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It's A Risk Off Friday...

ChuckButler — Fri, 20 Nov 2009 15:22:00 GMT

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                            EverBank World Markets
                         A Pfennig For Your Thoughts
                               November 20, 2009

In This Issue..

* It's a Risk Off day!
* Commodity Currencies get rocked...
* Audit the Fed Bill moves along...
* Just keep spending money we don't have!

And Now... Today's Pfennig!

It's A Risk Off Friday...

Good day... And a Happy Friday to one and all! A Fantastico Friday in my books, as the people at the Retina Institute told me yesterday that the fluid on my eye was drying up, and almost completely gone. I told them I had not noticed any improvement in vision, and they said, "at least it hasn't gotten worse!" And for that, I am quite thankful! So... With that news, I head into today, and believe it to be a Fantastico Friday!

Well... In my hours on hours of waiting for the next person to look at my eye yesterday, (I think it was "train the eye doctor day" on Chuck's eye) I kept checking the currencies, and noticed that as the day went on, the non-dollar currencies were stronger, led by the Big Dog, euro... But then late last night, and I mean late last night, I checked them, and those gains had been wiped out...

So, when I arrived here this morning, I had one thing on the top of my list of things to do, and that was find out what happened... Come on, I said to myself, it had to be more than the Risk On, Risk Off stuff that's been hanging over the markets like the Sword of Damocles! But, when you get right down to the nitty gritty, that's all it was... For once again, there was some data or story, or rumor, that spooked the markets into believing the global recovery isn't going to happen, and the Risk Off came into play...

Like I said the other day, this happens so much that you start to believe Mr. Myagi is directing the markets... Risk On... Risk Off... (Wax on, Wax off) HA!

So, I bet your asking... So, what was that data, story or rumor that spooked the markets... Well... The only thing I can find was the report yesterday about Housing Starts dropping that Chris told you about... Did you know that about 14% of U.S. homeowners were either delinquent on their mortgage or in some stage of foreclosure. That is the highest rate since the group started collecting the data in 1972!

But there was something else that was announced as the day went on, that I think probably spooked the markets more than anything else... And that is a key House panel approved two amendments to a sweeping financial-overhaul bill that would give federal watchdogs new authority to audit the Federal Reserve, and would establish a fund of as much as $200 billion to help dissolve large, troubled institutions. Rep. Ron Paul (R., Texas) offered the amendment seeking to subject the Fed to audits.

The House Financial Services Committee voted 41-28 to approve the amendments, wrapping up weeks of debate but postponing a final vote on the bill until after Thanksgiving.

OK... More deficit spending for sure, and I'm positive that this was "hung on this bill" to audit the Fed as the only way it would get through the gauntlet...

Why would this Bill "spook the markets?" Ahhh grasshopper... To audit the cartel, is a step toward getting a peek behind the curtain, and that's scary folks... But! It's what's needed! And so I applaud the panel's vote... (too bad they had to hang that $200 Billion deficit spending package onto this, but that's how the dolts in D.C. work...)

So... When things get spooky traders, crawl back into the dollar's corner... Love is kind of spooky with a girl like you, is what I'm reminded of!

And when traders crawl back into the dollar's corner, the currencies that have booked the best performances against the dollar, see their fortunes reversed the most... So... In this case, it's the Aussie dollar, New Zealand dollar, Norwegian krone, and Brazilian real... These three will most likely put a losing week into the books, which hasn't happened very often during this rally that began in March. I say "most likely" because, we've seen swings in these currencies that could easily wipe out these weekly losses in a NY Minute! But with the data cupboard as empty as my stomach feels right now, (not to worry, I have my daily apple ready to consume!) today... I doubt we'll see any "swings" to bring these currencies to the positive side of the ledger this week!

The Weekly Initial Jobless Claims here in the U.S. printed yesterday at 505,000, same as the week before... I heard one air-head TV commentator (if it's a commentator, it must be from Idaho! HAHAHAHA! Get it? Common Tater?) any way... I heard one say that at 505,000, it shows that employment is on the mend... Ahem... Did you do the math? That's over 2 million new jobless people per month! Dolt head!

Yes, I know it doesn't net out the jobs that were created... I'm strictly talking about jobs that are lost on a weekly basis... You can't in your Wildest Dreams, think that we're creating more than 2 million jobs a month during a depression!

So... That data wasn't good for the "recovery campers"...

I was writing some notes for my latest video on Wednesday, and noted that Japanese yen, gets the best of Risk On, Risk Off trading... For some strange reason, and yes, I'm well aware that Japan is the second largest economy in the world, Japanese yen is considered a "safe haven" when the Risk Off is in play... And when the Risk On is in play, spanking the dollar, Japanese yen doesn't sell-off!

Now... I'm not a HUGE fan of Japan, as their Gov't Deficit is tremendous in size, rivaling the doubled in size National Debt of the U.S. And I personally feel that the yen at 88 and change is bumping the ceiling... But, the markets can be irrational, right? And with yen, they are really irrational!

Hey! Did you see that there's pressure on U.S. Treasury Sec. Tim Geithner to resign? Personally, I don't know that he's done any worse than Hank Paulson... But, then, is that what we've come to accept? Bad leadership? I've said this before, and I know it really gets under some people's skin... But, besides the National Deficit, and the Trade Deficit, we have a Leadership Deficit... I'm talking about the lawmakers, The Fed Chairman, and Treasury Sec... I guess the administration should be thrown in there, for it's been that way for the last 9 years!

The European Central Bank's President, Trichet, and the Swiss National Bank's Gov., Roth, both spoke last night, and neither referred to the currencies in any way, but Trichet did add to the Risk Off mood of the markets by saying that, "it is too early, as of today, to declare the crisis is over." The People's Bank of China's Gov., Zhou, said that China was "passive on the direction of the dollar"... Hmmm... I have to wonder if he was truly speaking from the heart there, or... Just stating that to keep the dollar from falling into an abyss...

You know about the stock sell off that I've been warning you about for a couple of months now, that could very well drag the currencies and commodities along for the ride? Well... I know that you all think that I'm playing the boy who cried wolf, here... But, recent trading days have me worried a bit about this taking baby steps right now...

My trader / chartist, friend, sent me a note and told me to watch the A$, for it is very close to its 9-month trend line support of .9093 (it's currently at .9110), for should it close below that number it would signal (according to him!) a correction to 88-cents... Not a huge drop, but it's not like these charts can pin-point a level that a currency will turn-around... Or maybe they can! I'm lost when it comes to charts... I look at them and unless they are as obvious as a man with a hatchet in his head, like the U.S. dollar chart since 1971, then I could make a case for an asset that's being charted to go either way!

That's why charts are not "fundamentals"... Fundamentals are what put an asset into a trend, either weak or strong, and charts tell you what happened in that trend...

And then there was this... According to the Wall Street Journal..."Some of Goldman's largest shareholders have urged the firm to reduce the size of its bonus pool, arguing that it should pass along more of its blockbuster earnings to investors. The investors hold tens of millions of shares in the Wall Street firm, which is on track to make the biggest employee payout in its 140-year history."

Chuck again... Where have these "largest shareholders" been all these years? Why make a big deal about this now? Oh, that's right! The Gov't has made it look "dirty" to give bonuses...

Oh... And I heard that the Senate's version of the Health Care Bill will cost $849 Billion... Just keep spending money we don't have, Congress... I'm reminded of a saying by Voltaire... "Common Sense is not so Common"...

To recap... The Risk Off wax is being applied by Mr. Myagi again this morning, as the non-dollar currencies, other than yen, have given back recent gains VS the dollar. The "Audit The Fed" Bill has been pushed through the gauntlet for a vote after Thanksgiving. The Aussie dollar is near its 9-month trend level, and shareholders want "some of the action"!

