U of Michigan Spoils the Party

Well… Who’d a thunk it? Yes, who would have thought that the U. of Michigan consumer confidence could turn the markets upside down and spoil the party? Well… It happened on Friday! The U. of Michigan Confidence Survey for August unexpectedly dropped to 63.2, from the previous month’s 66 level. The real drop though was from the forecast for this month, which was 69! The drop brought the index to a five-month low.

CPI printed at 0%, Industrial Production rose and so did capacity utilization in July… But none of it could get the taste of the U. of Michigan consumer confidence out of the markets’ mouths. It was the Humpty Dumpty economy once again… All the king’s men couldn’t erase the drop of consumer confidence.

And, the return of the risk aversion campers swamped the markets. And all day Friday, we saw losses in value of stocks, commodities and currencies. In the overnight markets, the return of risk aversion got even stronger. From what I understand happened, it seems that China’s largest steel makers announced that they were going to see iron ore prices at 35% below the benchmark. This sent shockwaves through the commodities, and that has carried over to further losses in the currencies.

The euro (EUR) has just fallen through the 1.41 handle, and is taking all the other currencies with it to the woodshed. That is, except of course, Japanese yen (JPY). I’ve gone through this so many times in the past, I think you all know exactly what I’m going to say, before I say it… But, for those of you new to class, when the risk aversion crowds fill the markets, investors head for the hills, thus selling their “risk assets” of which currencies are a part. However, there are two currencies that the mental giants believe to be “safe havens”… One pick is ridiculous, and the other one is even more ridiculous as “safe havens.” But you can’t fight the markets, and they deem Japanese yen and US dollars as “safe havens.” Me? Personally? I deem one to be a currency that should be circling the bowl! And the other? It’s iffy for sure… I don’t think you need me to tell you which one is which!

Of course, the Japanese yen has its moments… And one of those came last night in the form of their second quarter GDP. The Japanese economy grew 3.7% in the second quarter, thus ending their recession… But just like the Australian economy that we talked about last week, and needing to see if it can maintain this growth after the removal of “fiscal candy”, the same is true for Japan. But Hey! 3.7% growth is still pretty impressive, for Japan!

This morning, as I look over the headlines on the Bloomie, I see one story that says the euro will fall to 1.30 versus the dollar, and two other stories that say the opposite, with one saying it will reach 1.45 in the coming days, and the other saying the euro is a “buying opportunity”… Confused? Well, that’s the stuff that markets are made of, folks… People with differing opinions.

Later this morning we’ll see German trade balance numbers, and… The June TIC flows data from the US. These TIC flows just don’t get the attention I believe they should. So, I carry on despite the mental giants in the markets that place importance on data prints! TIC Flows are simply the net security purchases by foreigners. The US has to sell its Treasuries to finance the ever-expanding deficit… And supposedly, these TIC Flows tell us whether that’s happening or not. But given the games that people (the Fed and Treasury) play these days, who knows what is real or not? Only the shadow knows!

Don’t ask Big Ben Bernanke, he’ll tell you he doesn’t know, like he did when a Senator asked him where $500 billion that left the Fed’s books went. Big Ben said… “I don’t know”… Ahem… Big Ben? IF YOU DON’T KNOW… WHO THE @#$& SHOULD WE ASK?

OK, that was a tangent I didn’t plan on going to… But I did… So let’s finish the TIC Flows talk, eh Chuck? So… Last month, for instance, the data showed a negative figure, which meant that we did NOT finance our deficit in May! June’s data prints today… Let’s hope it prints better than the May report!

Speaking of the cartel, I mean the Fed Reserve… I saw this quote by Bill Bonner the other day, and just knew it would fit nicely in with any discussion of the cartel, I mean the Fed, and Big Ben Bernanke…

“And remember, too, the feds don’t really have any money to hand out. They can only get money by taking it from its rightful owners – either in taxation or loans. Or, they can print it up themselves. In any case, the money adds nothing real or extra to the economy. It merely distorts the economy…twists it…misleads it…and makes it a bigger mess than it was already.”

Yes, that’s exactly right, Bill! And something that I’ve tried to tell my dear readers for some time now. A lot of people don’t agree with that… And that’s all fine and dandy with me… But I believe that the things that I’ve researched tells me otherwise… Quite a bit otherwise!

All the good that the Norwegian krone (NOK) built up last week, has been wiped out by the sell off of oil prices. And when the Norwegian krone backs off it takes the Swedish version of the crown – the krona (SEK) – with it!

The Aussie (AUD) and kiwi (NZD) versions of dollars saw their recent lofty levels melt away with the commodities damage from the Chinese steelmakers announcement. These two are still way above their levels from winter of this year, so, it’s not all bad.

So… These risk aversion outbreaks have been relatively short in recent months, and not like the risk aversion of last fall and winter… So, we can look to see what might shake the risk aversion campers… As I look over the data calendar for this week, I really don’t see anything that “might” scare the risk aversion campers… However, the week is dominated by several reports on housing and building… Maybe, just maybe, these reports might show that the housing market has bottomed, that sales are picking up, and that home prices have stopped falling…. Who knows? Maybe that would be enough to shake up the risk aversion campers!

I was thinking about this while I was typing that previous paragraph… And that is… Even if home prices show a bottom, how long will it be before they are on the upside of two years in the red? Unfortunately, it will be a very long time before that happens! Long-time readers will remember when I used to (what many believed me to be doing, crying wolf), warn about the housing bubble… Shoot, I had people in the mortgage industry that just wouldn’t/couldn’t come to agree with me… Of course when it all melted down eventually, they admitted to me that they had been drinking the Kool-Aid, but now see what I had been trying to tell them.

So… When I say that I believe it will be a very long time before that happens, I’ve got a track record here.

I was also one of the first people to say in 2001 that the dollar was about to go into a secular long-term weak trend. You should have seen the emails I got then! Oh, but look at us now… The dollar index has given up over 40% of its value since then! And some individual currencies were doing even better at one point during the trend.

The Daily Reckoning