A Sustainable Economic Recovery

There was more range trading in the currencies yesterday, with the euro (EUR) leading the currencies higher for most of the day, only to see their gains slip, sliding away by the late afternoon. In the overnight markets, the currencies, once again, have moved higher, but nothing to get all lathered up about…

This morning, the euro got a boost when, in a draft statement from European Union leaders, it was reported that they believe they are seeing the first signs of a “sustainable economic recovery,” and that there will be little to no need for further stimulus of the economy. Now… Normally this would have sent the euro on a trip to the moon, soaring ever higher… But, these days, everyone has to take a statement like that, and temper it a bit with a dose of reality… These guys don’t really know if the economy is going to have a “sustainable economic recovery”… Every country is in uncharted waters with their economy right now, and it remains a possibility that the economy could rebound a bit, and then take a double dip.

That’s what I see happening in the U.S. later this year… Double dipping, which is taboo when dipping chips into salsa… But is a possibility with an economy so deep in a recession/depression, that with all the stimulus, it does show signs of recovery, only to fall back… Because, it was never on terra firma.

Speaking of the economy here in the US… Yesterday, we saw the Weekly Initial Jobless Claims remain above 600K for the week, but… The continuing claims dropped drastically… And this is where I draw the line between make-believe and reality… First of all, no one in the media had covered the continuing claims data while it was going up, up and away in its beautiful balloon… But, show a drop, and these knuckleheads were all over it like a cheap suit! OK… So the number dropped… Well… I don’t see that as a “sign that the job meltdown is over,” like many in the media said… When Chris Gaffney told me that the number had dropped, I told him…

That means one of two things… 1. That people are going back to work… or 2. That unemployed people saw their unemployment benefits expire, which means – and I’ve explained this many times before, so it shouldn’t be a surprise – that they are DROPPED from the list of unemployed! Now… What mental genius came up with that one? Anyway… I would put my money on what’s behind door number 2! Wouldn’t you at this point?

When the Bureau of Labor Statistics (BLS) can report a strong jobs number without all the adjustments, then I’ll jump on the job creation bandwagon.

OK… It looks as though the story I told you about regarding the $130 billion in bearer bonds confiscated from two Japanese men at the Swiss/Italian border, turns out to be a non-event after all. The bonds, which at first were reported to be “real,” are now being called fakes/counterfeit. So much for the secret war financing under the covers/dark knight stuff, eh?

OK… Enough of that… Let’s see what the Fed has up its sleeve these days… The Fed is looking for ways to communicate to the markets that they will NOT be raising interest rates until, at the earliest, the second half 2010! Now… They also want everyone to know that they will be quick to remove the stimulus from the markets. One doesn’t add up to the other one here, folks… And just as the Fed has always been… Cagey… They’re just not being truthful to us.

You see, they don’t want the markets jumping ahead, and moving yields higher on bonds, which would basically shut down the nascent mortgage business recovery… But, they are very quick to say that they will remove the stimulus… I wonder how many people out there really, truly, in their heart of hearts, believe the Fed will 1. Know how to remove their stimulus without damaging the economy, and 2. Will do it at the right time?

You won’t see me signing up on the roster of those that believe in those two things! Just look at their track record! If you want some insight to the bumbling, tumbling, fumbling that has gone on at the Fed over the years, you should check out a book by William Fleckenstein, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve… It will open your eyes to all the things I talk about regarding Big Al’s incompetence and the Fed’s bungling.

Today is called a quadruple witching Friday… No… It’s not because there are 4 witches flying around! Quadruple witching Friday is a day on which contracts for stock index futures, stock index options, stock options and single stock futures all expire. There have been some strange things happen in the markets on a quadruple witching Friday… So, watch out!

The data cupboard has been emptied out this week, which means there are no scheduled data releases today in the US. So, we just have the stock stuff to deal with.

I would think that the currencies would just drift today for the most part… However, there’s one currency that seems to be in the mood to outperform all others this morning. The Aussie dollar (AUD),  is seeing a nice bid and wind in its sails from an overall general feeling that the Reserve Bank of Australia’s next rate move will be up, and not down.

Just like I talked about yesterday with Norway, and their central bank (Norges Bank) stating that they believe that they will raise rates next, this gives traders something to “trade on.” And there’s nothing better for a trader to trade on than interest rate differentials.

That makes two commodity currencies that are on the list of reversing their interest rate cut cycles. New Zealand/kiwi (NZD) should be the next to get on this list, but not for some time in my estimation, as the Reserve Bank of New Zealand (RBNZ) is not as optimistic at this time. South Africa, Brazil, and Canada round out the commodity currencies, and I really don’t see any of these three getting on the list any time in the near future… But, South Africa and Brazil already enjoy strong interest rate differentials versus the dollar, so it’s not so bad not having them on the list at this point… And Canada? Well… If the price of oil continues to inch higher and higher, so too will the Canadian dollar/loonie (CAD)… At least, that’s how I see it!

Australia and Norway don’t see the end of their rate cut cycles because inflation is under control! It’s quite the opposite… And here’s where I think the dollar gets squeezed once again… A double whammy if you will… First you have the commodity currencies/high yielders gaining versus the dollar because their interest rates will be higher than the interest rate a dollar can give… But their interest rates will be going higher because inflation is going higher… And… This is the second whammy for the dollar… If inflation is moving higher… Then that too will cause the dollar to be weakened, for an inflated currency is one that is having its value eaten away by inflation.

And then there was this… All my ranting about the government getting more involved with the markets, and our private lives, led a couple of people to question me regarding this… You see, I keep harping about the government getting involved in regulatory matters in the markets… Some thought that I was saying that there should be no regulations in the markets… I never said that! I said I didn’t think having the government involved in the regulatory matters in the markets was a good thing… I mean, we now have a government that can… Sell you a car, maintain that car, finance that car, and provide you insurance on that car… It’s all just beginning…

Yesterday, The Senate Banking Committee questioned U.S. Treasury Secretary Geithner about these plans to regulate the financial markets… And his answer is something that I’ve told you over and over again would be the answer to everything… “Our economy has been brought too close to the brink for us to let this moment pass.” It’s just more of the old, “these are extraordinary times, and they call for extraordinary measures” talk…

OK… I know, I know, I’ve written the Pfennig for 17 and 1/2 years, and tried to stay out of politics the best I could… But to see what’s going on now, and not say something is beyond my control!

Of course long time readers will remember me taking the Bush administration to the woodshed too when they placed tariffs on steel earlier this decade, and the spending. So, I’m not just “picking” on this administration!

And then one final note… I guess the Fed wasn’t in buying Treasuries yesterday, as the yield on the 10-year spiked higher to 3.82, from 3.69 yesterday morning.

The Daily Reckoning