Currencies today 11/20/09: American Style: A$ .9110, kiwi .7225, C$ .9360, euro 1.4850, sterling 1.6490, Swiss .9820, European Style: rand 7.5880, krone 5.68, SEK 6.97, forint 182.25, zloty 2.80, koruna 17.4340, RUB 28.95, yen 88.90, sing 1.39, HKD 7.75, INR 46.63, China 6.8278, peso 13.09, BRL 1.75, dollar index 75.64, Oil $76.91, 10-year 3.33%, Silver $18.17, and Gold... $1,137.20

That's it for today... I've been doing some "educational" presentations for the people over at DTI... I've done 2 on currencies, and 1 on Gold... Next Monday, I'll be doing one on "other ways" to diversify, using foreign stocks and bonds... You can listen to it if you want by clicking here at 1:30 CT on Monday... http://www.dtitrader.com/trading_education_MMM_Everbank_Nov23.htm

I'll be heading down the road to Columbia Missouri tomorrow, to watch my beloved Missouri Tigers on Senior Day... My little buddy Alex, had his football team banquet last night... His team went 20-5-1 in three years... That's pretty impressive! Now they move on to High School, where's it's a whole different animal! I have 4 videos to do today! YIKES! But I've got my "blue shirt" on... So, I should be good to go! Let's get working on today, and make it the best Fantastico Friday ever!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-984-0892
www.everbank.com
* Early withdrawal penalties apply. Fees may reduce earnings.

Silence Is Always Golden...

ChuckButler — Wed, 18 Nov 2009 20:17:38 GMT

..But First, A Word From Our Sponsor..
Gain exposure to currencies of emerging BRIC countries-and don't lose a dime on market risk

* 4 BRIC currencies: Brazilian real, Russian ruble, Indian rupee, Chinese renminbi
* High upside potential
* No market risk to deposited principal
* Low $1,500 minimum deposit

Don't miss this unique opportunity. Deadline to buy the BRIC MarketSafe CD is Dec. 3rd, 2009. Apply today or learn more at http://www.everbank.com/001CertificatesMSBRIC.aspx?referId=11808
.

In This Issue..

* It's a Risk On day!
* Commodity Currencies have the "stuff"!
* Gold's one-day window slams shut!
* RBA to not wait 2 months to hike rates!

And Now... Today's Pfennig!

Silence Is Golden...

Good day... And a Wonderful Wednesday to you! We're stuck in the mud with the rain again, but according to the weather people it should end tomorrow... Geez Louise, I guess it could be snow, which would have crippled this city by now!

Well... The currencies gave back all that ground they gained the day before on Mr. Toad's Wild Ride, yesterday... But, have turned around this morning in the European session as Eurozone stocks are up, and whenever equities trade with some zip in their step, it has been good for the Big Dog, euro...

Someone asked me yesterday a question about the euro... He said, "Chuck, I know you like the euro, but couldn't the Aussie dollar be a better choice going forward?" And I answered like this... The euro is the offset currency to the dollar... But that doesn't mean it is the best performer when the dollar moves down. The Aussie dollar (A$) has outperformed the euro since 2002, and will probably continue outperform the euro... But so has the Norwegian krone, and the New Zealand dollar, and the South African rand, and the Canadian dollar... Hmmm... Does that list ring a bell?

Why, yes, Chuck, it does! For these are all "Commodity Currencies"... You've Gotta Love 'Em!

Countries that have "stuff" to sell to other countries, that either don't have the "stuff" or are too lazy to deal with it!

Hey! Did you see my bit on Bernanke that I wrote yesterday made the "5-Minute Forecast"? WOW! My friend Ian Mathias, does such a great job on the "5", and I get a HUGE kick out of him putting stuff I write in his great letter! You should see the two of us standing side by side in Vancouver, where we meet up each year... The old kids song about fat and skinny went to bed, fat rolled over and skinny was dead... HAHAHAHAHAHAHA!

OK... Chuck, quit the back slapping of yourself, and get back to the task at hand!

Yesterday, my fat fingers made an appearance in the Pfennig, as I mis-typed the price of Gold, in the currency round-up... I had just talked about how those people waiting for a pull-back of Gold's price, might still be waiting when the cows come home... And then I type the price of Gold $100 cheaper than it was selling for! What a fat fingered dolt! Oh well, not many people pointed it out to me, as always letting me know that "Chuck made a mistake"...

Speaking of Gold... Well, you had a 1-day window to buy it cheaper, for the overnight sessions has the shiny metal hitting on all 8, and soaring once again to $1,148!!!!! Don't you just hate those 1-day windows? I mean, you wanted to pull the trigger and buy, but thought, what if Gold drops more today, that would mean I could buy it cheaper tomorrow... Don't be fooled! It's like this folks... If you want to buy something, buy it! Trying to time a purchase will leave you sitting the sidelines with a baseball cap turned backward on your head and holding a clipboard!

I used to tell people that if you're standing at the bus stop waiting for the bust to take you downtown, and the bus pulls up, but it's an old bus, and the rumor is going around that a brand spankin' new bus is on the way, you decide to not get on the old bus, but wait for the new bus... Then the new bus arrives, and there's a rumor that an even newer, updated bus is on the way, and you decide to wait for that one... If you never get on the freakin' bus, you'll never get downtown!

OK... So... Remember when I questioned the current administration's claims that instead of "creating jobs" they were "saving jobs"? I pointed out that claiming that jobs were saved, would be difficult to prove... Well, guess what? Proving that the jobs saved don't exist, has been pretty easy... And the people claiming that the stimulus "saved jobs" have egg all over their collective faces...

Speaking of Jobs... One of my fave economists, Nouriel Roubini, had this to say about jobs...

"Think the worst is over? Wrong. Conditions in the U.S. labor markets are awful and worsening. While the official unemployment rate is already 10.2% and another 200,000 jobs were lost in October, when you include discouraged workers and partially employed workers the figure is a whopping 17.5%.

While losing 200,000 jobs per month is better than the 700,000 jobs lost in January, current job losses still average more than the per month rate of 150,000 during the last recession.

Also, remember: The last recession ended in November 2001, but job losses continued for more than a year and half until June of 2003; ditto for the 1990-91 recession.

So we can expect that job losses will continue until the end of 2010 at the earliest. In other words, if you are unemployed and looking for work and just waiting for the economy to turn the corner, you had better hunker down. All the economic numbers suggest this will take a while. The jobs just are not coming back."

Chuck again... And you think the recession / depression is going to end with the unemployment problem in this country? Not when the consumer is needed to generate nearly 70% of the GDP...

And all that tells me that the cartel / Fed (Fartel!) is going to believe that they need to keep rates near zero for some time to come...

So... It's Risk On today! It was Risk Off yesterday! Don't ask me why... Tell me why, you cry, and no wait! Don't go singing songs, Chuck! This is serious stuff!

Yesterday's data cupboard was a mixed bag of economic data for the U.S. PPI wasn't as strong as forecast, Industrial Production slowed in October, but Capacity Utilization bumped higher, and the TIC Flows for September were $40.7 Billion, which was more than the $34.2 Billion in August. The report showed that Japan, China and the U.K. all increased their holdings of Treasuries. September's TIC Flows were probably the best report of the day, and the best report that this series has printed in a long, long time... Does this mean that the all-clear horn is blaring, telling us not to worry any more about whether we finance our deficit or not? Well... It might be, but I'm not listening to it!

Well... The President ended his visit to China, with a call for a more flexible Chinese currency (renminbi)... And... The Chinese said... Nothing! They met the President's words with silence... I used to date a girl that would say to me when I wasn't talking... "Silence is Golden, Chuck" and I would say... "Then shut up and we'll make a million!" HA!

Now, while it would nice if the Chinese played ball with us... I understand their dilemma... The IMF still believes that China's currency is about 25-40% undervalued... China could not deal with a floating currency that went up 40% overnight!

Did you know that America's trade deficit with China widened to a 10-month high in September? Well... It did, thus raising concern that the combination of a recovering U.S. economy and a fixed renminbi exchange rate against the dollar will worsen global imbalances. But... As I've said at least 100 times before this... The Chinese will do what they believe is best for their country, and that's not floating the renminbi at this time, no matter who the U.S. sends to visit them to persuade them to do so!

