Nothing Comes Out of the G-20 Meeting

St. Louis, Missouri- Good day… And welcome back to another workweek. I was driving into work this morning and started thinking about the growing number of people who no longer have jobs to report to. And the problems are no longer just concentrated on the manufacturing sector. I was shocked at the long list of retail stores that are planning to shut down after the holiday season. The situation in the U.S. economy continues to deteriorate, and unfortunately things are going to get much worse here before they turn around. On that cheery note, I’ll get started.

Leaders from around the world gathered in an attempt to solve the crisis facing the global economy. This meeting was being billed as “Bretton-Woods II” and the markets were counting on some action. But the meeting was largely a non-event, as leaders did little more than point fingers and try to pass the blame for the financial crisis. President George W. Bush and his counterparts from the Group of 20 blamed the looming global recession on imprudent investors who sought higher yields without an adequate appreciation of the risks. They also mentioned that the regulators who failed to address the dangers building in the market were at fault; but there was no mention at all of the Wall Street banks and investment houses that concocted complicated investment vehicles, bought them a AAA rating, and sold them to unsuspecting investors. Granted, these investors who purchased them without proper due diligence are partially to blame, but some fingers should also be pointing in Wall Street’s direction.

But pointing fingers won’t solve our problems, so what did the G-20 come up with to rescue the markets? Nothing more than a statement calling for higher capital standards and stronger risk management at banks, hedge funds, and credit rating firms. I agree that more regulation is needed, but the markets were looking for a coordinated response to the current crisis, and this announcement will undoubtedly disappoint them.

I received a phone call from a Reuter’s reporter on Friday asking my thoughts on the probable outcome of the G-20 meeting. I told her I had little expectations for any market moving announcements, and that they would most likely agree to have another meeting later next year. That is exactly what occurred, with the leaders scheduling another meeting for the first quarter of 2009.

The dollar fell versus most of the major currencies, with the British pound (GBP) turning in the best performance, increasing 1.28% versus the U.S. dollar. Chuck had a reader send him a very important newsflash from the Telegraph UK paper. The Financial Services Authority (FSA) has completed a liquidity/stability stress test on the capital ratios of U.K. building societies and found that they’re much more stable than the Banks. This undoubtedly helped the pound rally, but this move up could prove to be short-lived, as the underlying fundamentals for the pound are weak, and getting weaker.

The Brazilian real (BRL) was the biggest loser versus the U.S. dollar over the weekend, as weak economic data caused investors to move out of the emerging markets. I continue to believe that the commodity-based currencies hold some of the best values in today’s markets. The stimulus package announced by China, along with government infrastructure – which will likely be announced here in the United States – should increase demand on raw materials. More and more governments will try to ‘spend their way’ out of the global slowdown, investing into big infrastructure construction projects. These projects should bring commodity prices back up, which would be supportive of the Brazilian real and the Australian dollar (AUD), two of the major exporters of raw materials.

Today we will get the Empire Manufacturing data, which will likely show more rot on the vine for manufacturing in the NY area. The number is expected to show a record drop for November. We will also see the Industrial Production and Capacity Utilization numbers for October. The Industrial Production number is actually expected to show a slight pick up after falling almost 3% in September.

The rest of the week will bring even more data on the U.S. economy, with PPI and TIC flows scheduled for tomorrow; CPI, U.S. Housing starts, and the minutes of the FOMC’s October meeting on Wednesday. And to finish the week, the jobs numbers will be printed on Thursday along with the Leading Indicators. None of this data should be dollar positive, as the fundamentals of the U.S. economy continue to deteriorate. But as readers know, bad economic numbers have had a dollar positive effect, as investors flock to the ‘safe haven’ of U.S. treasuries. So the dollar could actually see more strength as the bad numbers roll in.

This is what happened with the Japanese yen (JPY) over the weekend, as Japan announced that GDP fell 0.4% during the third quarter. Japan’s economy, the world’s second largest, entered its fires recession since 2001 last quarter and the government economists say conditions may get even worse. The bad news was met with currency investors buying the Japanese yen. Yes, investors moved back into yen as they reversed carry trades, selling high yielding currencies to pay down loans in Japan. So, poor economic data in the United States and Japan are driving investors back into these currencies.

Crazy days!

Currencies today 11/17/08: A$ .6485, kiwi .5564, C$ .8119, euro 1.2646, sterling 1.4922, Swiss .8352, ISK (No Quote), rand 10.13, krone 6.9728, SEK 7.923, forint 212.13, zloty 2.9817, koruna 20.07, yen 96.51, baht 34.99, sing 1.5231, HKD 7.7501, INR 49.3375, China 6.8270, pesos 13.062, BRL 2.305, dollar index 86.97, Oil $55.54, Silver $9.50, and Gold… $742.84

That’s it for today… The weather here in St. Louis has been about as volatile as the currency markets. We had the first snowfall of the season on Saturday, followed by a beautiful fall day yesterday with temps heading into the ’60s. Back to winter today and tomorrow with temps down into the ’30s. And then back to the mid-’60s on Wednesday… You got to love the St. Louis weather! Tough weekend for St. Louis sports, as the Rams got embarrassed in San Francisco, and the Blues lost in overtime last night to the Montreal Canadiens. Chuck should be back in the saddle tomorrow, but is scheduled to head back out on the road at the end of the week. Hope everyone has a Marvelous Monday!!

Chris Gaffney
November 17, 2008