Jobless Recovery Not Going to Happen

The dollar started the day off with a move up after a positive report on US leading indicators; but it gave back most of the gains as the trading day wore on. At the end of the day, only one currency moved more than 1% versus the greenback, with the pound sterling (GBP) dropping almost 1.5%.

As just mentioned, the leading indicators for the US rose in September for a sixth straight month, giving confidence to those calling for continued expansion in 2010. The gauge that attempts to predict the economic outlook for the next three to six months climbed 1%, beating most economists’ forecasts. But much of the good news on the US economy is due to the government stimulus programs, and two other reports indicated that future growth for the US is still a question mark.

Offsetting this positive report were the weekly jobless claims – which rose – and a report that showed home prices fell. So apparently the leading indicators are predicting a recovery without jobs, and without a strong housing market. You can see why Chuck and I question reports of a 2010 recovery. The US economy will not be able to post strong growth with near double-digit unemployment and with both residential and commercial real estate in the dumps.

One of the Fed heads agrees. Federal Reserve Bank of Boston President Eric Rosengren said that the US economy is at risk of relapsing into recession after expanding in the second half of 2009. “It’s certainly a risk,” Rosengren said in an interview with CNBC. “That is why we don’t want to take away the stimulus too quickly.” I don’t look for the Fed to move interest rates higher anytime soon; the leaders of our Fed realize a full US recovery is still a ways off.

Here is a question that needs to be asked: Can the world grow without a robust US consumer? I believe the answer is yes! Growth in Asia and Europe can propel the world out of the global recession without the help of the US consumer; and I think that there is a very good chance that that is what is going to happen. Chuck has compared the current state of the US to what happened in Japan after its stock and real estate markets crashed in 1990. Japan plunged into a 10-year period of stagnant growth while the rest of the global economy prospered. Many will question how the global economy can grow without the help of its largest contributor, but Japan was the second largest economy during the ’90s, and the rest of the world barely skipped a beat during their malaise.

With the emergence of the consumer in both China and India, the global economy can and will continue to grow even if the US is stagnant. I read a report this morning that stated China would create over 11 million jobs this year, 2 million more than the government had earlier predicted. These new jobs will continue to increase the standard of living in China, and create 11 million ‘new’ consumers.

While the current administration may talk about reversing the stimulus and government spending as the rest of the world starts to recover, their actions won’t match their talk. I believe we will see interest rates stay low in the US for an extended period of time. We will also probably see additional stimulus proposals as US unemployment continues to rise and US consumers continue to tighten their purse strings.

As the rest of the world continues to recover, and central banks begin to increase rates in order to fight rising inflation, the US dollar will continue its slide. A strong dollar just isn’t in the interest of the US if we have any plan to try and pay down the tremendous debts and stimulate growth through increased exports. The dollar will fall victim to policies which will be designed to try and push the US economy up to keep pace with the global recovery occurring in Asia and Europe. Despite all of the rhetoric about a ‘strong dollar policy’, the administration is willing to sacrifice the dollar in order to keep the US from slipping further into recession.

I don’t think this is the right course to take for the US, but I firmly believe this is what is going to happen. The future is too far off for politicians to worry about; they focus on the short two-year election cycle. They will continue to leverage the future of America with borrow and spend policies designed to keep the US economy on life support until it magically recovers. Their policies will cause a dramatic fall in the value of the US dollar, which will eventually make our exports competitive and finally spur growth in the manufacturing sector. This drop in the value of the US dollar will also enable us to pay down our debts to foreign holders with cheaper US dollars.

I am not suggesting that the US will slip into a ‘great depression’, but I believe we will see an extended period of stagnant growth. Certain well run companies (like EverBank) will still be able to make a good profit, and the falling dollar will create opportunities for companies with a strong international presence. As an investor, you should look to hedge your portfolio against the inevitable fall in the value of the US dollar by investing in non-dollar assets such as our WorldCurrency and MetalSelect accounts.

One major problem the sliding dollar causes for the rest of the world is that the price of oil is inversely related to the value of the dollar. As the dollar has steadily declined this year, the price of oil, which is priced in dollars, has risen. In fact, a study released yesterday showed that oil is relatively cheap at $80 per barrel. The study showed that the price of oil should be $88 per barrel with the euro (EUR) trading at $1.50. As the dollar continues to slide, there will be further calls for oil to be priced and traded in some other currency besides the dollar, as countries try to de-link it to the falling greenback. If this would occur, it would be a major blow to the reserve status of the US dollar.