Moving further south in the Pacific, we land in Australia... I thought about this next Reserve Bank of Australia (RBA) quite a bit the past couple of days... And have come to the conclusion that the Dec 1st meeting of the RBA will net another 25 BPS rate hike... The reason I think this, is the fact that there will be no meeting in January, thus leaving a 2-month gap, which in these economic times could be devastating... So... Look for another rate hike in Australia on December 1st... Which would be their 3rd consecutive meeting rate hike, and could be the harbinger to parity for the A$... Could be... I didn't say it "would be"!

I know that yesterday morning, I talked about how the RBA meeting minutes had been perceived as "dovish", and that spooked the markets into thinking that the RBA would NOT hike rates in December... But upon further review, the meeting minutes were really pretty vague, and while they didn't sound outright hawkish, they also didn't sound "dovish" either... After reading the minutes, I got the feeling that overall, the minutes support the idea of "steady rate hikes"... I don't think the RBA will stop until they reach an internal rate of 4.25% early next year...

I was giving an interview last week with a writer from Business Week... And he asked me when this dollar weakness all started... I told him that, "Over the past nine years congress and two administrations have instituted fiscal policies that have undermined the value of the U.S. dollar, and the deficit spending has gone from $350 Billion Budget Deficits to $2 Trillion (annualized) Budget Deficits in a wink of an eye... So... The dollar made brief comebacks in 2005 and in the financial meltdown of August 2008 through Feb 2009, but other than that, the dollar continues to decline, and I just don't see anything on the horizon that will stop this decline."

Well... As I look across the desk, where the light only comes from the computer screens, yes, I like it dark here while I'm writing, it keeps me focused! HA! Any way, as I look across the desk at the currency screens, I notice that every currency that supposed to lighting up green (going up) is doing so, and every currency that supposed to be lighting up red (going down, but that's what you want in a European style currency) is doing so... We've got it all going on today... One of these days, we'll quit this stupid game of street hockey, you know, Risk On, Risk Off... Or the Mr. Myagi, with the wax on, wax off, bit! But until then we have to deal with this stupid game of street hockey, or karate training!

OK... To recap... The currencies have gained back the ground they lost in yesterday's Risk Off trading sessions. Gold is back to soaring after a 1-day stall... Data yesterday in the U.S. was a mixed bag. Chuck expects the RBA to hike rates in December, and China responds to the U.S. President's request to allow greater flexibility in the renminbi, with... Silence...

Currencies today 11/18/09: American Style: A$ .9325, kiwi .7490, C$ .9550, euro 1.4960, sterling 1.6810, Swiss .99, European Style: rand 7.4290, krone 5.58, SEK 6.8275, forint 177.50, zloty 2.7370, koruna 17.0130, RUB 28.67, yen 89.10, sing 1.3830, HKD 7.75, INR 46.22, China 6.8270, pesos 12.99, BRL 1.7080, dollar index 74.97, Oil $80.03, 10-year 3.34%, Silver $18.75, and Gold... $1,148.30

That's it for today... Chris will have the conn on the Pfennig tomorrow morning, as I report to the retina institute at the Center for Advanced Medicine. God willing, I'll be back on Friday morning! My younger sister, Terri, was just diagnosed with breast cancer. I'm waiting to hear what the game plan is for her... I picked up my son Alex's electric guitar last night, and played it a little... I've played acoustic guitars for so long, that his electric guitar felt very strange.. I played a song, and little Delaney Grace, who had sat still listening to me play, cheered, and then got up and left... Cracked me up! Every day it's something with her! Time to get this out the door, folks... I hope you have a Wonderful Wednesday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

If This Is Recovery…

JohnMauldin — Sat, 14 Nov 2009 05:31:00 GMT

If This is Recovery, Where Are the Taxes?
Last Business Standing
Stimulus, What Stimulus?
The Reality of Unemployment
Let the Good Times Roll
The Quick Double-Dip Scenario
Phoenix, New York, and Thoughts on the Internet

No one goes into Wal-Mart and asks to pay extra sales tax. Thus sales taxes are reasonable barometers for retail sales. This week we look at how taxes are doing in a period of economic recovery. Then we turn our eyes to a very interesting (and sobering) analysis of possible future unemployment rates. This is an anecdote to the happy-face analysis of employment numbers you get from establishment economists. There will be a lot of charts and tables, so this letter may print a little longer, but I think you will find it very interesting.

If This is Recovery, Where Are the Taxes?

I keep reading about surveys that show that retail sales are up. But as noted above, no one pays extra sales taxes, or decides they need to pay more income taxes. The surest way to measure retail sales is sales taxes. Want to know how incomes are doing? Look at income tax receipts. Let's look at sales taxes first.

First off, I can find no single source of recent sales tax information. It is all one-off, but it is consistent. Sales taxes in my home state of Texas are down 12.8% year-over-year, and we're in the fifth straight month of decreases of 11% or more. Projections are for sales taxes to continue to decline into 2010.

There is a very revealing study by the Pew Center on state taxes, called "Beyond California" (http://www.pewcenteronthestates.org/). Everyone knows how bad California is. The Pew Center looks at how the rest of the states are doing, and focuses on 10 states that also have severe problems. Sales tax receipts are down 14% in Arizona, and state income taxes are down 32%.

On average, revenues are down almost 12%. Oregon has seen their revenues collapse a stunning 19%. New York is down 17%, with a deficit of 32%. Illinois has a projected deficit of 47% of its budget, second only to California with 49%. You can see how your state fares at http://downloads.pewcenteronthestates.org/Beyond_California_Appendix.pdf.

The Liscio Report notes that all states had negative year-over-year sales tax collections in October, and the weighted average decrease was 10.2%, down from a negative 7.2% in September. (www.theliscioreport.com)

Sales at Wal-Mart stores slipped by 0.4% in the third quarter. Actual government figures show that retail sales were down 1.5% in September from the previous month and 5.8% year-over-year. So how do we keep seeing headlines about retail sales being up, as unemployment keeps rising?

Remember that such reports are usually based on surveys, and generally cover mid-sized and up retailers, leaving out smaller businesses. Further, if you are a retail chain that has closed 10% of its stores, the remaining stores should in theory benefit from getting your loyal customers into them.

Last Business Standing

Yesterday I was with an associate, and I hesitated in asking them how their business was doing, because I knew things had been tough at the beginning of the year. But I did ask, and they said sales were up over the last months and business was looking better. Surprised, I asked them what made the difference. "Ah," they said, "less competition. Our competitors have gone out of business."

Best Buy and other electronic retailers had to benefit from Circuit City disappearing. That is Schumpeter's creative destruction at work. Not very good for total employment, but it does help the profitability of the survivors.

So, if things are so bad, how did we have 3.5% growth in the third quarter? First off, things are not as bad as they were in the past year. We are in fact getting close to an economic bottom, at least for now. Second, the 3.5% number is a preliminary estimate. A study by Goldman Sachs suggests that the number will be revised down by at least 0.5% and maybe as much as 1%.

Why? The estimate does not really take into account how poorly small businesses are performing. If you look at small-business indexes and compare them to historical GDP numbers, you get the smaller number mentioned above. And since at least 2% of the GDP was from the stimulus package (Cash for Clunkers, houses, tax cuts), the economy on its own was flat. That begs the question, what happens when the stimulus runs out?

And the answer is that we won't know for some time, as the stimulus is just getting ramped up. "According to CBO estimates, only 21% of [the stimulus] spending will occur in 2009; another 38% will come in 2010, and 22% in 2011. After that, its effect will dissipate quickly." (The Liscio Report)

But David Rosenberg notes that what the federal government is giving, the states are taking away. The Pew Study shows that at least nine other states are in appalling shape, so it is no wonder that David writes:

Stimulus, What Stimulus?

"Fully nine states are in fiscal distress and only two have balanced budgets. States like Michigan are planning 20% budget cuts for the coming year. Indiana is planning a 10% spending cut in light of a 7.4% YoY revenue decline. How can the economy really be out of recession if government revenues are still deflating?

