A W-Shaped Recovery
The dollar continued to drift lower throughout the trading day on Friday, with the commodity currencies of Australia (AUD), South Africa (ZAR), and New Zealand (NZD) leading the way. Confidence is returning to the markets, and investors are once again moving out of the ‘safe havens’ of the Japanese yen (JPY) and US dollar. The reports coming out of Jackson Hole indicate that central bankers believe chances for near-term growth appear good, and recent data seem to support this conclusion.
European industrial orders increased more than economists forecast in June rising 3.1% from May. This was the largest gain in over a year and a half, and is the latest sign that the European economy is starting to climb back out of recession. But many economists question the strength of the recovery, saying that the pick up in economic growth was mainly due to government programs. ECB President Jean-Claude Trichet sounded cautious after the report. “We see some signs confirming that the real economy is starting to get out of the period of freefall,” Trichet said in Jackson Hole. But this “does not mean at all that we do not have a very bumpy road ahead of us.”
The home sales data released in the US on Friday were surprisingly strong, with existing home sales increasing 7.2% month on month. We get a bit of a break in the data releases today with just the Chicago Fed index; but the rest of the week will give us plenty of data to digest. Tomorrow we see the S&P/CaseShiller housing data, US consumer confidence, and ABC consumer confidence numbers. Wednesday will bring Durable Goods orders along with New Home sales. Thursday will give us another look at the estimate for second quarter GDP here in the US along with the weekly jobless claims. And we will close out the week on Friday with the release of personal income and spending for July.
Should be a busy week ahead, and I would expect for most of the data out of the US to continue to confirm that a government led recovery is underway here in the US. In particular, the consumer spending and durable goods orders should show a nice uptick on the back of the “cash for clunkers” program. But Chuck sent me a note over the weekend that questions the “success” of this program. Is it really what the US economy needed? Here are Chuck’s thoughts from San Francisco:
“I was sitting here thinking about something that had flashed across the TV screen here in my room: the ‘Cash for Clunkers’ program… I blasted this program two weeks ago, and now that it’s finally done with, and $3 billion was spent to artificially boost auto sales, I will put my final thought on this… I believe the program is going to end up hurting the most vulnerable consumers in the US. Middle class buyers, traded in their “paid for” cars, and leveraged up to buy a new car, when they probably shouldn’t have done so, given the rot on the economy’s vine.
“So… Once again, I’m reminded of the words that President Reagan said were the scariest words that could be spoken… ‘I’m from the government, and I’m here to help’…
“The reason I’m all over this program like a cheap suit today, is that over weekend I heard that Big Ben Bernanke make a claim at the Jackson Hole boondoggle, that ‘we saved the world’… Oh, come on, Big Ben… Isn’t that just a bit dramatic? Does this statement have anything to do with the fact that you are up for reappointment in January, and you would love to have that thought of you ‘saving the world’ on the minds of the administration?
“So… In the end, we’ll just have to wait and see if he really did ‘save the world’…”
I’m with Chuck on this one. It seems the US government is intent on getting consumers to go back to their borrow and spend habits. This is what created the bubbles, and the administration seems intent on creating another bubble economy. US consumers have made some historic cut backs on the amount of debt they are amassing (whether or not these cutbacks are by choice). The US government should not be encouraging these consumers to go back to their previous ways, but should instead be trying to use the funds to educate and train consumers and to encourage new and innovative companies. Use this downturn to correct some of the bad habits that we had gotten into. Yes, it will be painful, but breaking an addiction is always hard and painful. US consumers need to break their addiction to easy credit and massive debt. This recession/depression has given consumers a much-needed wake up call; hopefully the administration won’t be able to push consumers back into their old habits.
I went running with my wife and her friends over the weekend (trying to take it easy on the back) and got into a discussion about the US economy. One of my wife’s friends had heard an interview on MSNBC in which an economist stated we were in a classic ‘V’ shaped recovery. I let her know that I thought the economist was one letter off, and that instead we will see the recovery shaped more like a ‘W’. The green shoots and recovery we are seeing right now will die out as government stimulus slows. High unemployment, a long slow housing recovery, commercial real estate woes, and rising personal bankruptcies will force the economy into another dramatic downturn. Central banks who have ‘juiced’ their economies with unlimited credit will have to decide whether to continue juicing, or pull back from the table.
Nouriel Roubini wrote a commentary in today’s Financial Times that agrees with my thoughts. Roubini said that the chance of a double-dip recession is increasing because of risks related to ending global monetary and fiscal stimulus. He believes the global economy still has further to fall, and will bottom out sometime during the second half of 2009. While some economies such as China, Germany, Australia, and France will likely recover; others such as the US and UK will double-dip with another leg down. “There are risks associated with exit strategies from the massive monetary and fiscal easing,” Roubini wrote. “Policy makers are damned if they do and damned if they don’t.”
