Better-Than-Expected US Economic Growth

According to the US government statistics, we have nothing to fear any longer with regards to our economy, inflation, deficit spending, interest rates, etc., for you see, the fourth quarter GDP had a preliminary print of +5.7%! It’s all seashells and balloons for us now, folks… That’s what the cable news guys said, and that’s what’s all over the newswires. Forget about saving; go out and spend… Everybody’s doing it, they say! Just fork over those gold coins; there’s no reason to buy them any longer… Everything is fine here in the US. There’s nothing to see here, move along…

BUZZZZZZZZZZ, thank you for playing, but that’s a wrong answer! There’s a nice parting gift for you at the door! Johnny… Tell them what they take home with them today!

Geez Louise… I mean even the economic propeller heads in Davos, Switzerland we’re drooling all over themselves at the US economic growth. Of course, none of them took the time to look at the number, and question it… 5.7% growth? With 20% unemployment? As the robot used to say on Lost In Space, “Will Robinson, that does not compute”…

OK… Let’s take a step back for a moment… Remember the third quarter GDP that was supposedly showing strong economic growth? Well… A funny thing happened on the way to the forum… Growth in the third quarter was originally estimated at an annualized rate of 3.5%, but was revised down to 2.2% after more information was received. And… Most of the fourth quarter growth came from increased manufacturing to rebuild inventories. Consumer spending – the biggest component of the US economy – was down…

So… What happened in the currencies with all this trumped-up euphoria? The currencies, led by the Big Dog, euro (EUR), got sold versus the dollar, and I mean sold… Not a tight range, no resistance levels got in the way, they were sold, along with gold and silver!

There was lots of talk about the euro in Davos this past weekend, and most of it was not good talk… Most of the economic propeller heads were talking about the break-up of the euro, etc. all because of Greece…

Again… With the Greece thing! Greece WILL NOT DEFAULT! In the words of European Monetary Affairs Commissioner, Joaquin Almunia… “In the euro area, default does not exist”… But that doesn’t stop the boys from having fun with the euro.

So… With such stalwarts as Aussie (AUD), Norway (NOK), Switzerland (CHF), Canada (CAD), following the euro down the slippery slope, you’ve got the “this is a reversal of the weak dollar trend” guys coming out of the woodwork again… We heard all this after the collapse of Lehman Bros., didn’t we? We heard all this in 2005 when the EU Constitution got battered with no votes, didn’t we?

I think, just like those previous dollar rallies, we just need to do some REO Speedwagon – Riding the Storm Out! Do not panic, I would tell you if I believed this was a reversal of the weak dollar trend… And I do not see that in the least bit! If you’ve battened down the hatches with us in 2005, and 2008, then you know what’s in store… If you’re new to this, keep to your reasons for diversifying… Don’t let the “it’s all clear in the US” dolts get to you!

So… Did you hear about the budget that the president sent to Congress this past weekend?

I was throwing things in my basement at the computer desk when I read about how the budget calls for a “receding of the deficit in 2011 to $1.3 trillion”! Here’s the skinny… Put away the sharp objects, folks…
President Barack Obama’s proposed budget predicts that the national deficit will crest at a record-breaking $1.6 trillion in the current fiscal year, then start to recede in 2011 to $1.3 trillion, a congressional official said Sunday.

Still, the administration’s new budget to be released Monday says deficits over the next decade will average 4.5% of the size of the economy, a level which economists say is dangerously high if not addressed.

OK… Let me take you back to 2001… This is when I wrote the white paper about the decline of the dollar, for it was in 2001 that the US deficit reached 4.5%, which historically meant that a country running up a deficit like that would experience a currency crisis… When the deficit reached 4.5% of GDP I knew it was time to sell the dollar.