"The states are filling around 40% of their fiscal gaps with the federal stimulus (so much for spending on "shovel ready" infrastructure projects). Even after the fiscal help from Washington, the state governments will still face a projected deficit of $142 billion for 2011 (versus $113 billion in 2010). All in, the restraint in the state and local government sector is estimated to drain a full percentage point from U.S. GDP growth in 2010 and more than fully offset the stimulative efforts from Washington. The U.S. economy is more likely to post growth of little more than 2% next year, rather than the 5% currently being discounted by the equity market."

The Reality of Unemployment

All this is, of course, going to put continued pressure on employment. As I noted last week, the number of unemployed actually soared by 558,000, to 15.7 million, as measured by the household survey, not the 190,000 you read about in the mainstream media. Unemployment is sadly continuing to rise by significant amounts.

In August, I did an interview with CNBC from Leen's Fishing Lodge in Maine. The unemployment numbers had just come out. I did a back-of-the-napkin estimate that we would need about 15 million new jobs over the next five years just to get back to where we were when the recession started.

That works out to a need for about 125,000 new jobs each month to handle new workers coming into the market (which comes to a total of 7.5 million over five years), plus the 8 million and rising jobs we've lost. That is a daunting number. It amounts to 250,000 new jobs a month every month for five years. And we are still losing more than that number a month, let alone adding the needed 250,000.

Look at the chart below. It shows the establishment survey employment figures for the last ten years. Only once, in 1999, did we actually add over 250,000 jobs a month for a whole year. And that was during the internet boom.

Sadly, the private sector has shed over 300,000 jobs since 1999. Think about that. We have had a decade where there have been no new jobs added by the private sector. Real incomes are roughly where they were, and the stock market is down. Talk about a lost decade.

I love it when someone does the really heavy lifting for me, and my friend Mike Shedlock of Sitka Pacific Capital Management has done a wonderful job of taking that speculation of mine and putting it into a spreadsheet that helps us get a real handle on what unemployment is likely to look like for the next ten years. I am going to make use of his basic analysis and then modify some of his assumptions in the spreadsheet he provided me, in order to think about different scenarios.

All three scenarios are based on assumptions, so let's see what Mish started with. There is a wealth of data available from the Bureau of Labor Statistics and the Census Bureau. According to the Census Bureau Population Estimates we are going to add about 2.5 million working-age (16 years old and up) citizens a year, from now until 2020. The numbers varies slightly year to year. Mish used an estimate of the average, summing up the buckets from 16 to 100+ for the years in question and rounding the result.

You can go to the BLS site and look at Table A-1, which shows the civilian noninstitutional population (those over 16 not in prisons), the participation rate (those who are working and/or want to work), the unemployment rate, the number employed, those not in the labor force, and those who want a job. Those are starting numbers for the charts below.

For those interested, you can read Mish's very full (and quite detailed) analysis at his blog site http://globaleconomicanalysis.blogspot.com/2009/11/mish-unemployment-projections-through.html). But let's look at his assumptions:

Job losses are likely to continue for a minimum of another year.
When job gains start, they will be very slow at first, then pick up.
An extremely generous monthly job gain stat over the course of the year would be 150,000 jobs.
A falling participation rate (boomers retiring) will continue to mask reported unemployment.
Starting in 2013 the labor pool will start decreasing because of Boomer demographics.
The noninstitutional population will rise by 2.5 million workers a year.

The spreadsheet below needs a little explanation. Let's start with the assumptions. Mike starts with current working-age population and adds 2.5 million people a year. He assumes that Boomers will retire at 65 (something which all the surveys say is not going to happen). And his last estimate is what the unemployment numbers will be. Everything else is based on those assumptions, which leads to the first column, or the expected unemployment number.

By the way, we know that everyone will want to make different assumptions. I am going to create three scenarios, but you can go to Mike's blog and at the bottom of the post is a link to the actual spreadsheet. Have fun. Let's look at scenario 1.

This assumes there is no double-dip recession, and jobs roughly rise along the same lines as the last recovery. Actually, Mish is far more optimistic, as in the very first chart you will notice that job losses were negative in the first year after the end of the recession and flat the second year. Mish has jobs rising by 120,000 next year and 600,000 the second year (2011), and then a fairly robust recovery. Below is the graph of the unemployment numbers under such a scenario.

Notice that unemployment stays at or above 11% for three years. Pessimistic? Mainstream and usually very optimistic Mark Zandi of www.economy.com predicted this week that unemployment would rise to 11% by the middle of next year, right in line with this scenario. Also note that total jobs rise by 14 million over ten years. Hardly doom and gloom. Again, Boomers all retire on time and there is no double-dip recession.

Let the Good Times Roll

What would it take to get back to 5% unemployment? I played with the spreadsheet and came up with the following numbers, which get us below 5% by 2020. I assume no recessions for the next ten years, and 2 million new jobs a year after 2011, which I start off with almost 1.5 million jobs. Of course, we have never done that, but let's be optimistic.

And the graph below shows the unemployment numbers for the Good Times Scenario.

Want to get to 5% within five years? Add 3 million jobs a year starting now. With no housing recovery, a smaller auto industry, and financial firms getting leaner.

The Quick Double-Dip Scenario

When I called the last two recessions about a year before they happened, it was not all that hard. We had inverted yield curves, falling leading indicators, and a lot of other data that pretty much pointed to a recession. Believing that we had a housing bubble and a looming credit crisis also helped my conviction in calling the last recession.

I think we are in for a double-dip recession in 2011, yet I readily admit there will be little if any statistical evidence in advance this time. This is more of an instinct call. I have serious doubts that we can have what amounts to the largest tax increase of all time in what will be a very weak (albeit growing) economy, without putting us back into recession. And Speaker Pelosi thinks it is a smart thing to add another 5.4% surtax on what will already be a rising capital gains and dividend tax.

Taxing small businesses, and that is what the tax increase amounts to, is a very bad idea in a weak economy. Small businesses are where the job growth comes from. Taking money from productive businesses and giving it to government is a fundamentally flawed concept.

Now, if they decide to postpone the tax increase, or phase it in slowly, then maybe we avoid the double dip. But right now it doesn't look like that will be the case. So, let's quickly see what a double-dip scenario might look like. Let's be optimistic and assume we only lose another 1.2 million jobs in the next recession, since we have already lost so many in this one (8 million and counting). And then the economy comes roaring back in 2012 with 1.5 million jobs and continues to grow rather smartly for the rest of the decade. No further recession. We absorb the tax increases and move on with our economic lives.

Unemployment under such a scenario would rise to just under 13% and stay above 10% for 8 years. Take a look at the chart and graph.

Think 13% is too dire? This week David Rosenberg said unemployment would rise to between 12-13%. The former Merrill Lynch economist was one of the few mainstream economists who called the recession and the credit crisis. The so-called "Blue Chip" economists told us at the beginning of 2008 that unemployment would peak out at 6%. While Rosie is not optimistic of late, he has a rather solid record of being right.

We are at 10.2% unemployment today. The economy lost jobs for 21 months after the end of the last recession. That would easily take us into 2011. Another million lost jobs will take us well over 11% and close to 12% (remember, you have to add in the increasing population), even without my double-dip scenario.

The letter is getting long and it's getting late, so let me close with a few thoughts.

First, 12% unemployment is horrendous by American standards. But Spain is now at 20%, and much of Europe has been in the 10% range for years.

Second, Americans are not used to the concept of 12% unemployment or 10% rates for extended periods. That is going to cause a serious backlash across the political spectrum. Couple that with the discomfort over $1.5-trillion deficits and there could be some serious political changes in the coming years. I think the message will be more anti-incumbent than one party or the other.

Third, the only way out of this morass is to create an environment where small business can thrive. As I've noted for the last several weeks in this letter, government spending does not increase GDP over time. It is a temporary nonproductive stimulus. It takes private investment to create jobs and increase productivity. Over the next few months, I will write more about how to do that.

