Export Growth Drives GDP!

Good day… And a Happy Friday to one and all! A Fantastico Friday in my books because it will be the end of a bad week for yours truly, and the start of a 3-day Labor Day Holiday weekend! YAHOO! Another storm, Gustav, is headed for the Gulf Coast, and maybe Louisiana, which wouldn’t be good. So my thoughts are with those in the path of Gustav.

Gustav is causing some problems for the price of oil, this bubblin’ crude, black gold, Texas tea, has posted its first weekly gain in two months! The rise in oil prices has lit a fire under gold, and put pressure on the dollar once again, along with inflation pressures to say the least!

The dollar pushed the euro (EUR) and other currencies lower yesterday after the second quarter GDP surprised on the upside, posting a gain of 3.3% annualized. I told you twice this week that second quarter GDP would be stronger, and yesterday I laid out the scenario that the boost would come from: 1. Stimulus checks, and 2. Export growth because of the weak dollar.

Well… Export growth was bigger than a breadbasket. In fact, one analyst says that of the 3.3%, up to 3% was directly tied to exports! WOW! OK, I don’t know if that’s bang on, but it sounded right to me, given the weakness in the dollar in the second quarter. So… You always questioned me when I said a weak dollar would give the manufacturing that’s left in the United States a competitive advantage with their exports, eh? Well, you won’t question that thought any longer as this is living proof that it can happen!

So… I hear that Kudlow & Co. were all gaga over this GDP print last night. Well, I’ll bet he didn’t – nor anyone else for that matter – tell you that this is a one and done for GDP growth in 2008! I’m saying right here and now that this is the high-water mark for GDP this year!

But… If you don’t agree with me, then you would have to say that you don’t believe the scenario that there will be a global slowdown, for if the United States is going to come out of the recession now with both barrels blazin’, then there will be no global slowdown, and if there’s no global slowdown, then commodities are going to soar, and interest rates around the world will remain at a positive differential to the dollar, and you all know what that spells, right? It spells, dollar weakness!

I’m not pinning my colors to that flag though… I’m going with the aforementioned thought that this is a blip, and a high-water mark for U.S. growth in 2008. As far as the global slowdown, I admit there will be one, but I just don’t see it being as bad as in previous times when the United States went into recession. I’m NOT GOING TO SAY “THIS TIME IT WILL BE DIFFERENT”. I totally dislike that statement, it reminds me of Big Al Greenspan, and his insistence that the tech bubble would provide “fixes” for inflation… And those were the beginnings of the problems for the tech bubble, and the mortgage bubble, and… STOP! This is a Friday, there’s no reason to get your blood boiling, Chuck! And if anyone can do that, it’s Big Al!

So… The dollar rebounded on the GDP news, like I thought it would… But it couldn’t hold onto the gains, as the currencies, led by the euro, have mounted a comeback in the overnight markets.

And speaking of gold… Recall yesterday that my friends, the Aden Sisters – Pam and Mary Anne – wrote that their charts showed that if gold traded and stayed above $845, it would enter an “A” rise… Well, gold got to within $2 bucks of $845 yesterday, before the U.S. GDP report printed. So… We’ll have to wait for another day, eh?

This morning, in the Eurozone, an index of executive and consumer sentiment index dropped from 89.5 to 88.8. This has held the euro back from gaining further. In another report, consumer inflation dropped to 3.8% from a previous figure of 4.1%. This has the drop in oil written all over it, and the ECB will be smart enough to figure that one out, and not be willy-nilly with interest rates like their brothers in arms at the Fed. The Eurozone unemployment rate remained at 7.3%, so the Eurozone isn’t slowing as much as the U.S., as layoffs haven’t begun in earnest like they have here in the United States.

Today, before the “boys” head to the Hamptons for the last holiday of the summer, we’ll see the color of July’s Personal Income and Spending, and a piece of data that the Fed does pay attention to, the PCE (Personal Consumption Expenditures), and the Chicago PM Index (Manufacturing), and finally the U. of Michigan Consumer Confidence Index.

So, plenty to digest before the holiday plans can be put into motion!

In Japan overnight, there was promising data that slipped under the doormat for the markets, but I think it’s important, so here goes! Japanese consumer spending remained in negative territory, but improved in July from a negative -1.8% in June to a negative -0.5% in July. That’s a huge jump folks, and it’s going the right way! I received a note from a reader that travels back and forth and around Asia, and he reports that Japan normally sees a slowdown in August, due to vacations, much like in Europe. So… When we see the Japanese economic slower in August, we’ll say, “Ahhh, that’s because of vacations!”