But what to buy back then? The euro which had been introduced in 1999, had fallen to 82-cents, from its introduction level of 117, and nothing looked good to buy… But! You had to have faith that this 4.5% level would hold out and come through with a currency crisis… It took a year, but eventually, the rest of the traders around the world figured this out, and in 2002, I wrote the whitepaper “The Year of the Euro”… And the rest is history…

So… This is one of the reasons I tell you that this current dollar rally is not a reversal of the weak dollar trend. The fundamental reason the dollar entered the weak trend, was that its deficit level hit 4.5%… And what does the president’s future budgets say? That the deficit will AVERAGE 4.5% for the NEXT DECADE! And… That’s sure to change on the upside.

Did anyone else notice that the president was talking about a “jobs Bill” during his 70-minute campaign speech the other night? Notice he didn’t use the word, “stimulus” but instead “jobs bill”. One has to wonder just how big this “jobs bill” will be, and if it was even counted in the budget presented to lawmakers!

Here’s another spanner in the works for those calling for a reversal of the trend… Unemployment in the US… Now, when most people hear about our unemployment problem, they think that it is centered in the big cities on either coast, and Las Vegas… But that’s not the case… This job loss problem is widespread.

For instance… In the decade that just ended, we lost jobs here in St. Louis. The Bureau of Labor Statistics says the St. Louis metro area had 28,600, or 2.1%, fewer people working at the end of 2009 than it had 10 years earlier.

The nation as a whole added a few jobs – 0.2% since 1999 – but St. Louis wasn’t alone in experiencing a lost decade. Pittsburgh, Cincinnati and Memphis saw jobs disappear at roughly the same rate as we did, and the losses were heavier in Great Lakes cities such as Chicago (down 6%), Milwaukee (down 9%) and Cleveland (down 12.5%).

Yes… Here in St. Louis, we were once the 5th largest city with company headquarters in the Western Hemisphere… But, those companies are all gone, save a few. Manufacturing has disappeared from the region, and probably from all those cities listed above, and replaced with service workers, casino workers, and other service jobs, but at much lower numbers.

So… The unemployment problem is for real, folks… And will be a drag on our economy for years to come.

One of the economists who is usually on my list of people to read – Nouriel Roubini – said that the “US growth outlook looks VERY DISMAL.”

The Brazilian real (BRL) has sure fallen on difficult times, as the government’s attempts to weaken the currency versus the dollar have garnered an 8% drop in January. So… To date, I’ve been wrong about the Sovereign Wealth Fund (SWF)… The SWF has sold reals by the truckload since the beginning of the year, and that’s been difficult for the markets to offset.

The fear in the markets is that the Aussie dollar will follow the real down, since it followed the real up last year, almost matching the real’s 35% gain versus the dollar. The Aussie dollar lost 1.6% last month… But, I’m at a loss as to why the markets fear it will follow the real down, as long as there is no government Sovereign Wealth Fund to sell it!

The thing I see for the Aussie dollar is that when the Reserve Bank of Australia (RBA) meets this month, they’ll see an opportunity to raise rates again, for the Aussie dollar has lost 1.6%, thus keeping the exporters happy… An interest rate hike by the RBA could be the cure to what ails the Aussie dollar.

Today in the US we’ll see two of my fave data prints… Personal Income and Spending and the ISM Manufacturing index… So, a couple of market moving pieces of data… The way the books are cooked here in the US these days, it just doesn’t make sense to take a stab at where these pieces of data will print…

We have a few central bank meetings this week around the world… The RBA, European Central Bank (ECB), Bank of England (BOE) and the Norges Bank (Norway), will all meet to discuss rates…

So… It’s time to look at our “pros and cons” ledger we kept since the last RBA rate hike… And as far as I can see, the “pros” far out-distance the “cons”. So… I’m here to say that the RBA will hike rates this week. As for the rest of the lot… I don’t expect a rate hike from any of them, ECB, BOE, or Norges Bank…

Then there was this… Sorry, but I have to come back to the president’s budget… The $1.6 trillion deficit will be equal to 10.6% of our GDP! That’s a post WWII record! One has to wonder what the debt rating agencies are doing right now… Sitting on their hands, I guess! Look… I don’t want bad stuff to happen to the US… I just want to see things handled in a different manner, so that maybe, just maybe someone in the government wakes up and smells the coffee, and goes about doing something to stop this deficit spending!

The Daily Reckoning