Phoenix, New York, and Thoughts on the Internet

Next week I take a quick one-day trip to Phoenix, then back to do a satellite-remote speech to a South African hedge fund conference. I will be in New York the first weekend of December (the 4th) for Festivus, a great fundraiser for kids sponsored by Todd Harrison and the team at Minyanville (http://www.rpfoundation.org). Interestingly, they hold it every year at a "Texas" barbecue joint. Look me up if you are there.

The 7 kids, spouses, and grandkids are starting to gather. We will all have brunch Sunday and then a shower for Tiffani. She has another 6 weeks before she is due, and she is really uncomfortable. Walking is literally a pain.

Permit me to reminisce. A little over 9 years ago I started this letter on the internet with about 2,000 email addresses. It was a new version of what had been a print letter, as that was the business I knew. The internet was still a new thing to me, but it seemed like a good idea at the time. Little did I know.

I am still amazed at the growth and the direction my business and life have taken. My letters are sent out by various publishers and affiliates to over 1.5 million readers and posted on dozens of web sites, and the numbers have been growing rapidly of late. I am grateful. But I wonder what would happen if I started it today. Ten years ago there was little in the way of free economic letters. Not a lot of competition.

Today, there is so much free information that it's staggering. There have to be thousands of blogs and hundreds of free letters, some with very large circulations. It seems a new star is born every few months. While much of it does not add to the level of conversation, some of it is quite excellent. I think I am lucky to have started when I did.

And I am grateful for the kind attention you give me. As I turn 60, I note that this has been a rather overwhelming last ten years. A lot of changes for me, and almost all of them very good. But there are more to come. The last two flights I was on I was connected to the internet at 35,000 feet. I sense a lot more changes coming. I am thinking a lot about how to keep up and not get left behind, how to make sure that you, gentle reader, continue to get my best. That is what, at the end of the day, drives me.

Have a great week. I know I shall. Dad loves it when his kids (from 15 to 32) and spouses and grandkids are all under one roof.

Your amazed at it all analyst,

John Mauldin

Germany & France Post 3rd QTR Growth...

ChuckButler — Fri, 13 Nov 2009 15:31:01 GMT

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In This Issue..

* Risk Aversion fuels dollar rally yesterday...
* Eurozone growth may stop the Risk Aversion...
* Budget Deficit is a record $176.4 Billion!
* Euro, Swiss, Aussie, Norway, all cheaper today!

And Now... Today's Pfennig!

Germany & France Post 3rd QTR Growth...

Good day... And a Happy Friday to one and all! Let's try to make this a Fantastico Friday as well! The Risk Aversion that was creeping into the currency markets yesterday really took hold in the U.S. trading session, which meant the dollar was being bought once more, along with Japanese yen...

It just makes me laugh out loud, when I write that the "safe haven currencies" during Risk Aversion trading are the dollar and yen... These two countries have debt up to their eyeballs, pay no interest on their deposits, and have a leadership deficiency... (ok, before every begins to think that I'm ripping the president again, I'm not... I'm talking about the Central Bank, and lawmakers of each country)

There was good news out of the Eurozone this morning... Both Germany and France followed their previous quarter's growth, with stronger growth in the 3rd QTR... The Eurozone's two largest economies continued to recover from recession in the 3rd QTR, as exports boosted both German and French gross domestic products. I say that, and I want to spit out a raspberry to all those that claim the European Union will collapse because of the strong euro! Neener, neener, neener... The largest economies of the Eurozone can grow, with strong exports even with a strong euro!

OK Chuck, no need to be childish here, let's get back to the growth... Germany's GDP rose 0.7% in the three months to Sept. 30. In France, GDP also grew for the second consecutive quarter, rising 0.3%.

So... Of course this data from the Eurozone put a floor under the euro's decline from yesterday... It will be interesting to see how the U.S. guys look at these growth numbers... The European guys liked them... The U.S. traders though can be very fickle...

And more than that though, I think this might be the thing to put the Risk Aversion to bed... Recent history tells me that whenever Risk Aversion has crept into the markets, any sign that Global growth is back on track, and will lead investors to higher yielding assets, the Risk Aversion ends abruptly... Let's hope that's the case today with these two growth reports from the Eurozone!

Yesterday's data in the U.S. showed that the Weekly Initial Jobless Claims remain above 500,000 per week, and that the Budget Deficit was even worse than the forecast $160 Billion! The Budget Deficit for October totaled $176.4 Billion, which annualized puts us over $2.1 TRILLION! OMG! That awful folks! And you should be writing, calling, or making your way to your representative's next meeting and demanding that they STOP SPENDING MONEY THEY DON'T HAVE!

You know that letter that I said I was going to write to my darling granddaughter, Delaney Grace, apologizing for the lack of freedom and tax burdens that were left to her generation to deal with? Well, I started writing it the other night... What this and the previous administration is doing has no morals, when it comes to leaving the debt to be dealt with by future generations...

OK, it's a Friday, I need to try to remain calm here, and be upbeat! Hmmm... Usually, that means that I pull out a story on Gold... But yesterday was not a good day for the shiny metal, after reaching a new all-time record level of $1,118, it fell more than $10 in the aftermath of the Risk Aversion... See how stupid the Risk Aversion people are? I mean, if you wanted to avert risk, wouldn't you buy Gold?

Any way, colleague, Don Ries, sent me a story that he came across regarding Gold that I thought was quite interesting... The Telegraph in the U.K. printed a story about how Barrick Gold believes we may have reached "peak" Gold already... And by that "peak" I'm talking about the mining of the shiny metal!

"Aaron Regent, president of the Canadian gold giant, said that global output has been falling by roughly 1m ounces a year since the start of the decade. Total mine supply has dropped by 10% as ore quality erodes, implying that the roaring bull market of the last eight years may have further to run. There is a strong case to be made that we are already at 'peak gold'," he told The Daily Telegraph at the RBC's annual gold conference in London."

WOW! Did you get the one line that was in there about how this lack of mining implies that the roaring bull market of the last eight years may have further to run? I think that's putting it conservatively for sure! "may have further to run?" I would say it stronger... But I can't... Or I'm not supposed to! ( our legal beagles read the Pfennig each day!)

OK... That put me back on track to be more upbeat for this Fantastico Friday! Today's data cupboard will yield the Monthly Trade Deficit data, and the U. of Michigan Consumer Confidence index... The Trade Deficit overhang continues to be a problem for the U.S., obviously not as bad as a problem as it was during the go-go days for the consumer...

Traders have become "comfortably numb" with the deficit figures in the U.S. which is a bad thing folks... Traders need to make a stand, and not allow this stuff to just slip under the door, thus allowing larger and larger deficits in the future!

I see the President is in China... I bet he thinks his presence will be the thing that will move the Chinese to allow greater currency flexibility... I just don't see the Chinese getting caught up in the "show" to give in and allow flexibility in their currency, just because the President of the U.S. showed up...

The currencies are rallying this morning VS the dollar. Since I came in and began writing, the euro has climbed higher, albeit a small move higher, it's still moving higher, and thus has stopped the bleeding, that began yesterday morning...

I'm surprised the Aussie dollar isn't really hitting on all 8 this morning, considering the growth numbers in the Eurozone... But I think we might have to wait for the U.S. traders to come in to see the rally in the A$ this morning... It is Saturday in Australia!

The Swiss franc got caught up in the Risk Aversion trading yesterday, and has backed off its ascent to parity... The franc is trading around .9855 this morning, which is more than 1-cent lower than yesterday morning... Wink, wink...

And a country / currency that I drop the ball on all the time, when it comes to talking about it in the Pfennig, is the Norwegian krone... Long time readers know that I truly like Norway, for their fiscal and monetary surplus prowess... And most recently, for their absence from the rolls of those countries that got involved in sub-prime and bad lending practices. Earlier this month, Norway's central bank, the Norges Bank, hiked rates 25 BPS, and is expected to raise them again in a month or two... So, now we have a country that has a strong fiscal and monetary position, no bad banks or loans, and a strong positive interest rate differential to the U.S.... Hmmm...

