Bernanke Says US Economy is "Close to Faltering"

Yesterday Big Ben Bernanke took the stand to talk about the economy… I sat here in amazement with his disconnection to the goings-on in the economy… He still believes the economy will be stronger in the second half of the year… Of course, one only has to question that if he really believes that, then why did the Fed Heads implement Twist & Shout? If the economy is on the verge of taking off to the moon, why did he need to cut interest rates 0.5%, which is what, in his own words, Twist & Shout is worth… 0.5% rate cut…

However, Big Ben Bernanke did do a little “telling it like it is” when he told lawmakers that the US economy is “close to faltering”…and he must have scared the dollar bulls back into the woodwork, because after he talked, the currencies rallied back against the dollar. It was as if there weren’t problems out of the wazoo in the Eurozone… buyers of the euro (EUR) didn’t care… they just didn’t want to hold the currency (dollars) of a country where the top dog central banker says the “economy is close to faltering”…

The euro, which rose to 1.3350 in trading throughout the day and overnight session, has just given back ½-cent because Moody’s lowered Italy’s Debt Rating from Aa2, to A2… and then Moody’s made a statement that went something like this… “All but the strongest euro-area sovereigns are likely to face sustained negative pressure on their ratings.” Which is rating agency parlance for… Get ready for downgrades to the likes of Portugal, Ireland, Greece, Spain, and I guess you could throw Belgium in there now, but, they are so darn small, it’s a non-event.

So… Just like I painstakingly explained yesterday… When the Big Dog euro is allowed to get off the porch and chase the dollar down the street, the other currencies (little dogs) get to run too… And so it was with the likes of Aussie dollars (AUD), Norwegian krone (NOK), and so on…

Unfortunately, though… Something happened to gold’s steady rise from $1,600… Yesterday morning I told you that gold was up at that point about $15, after gaining $25 the previous day… Well, somebody pulled the rug out from under gold, or sprung the trap door, because the price of gold fell, and it fell quickly… Before you could say “all we need is a base hit with the bases loaded”, the price of gold had fallen to negative territory, and continued to sell off to the tune of about $50… And don’t look now, but gold is in the red again this morning… I’m not going to go into my thoughts on the price manipulators, I’m tired of doing that, and what good has it done? The manipulators are still working and not in jail! All I’ll say today is that, once again, the manipulators have allowed those who have missed the bus several times, to buy gold at a cheaper price…

My dad explained to me years ago that if you want to take a bus downtown and one arrives, but you don’t get on it, because you know the next bus is going to be a newer, shinier bus… When that bus arrives you don’t get on it because rumor has it the next bus is even better, and so on… The moral of the story is that if you never get on a bus, you never get downtown!

Well… Thank goodness someone in Washington, DC thought about this legislation that would punish China for their undervalued currency, and pressure them to allow a faster appreciation of the renminbi (CNY). House Speaker, John Boehner, said the bill was “pretty dangerous”… And then went about attempting to change the wording of the legislation… I had already told you how the Chinese thought about all this… And finally someone stopped to think, and say… “Hey, I read in the Pfennig this morning that this bill could be the beginning of trade wars, protectionism, and all the bad things that came about after the passage of Smoot-Hawley in the ‘30s”… HAHAHAHAHAHAHA! Like our elected officials read the Pfennig! Yes, they should… It should be required reading for them each and every day… But they don’t… Or else we would have never gotten into this situation!

And just to rub some shame in the lawmakers’ collective faces… A Chinese Central Bank Advisor issued a statement saying that the renminbi would gain 4% to 5% this year against the dollar… He also mentioned that the central bank expects Chinese growth to continue to grow 8% to 9% per year, and that the “nation’s slower growth won’t be a disaster for the resource economies”…

Back to the euro (Big Dog) once again… Yesterday afternoon I was doing some research and came across a media report that said EU officials are examining plans for coordinated recapitalization of European banks. I thought to myself that this sounded like a good exercise to undertake… So I read more… EU Commissioner for Economic Affairs Rehn is quoted as saying, “capital positions of European banks must be reinforced to reduce uncertainty”, but then he gave no details of the plans under discussion. Sounds a lot like what goes on here… We have these outcomes all lined up, but no details as to how to achieve them… Hmmm… Sure hope there are details here!

The calls for a rate cut in Australia received a shot to the mid-section yesterday, when August retail sales printed better-than-expected, rising 0.6% versus July, the consensus expectations were for 0.2% growth… And… Previous reports were revised upward… So… I personally don’t see the need for a rate cut in Australia… But, the markets are still pricing in a rate cut… So they must know something I don’t, or haven’t seen yet…

The price of oil has rallied $3 since yesterday morning… But it’s still way off its levels of a month ago… The petrol currencies though did see some relief to the selling, with this rally in the price of oil.

Well… As I get ready to head to the Big Finish… The euro has gained back that 0.5-cent it lost after Moody’s announced that they were downgrading Italy’s debt rating. The Aussie dollar is back to 96-cents, and the risk aversion campers are crawling back to the woodwork. Hmmm…

The Greeks are mad again… 20,000 are marching to protest the government’s attempt to cut jobs… Again… I see that, and I think about how that will play out here… To that end… What about the Wall Street protesters? Even Big Ben Bernanke mentioned them yesterday… Yes… They are protesting things they don’t like about Wall Street… Like the bonuses that have been paid… Hmmm… You have to think that if the protesters had been the recipient of a bonus like that you would not see them protesting… But, that’s just me being difficult…

I forgot to mention the data yesterday from Monday… The ISM Manufacturing index surprised to the upside in September moving from an index number of 50.6 to 51.6… That was good, because I was of the belief the index was about to go into contraction territory below 50! Yesterday, Factory Orders showed more rot on the economy’s vine by falling 0.2% versus July. Today, we’ll see the ADP Employment reports, which are the first leg of the Jobs Jamboree on Friday.

Then there was this… From The Economist… This is a response from The Economist to a statement that Paul Krugman (my least favorite economist, I might add), made about China…

Paul Krugman… “Holding China accountable won’t solve our economic problems on its own, but it can contribute to a solution — and it’s an action that’s long overdue.” – Paul Krugman

The Economist… “I’m uncomfortable with that logic, and you should be too. Unemployment is a national crisis, but that doesn’t mean that America should throw cost-benefit analyses out of the window. And in fact, Mr. Krugman spends the first half of his column laying out the benefits of a policy that strictly dominates a dust-up with China: monetary expansion. Based on my reading of the 1930s, the worst thing a country can do is to try and achieve internal adjustments by forcing deflationary policy on others. America should ignore China’s peg — and its warnings against taking further steps to loosen monetary policy — and adequately reflate. That will place pressure on China to revalue, but without putting the country in a position that weakens international institutions and a key diplomatic relationship. And it will have a much, much more salutary effect on the American economy than a stronger yuan — as I suspect even Mr. Krugman would agree.”

To recap… Big Ben reminded everyone yesterday just how horrible things are here with the US economy, saying that it was “close to faltering”, and the dollar bulls had to scatter. The currencies led by the euro rallied. Gold, however, saw the trap door open under it yesterday, and the selling of the shiny metal is still going on this morning. The Manufacturing Index surprised to the upside, and Factory Orders showed more rot on the economy’s vine in August, falling -0.2%…

Chuck Butler
for The Daily Reckoning

The Daily Reckoning