Manufacturing Growth Continues

I have to tell you what’s on my mind this morning after watching the price action again yesterday… I know, it’s just me, and no one else in the writing/analyst world will tell you this, because they have no proof… I don’t either, but that never stops me from saying what’s on my mind regarding these markets now, does it?

After watching time and time again, the overseas markets take the dollar to the woodshed, and then when the New York traders come in, the price action all gets reversed. I thought to myself, “Self, doesn’t it look like New York traders have orders from the top of the house to make sure the dollar doesn’t fall off a cliff? Why, yes, self, it does look like that!” Now let’s get back to reality…

Here’s an illustration that shows us just how dumb the markets are these days… Yes, I know they’re always right… but in all my days as a currency analyst, trader and writer, what happened yesterday would have never happened before 2008…

First of all — for one of the few times recently — consumer confidence surprised the experts who thought it would rise by a large margin, by falling by a large margin! I don’t want these things to happen… I just want what’s the correct reaction to happen… And given what the Fed Heads had to say, real unemployment at 23% and home prices still falling, consumer confidence should fall… and, finally, it did! But what happened afterward is just not right!

Pre-2008, a weak consumer confidence report would have sent the dollar to the woodshed, and currencies and metals onto the rally tracks… But not any longer, it seems… That bad stuff in the U.S. (except quantitative easing) sends the markets to dollars… stranger than fiction… but it is what it is, and we have to deal with it!

The dollar rallies on a day when the Congressional Budget Office (CBO) issued a report in which they forecast the U.S. budget deficit to be greater than $1 trillion — for the fourth consecutive year — in 2012. Now, isn’t that special, as the Church Lady on SNL would say! As most of you know, and all new readers are about to find out… The budget deficit at the end of the year is what is added to our national debt.

Now, I know a lot of economists — and people that I think should know better — seem to think that this growing national debt is no problem… That superpowers are allowed to grow such debts without recourse, because of their status as a superpower… Hmmm… Of course, they have no proof that this will have no bad recourse, while the proof of empires that got over their heads in debt, go back so far, with so many instances, that you would have to be wearing blinders to not see what’s ahead for the U.S. and the dollar!

But that’s just me. I’m no Harvard grad. I’m not an economist. I’m just your friendly neighborhood realist that understands that the depreciating dollar has been like a tax to U.S. citizens, as the purchasing power has been chopped off at the knees. That rising debt will have to be dealt with by either raising taxes to the hilltops or allowing a depreciating dollar, thus inflating away the debt. Or both! And spending cuts… No, in contrast to what Angela Merkel believes, the debt cannot be “austerity measured” away. But some exercise in spending cuts does shorten the work that the increased taxes and inflating dollar value have to do.

And there will come a day when the U.S. abuses the ability to run up debts because of it being a superpower. Look, I’m a proud American, and this is not what I want to see happen, but this is the cruise ship we’ve embarked on… we have no power to stop the cruise ship from its destiny with an iceberg, we can only make sure we have on our life jackets, and the shortest route to the lifeboats… Which means nondollar investments, along with gold, silver and other commodities…

OK… a lecture from your friendly neighborhood realist this morning… Not what you wanted first thing this morning, I know. I apologize, but when I have something on my mind, my fat fingers begin to type away, and the next thing I know, I’m halfway through the letter and haven’t told you a thing about the markets this morning! UGH!

Well, another morning of currency and metals strength… let’s see if their strength can hold up to the New York traders. The things that have the currencies all lathered up this morning center around two manufacturing reports… one from China, the other from Germany. First, China saw their manufacturing index rise again, marking two consecutive months of increase in the index.

China printed a 50.5 level for the manufacturing index called PMI — this is an increase of 0.2 from December’s 50.3 reading. So once again, the Chinese economy continues to make those that called for a collapse over two years ago go hide and hope no one remembers what they said!

And Germany… Germany’s PMI manufacturing index rose to 51 in January from 50.9 in December. For those of you new to class, these manufacturing indexes use a number of 50 as the line in the sand between contraction and expansion for the manufacturing sector. So any number above 50 represents expansion…

So it was with China and Germany overnight. This good sign from both reports has put wind in the sails of the currencies, and metals this morning. The biggest beneficiary of the Chinese data is Australia. The Aussie dollar (AUD) is back to climbing toward $1.07.