And then there was this... Neil Barofsky, the special inspector general for the $700 Billion TARP bailout said the program will "almost certainly result in a loss to taxpayers"... "We need to temper or be realistic about our expectations, a dollar-for-dollar return is just highly unrealistic." Barofsky also said that he's conducting 65 investigations of possible fraud...

OH MY! You're telling me that with the $700 Billion TARP funds that there could have been some fraud involved? I wouldn't have believed it! .... NOT! I bet you thought I had gone softy on you! The whole TARP was fraud to begin with! So, with all the corruption and scandals that have gone in before, the thought that there could be some fraud, should have been a belief that there "would be fraud for sure" when the TARP was issued!

Currencies today 11/13/09: American Style: A$ .9285, kiwi .7370, C$ .9495, euro 1.4890, sterling 1.6685, Swiss .9860, European Style: rand 7.4410, krone 5.62, SEK 6.8660, forint 180.80, zloty 2.76, koruna 17.10, RUB 28.83, yen 89.70, sing 1.3860, HKD 7.75, INR 46.34, China 6.8263, pesos 13.16, BRL 1.73, dollar index 75.39, Oil $77.45, 10-year 3.44%, Silver $17.36, and Gold... $1,109.30

That's it for today... Yes, today is a Friday the 13th... I don't get into that stuff, but if you do, be careful today! We're supposed to have another nice weekend here in St. Louis, weather wise, so we have that going for us! No football game this weekend though for my little buddy, Alex. I saw Chris Gaffney and his son Brendan on TV at the Blues game last night. The Blues lost the game though. UGH! Another week, and well be talking about Thanksgiving getting here so fast! The radio station that plays Christmas music every year, began broadcasting the Christmas music a couple of weeks ago! They used to at least wait until Thanksgiving came and went! Well... Let's get working on having a Fantastico Friday! And a Wonderful Weekend!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Risk Aversion Creeps Back Into The Currencies...

ChuckButler — Thu, 12 Nov 2009 15:32:59 GMT

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In This Issue..

* Comments spook currency traders...
* A$ hits 15-month high, this time going up!
* Geithner as the "joker"?
* China changes statement about the renminbi...

And Now... Today's Pfennig!

Risk Aversion Creeps Back Into The Currencies...

Good day... And a Tub Thumpin' Thursday to you! It's a Thursday, and it's not raining here! YAHOO! After a week of Indian Summer weather, we're slowly creeping back to the colder weather, but still, better than most Novembers of the past, so far!

That was a strange feeling yesterday, having a holiday in the middle of the week, but the day was nice, and I got to spend the day with my granddaughter, Delaney Grace, who sang me songs all day long!

So... Last night, I'm doing some writing, and before I put the laptop to bed for the night, I checked the currencies, and while they had drifted in the early Asian session, the Big Dog, euro was still trading above 1.50, and the Aussie dollar (A$) had set a 15 month high of .9368... But when I turned the currency screens on this morning after arriving to a pitch black office, which is the way I like it this early in the morning, the euro had given back about 1/2 cent, and so had the A$... So, it was my mission to find out what caused this slippage...

The only thing I could find was a comment by the Chinese Premier, Wen Jiabao, who said that "the world faces an uneven recovery"... This made traders think twice about leaving me behind, no wait... I mean they thought twice about the green light they thought they were under to have carte blanche with the dollar...

The dollar also received a bit of love from the comments by U.S. Treasury Sec. Geithner, a.k.a. the Cheater... Geithner was doing his best Robert Rubin, circa 1995, saying that he believes strongly in the need to maintain a strong dollar and said the United States was determined to get its budget deficit down. HAHAHAHAHAHAHAHAHAHA! That's a joke, right? OH! He wasn't joking? Are you sure? Because for a minute there, I really thought he was joking, for what, in the past, has he or this administration done to back up those words? But he wasn't joking... Hmmm... And I was all ready to give him a new nickname... The Joker...

Geithner did say that the U.S. was well aware it must work to keep investors' confidence in U.S. economic policymaking... Yeah, and that's exactly what you've done, right? NOT! Hey Timothy, you might want to check the scorecard on your performance so far... The dollar index has fallen 7.6% this year, and hit a 15-month low of 74.89 yesterday...

OK... I've got to go on to something else, otherwise I'll say something that will cause people to fill my email box with nasty emails! But... It sure looks like Risk Aversion has crept back into the currencies after all these statements... We seem to run into these Risk Aversion stints about every week... They come, they take away gains, and they go away, thus allowing the gains to be reinstated...

How about that 15-month high for the A$ yesterday of .9368? At least this time the currency is on the way up when it hit that 15-month figure... 15 months ago, it was on the way down! So, here's the skinny on this move by the A$... Australian employers added jobs in October... This was unexpected... But... Caused the immediate response of speculating that the Reserve Bank of Australia (RBA) would indeedly do, raise rates at their next meeting on Dec. 1st...

There was another "push" to the A$ yesterday... And it came from Gold! The shiny metal pushed to yet another new all-time high record level of $1,117 during the day... I might remind you here that Gold is Australia's third most-valuable raw material export... Oh! By the way, Australia's unemployment rate is now 6.5%, which is still too high, but falling... And doesn't that have a nice ring to it, versus saying an unemployment rate is rising past 10%?

The A$ pulled its kissin' cousin from across the Tasman, New Zealand dollar / kiwi along for the rally yesterday... Kiwi continues to be haunted by the ghost of deficits past... But, hiding in Australia's shadow suits kiwi just fine... And New Zealand Retail Sales just posted a nice, surprise, uptick... There are all kinds of reports going around that say the New Zealand 3rd QTR GDP will be strong... I'm from Missouri, so they'll have to show me!

There was further news out of China yesterday, from the People's Bank of China (PBOC)... The PBOC stated that "the exchange rate will be guided in a proactive, controlled and gradual manner and based on international capital flows and movements in major currencies." What's the news of this you might be asking? Ahhh grasshopper, sit... Here is the news... That statement is completely different toward the Chinese currency than previous statements that said that the PBOC would keep the currency "basically stable"...

This is Central Bank parlance folks, to say that the PBOC will continue to "gradually" move the renminbi... As previously they basically said they would keep it at current levels... The foreign newspapers are all over this statement like a cheap suit, folks... But I think they're going in the wrong direction... The foreign newspapers are thinking that the PBOC has given the "high sign" that they are ready to allow the renminbi to float... Buzzzzzzzzzz! I'm sorry, that's the wrong answer... We hate to see you leave, but Johnny, tell our contestant what they've won!

I just don't see it as that... The Chinese like to play these games with words, to get everyone all lathered up... And then pull the rug out from under them... No rug pulling from under me!

The Wall Street Journal (WSJ) is reporting this morning that Central Banks around the world, like the Russian Central Bank, are buying dollars to underpin the currency from a free fall... The WSJ also said the Asian Central Banks have all been buying dollars to keep their currencies from getting too strong... Hmmm... I wonder how that's been working out for them? Oh... Here's the skinny on that... "Quite clearly, all Asian central banks have found it necessary to intervene, and it's costing us," said Korn Chatikavanij, Thailand's finance minister.

So, it's kind of nice to see other Central Banks around the world throwing good money at bad money, like the Fed Reserve has done for 15 months now... At least they're not throwing money down the toilet, nononononononono! YES THEY ARE! They're buying dollars! What dolts!

OK... While I was browsing through the WSJ, I saw another story that caught my attention... Here was the headline... "Fannie Mae, Freddie Mac say more losses are possible"... According to the WSJ, the U.S. Treasury has already injected $112 Billion into Fannie Mae and Freddie Mac since the government took them over last year... And now, more losses are possible?

Let's see... The Government took them over, and more losses are possible? Sounds like the Post Office... Sounds like Amtrak... What else has the Government taken over, and the bleeding continues? I know, and you know where I'm going with this, so I'll stop there!

