Dow at 13,000. How to account for the disconnect?

Wednesday, April 25, 2007

Call us skeptical by gimleteye

You read and hear the same news we do. Yesterday, on a day the Dow Jones Industrial Average closed above 13,000 for the first time, a new Wall Street Journal/NBC News poll disclosed that only 22 percent believe the nation is headed in the right direction.

How to account for the disconnect?

Wall Street apparently believes that the consumer economy is strong. But is consumer confidence really so different from what people feel about the war in Iraq and the collapse of the housing markets and sharply tightening credit across the nation?

It is true that Wall Street has always tended to view gridlock in Washington as good for business, and business is generally good in a time of war.

We look, though, at the disparity in wages, between the economic elite and the mass of Americans ("Income inequality grew significantly in 2005, with the top 1 percent of Americans--those with incomes that year of more than $348,000--receiving their largest share of national income since 1928, analysis of newly released tax data shows." NY Times, March 29, 2007) and believe that something else is going on.

The earth has been "flattened" by globalization. Americans have benefited from high quality goods manufactured in low wage nations, but those benefits are diminishing. People are very anxious, and with good reason.

A dollar of US labor no longer towers over our neighbors or trading partners. We are not educating and training American workers fast enough to compete for higher paying jobs in the new global economy. Hungrier workers are getting those jobs.

It doesn't mean we aren't working hard. We are. In urban areas where housing costs have skyrocketed, two wage-earner families are on a fast treadmill just to keep pace with a single wage earner family, a few decades ago. And businesses are finding out that the last dollar of productivity squeezed by technological efficiencies is not necessarily protecting the higher paying jobs that remain.

The stock market is agnostic to the difficulties ordinary Americans are experiencing. The stock market likes what globalization is doing for large multinational corporations, whose executives are part of a new economic elite, defined by the highest wage differential with ordinary workers since the Great Depression.

The markets are glad. Americans are sad and increasingly irrelevant to the operation of the world economy.

In Nation this week, William Greider interviews economist Ralph Gomory who explains, "America... becomes increasingly dependent, buying from abroad more and more of what its citizens consume and producing relatively less at home. US incomes stagnate as the high-wage jobs disappear and US exports become a smaller share of the world total."

Greider writes, "The conventional win-win assurances... are facile generalizations ... some nations, in other words, do indeed become 'losers'."

What seems to be driving both foreign and domestic policy in the United States is the urgency of 'winners' to separate themselves from the afflicted losers of the global economy. It is not just the issue of wage disparity: that the "the top 1 percent (of income earners) recieved 21.8 percent of all reported income in 2005, up significantly from the 19.8 percent the year before and more than double their share of income in 1980. The peak was in 1928, when the top 1 percent reported 23.9 percent of all income." We all know what happened in 1928.

No, there are more subtle effects, like the fact that so many Americans are driving gas-guzzling SUV's while Exxon coasts from one record profit to the next, a promise sold to consumers by a domestic auto industry that claimed it could not afford high gas mileage standards, leaving Toyota to dismantle US jobs on the basis of better engineered and more fuel efficient products that US auto suppliers couldn't build then but apparently will have to build now, now that they have lost that war, and, American jobs.

We could be wrong. Every government bean counter and statistician for the government wants to find good news in the numbers and even will 'cook the books' (ie. how inflation is measured) when reality cuts too close to the bone.

We noted, yesterday, how the good news on manufacturing and exports highlighted the contribution of a single company, Boeing Aircraft.

It seems inevitable to us that the collapse of housing markets will drag the economy downward. We look at the cranes busily moving over the Miami skyline, hurrying massive condominiums toward certificates of occupancy, we watch our local county commission doing back flips to satisfy the greed of the development lobby, built on the back of liar loans, mortgage fraud, and incestuous relationships between builders and lenders, and shake our heads.

But we may not be wrong. We may just be early.

US Dollar Hit By Another Meltdown in the Dow

Japanese Yen Soars as Carry Trade Liquidation Resumes • New Zealand Dollar Sees Majors Losses Against the US Dollar and Yen

