Greenspan Believes in a Modest Recovery

Chuck is headed down to Springfield with his family for their annual summer camping adventure, so he handed off the responsibilities of the Pfennig to me. But as usual, Chuck left me a good bit of information before heading out the door. Here it is:

Right after I hit “send” on Friday, and told you that the euro (EUR) had sold off 1-cent, and drug the other currencies (except yen (JPY) and francs (CHF)) with it… The euro turned around and headed north! I felt as though I had sent out some bad information! But there’s always a time to cut off, and when I did, the selling was going on…

And I was bang-on with my call for a weaker second quarter GDP than what was forecast, which was 2.5%, with GDP printing at 2.4%. So you can be assured that I did the proper amount of “self back-slapping”! HA!

But on the back of the page, it was reported that revisions to GDP going back to 2007, were done, and they had this data, that I’m sure you didn’t see anywhere else! The revisions showed a generally softer economic performance with 2007 growth at 1.9% (versus 2.1%), 2008 flat compared to previously reported gain of 0.4% and a 2.6% drop in 2009 from -2.4%.

Now… The government tells us that first quarter GDP this year was “revised up” to 3.7% from 2.7%… Who among us believes that, now knowing the downward revisions to previous reports? Yes, that’s what I thought!

In a much lower priority news item, Canadian second quarter GDP printed at +0.1% – pretty anemic… But… The good news of the report came in the “good-producing industries” which showed a 3.4% surge in the mining and oil and gas extraction… That’s good news for commodities…

And then I left this on the desk for whoever wanted to take the reins on my previous research… Basically, I’m charting something that looks very fishy to me, and would like for someone at the Cartel, or Treasury to explain to me… Basically, it’s like this… For nearly four years, the US has accumulated a Federal Deficit of $3.2 trillion (the total added to the deficit prior to four years ago is now $13,258,239,000)…

However, our Treasury issuance, which is supposed to equal the deficit that we need to finance, was $1.5 billion more than the Federal Deficit for the same period! The US has issued $4.7 trillion in Treasuries… Inquiring minds need to know, just where are these funds?

And… If the “audit the Fed Bill” that Ron Paul introduced had been approved, and not watered down, we would know things like this!

Anyway… Don’t get mad at Chris regarding this… It’s me. And I’m on vacation… Starting.…… NOW!

See you August 9th…

The US dollar continued to cool off over the weekend as reports indicated that the recovery in Asia is gaining steam. Former Federal Reserve Chairman Alan Greenspan threw cold water on the dollar, appearing Sunday on Meet the Press. Greenspan said the economic recovery is on ‘pause’ here in the US, and worried that falling home prices could send us into the second half of a double dip.

“We’re in a pause in a modest recovery, but a pause in the modest recovery feels like a quasi-recession,” he told NBC. Greenspan tried to stay positive when pressed about the risks the US economy faces in the coming months. “Home prices, as best we can judge, have really flattened out in the last year,” Greenspan said. “And while it is true that most economists expect a small dip from here, largely as a consequence of the ending of the tax credit, the data don’t show that at this particular stage. If home prices stay stable, then I think we will skirt the worst of the housing problem.”

That is a pretty big IF, and our former Fed Chairman doesn’t have a good history predicting the direction of home prices (remember when he refused to see the housing bubble!) I think rising foreclosures and a stubbornly high unemployment rate will challenge Greenspan’s overly optimistic outlook on the US housing market, but hopefully Big Al is right and I am wrong.

We do agree on what should be done with the Bush-era tax cuts, which are set to expire at the end of the year. Greenspan said he disagrees with the notion that they should be extended. “I’m very much in favor of tax cuts, but not with borrowed money,” he said. “And the problem that we’ve gotten into in recent years is spending programs with borrowed money, tax cuts with borrowed money, and at the end of the day, that proves disastrous. And my view is I don’t think we can play subtle policy here on it.”

So the combination of better growth prospects in Asia, and the cautious tone of Alan Greenspan kept the dollar lower in early European trading. The euro held up above $1.30 for a fifth day in a row and is close to moving up over $1.31 today. A gauge of manufacturing in the 16-nation Eurozone increased to 56.7 from 55.6 in the previous month. That puts this indicator of manufacturing health at a three-month high.

This data is in direct contradiction to what is occurring here in the US. Today will bring the release of the ISM Manufacturing index here in the US. This is expected to have fallen to 54.4 during the month of July from a figure of 56.2 in June. Recent data shows that the recovery in Europe may have more staying power than that of the US. While the early numbers showed the US recovery came out of the blocks faster, the ‘slow and steady’ pace of the euro region recovery may win out in the long run.

But some currency traders don’t agree. The Royal Bank of Scotland suggested investors should be selling euros against the dollar amid risks that the euro-region growth will start to moderate. An RBS analyst wrote in a report this morning that it is ‘tactically the right time to sell the euro.’ And the folks over at RBS aren’t the only ones indicating that the euro could be at a short-term peak. I read a couple other stories on Bloomberg this morning reporting that many hedge funds are betting the recent run-up in the euro has been overdone, and many expect the euro to fall back to test the $1.25 levels of early July.

The best performing currencies over the weekend have been the New Zealand dollar (NZD), Australian dollar (AUD), and the Norwegian krone (NOK). These commodity-based currencies are some of our favorites here on the WorldMarkets desk, but have suffered a bit recently as currency investors have moved money back into the US dollar as a ‘safe haven’ move. Signs that the Asian economy is remaining on a good recovery path helped boost demand for the New Zealand kiwi and Aussie dollar.

The Australian central bank will probably keep interest rates unchanged for a third month during their meeting tomorrow. Consumer prices had the smallest increase in three years during the last quarter, allowing RBA Governor Glenn Stevens a bit of room to pause in his fight against inflation. This is also an election cycle in Australia, so the RBA will not want to risk damaging Prime Minister Julia Gillard’s election campaign with an increase in rates.

Positive economic news out of both Europe and Asia have sapped ‘safe haven’ demand for the precious metals, sending gold down nearly $8 in early European trading. Gold had nearly recovered from the dramatic $26 selloff early last week and closed at $1182.95 on Friday, but started off this morning on a negative note. But as New York is starting to come into the market I see the gold price heading back up. I guess the folks on Wall Street think these prices below $1180 are attractive, and I agree.

To recap: Chuck headed down to southeast Missouri for his annual summer vacation, but not before sharing a bit of a riddle regarding the recent US debt issuance, Greenspan still thinks the housing markets have stabilized, but warns what could happen if he is wrong, Eurozone manufacturing surprised on the upside pushing the euro higher, but many believe it is now time to sell, and the RBA will probably pause rates.

Chris Gaffney
for The Daily Reckoning

The Daily Reckoning