What some more depressing data? October saw 332,292 U.S. homes seized by lenders or listed in default or auction documents according to RealtyTrac... October was the 8th consecutive month of 300,000 or more.... There was a 3% decline in October from September, but I wouldn't get too lathered up about that, given the chart I saw and shared with the desk the other day regarding residential loan resets that are coming due in the next two years, with peaks in Sept of 2010, and Sept 2011...

Looking at this chart tells me that the cartel, I mean the Fed will have no other choice but to keep rates low, and to keep buying Treasuries to keep the yield from getting too high... Haven't we learned anything the past 10-years? You have to learn from previous mistakes or you'll make them all over again... And that, is what, I, believe, the Fed is doing! The tried like heck to keep the Tech Bubble from bursting, by keeping rates artificially low, and credit loose as a goose... What were the unintended consequences of those actions? And what will be the unintended consequences of these actions by the Fed? I don't have an answer to that, but I don't see how this works out nice for the U.S. economy and taxpayers...

Before I go on... A reader sent me a note that made me laugh... He said, "Hey Chuck, since you can't decide on whether or not call the Fed the Fed or the cartel... Why don't you just put them together and call them the Fartel"? HAHAHA HAHAHAHAHAHA!

The data cupboard finally gets restocked today, and we'll see the usual Thursday fare of Initial Weekly Jobless Claims, which remains above 500,000 every week, and something that Tim Geithner might want to pay attention to... The U.S. Monthly Budget Statement, which will be somewhere around $160 Billion for October... Annualized, that's almost a $2 Trillion deficit in the Budget! OUCH! Say it ain't so, Joe!

To recap... The non-dollar currencies rallied all day yesterday, but have given back those gains in the overnight sessions. Most of the slippage has been from words, not actions. The Chinese premier, and the U.S. Treasury Sec. So... Don't look for this to be any reversal of the weak dollar trend... The Aussie dollar hit a 15-month high last night on a strong employment data report, which has traders thinking another rate hike on Dec. 1st is coming, and the Asian countries have been buying dollars to keep their currencies weak, and according to them they are "paying the cost"!

Currencies today 11/12/09: American Style: A$ .9315, kiwi .7370, C$ .9315, euro 1.4950, sterling 1.6580, Swiss .99, European Style: rand 7.4380, krone 5.6050, SEK 6.8550, forint 180.50, zloty 2.7645, koruna 17.0490, RUB 28.79, yen 89.80, sing 1.3870, HKD 7.75, INR 46.65, China 6.8267, pesos 13.17, BRL 1.7150, dollar index 75.25, Oil $78.67, 10-year 3.44%, Silver $17.57, and Gold... $1,116

That's it for today... Isn't that something, the Gold move? My good friend, David Galland, said that Gold is "blowing a raspberry"! HA! Well... Now that my blood has been thinned out, and had the consistency of water, the swelling in my left leg has backed off just a bit... At least I don't have to continue with the shots! Next week I go back to the cancer doctor that has been treating my left eye that was taken over by cancer... I really don't know why I have to go back, he told me last time there "was nothing else he could do"... All these things, and still life goes on, right? Yep! Little Delaney Grace was really cute the other day, trying to pawn off her carrots to me, she kept telling us that the carrots were mine to eat, not hers! Well... I'm locked down in St. Louis until late January... But my annual Christmas vacation will break things up... I know, it's a month away, but I can't help starting to get geeked about it! OK... A little long here with the Big Finish, I had better get going on this Tub Thumpin Thursday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Are We Sure the Recession is Really Over?

GaryHalbert — Tue, 10 Nov 2009 21:46:00 GMT

IN THIS ISSUE:

3Q GDP Report - Was It Really Better Than Expected?
What Else Was Missing in the 3Q GDP Report?
Worker Productivity Surges to Six-Year High
Latest Unemployment Numbers Not Encouraging
Roubini - Too Many People Are "Short" the Dollar

Introduction

When the government announced on October 29 that 3Q Gross Domestic Product surged 3.5% (annual rate), there was a collective sigh of relief around the world that the US economy had finally emerged from the most serious recession since the Great Depression. After all, the 3.5% number outpaced the pre-report consensus of around 3%.

On closer inspection, however, the latest GDP report was not nearly as rosy as the headline number of 3.5% seems to suggest. For example, if you consider all of the government's incentives for consumers to spend (think "cash-for-clunkers" which ended in August, the $8,000 first-time homebuyer tax credit, and huge stimulus spending), GDP growth in the 3Q would have been significantly lower.

These and other caveats from the latest GDP report suggest that while we have turned the corner on the recession - barring any big negative surprises - economic growth over at least the next several quarters is likely to be disappointing. For example, most estimates I see for 4Q GDP growth are in the 1-2% range.

Last Thursday, the Labor Department reported that US worker productivity soared to a six-year high in the 3Q, well above expectations. Rising productivity is a good thing, right? Not necessarily, especially when it means that companies are laying off their best and brightest, such as scientists and engineers, that are focused on new product development (R&D).

On Friday, the Labor Department reported that the unemployment rate surged from 9.8% to 10.2% in October, well above the pre-report consensus of 9.9%. 10.2% is the highest unemployment rate since 1983. 15.7 million Americans are officially out of work, and that does not include those who are working part-time by necessity and those who have given up looking for work.

This week, we will examine the latest 3Q GDP report in detail and what that means for the future of the economy. We'll also take a look at some subsequent economic reports which seem to suggest that 4Q growth will be tepid. Next, we'll delve into the latest worker productivity report and what that may mean for the economy and the markets. Also, we will dissect the latest unemployment figures.

Finally, I will bring you the latest dire warning from noted forecaster Nouriel Roubini. You may recall that he predicted the housing/credit crisis back in 2005. Now he warns that too many people around the world are "short" the US dollar, and this could spark a second credit crisis.

3Q GDP Report - Was It Really Better Than Expected?

As noted above, the Commerce Department reported on October 29 that US GDP grew at an annual rate of 3.5% in the 3Q. Pre-report estimates varied widely with a consensus of 3%, so the actual report was better than expected. Stocks rallied sharply and closed 200 points higher following the report's release. In the Commerce Department's report, it stated: "The increase in real GDP in the third quarter primarily reflected positive contributions from personal consumption expenditures (PCE), exports, private inventory investment, federal government spending, and residential fixed investment." The 3Q boost in the economy followed four consecutive losing quarters, including the 2Q that saw a drop of 0.7%. The 3Q GDP report, the so-called "advance" report, will be revised two more times before it goes "final", and the next revision will be released on November 24.

While stocks rallied strongly just after the report, it did not take long for analysts to see that the number was artificially pumped up. For example, if you take out surging auto sales ("cash-for-clunkers" which ended in August), GDP rose only apprx. 1.5% in the 3Q. Take away the government's $8,000 tax credit for first-time homebuyers, which is scheduled to end on December 1, and economic growth was even weaker.

Consider also the fact that GDP was boosted by the federal "stimulus package" spending, which unlike cash-for-clunkers and home tax credits, is not going away anytime soon. But the point is, the GDP number would have been much lower without these artificial incentives. Actually, the White House admitted as much just after the report. Christina Romer, chairwoman of the White House Council of Economic Advisors, acknowledged that without all these government incentives, "real GDP would have risen little, if at all, this past quarter."

Looked at differently, the 3.5% GDP report noted that the overall economy rose to a seasonally adjusted $13.014 trillion (annual) in the 3Q, up from $12.901 trillion in the 2Q. In other words, the economy added apprx. $112 billion dollars in output quarter-over-quarter. Yet we have spent an estimated $173 billion worth of the $787 billion stimulus plan so far. This shows how heavily dependent the economy is on government spending.

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

What Else Was Missing in the 3Q GDP Report?

There are a number of factors and trends that the government's GDP reports do not consider. For example, the official GDP statistics are not designed to pick up cutbacks in "intangible investments" such as business spending on research and development, product design, worker training, etc. There's plenty of evidence which indicates that companies are slashing this kind of spending, which is essential for innovation, in an effort to cut costs.