I know that the prime minister has nothing to do with the currency’s value, and monetary policy. But I found it interesting that Australian Prime Minister Julia Gillard to reports last night that the Aussie dollar will likely stay “relatively high for years to come.” I’m sure that comment won’t make the exporters of Australia happy.

Australia is not of the caliber regarding manufacturing as China and Germany, but the Aussies also printed a stronger-than-expected PMI manufacturing index last night. The Aussie rise was stronger than those in China and Germany, printing at 51.6 in January versus 50.2 in December. I think it’s important for lawmakers and kings, presidents and other dictators to take notice here, that even though the A$ is very strong, not only has their manufacturing also remained strong, but their trade balance has turned to surplus!

It can be done. But you need to have the “stuff” that other countries want and need. Raw Materials in Australia, keep the wind in their sails.

The Chinese and German data also have gold and silver moving higher this morning. You see, if China and Germany are still pumping out the manufacturing, the global growth isn’t fading away, and with global growth comes inflation.

Remember about a month ago, I gave you some great info on the trading pattern of gold and silver and how they for the past 10 years (except 2008) had booked their lows in January. This year will have been no different, as gold is off to its best start of a year since 1980! 127,000 ounces of American Eagle gold coins were purchased from the U.S. Mint in January, the most in a year. Hey! There’s a reference to last Jan.! I guess that data and info I gave you came in handy, eh?

So it’s not just the global growth thing pushing gold higher. The eurozone debt debacle continues to fuel gold’s run to higher ground.

Moving over to silver, my colleague here, Aaron Stevenson, sent me an article on silver yesterday that was pretty interesting. The writer gave all the reasons why he believed that there was about to be a paradigm shift in silver. I can say that I didn’t disagree with his thoughts. He believes silver is going to break out to the upside, and I agree!

So here’s the definition of a paradigm shift: a radical change in underlying beliefs or theory.

Here’s a snippet of the article: “The coming paradigm shift in silver will not happen due to technical analysis, fundamentals or supply and demand forces, but rather due to a change in mass psychology of investors. Even though fundamentals and supply-demand forces will play a part in this shift, they will not be the ultimate cause. I believe technical analysis as it is used today only charts the amount of manipulation and mass psychology in the silver market.”

The U.S. data cupboard will print its own PMI manufacturing report for January today, and it too is expected to be stronger than December’s print. And in a pre-game look at the jobs jamboree that will print this Friday, the ADP employment change for January will print today, along with vehicle sales and construction spending.

Then there was this, from The Washington Post:

“Data released Tuesday showed that seasonally adjusted housing prices have reached a post-bubble low, as the minor surge that began in 2009 fizzled, to be followed by the almost continuous slide of the past 18 months.

“The housing bust, in other words, appears to be even worse than it was at the nadir of the recession.

“For millions of homeowners, that’s an unsettling reality, and potentially an issue in the presidential campaign. But the damage may be far more widespread.

“By making people less wealthy, according to economists, the decline in home values inhibits consumer spending and hampers the nation’s stop-and-start economic recovery.”

I was just going over my presentation for the Orlando MoneyShow next week and there’s something there that plays well with this. In 2004, I began to notice that housing in my small river town was not selling as quickly as in the past, and it occurred to me then that we were in a housing bubble. I began to write about then, and people thought I was crazier than a loon. We all know what happened a few years later. But the next thing was that in 2009, I said that home prices would lose another 10%. And once again, people thought I was crazy. Who’s crazy now?

To recap, the currency rally yesterday morning was wiped out as U.S. consumer confidence hit the skids in January. The currencies are back on the rally tracks this morning, as both Germany and China printed stronger-than-expected manufacturing data. Australia too, printed strong manufacturing data. Gold and silver are stronger on those reports and the continuing debt debacle saga of the eurozone. And a guy believes that silver is about to take off to the moon!

Chuck Butler
for The Daily Reckoning