Eurozone Economy Slows Down

Good day. Strangeness all around, folks. The U.S. government continues in their effort to make us all feel better, so we go out and spend, spend, spend. We have that to talk about today, along with the regular risk-on/risk-off discussion. The sun finally came out yesterday, which always makes me feel more alive.

The tight ranges, and bias to sell dollars, went out the window yesterday and in the overnight markets. It’s definitely a risk-off day in the currencies and metals. It remains to be seen what the stock jockeys are thinking today.

Starting off in the eurozone, where the euro (EUR) is down almost 1 cent since yesterday morning, eurozone manufacturing isn’t keeping up with the rest of the world’s manufacturing (more on that in a bit), and unemployment in Germany rose materially. Both of these reports left the markets feeling that growth in the eurozone is going to get really slow, so the euro got taken to the woodshed.

But didn’t everyone already know that? I mean these bond guys and the economists are supposed to be looking out on the horizon at these markets. And these two reports just now surprised them? Come on, give me a break here! Craziness, for sure, because even old Chuck Butler, who does all his research himself, knew that austerity measures are going to lead to slower growth. It’s the way it is!

Think about that for a minute. You are a nation, something happens to your income stream and you have to “tighten your belt”. Spending in your “nation” comes to a halt, except for necessities. But the overall economic activity in our “nation” has slowed down. It’s the same with a country that implements austerity measures — their economic activity slows down. It’s a given.

I kept waiting for the euro to slump, based on the slower growth. Remember what I told you at the beginning of this year regarding the euro? Well, that still stands today. I wouldn’t be surprised to see the euro fall to 1.18, nor would I be surprised to see it recover to 1.40.

The good news from yesterday was that manufacturing around the world showed strength, but who’s telling the truth, and who’s “nudging the numbers”? Here’s the report card for manufacturing. Remember that anything above 50 represents expansion and anything below it represents contraction:

U.S. 54.8
China 53.1
U.K. 51.9
Canada 53.3
And then the eurozone 45.9

Yikes! That doesn’t look too good on paper, now does it?

Years ago, I told you all (not all of you, as there are tons of new readers since I explained this) that long ago, one of my economic mentors told me to watch these manufacturing reports, and to use the 45 level as an indicator of recession. Any country printing a manufacturing index number of less than 45, for two consecutive months, was a very good indicator that the country was in recession.

Of course, it will take the country’s official recession callers a few months to actually pin that label on the economy. But now you know another way to make that call long before any government agency gets around to doing it!

However, with all this euphoria in the U.S. manufacturing number, I had some doubts about the number. How does the national manufacturing index surprise on the upside, when in fact the regional reports were all weaker? Don’t the regional reports roll up to the national report?

Chinese manufacturing also climbed higher, again, making those calling for a collapse of the Chinese economy for over two years now scratch their heads.

I explained to a Casey Conference attendee last week that I truly believe that those calling for a Chinese collapse used the same criteria they had used for years on Western economies. China is not a Western economy, folks. To use that criteria on them is wasting time, and scaring people away from China’s currency when they shouldn’t be doing so!

Speaking of China, this is an exercise for longtime readers. U.S. Treasury Secretary Geithner is on his way to visit China. So with that in mind, what comes next?

Yes, good job! Of course, the Chinese allowed a greater appreciation of the renminbi (CNY) last night, to the strongest level for the renminbi versus the dollar since the peg was dropped in July 2005. Hey! Wouldn’t it be great if we could just get Geithner, or the other lawmakers that used to make this boondoggle a part of their vacation schedule, to come to China on a regular basis? That way the renminbi would be making big moves all the time! HA!

I see where the Republican candidate for U.S. president (I know it’s not official yet) has vowed to brand China a “currency manipulator.”

I just don’t see where these guys get off with these thoughts about China. The currency has gained nearly 30% since the peg was dropped. And the U.S. trade deficit with China is shrinking. So as I’ve said for a long time now. U.S. officials had better be careful here, biting the hand that feeds them.

The strong Chinese manufacturing number allowed the Australian dollar (AUD) and New Zealand dollar/kiwi (NZD), to rebound yesterday after selling off the night before due to the Reserve Bank of Australia (RBA) taking a deeper cut of interest rates.

The price of oil is pushing higher again, hitting $105 this morning. That’s good for the petrol currencies, but not good for consumers when they go to fill up their gas tanks.

There was a very interesting discussion about the price of oil at the Casey conference last week. Well-respected analyst Porter Stansberry said that all the new oil and natural gas fields that have been discovered in the U.S. are going to lead to the price of oil dropping to $40 in the next year.

OK, to temper that, I also heard that from a guy named Rodney Johnson at our Global Currency Expo last May. And Oil is $105 this morning, one year later.

But maybe it can happen. Of course, we’ll have to get past the CPA, all the new equipment that will be needed to get the oil and gas and a host of other things. But think about this, folks: We are the country that defeated Nazi Germany and Imperial Japan at the same time! We can do this! We could be energy independent, and not have to deal with OPEC!

Did it feel like I was Knute Rockne in the Notre Dame locker room there? I thought that most of the time I’m talking about depressing things, so why not change it up?

OK, back to depressing. On Monday, April 30, the U.S. held a bond auction, and this isn’t about how much of it the Fed took down. It’s more of a tally of where we are here in the U.S. with debt. The total auction was $70 billion, bringing our national debt to $15.692 trillion.

Don’t look now, but $15.692 trillion is just $600 billion shy of the debt ceiling. So if we go through that $600 billion in regular fashion, the debt ceiling discussion will begin just about time for the general election in November.

Now, wouldn’t it behoove the challenger to make a big deal out of all this debt that has been created? (Not that the challenger would know what to do about it.) Just remember what happened to the dollar in August the summer before when the debt ceiling became a bargaining tool.

Anyway, the total debt in this country now represents 101.5% of GDP.

I’ve got a special treat for you all today: Congressman Ron Paul debated economist Paul Krugman on the economy for Bloomberg the other day. It’s about 20 minutes. If you’ve got the time, I think you’ll like this debate.

To recap: It’s a risk-off day for the currencies and metals (oil is up, though!). Manufacturing in the eurozone and rising unemployment in Germany deep-sixed the euro this morning. Manufacturing in China was stronger, and allowed the A$ and kiwi to rebound after getting sold the previous night on the RBA rate cut. Manufacturing in the U.S. was surprisingly stronger. How did that happen when all the regional reports were negative?

Chuck Butler
for The Daily Reckoning