozone debt crisis has continued to worsen, said that he was more confident on the eurozone after the meeting with Merkel, and that governments in the EU have the wisdom and ability to overcome the crisis. And then the Angela Merkel made a comment that China will continue to invest in euro debt. Now either she shocked the Chinese with that statement or she received permission from the Chinese to make that statement. I would have to believe that it was the latter.

So those comments by the leaders of Germany and China have underpinned the euro overnight and through the morning sessions. We’ll have to wait and see just how long the markets will be impressed with those statements. In today’s world of trading, I would say “not long”: The markets’ attention span is like that of a 2-year-old.

I saw last night that Japan printed some data, which is always interesting in that we want to see if the economic funk continues. And apparently, it does! Japanese retail sales for July were not good. They fell -1.5% versus June, and -0.8% year on year. And large retailer’s sales fell -4.4% versus June. But this is so old hat for Japan. The Japanese have been in this economic funk so long now that when data print bad, traders just ignore it. They’ve been there, done that and bought the T-shirt.

The sad part is that I truly believe that we are heading down the same road traveled previously by Japan. The only difference I see right now is that the Japanese people are in better financial situations than we are here in the U.S. I do believe that this is the reason that Japanese yen hasn’t been sent for a very long ride on the slippery slope. About a month ago, I talked about how the yen was looking weaker and it could be the end of yen strength versus the dollar. That lasted about as long as it takes to read the “what man knows about women book.”

The demographics are against Japan, though. And eventually, they will catch up with the strong yen. But when that happens, I have no idea. There’s a guy that has attended some of the investment shows that I’ve done who does a whole presentation on demographics of countries and what they mean for their economy. Very interesting stuff. The only problem I have with the whole thing is that it doesn’t take into consideration anything else going on in the economy or in the markets. For instance — and boy, do I wish he was right on this — last May, this guy said that the price of oil would be $40 within a year. As I said, I sure wish he had been correct!

Remember right after the Olympics I told you how I saw Brazilian President Rousseff, doing the V8 head slap and saying, “OMG! Our Olympics are only four years away!”? I have no idea if that really happened, but you get the idea I’m trying to get across. All the rate cuts, the taxes on inflows of investment, and the kitchen sink that was thrown at investors to weaken the real are going to have to be reversed so that the investment into Brazil can get the infrastructure built that will be needed for the Olympics. And lo and behold, this morning, a story on the Bloomberg plays well with my thoughts: “Brazil’s central bank signaled as yearlong easing of interest rates may have come to an end as record-low borrowing costs start to revive the economy.”

For those of you keeping score at home, Brazil cut 500 basis points from their interest rates (5%). And just for good measure, they cut another 50 basis points (0.5%) from their official rate last night. But now it’s time to deal with inflation, and with that, I expect interest rates in Brazil will begin a rate hike cycle in the first quarter of next year.

What does this do to the currency (the real)? I can tell you this, given the recent history of the Brazilian government dealing with the uber-strong real, we don’t want to go there again! But a slow general appreciation that’s almost stealthlike would be fine, I think. So hopefully, the markets don’t go bananas on Brazil (HA!), and hopefully they have learned their lesson!

Today’s U.S. data cupboard has two of my faves: personal income and spending. The July readings of this will most likely show that once again the U.S. consumer spent more than they made. And with it being a Tub-Thumpin’ Thursday, the weekly initial jobless claims will print. Last week, they bumped up to 372,000. I expect them to remain in that area.

After we put away the barbeque pits, and the public swimming pools close, and we all drag ourselves back after a three-day weekend, we will see the color of the latest ISM manufacturing index. You may recall that last month the index fell below 50. Given the regional manufacturing reports, one would expect the ISM to fall further below 50. However, the “experts” believe it will print right at 50. But shouldn’t all the regional reports make up the national ISM? Yes, grasshopper, they should, and do. But that’s before the government gets to massage the numbers. Anyway, I’m going to stick to my guns and say that the regional reports tell me that the ISM should be lower.

If it does print lower, the calls for more stimulus will come back out of the walls. It’s like a tug of war on this stimulus call. One day, the stimulus campers win, and the next day the no-stimulus campers win.

The RealtyTrac people issued a report yesterday that shows that foreclosures were down in the second this year from last year. Last month, 1.47 million U.S. homes were in a stage of foreclosure or owned by a bank. Of 620,751 held by lenders, just 15% are listed as for sale.

The measured approach has triggered bidding wars and led to higher prices in markets like Las Vegas, where the inventory of bank-owned homes sank to a 6.2-month supply in June.

The pool of foreclosed properties for sale also has declined because many pending foreclosure cases were put on hold last year while banks sorted through foreclosure abuse claims. A $25 billion settlement in February cleared the way for lenders to tackle that backlog of foreclosures, and the number of homes entering the foreclosure process has been rising.

Still, those properties, should they end up foreclosed, are not likely to hit the market until next year. And this is why I said yesterday that I’m not buying the idea that the home price rise is a sign that the housing sector is healing.

Then There Was This, from CNBC, and that’s appropriate, given this story. Here it is. I file this under the heading, “You’ve got to be kidding me!”:

“Thought the global financial crisis in 2008 was caused by subprime bonds, collateralized debt obligations (CDOs) and other Wall Street engineering? Think again…

“[A] study from the Erasmus Research Institute of Management said the saving frenzy of the Chinese created the cheap money, which fueled the U.S. housing bubble and its collapse.

“Heleen Mees, writer of the study and adjunct associate professor at the NYU Wagner Graduate School of Public Service, said that exotic mortgage products could hardly have been the cause of the U.S. housing market bubble and its ultimate collapse.”

The only part of the report that I agree with was the study that argued that “Ben Bernanke set the world up for the Great Recession by providing the “intellectual backing for the aggressive rate cuts in the early 2000s.”

Chuck Bulter
for The Daily Reckoning