A Self-Fulfilling Prophecy

Good day… And a Wonderful Wednesday to you! Well… While I’m not usually one to sit around watching financial talking heads on TV all day long… My unexpected additional day at home yesterday did find me watching – well, in between dozing off several times – the events of the day… And there were quite a few financial people, talking about a recession for the United States in the coming 4-5 quarters.

Yesterday, the person getting interviewed on Bloomberg was none other than one of my fave economists… Nouriel Roubini… So I just had to stop what I was doing (answering email) and listen in to what he had to say. Roubini believes there’s a better than 50% chance of a recession in the next 4-5 quarters.

Now, you may recall late last year, me telling you that George Soros forecast a recession for the United States in 2007… Looks like old George has my problem of always being way ahead of the market. HAHAHAHAHAHAHAHA! So… If the “talking heads” – and I’m not talking about the guy with the BIG Suit – keep talking about a recession, it could very well turn into a self-fulfilling prophecy! But then… I’ve been talking about a recession for the United States ever since the mortgage meltdown began. So far the economy is singing, “Everybody’s talking at me, I don’t hear a word they’re saying.” But that’s where investors get into trouble!

OK… Enough of my “day at home”… Yes, I’m going to once again attempt to go to the office today… My leg and foot are still swollen badly, but the pain has subsided.

The currencies spent the day with no real bias, although the dollar did lose the ground that it had gained when I signed off yesterday. The euro (EUR) moved higher on the day versus the dollar, after some data that I warned wouldn’t be dollar friendly, printed. First we had construction spending, which fell sharply in July. And even though June’s number was revised upward, the overall look and feel of construction spending is that it is falling again after rebounding in the first half of this year.

Then the ISM Manufacturing Index fell more than expected, and looks to be slipping again after rebounding strongly in the first half too. However, it has yet to breach 50, as it did in 1995, 1998, and in 2000 (not to mention January of this year). I would look for more rot on the vine here as we finish out this year. I would think that given the credit turmoil that is going on, manufacturing would take a hit.

At least somebody printed a good data report yesterday, as Australia’s June quarter GDP grew 0.9% to equal out to a 4.3% clip for the year. That’s nice, strong growth… But the report wasn’t enough to move the Reserve Bank of Australia (RBA) to make a rate move, as they left rates unchanged last night. I don’t think the RBA’s non-move is going to hurt the Aussie dollar (AUD), as the GDP growth is going to keep the RBA at the rate hike table for some time now.

The Bank of Canada (BOC) will announce their rate decision this morning. As I said yesterday, I believe the BOC is taking a pause for the cause with rate hikes. The most important thing to come out of the meeting is the press conference afterward. Let’s hope the BOC keeps the hawkish tones to their words, eh?

Today, in the United States we’ll see the color of the Fed’s Beige Book, and the Pending Home Sales Index. I have some good friends trying to sell their home right now, with little luck, so the Pending Home Sales Index that keeps growing hits home with me. The Fed’s Beige Book will be interesting just to see if any of the regions “fess up” and report what’s really going on!

The big piece o’ data this week will be the Jobs Jamboree on Friday. The forecast right now is for a tepid 100K jobs being created in August. Every day I read that another firm is laying-off workers. So, it will take a while for all those to filter through, but for the most part, the labor picture doesn’t look good going forward.

And that my friends leads me to remind everyone that back in May at the Las Vegas Money Show, and then in the Pfennig when I returned from the trip, I told my audience that I believed the Fed would begin their rate cuts this fall. So… with the labor picture going sour, and credit problems not going away in any sense of the imagination… I am now going out on a limb to say that I believe a Fed rate cut on September 18th is a done deal. And they will follow that one up in October, and then December. Then we’ll head into 2008, with a very hard landing, and rates will be cut even more.

The dollar bulls might as well, Hmmmm… I better not say that… Let’s just say the dollar bulls had better batten down the hatches because it’s going to get ugly for the dollar when the Fed is cutting rates like there’s no tomorrow.

So… I hear that lawmakers are going to question Federal Regulators about the path ahead for all these homeowners that have adjustable rate mortgages that will reset in the near future. You know, this really gets me angry. These people that have ARM’s coming due have had multiple chances to convert those to 30-year fixed mortgages. If they have not done so, why would the Government now feel like they have to stick their hands in there and act like they know what they’re doing? I’m just looking at this in simple terms. And I know, not everything is in simple terms… So, give me some slack on this, but really… Why?

You know, I thought of this the other day, and just now remembered to talk about it! But, have you noticed that there has been none, zero, zilch, nada, a big goose egg, of banter coming from lawmakers about tariffs on Chinese goods since the Chinese mentioned their “nuclear option”? As Edwin Starr used to say… Nothing… Absolutely Nothing!

Remember the Chinese “nuclear option”? That’s when Chinese think tank members decided that there had been enough China bashing going on, and began to lay out a plan that would see China unload Treasuries on the markets. It caused a big scare in the markets, but this was before the liquidity/credit crunch, and I think people forgot about it. But I don’t think lawmakers did. I think they took a shot to the midsection, put their tail between their legs and decided to address the mortgage meltdown instead!

Before I head to the Big Finish I want to say that I was remiss yesterday in forgetting to mention the passing of Dr. Kurt Richebächer. Dr. Richebächer’s writings have long been a staple of my required reading. Yes, I used to kid about how when you read one of his letters you would need to put away all the sharp objects… But he told it like no one else. He didn’t pull punches, and he was always ahead of all other economists with his thoughts. I will miss his writings… And the world has lost an economist that didn’t cower to Washington.

Currencies today: A$ .8230, kiwi .6945, C$ .9490, euro 1.36, sterling 2.001, Swiss .8250, ISK 64.50, rand 7.2350, krone 5.8190, SEK 6.9125, forint 188, zloty 2.8120, koruna 20.34, yen 115.80, baht 32.50, sing 1.5280, HKD 7.7940, INR 40.9150, China 7.5520, pesos 11.03, dollar index 81.01, Silver $12.38, and Gold… $688.30

That’s it for today… Can you believe that the NFL season is here? Where has the year gone? I missed summer, but that’s another story… Seems like we just went to a Super Bowl Party a couple of months ago! OK… I’m going to attempt to get ready for a trip to the office… This ought to be interesting in that I haven’t had long pants on in three months! It’ll be happy days are here again for my beautiful bride! Gotta stop and get Krispy Kremes for the boys and girls in the office, they always love when I do that! So… Have a Wonderful Wednesday!

Chuck Butler — September 05, 2007

The Daily Reckoning