OMB Makes New Deficit Forecast

The currencies took a breather versus the dollar yesterday, and basically traded right around the currency round up levels most of the day. Overnight, things were pretty quiet too… The markets are trying to figure out which way they are going to go with the dollar… The deficit is growing, which SHOULD be bad for the dollar, but in recent times, fundamentals get a little hazy at times. So… Let’s go to the tape on the Office of Budget Management (OMB).

The OMB reported yesterday that they were revising the budget deficit for this fiscal year, which ends September 30th. Get this folks… The OMB says that this year’s deficit will be 12.9% of GDP, and next year’s deficit will be 8.5% of GDP… OUCH! Now… Let me put these figures into some framework… First of all, back in 1985, finance ministers of the world met at the Plaza Hotel in New York, and were scared to death that the U.S. deficit was out of control… At that time it was 2.5% of GDP! The Plaza Accord called for a weaker dollar to deal with this, what was called out of control, deficit.

In 2001, the U.S. deficit reached 4.5% of GDP, which historically meant that a country experiencing debt levels at 4.5% of GDP would experience a currency crisis, or at the very least a major debasing of the currency….

Now skip forward to today… 8.5% of GDP? Where the heck are the finance ministers of the world now, and why are they scared to death regarding this out of control deficit? The only country crying wolf at these figures is China! Oh… And one more thing about the 8.5% of GDP… This is the highest level our debt has been in 60 years, since the end of World War II…

I shake my head in disgust… What has become of our republic… Oh… And to add injury to insult… This morning, the trade deficit, which had fallen recently due to the recession, actually gapped up 5.5% in March… That makes sense to me, actually… You see, the dollar was still “stronger” in the first part of the year, thus eliminating the ability for exports to make a dent in this deficit… The sharp narrowing of this deficit looks to be leveling off, and once again, that does not bode well for the dollar. The return of the twin deficits could be in cards once again, and that could be devastating once again for the dollar.

Oh…. And one more thing on the Jobs Jamboree from Friday that I completely forgot to talk about yesterday… The jobs created were “ghost jobs”! The totally insane Bureau of Labor Statistics (BLS) added… 226,000 jobs from what they believe was “business creation”… WHAT? Are you kidding me? What a bunch of dolts! Business creation during a recession like this? That would add 226,000 jobs! I’ll tell you what happened here… The government needed this report to show some sunshine… And voila! The BLS came through! But here’s the rub… It will lead people back into the markets artificially… If losses come, then the BLS should be held responsible for this artificial attempt to make us feel good! Oh… And don’t forget, in a future month, the BLS will have to take these out because they won’t materialize… And when they do… That month’s jobs data will suffer… But hey! I can hear the dolts over at the BLS now… Just push it down the road for somebody else to deal with.

I’m watching, the best I can that is, from the road, the euro go on a run here this morning, and 1.37 looks like it could very well be its next stop. The flight to safety (read Treasuries) seems to be wearing off, and I’ve told you time and time again in the past, right here, right now, that when the “BIG GUYS” grew tired of the paltry yields in Treasuries, they would unload them as swiftly as they bought them, and that would cause the dollar to be under severe pressure… I’m not saying that this is what’s happening right now… But it sure has the smell of it… Yields on Treasuries have been rising, which indicates selling, as the prices of the bond go down with the sales… And the dollar has been teetering.

Our long-time friend, Jim Rogers, was interviewed on Bloomberg TV yesterday… And it’s always of importance what Mr. Rogers has to say… So let’s listen in to Jim Rogers!

“The dollar’s rally is set to end in a currency crisis…probably this fall or the fall of 2010. It’s been building up for a long time. We’ve had a huge rally in the dollar, and artificial rally in the dollar, so it’s time for a currency crisis.”

I’m with you, Jimmy! This artificial dollar rally has lasted way too long! But, if you look at the move in the currencies since March 1st, then we may be on to something here… My problem is the link with stocks that currencies have held onto for a few months… I just can’t get my arms around the fact that “all’s right on the night” in the financial markets, that the recession is nearing an end, and stocks will continue to rally… I just don’t see it that way, and if the currencies hang on to this link, then that wouldn’t be a good thing… BUT! This is a runaway bus right now, folks, and you won’t see me stepping in front of that bus! So… Let’s just go with the flow!

Good news this morning from Canada, as their trade surplus increased to $1.1 billion in March. The March figure was larger than expected… This is another in the list of things that have gone right for the Canadian dollar/loonie (CAD), recently… The news is tempered with the fact that imports saw big decline, which would be a representation of a slow economy. But, again, this bus is moving…

The Daily Reckoning