Consumer Spending Drives GDP?

Do you recall the Thursday action after the GDP report showed such strength (whether you believe it or not) and the dollar got sold like pet rocks? Well the government made a big deal out of the fact that a good portion of the GDP report was consumer spending during the quarter… In fact 1.6% of the 3.5% increase was the Cash for Clunkers program! Well… That was a bad thing to do, for on Friday, personal spending and income printed, and the spending piece had fallen in September… So much for the euphoria of consumer spending bringing the economy out of the recession! Oh, and like I said last week, this plays right into my thoughts from long ago, that we would see some growth near the end of this year, but would slip right back into recession, thus a double-dip… So, the first two parts are in the books.

So… The currencies slid versus the dollar on Friday, and haven’t really rebounded overnight from what I can see. The Aussie dollar (AUD) seems to be champing at the bit to move higher versus the US dollar, but just can’t get the Big Dog, euro (EUR), to get off the porch this morning!

The reason the Aussie dollar is champing at the bit to move higher, is the news from China this past weekend that their manufacturing data from October showed the fastest gain in 18 months! So, in keeping with the Manufacturing Index here in the US in mind, the Chinese Manufacturing Index moved to 55.4 in October, from the 55 in September, and the Chinese say that exports were strong. OK… We have to apply the “believe half of what the Chinese tell us about their economy” principle… And if that’s so, then the Manufacturing Index still is above the expansion line of 50… And that’s a good thing for the global economies!

I would think that news like this from China would be a springboard for commodities, and the commodity currencies of Australia, Brazil, Norway, New Zealand, and Canada.

Speaking of strong manufacturing… The Eurozone printed a strong Manufacturing Index report this morning too! Manufacturing in Europe expanded for the first time in 17 months, in October, increasing to 50.7 versus 49.3 in September!

The dollar index is beginning to show some weakness as I write this morning… And one would certainly think that news like this from China and the Eurozone, would push the dollar down… But, there’s that stinkin’ trading theme hanging over us like the Sword of Damocles! And with the news this past weekend that CIT Group was going to have to file bankruptcy, if things hold true, it would be good for the dollar… The flight to safety, and all that!

Hey! Doesn’t this news about CIT Group (CIT) tick you off a bit? It does me… And I’ll tell you why! CIT Group had received $2.33 billion of taxpayer money in an attempt to bail them out last year, but they failed anyway! Again! Wouldn’t it have been far better to just let them fail when they first showed signs of not being able to compete, and survive? I know that in the whole scheme of things $2.33 billion doesn’t sound like that much… Considering the trillions that have been spent, allocated or guaranteed! But… $2.33 billion here, and $2.33 billion there, and pretty soon you’re talking about a nice sized pile of cash, that would not have been wasted!

The business section of our local paper had an article this past weekend that I referred to last week regarding GMAC and Ally Bank… Here’s David Nicklaus saying what I wanted to last week… “That clever Ally Bank ad, the one where a boy is denied a toy truck because of a ‘limited-time offer’ omits a fact that would interest most viewers.

“You, the taxpayer, are propping up Ally – the bank that’s so good at making fun of other banks. And it looks like Ally’s parent, GMAC Financial Services, will ask for more money soon.”

So… The government is in competition with private sector banks… And they can pay interest rates that are higher than other banks, because… If they lose money, they can just go back to the well and get more bailout money!

This is all just becoming one Big Mess, folks… You’ve got to see what’s going on here! It’s called big government… And when you have big government, you have big deficits! The government does not have any money to spend unless they steal it… I mean take it from taxpayers first! And they’re spending what they don’t have! Tax receipts are falling, and the government’s expenditures are rising! That’s a bad formula, folks…

And one that makes you so aware of the need to be diversified with a portion of your investments out of the dollar!

OK… I’ve got to stop there, I have to go to the doctor’s office this morning, and I don’t need my blood pressure boiling!

Hey! I was reading an article on Friday about Australia in which the Australian Treasurer, Wayne Swan, told reporters that he truly believes that the Australian economy is going to outpace most of the world in 2010… This plays well with my thought that I’ve held for so long, and have told you dear readers about for some time now, and that is… Australia is the proxy for global growth… And if the “insiders” in Australia think their economy will outpace most of the world, that’s a good sign for the global growth! And one that I think traders should be taking notice of!

I think that Brazil has a long way to go to catch up with Australia, but Brazil has made great leaps in the past five years, and has really taken steps to be in the same conversation when talking about Australia. The country is still an emerging market, though, and with that, you get wild swings in the currency… Just so you know!

I want to get back to the GDP report in the US from last week… Recall that above, I told you that the government made a big deal out of the fact that a large portion of the rise in GDP was consumer spending… But you have to ask yourself this question… “How are consumers propping up GDP with spending in the face of over 16% unemployment? Personal consumption climbed while personal income fell in the quarter, as documented in the Pfennig each time they printed… So, the only way that works is if… Wait, you don’t think… Nah, we’ve learned our lesson, right? Oh well, I’ll throw it out there… The only way that works is if the money is borrowed… Credit cards, etc. OH NO! Tell me we’re not going down this road again! Ahhh grasshopper, but Christmas is just around the corner… With 16% unemployment going on, this should be a very “plastic” Christmas shopping season!

Ok… The week ahead is chock-full-o-data and events… Like… The FOMC meeting tomorrow, that carries over to Wednesday… You know what I say about those two-day FOMC meetings! Got any aces? Go Fish!

We’ll see our own version of Manufacturing Index – the ISM – as it prints this morning… We’ll also see Pending Home Sales. Tomorrow is the Auto Sales, and Factory Orders. Wednesday we’ll get the Treasury Refunding Announcement, and Thursday is weekly initial Jobless Claims, and the stupid Productivity reports, and then Friday is the Jobs Jamboree!

So… We’ve got a lot to talk about his week… I’m supposed to be leaving for Cabo tomorrow, but I doubt the doctor is going to let me travel, so I’ll probably be here all week. So, Chris gets off the hook this week most likely.

To recap… The euphoria that was all over the markets after the GDP report was wiped out by a very weak consumer spending report for September. The dollar rebounded on the “bad news for the economy” thus confirming that the “trading theme” is still in place. CIT Group filed for bankruptcy this weekend, thus wasting the $2.33 billion that was given to them by the government from taxpayers! And both China and the Eurozone’s manufacturing indexes were strong last month, which should be a good thing for the global economies, commodities, and so on…

By Chuck Butler

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