Wednesday, March 14 - 2007 at 01:49


US Dollar -The problems in the sub-prime lending market have become too much for even the most optimistic trader to handle. New Century Financial Corp, the poster child of the meltdown in the sub-prime lending sector had its shares suspended from trading on the NYSE today and will most likely be de-listed in the near future. Although the market had become somewhat accustomed to hearing about the problems at New Century Financial, it was not prepared to hear that mortgage delinquencies hit a 4 year high in the fourth quarter. In the sub-prime market, delinquencies reached 13.33 percent and even though non-subprime borrowers are far less likely to be delinquent on their loans, the rate has been growing since the first quarter of 2006. With the housing market just beginning to turn, the worst may be yet to come. The Dow has fallen close to 245 points or 2 percent today, marking the biggest one day sell-off since the 3.3 percent move on February 27th. Risk aversion has returned to markets with traders liquidating all of their risky and high yielding positions. Carry trades have been hit the worst with NZD/JPY falling by 2.2 percent, AUD/JPY falling by 1.51 percent and USD/JPY falling by 1.12 percent. In addition to the problems in the sub-prime sector, consumer spending fell short of expectations for the month of February. Headline sales rose a meager 0.1 percent while sales excluding autos fell 0.1 percent. This is the first drop in sales excluding autos since Oct 2006 and suggests that first quarter GDP will be particularly weak since sales were flat in the month of January. Cold weather and a downturn in the housing market are to blame as sales of furniture and building materials slip significantly. Weaker consumer spending at a time when the sub-prime lending sector is in disarray could force the Federal Reserve to cut rates as early as this summer. With both stock market and housing market wealth of Americans slipping, future growth looks extremely bleak. At this point, the US dollar has few reasons to rally but any further extension lower may not come until Thursday when we have producer prices, net foreign purchases of US Securities and the Philadelphia Fed index on the docket.

Euro - On a day when we have seen a massive liquidation of many currency pairs, the fact that the Euro has been able to remain unchanged is quite remarkable. The strength in the German ZEW survey is sure to have helped. Even though analyst sentiment deteriorated between February and March, the deterioration was far less than expected as concerns about the Value Added Tax increase and the recent interest rate hike remains limited. In today's market, it is all about relative performance and right now the outlook for the US economy is far more concerning than the outlook for the Eurozone. In fact, Bundesbank President Weber joined ECB's Liebscher in saying that the risks to price stability remain strong and because of that, the ECB will need to raise rates again. Compare that to the Federal Reserve who may need to cut interest rates before August and we have a very clear explanation of why the EUR/USD is still holding strong. Eurozone industrial production and French and Italian consumer prices are due for release tomorrow. None of these reports will be particularly market moving. Traders will have their eyes pinned on USD/JPY and the US stock market to see if both will continue to sell-off.

British Pound - The British pound has sold off against everything in sight as the pair comes under the pressure of carry trade liquidation. Having been one of the market's favorite carry trade currencies to invest in over the past few years, it has also become one of the first to be sold in this wave of carry trade liquidation. UK data released this morning was mixed. The RICS house price balance reported the weakest growth in prices in 9 months. Although this is the first of many indexes to report softer price growth, traders should not completely ignore it. The key to figuring out whether the BoE will raise rates again this year is housing. It is important to keep on top of how the housing market is faring because it is a key component to their decision making. Looking ahead, we have unemployment data tomorrow. The report is expected to be positive for the British pound with the number of claimants dropping and average hourly earnings rising.

Japanese Yen - Once again, the Japanese Yen has stolen the show by ending the day with the biggest movements in the currency market. Over the past few weeks, if you want trade volatility, you have to be in the Yen. With no economic data released last night, the move today was completely driven by the liquidation. The Dow and USD/JPY relationship remains very much intact, but even though USD/JPY sold off first, the sharp reversal in the Dow appears to have exacerbated the sell-off in USD/JPY. We will probably see a bit more liquidation since prior waves of carry trade selling over the past few years have resulted in an average loss of 8 percent. So far, USD/JPY has fallen approximately 4.5 percent. We are only expecting the revision to industrial production tonight. There are no Japanese data of consequence until the Bank of Japan monetary policy meeting next week so flows will continue to drive the fluctuations in the Yen.

Commodity Currencies (CAD, AUD, NZD) - The Australian, New Zealand and Canadian dollars have all sold off significant today as traders liquidated all risky assets. Even though the market was very bearish US dollars today, they were even more bearish the Australian and New Zealand dollars since these pairs offer a higher interest rate than the US and because of that, they have been the preferred carry trade currencies for the market. The New Zealand dollar fell 1.45 percent against the US dollar while the Australian dollar fell 0.57 percent. The stronger Australian business confidence and job advertisement reports may have helped to limit the slide in the Aussie. Meanwhile the Canadian dollar dropped because traders were concerned that the down turn in the US housing market and the US economy as a whole could have a spillover effect on the Canadian economy. Looking ahead, we are expecting New Zealand manufacturing activity and Australian consumer confidence tonight. These reports will most likely do little to shift the current market sentiment.