Spending More Than We Make

Once again yesterday, we traded all day in a very tight range with the currencies. The ADP/Challenger data didn’t give anyone a warm and fuzzy about the labor picture, and tax receipts are in the news… So, let’s go to the tape!

OK, front and center this morning, I have to talk about this deal with tax receipts in this country. So, I’ve chronicled the April and June debacles for tax receipts, but just in case someone is new to class, and missed that, let’s review… The US used to count on the months of April and June for HUGE cash receipts from tax returns, but this year, both April and June’s tax receipts were so bad, the expenditures were greater than the receipts! I highlight these two months because, they should have been positive months for the budget balance. If we can’t post a positive balance in April and June, what’s the rest of the year going to look like?

Well… Just for starters, tax receipts in the US are the worst since the Great Depression, and if they continue on this path, could pass that awful period of time for the top spot! My friend, The Mogambo Guru, had this to say, in that “special” Mogambo way of describing something… Let’s listen in…

“In fact, speaking of taxes, it makes your hat fly up comically off your head in astonishment when you realize that total income and corporate taxes are less than this year’s federal budget deficit alone! And then you really start screaming your guts out in anger when you then realize that the total federal budget is 400% of total federal revenues! They are spending four times as much as they take in! Four times as much!”

OK… Now that I’ve sufficiently raised my blood pressure talking about the fact that in a time when tax receipts are down because of the depression, the government is spending more and more and more and more. I’ll stop there, even though the government isn’t stopping their spending! And just like I used to bang on consumers for spending more than they made… The US government continues to do so… Consumers have gone to saving (YAY!), but the government has not! As we all found out, you can’t continue to spend more than you make forever… I wonder when the government will figure this out. (Probably when foreigners say “no mas” on financing the deficit spending!)

Well… The currencies, like I said at the top, remain in a very tight trading range… Three currencies stick out above the others, though, in the overnight trading…

1. Mexican pesos (MXN)… Moodys affirmed Mexico’s credit rating, which was thought to be revised lower, and the peso rallied on the news…

2. Canadian dollars/loonies (CAD)… After a day of consolidation trades due to the Central Bank Governor once again threatening the markets if they take the loonie higher, the loonie went higher! Look for the Bank of Canada (BOC) to come out and make a statement, something to the tune of they are going to extend their interest rate pledge for a longer period. They will do this to once again attempt to keep a lid on the loonie.

3. Brazilian real (BRL)… Oh brother! Somebody put a leash on this puppy! The real continues to edge higher and higher, and now is close to move past the 1.80 level. The real has posted a better than 27% gain versus the dollar this year, with most of that move coming in the past three months!

Yesterday, there was a story in China Daily that said China was going to switch from Australian Iron Ore to Brazilian Iron Ore… Now… On the outside this looks bad for Aussie dollars (AUD) and good fro reals, right? Well… As I told the boys and girls on the trading desk yesterday, I think this is more posturing by China, after some of their businessmen were arrested in Australia and charged with espionage. We’ll have to keep an eye on this, to see if there’s more to this than posturing.

The news didn’t hurt the Aussie dollar yesterday… In fact it’s trading near a 10-month high this morning, after posting a surprising jobs report for July, last night. Once again, the jobs markets sparked the Aussie dollar higher, just like in the go-go days before the deleveraging meltdown last year.

I’ll tell you what this report does do, more than anything… It gives the markets the idea that the Reserve Bank of Australia (RBA) is definitely on track to raise interest rates next year… And some traders are now thinking that the RBA will move rates higher before we turn the calendar page on 2009! WOW! Now that’s aggressive thinking! So, you can see why the Aussie dollar took the news in China Daily, and let it roll like water off a duck’s back!

In the US yesterday… The ISM Index for Services (non-manufacturing) printed, and fell unexpectedly in July. The ISM Services Index printed at 46.4 following the prior month’s 47.0 reading. The weakening was broad-based amongst the sub-indices. New orders declined to 48.1 from 48.6, business activity fell to 46.1 from 49.8 and employment softened to 41.5 from 43.4.

But… To offset the ISM we saw Factory Orders rise; but that data was for June… I really don’t understand why it takes two months to get data like this to the markets!

Today, we’ll see the Weekly Initial Jobless Claims, which have fallen below 600,000 each week, but remain very high at 580,000, so nothing to get the “recovery is here” campers all excited… Today’s report is just an appetizer for tomorrow’s Big Jobs Jamboree.

Economists are expected a HUGE drop in the jobs lost figure for July, dropping to 327,000 from June’s 467,000 (after BLS adjustments, of course!) I really don’t know where they think the jobs came from, but if they’re right, then good for the US worker! And, that kind of number, although it will seem strange to say this, and for you to hear it when you read it, but… A good Jobs Jamboree number will be negative for the dollar…

Why? Because… As I’ve been telling you over and over again, like a broken record (or for you youngsters, a scratched CD)… The dollar was a safe haven last fall and winter with US Treasury purchases… As the losses mount on those “safe haven” purchases of Treasuries, and things begin to look brighter those “safe haven” trades are reversed, and than means the dollar gets sold.

You know for some time now I’ve written about the Treasury Bubble popping… And those darn Fed Reserve purchases of Treasuries kept a lid on the losses mounting… But, it appears that the cartel, I mean Fed Reserve has backed off their purchases… And Treasury yields are once again on the rise… And for those of you new to bonds, they work like this… As a bond’s yield goes up, the price goes down, and vice versa… So… In January this year, the 10-yr Treasury yield was 2%… In June it reached 3.80%, then the cartel (I mean Fed Reserve), bought Treasuries, and the yield on the 10-year fell to 3.12%… But in the past three weeks, those yields have risen once again to 3.73%… Looks like the Bubble popping is once again on the table, eh?

You’ve got the US issuing more and more Treasuries to finance their deficit spending, and on the other side you’ve got Treasury holders unloading them on the markets… That looks like a perfect storm brewing, folks.

The Bank of England (BOE) and The European Central Bank (ECB) are meeting as I write… Don’t expect anything earth shattering from either meeting. There is hope that the BOE will announce an end to their Quantitative Easing (QE), which I talked about yesterday. Now that would be earth shattering, but… There’s no guarantee that the BOE sees things the way the markets want them to be seen!

Gold backed off yesterday as it saw profit taking. The shiny metal had traded over $670 yesterday before seeing the profit taking. I would think that the inflation hedging buying of gold would really be strong for the remainder of this year, as my inflation fears really begin to grow stronger every day, you know I’m alright now… HA!