Dismal News Stokes Speculative Fire

Unemployment numbers reached their highest rate in 2 and half years, this week, and the Commerce Dept. reported businesses slashed their payrolls by the largest amount since the last recession – a decade ago.

Wall Street’s response? Party!!!

Expecting further rate cuts from the Fed… and tax cuts from Congress, investors drove the Dow up 154 to 10,951 – its most potent close since the last Greenspan Put puffed it up to 10,957 on Feb. 6th. For the week, the Dow finished the week 141 higher – a positive 1.3%.

The Nasdaq fared well for the day, up 45 to 2,191, making five winning sessions out of six. The Nasdaq, up 115 for this week, is now hovering 34% above its year low… set just a month ago. The S&P’s 500 rose 18 to 1266, ending the week up 13.

Code Blue: Despite continued reports affirming dismal economic fundamentals in the US economy… speculation is back in vogue on Wall Street. The insiders, schemers and dreamers are gearing up for another round of “legal” wealth transfer. Watch your wallet.

ADD’L PRICES FOR THE WEEK: Gas back down around September prices

Gold: $266

Crude Oil: $28.36

Natural Gas: $4.49

CRB Index: 215

Dollar Index: 115

The Sad, Sad Euro: $.89

British Pound: $1.43

Japanese Yen: $.82

FLOTSAM AND JETSAM: Global Currency Devaluation V. The US Dollar

– The Blue Team’s Dr. Marc Faber:

“As long as the currencies of emerging economies decline against the US dollar, these economies experience deflation in US dollar terms – their export prices in dollars are likely to remain weak.

Moreover, as long as their currencies decline against the US dollar and their local interest rates remain below the level of US rates, flight capital will flow from the emerging world into the US dollar and keep it strong.

But here lies the danger.

This gigantic pool of foreign money is very volatile; once the still-optimistic perception among foreign investors about the US changes, triggered possibly by no economic recovery in the second half, very weak corporate profits, or consumer price inflation and declining bond prices, a sudden shift out of US dollars into another asset class such as the Euro or gold could take shape.

In an environment of a weakening US dollar, TIPs may not be as attractive as high-quality Euro-denominated bonds, whose yields look set to decline somewhat further. According to The Bank Credit Analyst the US Treasury bond market rally is ‘probably over’ and ‘the next major move in yields is up’ because ‘the U.S. economy will be among the first to spring back to life this year.’ I am less sure about BCA’s prediction of a rebound in the US, but I do agree with their view that ‘the next few months will be one of the infrequent periods when yields fall in the euro area but stay flat or rise in the U.S.’

According to BCA’s managing editor, Ian Boeckh, the present situation is reminiscent of 1998, when the Fed eased aggressively and put a floor under US bond yields, while the ECB didn’t ease until three months later and the Euro area bond yields didn’t bottom out until early 1999. Boeckh writes that ‘the ECB’s current inaction in the face of deteriorating economic data is bond bullish and euro area bonds will benefit as consensus forecasts for the euro area economy are downgraded.’

Finally, I might add that, concerning the outlook for US Treasury bonds, a number of technicians whom I regard highly, including Robert Prechter and Michael Belkin, have recently voiced cautionary or negative views about the bond market.”

Enjoy your weekend,

Addison Wiggin
Paris, France
May 5-6, 2001

The Daily Reckoning