There hasn’t been any news this week regarding the credit crisis that’s going on in the U.S., and we’ll have to go with the saying that “no news is good news”, because this credit crisis is far from over, I don’t care what the likes of U.S. Treasury Secretary Paulson, or Fed Chairman Big Ben Bernanke say about the mess, they don’t have a clue! Remember last year, when the cracks in the foundation of credit began showing, and Paulson told us not to worry – that the problems would be contained? I guess NOT! Oh, there’s a laundry list of wrong statements about this whole mess by both of them, and I can’t believe the markets let them get away with them… But then, they can’t bite the hand that feeds them, eh? That’s right, it’s all too creepy for me to think about… There’s a word for it, but I’ll keep it to myself!

I had an interview with an old fave of mine from the Wall Street Journal yesterday, Jeff Opdyke, who regularly writes in the Personal Journal section, and is the author of the book The World Is Your Oyster. He called to ask me about the “surprise of the summer” – the dollar rebounding. I told him, “Jeff, the markets are playing a game of ‘your economy’s worse than mine’, and that might be true… In that I mean the Eurozone economy might be slowing worse than the U.S. (even though I highly doubt it, but for this discussion I’ll play along). When the dust settles, the United States had a recession, and the Eurozone did too… But, in the end, the U.S. is still saddled with all this debt, a credit crisis, and a housing market circling the bowl. I just don’t see how that is a good thing for the dollar.”

So, there! Even if you don’t get the Wall Street Journal, you got a piece of an interview that will appear in it, before Wall Street Journal readers! Who’s your buddy? HA!

China and its renminbi (CNY) are going to finish the month of August with the first monthly decline since they dropped the peg to the dollar in July of 2005. I told you all this could happen as we approached the election period in the United States, given that the focus would be on “getting elected” and not banging on the Chinese to allow their currency more flexibility. But… We don’t have to get all full of panic and rush to sell our renminbi. This is simply a bump in the road, in my opinion. China’s still growing and they will need a stronger currency to help fight the inflation pressures of that growth. But as long as the U.S. is “looking the other way”, the Chinese will take this opportunity to slow down the appreciation rate of the renminbi!

Speaking of growth in Asia… India posted a GDP of 7.9% in the first quarter. That sounds pretty good, eh? Well… It’s a slower rate than India is used to – at least in the past 3 years! – but before the Chicken Littles all come out and scream that the sky in falling in India… The growth is still strong, and manufacturing growth, while halved from the highs, is still strong at 5.6%. This is what happens when interest rates go higher, which they did in 2007 in India. I still can’t get my arms around why the rupee (INR) has lost so much ground… But, with China slowing down it makes some sense.

Volume will thin out this morning after the Londoners head to the pubs, so watch out for thin volume wild moves that sometimes rise up.

Currencies today 8/29/08: A$ .8635, kiwi .7055, C$ .9545, euro 1.4725, sterling 1.8290, Swiss .9210, ISK 83.06, rand 7.6780, krone 5.39, SEK 6.4125, forint 161.70, zloty 2.2770, koruna 16.76, yen 108.60, baht 34.25, sing 1.4140, HKD 7.8070, INR 43.93, China 6.8390, pesos 10.25, BRL 1.6320, dollar index 76.99, Oil $117.25, Silver $13.70, and Gold… $832.45

That’s it for today… The end of August! WOW! Where did this month go? It seems like just last week that I was in San Francisco! Of course I spent the month on cancer drugs, so, I’m amazed I can even remember I was in San Fantastico! I’m now through with them! Maybe for good! I go for two types of scans on Friday, September 12th… If they continue to show that I’m free of cancer, then I get to stop the cancer treatments! I’m holding back my excitement, because I know nothing’s a given, I never suspected I had cancer when I went for my first scan in May of 2007… But we all know now that didn’t work out so great… So, I’ll keep my fingers crossed on the 12th! OK! College Football began last night… But my focus is on the Saturday night game called the arch rivalry between my beloved Missouri Tigers and Illinois. I’ll be there with “my boys”… My beautiful bride gave up her ticket to son-in-law, Jerry. (He’s always asking to be mentioned in the Pfennig, so he’ll get a kick out that!) So it will be Andrew, Alex, Jerry and me all rooting for our beloved Tigers! Did you wear your college colors to work today? Oh, well… I hope you have a Fantastico Friday, and Heck-a-va Holiday Weekend! Go Tigers!

Chuck Butler
August 29, 2008

The Daily Reckoning