Figures Lie and Liars Figure

Good day…and Welcome to a Wonderful Wednesday! No surprises in the markets yesterday, with the dollar staying within a fairly tight trading range. These end-of-year markets are thin, which means we can get wild fluctuations or tight range trading. At this point it looks like we are going to get the latter, as currency traders want to end the year with their existing profits and aren’t willing to place any big bets until 2008.

The only report released this morning here in the United States was MBA Mortgage Applications, which dropped 19.5% last week. This is in line with the housing data released yesterday, which showed that housing starts fell in the United States and building permits slid to a 14-year low in November, providing no evidence that the real estate market is stabilizing. The housing starts, at 1187K were actually a little better than expected, and building permits also came in slightly higher than predicted so the markets largely shrugged off the data.

On the drive in this morning, NPR reported that foreclosures in the United States were up 68% compared to November of last year, but down 10% from the record number in October. It is pretty amazing that the markets aren’t really bothered by these numbers. Anyone who thinks the bottom has been reached in housing is definitely wrong. Housing will continue to be a drag on the U.S. economy well into 2008.

Ed Bonawitz, who is working on setting up a Wealth Management division here at EverBank, sent me an article that appeared in the Investment News yesterday. The article highlights just how questionable some of the government numbers are, and the title should probably have been “Figures Lie, and Liars figure”…

“The federal budget deficit for fiscal 2007 would actually have been 69% higher than the White House projected in October if the government had used the same accrual accounting methods used by U.S. corporations, according to a Bush administration financial report issued today. The deficit estimate of $162.8 billion was calculated using cash accounting methods, while the accrual method that corporations use would put the federal government’s net operating costs at $275.5 billion as of Sept. 30.

“The Government Accountability Office declined to comment on the reliability of the new report due to its ‘serious material weaknesses,’ according to a GAO news release.

“‘If the federal government was a private corporation and the same report came out this morning, our stock would be dropping and there would be talk about whether the company’s management and directors needed a major shake-up,’ David M. Walker, comptroller general of the United States and head of the GAO, said in the release.”

I know this won’t surprise most of our readers, but I continue to be amazed at just how hard our government tries to mislead us. They want to present the best possible picture of our economy in the hopes of keeping all of us ‘borrowing and spending’. This is what is driving the U.S. economy right now, and the government is too afraid to show us a true picture of our current situation.

The euro (EUR) sold off slightly overnight after the Ifo research institute said German business confidence fell to a two-year low. Rising credit costs, higher oil prices and the euro’s appreciation were blamed for the drop in confidence. But there was no reason for investors to panic, as the level of the index is still relatively high. The euro also came under pressure as ECB officials continued to say they’re ready to keep channeling cash into money markets to ease lending.

But in a somewhat mixed signal, ECB President Trichet also signaled that faster inflation would prevent a cut in borrowing costs. In testimony today to lawmakers in Brussels, Trichet said the euro-area economy faces a ‘more protracted’ period of elevated inflation than previously expected, indicating no imminent plan to reduce interest rates. Trichet said the bank won’t ‘mix up’ its inflation fighting focus with helping financial markets. So it looks like the ECB is going to continue to inject funds to help the short-term credit markets, but will hold off cutting rates. This is a very precarious position the ECB is taking; I just hope they make it across the tight rope on which they have ventured out.

Sweden’s central bank kept its benchmark interest rate unchanged at a five-year high to limit inflation, even as growth has slowed in the largest Nordic economy. The bank kept a forecast for one more increase in the first half of 2008 and slashed its forecast for economic growth next year and in 2009. Inflation has accelerated to a four-year high in November so the Riksbank is not willing to cut rates to promote faster economic growth. With the markets expecting one more increase, the SEK should hold on to its recent strength.

Two currencies that continued to perform well yesterday were the Australian (AUD) and New Zealand dollars (NZD). Apparently the large cash injection by the ECB encouraged traders to put on carry trades again. Much of the buying of Aussie dollar has been by Japanese individual investors who are looking for higher yields. But all of the rally in these two currency trades was not due to the carry trade, as the Japanese yen (JPY) also moved up versus the U.S. dollar. And while the carry trade is being credited with the gains in Aussie and New Zealand dollars, the other high yielding currencies including those of Brazil (BRL), Iceland (ISK), and Great Britain (GBP) were down.

Japan’s government slashed its economic growth forecast after stricter rules for obtaining building permits caused housing starts to plummet in September to a four decade low. The world’s second biggest economy is predicted to grow 1.3% in the year ending March 31, slower than a previous forecast of 2.1%. The government predicts a 2% expansion for the next year. Worry about growth prospects has kept the BOJ from increasing rates, but higher inflation will likely force their hand in 2008. The Japanese yen will continue to be dominated by the carry trade, as these low rates make it the preferred currency for carry trade funding. I would expect the yen to continue its roller coaster volatility as the credit crisis causes these carry trades to be reversed one day, and then put back on the next.

Currencies today: A$ .8609, kiwi .7565, C$ .9948, euro 1.4390, sterling 2.0046, Swiss .8675, ISK 63.39, rand 6.9071, krone 5.5904, SEK 6.5816, forint 176.48, zloty 2.51, koruna 18.25, yen 112.97, baht 30.80, sing 1.4608, HKD 7.8020, INR 39.566, China 7.3733, pesos 10.853, BRL 1.8087, dollar index 77.41, Oil $90.39, Silver $14.01, and Gold… $798.74

That’s it for today… It is birthday week here on the sales desk as Ty Keough is celebrating another year today! That is great news for the rest of us, as we get birthday cake for breakfast! The snow is slowly melting here, with temperatures expected to climb above 40 today. Hope everyone has a Wonderful Wednesday. Only five more shopping days left!!

Chris Gaffney
December 19, 2007

The Daily Reckoning