Oil traded up to a 10-month high over the weekend, and carried the commodity-based currencies of Canada (CAD), Mexico (MXN), Norway (NOK), and Australia with it. Oil will continue to run up as confidence in a global recovery strengthens. Another factor that has helped boost demand for Australian dollar investments was a move by the Aussie government, which removed interest withholding tax on federal government securities. This made these investments more attractive and spurred additional demand for the currency.
The Hungarian central bank will meet today and is expected to cut their benchmark interest rate. Rates in Hungary are the highest in the European Union, and lower growth combined with low inflation will spur the cut. The Hungarian forint weakened from the strongest level in a week on the interest cut speculation.
The dollar’s role as the world’s reserve currency has been a continued topic among scholars and was undoubtedly discussed out in Jackson Hole last week. China and Russia have both been adamant about discussing the possibility of moving toward a new reserve system to replace the greenback. Since no single currency is strong enough to replace the dollar in today’s global economy, most discussion has centered around the idea of creating a ‘reserve currency’ that is comprised of a basket of the world’s largest currencies. This idea is supported by Joseph Stiglitz, a Nobel Prize winning economist and Columbia University economics professor. “The dollar’s role as a good store of value is questionable and the currency has a high degree of risk,” Stiglitz said at a conference last Friday. “There is a need for a global reserve system. The currency reserve system is in the process of fraying,” Stiglitz said. “The dollar is not a good store of value.”
Frank Trotter was thinking about the same thing as he sat and watched a musical over the weekend. Frank is a real thinker, and I really enjoy it when I get a chance to have a good economic discussion with him. Luckily for all of you Pfennig readers, he decided to send me a note on his thoughts during the performance. So here they are:
“Went to the touring musical Mary Poppins, Saturday night; it’s always great to see a play about a run on a bank. While the books were written in the 1930s and beyond, most of you will remember the Disney film set in 1910, before the Great War – when England ruled the waves and empire was returning untold dividends to the mother country. At that time, of course, there was no questioning the power, status and earning capacity of the British Empire. As George Banks replies to Admiral Boom in the movie, ‘Credit rates are moving up, up, up. And the British pound is the admiration of the world.’
“Well that was then and this is now. Soon after, in 1914, England suspended the conversion of Bank of England notes to gold for the period surrounding World War I, and the on-again/off-again slide into today’s fiat currency world began. Over the next 100 years, England has learned the lesson of empires that came before: that extending the resources of a country in non-producing capacity leads to the decline of the currency and a fall in the economic power of the country and the economic wellbeing of it’s population. In 1910 it took 4.25 pounds to buy an ounce of gold, and 0.2056 pounds to buy a US dollar. Today of course the price of gold has risen 13,447% for British buyers, while the price of a greenback is only up 195%. We are uncomfortably comfortable in feeling that the carabineers have given way for the good old USA in a parallel fashion.
“We’ll freely admit that there has been a slow motion slide going on in the US dollar since establishment, and especially since the removal from the gold standard and the Bretton Woods Agreement in 1971. But we feel even more strongly that the fiscal and monetary policies put in place starting in 2001, accelerating through the 2000s, and now amplified since January 20th, have left us with no legs for our stool. Fiscal policy has been and continues to be out of control. The Federal Reserve policy of the 2000s created the credit bubble and now stands to create the largest monetary inflation experienced in a first world nation. Both political parties have determined that no one can be an adult in government by slashing spending or raising taxes to cover our exploding gap (mathematically the only two options), and instead are hiding behind the invisible tax of currency depreciation. For a country we conclude that a strong currency is essential to long-term well being, and by extension that our government has given up on the dream in exchange for election and reelection.
“So what’s to be done? If you are a believer that the political process can sort things out and return our wonderful nation to fiscal prudence and steady governance, go ahead and stay the course. For the rest of us who like Margaret Thatcher believe that ‘the problem with socialism is that eventually you run our of other people’s money’, we’ll be letting our ‘tuppance safely invested in the bank’ seek diversification across the globe in countries and markets with more opportunity and prudence. We couldn’t agree more with the Mary Poppins conclusion, re-written for modern times that ‘Where stands the banks of [the USA], America stands. Oh, oh, oh, oh! When falls the banks of [the USA], America falls!”
Leave it to Frank to use Mary Poppins to give an economics lesson! And with that, I will close this out and head to the currency roundup.