And the folks at PIMCO, the global bond giant based in California, seem to agree. Richard Clarida, a strategic adviser at Pimco wrote a note to clients yesterday pointing to “an orderly dollar decline” as the “most likely scenario”. He added, “a disorderly decline, while unlikely, cannot be ruled out.” In the note, he states that a collapse in the value of the dollar would jeopardize its status as the world’s reserve currency. Not a rosy picture for the greenback.

Both the central bank of Sweden and South Africa announced they would be keeping rates unchanged yesterday, but the announcements have very different effects on the values of their currencies. The Riksbank of Sweden stated that they would keep their benchmark interest rates at 0.25% and said that that level would be maintained until ‘autumn’ of next year. The Swedish krona (SEK) slid against the dollar after the announcement.

South Africa also left their rate unchanged at 7%, but the rand (ZAR) rallied as some had expected a 50 basis point cut. South Africa’s central bank leaders said rising energy costs had added to inflationary pressures, and therefore rates would have to be maintained at their relatively high levels. The rand rallied after the announcement.

As mentioned earlier, the big loser overnight was the pound sterling, which fell over 1.5% versus the dollar. A report this morning showed that UK gross domestic product unexpectedly dropped in the third quarter, falling 0.4% from the previous three months. The British economy has now shrunk over six consecutive quarters, the most since records began in 1955. The report confirms the BOE will continue to keep the ‘quantitative easing’ policies of low interest rates and government purchases of debt in place. Both Chuck and I have railed against these policies, as they are largely untested, and will likely lead to a spike in inflation down the road. Unfortunately the US has been following the UK in their attempts to borrow and spend their way out of recession. I don’t think the future is too bright for either the pound sterling or the dollar.

Before leaving work yesterday, Chuck wrote me the following to add to today’s Pfennig:

“Canada posted a stronger than expected retail sales in August, printing at +0.8% (forecast at +0.4%)… Then that report was followed by the Bank of Canada’s (BOC) Monetary Policy Report for this month, in which the BOC admitted that ‘Canada’s economic recovery is due to monetary and fiscal stimulus, increased household wealth, improving financial conditions, higher commodity prices, and stronger business and consumer confidence.’

“Hmmm… Seems to be the same exact things I’ve been saying about Canada!

“There is an important point in on the items the BOC talked about… And that is the stimulus… Once in a while I get notes from people telling me I bang on the US for stimulus when every other country in the world did the same thing. Well, not quite… While every other country might have implemented stimulus, they were in a fiscal position of strength to do so, while we merely raised the national debt to levels that now place more than $38,000 of debt on each civilian in this country! So… There was a difference, folks… And that leads me to the point I’ve tried to make for years now, and that is why it is so important for a country to be a surplus country!

“Colleague Aaron Stevenson brought this to my attention yesterday regarding the price of gold… The charts show that the price of gold basically traded back and forth for a flat result for six months prior to August 25, 2009.

“From August 25th of 2009, gold has gained 12%! So… Guess what was announced on August 25th that probably has a ton to do with this gain in gold? Give up? August 25th was the day that the President announced that Ben Bernanke would be reappointed Fed Chairman…

“Co-inky-dink? I don’t think so!”

I really appreciate it when Chuck gives me these notes to get me going when I am pfilling in for him. It gets the juices flowing instead of staring at a blank sheet of paper!

Both the high flying Australian (AUD) and New Zealand dollars (NZD) fell a bit versus the US dollar yesterday as investors worried about China pulling back there stimulus. The currencies, which were trading near their 14-month highs, were ripe for profit takers after China announced accelerated growth in the third quarter. With China clearly back on the growth path, some investors feared they would reverse some of the stimulus programs put into place over the past year. China will certainly start to pull back some of their expansionary policies, but I think this was just a good opportunity for ‘traders’ to book some nice profits. The Chinese economy will continue to grow, and their demand for raw materials will keep the exporters of Australia and New Zealand busy. As Chuck stated the other day, this isn’t a crying opportunity but is rather a buying opportunity! We still feel the Aussie dollar is a solid currency to own.

By Chris Gaffney

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