Without investment in intangibles, the U.S. can't compete in a knowledge-based global economy over the long-run. Yet we don't see that plunge reflected in the GDP numbers which are still too focused on more traditional sectors, such as motor vehicles, construction, housing, etc.

There are more signs that companies are robbing the future to cut costs and improve profits. For example, over the past year, US employment of scientists and engineers has fallen by 6.3% according to BusinessWeek. For the most part, these are the people who create the next generation of products and make the US more competitive over the long-term. Again, this trend is not considered in the GDP reports.

Another clear-cut sign that GDP growth is being overestimated is the sharp drop in venture capital investment, which goes directly to new businesses. Venture capital firms invested about $12 billion in the first three quarters of 2009, barely half the $22 billion invested during the first three quarters of 2008. Some of this shortfall would have been spent on computers and other physical equipment, which would have been picked up in GDP. But most of the drop in VC money would have gone to pay for scientists, engineers, and new product development - all valuable intangible investments that don't show up in the GDP reports.

Similarly, many companies have slashed their reported R&D spending, which also doesn't show up in GDP. Just to cite a couple of examples, Alcoa announced recently that it cut its 3Q R&D spending by 36% from the year before. Johnson & Johnson has reduced its R&D by 13% over the past year. Such cuts are going on across industry sectors, with few exceptions. Again, these significant cutbacks are not reflected in the GDP data.

Another big problem not reflected in the GDP statistics is that many companies are retreating from development of new products, especially in stressed industries. In many sectors of the economy, companies have not only cut back on new products, but in many cases are reducing the number of models or options they currently offer.

Likewise, US companies are significantly cutting their spending on worker training. The drop started in 2008, when employers reduced their per-worker "learning expenditures" by 3.8% on average, according to the American Society for Training & Development. No data are available for 2009, but "from anecdotal evidence, obviously there's a lot of cutback," says Pat Galagan, executive editor of publications.

Ideally, a big burst of training would occur during a severe recession such as this so that people can acquire the skills needed for the jobs of the future. The problem is how to pay for that training, since unemployed people rarely spend money on long-term training when they're worried about short-term survival.

Worker Productivity Surges to Six-Year High

Last Thursday, the Labor Department announced that worker productivity surged to the highest level in six years in the 3Q. Productivity nationally rose 9.5% on average, well above the pre-report consensus of 6.5%. Non-farm productivity and costs provide measures of the productivity of workers and the costs associated with producing a unit of output.

The report also noted that overall output rose 4.0% in the 3Q, while hours worked fell 5.0%. Non-farm businesses continued to get lean and mean, finding ways to squeeze more output out of fewer workers (more on this below). Unit labor costs also fell 5.2%, which will help keep inflation contained.

Productivity growth has risen at an 8.2% average annualized pace during the last two quarters, the fastest two-quarter surge off a recession trough since 1961. Unit labor costs, typically the flip side of the productivity numbers, collapsed at nearly a 6% annualized rate during the last two quarters - the largest two-quarter decline off a recession trough on record. Since corporate profits are directly related to productivity growth and inversely related to unit cost growth, this data is good news for earnings.

Normally, it is considered a good thing for productivity to go up but the question is, why so much? With the unemployment rate continuing to go up every month, we know that companies continue to terminate and/or lay off workers. In doing so, they are demanding more productivity from those employees that remain on the job.

Actually, it is not unusual for productivity to rise in the early stages of a recovery as businesses continue to aggressively cut costs even as output begins to rebound. Companies are reluctant to hire near the end of recessions and even in the early stages of a recovery, as they are not sure the economy has really turned the corner, especially with the unemployment rate rising month after month.

On a related note, the Labor Department also published monthly data on the "average work week." The average work week shrank to a new all-time low of 33 hours in June, and it remained the same in October, as reported in last Friday's unemployment data (more on that report below). While the manufacturing sectors are averaging well above 33 work hours per week, the much larger service/retail sectors are averaging less than 33 work hours per week.

Many economists believe, however, that the recent productivity gains and the shrinking of the average work week are not sustainable. At some point, hours worked and payrolls will have to rise in order to meet stepped-up production schedules. As this occurs, income growth should recover, allowing households to spend more even if they are setting aside a larger fraction of their income in savings. Of course, the question is, when?

Latest Unemployment Numbers Not Encouraging

On Friday, the Labor Department reported that the US unemployment rate rose from 9.8% to 10.2% in October, the highest level since April 1983. The report noted that in October, the number of unemployed persons increased by 558,000 to 15.7 million, a record high. The largest job losses over the month were in construction, manufacturing, and retail trade.

Since the start of the recession in December 2007, the number of unemployed persons has risen by 8.2 million, and the unemployment rate has grown by 5.3 percentage points. Keep in mind that the official unemployment rate does not include those who are working part-time out of necessity, and does not include those who have given up on looking for a job.

The number of long-term unemployed, jobless for 27 weeks or more, and assumed to have given up on looking for work, was 5.6 million in October according to the latest report. The Labor Department estimates that 35.6% of unemployed persons were jobless for 27 weeks or more. Yet these people are not counted in the official unemployment rate.

The number of persons working part-time for economic reasons (sometimes referred to as "involuntary part-time workers") was 9.3 million. These individuals were working part-time because their hours had been cut back or because they were unable to find a full-time job. Here too, these people are not counted in the official unemployment rate.

If we include discouraged workers and those forced to work part-time, the unemployment rate surged to 17.5%, the highest on record.

The latest unemployment rate was considerably worse than expected. The pre-report consensus was for a rise from 9.8% in September to 9.9% in October. While many in the media have led us to believe in recent weeks that job losses were falling, the latest report clearly muzzles such optimism.

Most economists believe that the unemployment rate will continue to rise for at least a few more months. A Bloomberg survey of leading economists concludes that the unemployment rate will remain high for at least another year. The average forecast among the dozens of economists surveyed indicates that unemployment will average 9.7% for all of 2010.

If true, this is very bad news for the Obama administration and for Democrats who will be seeking re-election in 2010.

Is the World Too Bearish on the US Dollar?

There is now near-universal agreement that the US dollar will continue to fall for the foreseeable future. While not admitting to it, the Obama administration favors a weaker dollar as it is good for exports, just as the Bush administration did. The Fed is encouraging a weaker dollar by keeping short-term interest rates near zero for "an extended period."

As the dollar has fallen sharply since March, investors around the world have taken to "shorting" the dollar in various ways. Yet the US dollar is a commodity, after all, and commodities of all stripes have a way of not doing what the crowd expects. There is no way to know when the dollar will reverse higher, but when it does, it could well be explosive at least for a time.

Nouriel Roubini is a well-known professor of economics at the Stern School of Business at New York University and is chairman of RGE Monitor, an economic consulting firm. Roubini is best known for his public warnings in 2005 that we were in a housing bubble that was about to burst, and that it would lead to a financial crisis. At the time, he was called "Doctor Doom."

Last week, Roubini issued a serious warning that too many people around the world are "short" the US dollar, especially via so-called "carry trades" where investors borrow cheap dollars and then invest in other "risk assets" (stocks, etc.) that earn higher returns. Roubini believes that, at some point, the short dollar carry trade is going to blow up.

I have taken the liberty of reprinting his latest warning in the Financial Times (of London).

QUOTE:

Mother of all carry trades faces an inevitable bust

By Nouriel Roubini
November 1 2009

Since March there has been a massive rally in all sorts of risky assets - equities, oil, energy and commodity prices - a narrowing of high-yield and high-grade credit spreads, and an even bigger rally in emerging market asset classes (their stocks, bonds and currencies). At the same time, the dollar has weakened sharply, while government bond yields have gently increased but stayed low and stable.

The dollar and the sterling have weakened against a host of other currencies since the summer, promoting speculation that they could become the next carry trade currencies and supplant the yen as the ‘funding currency' of choice.

This recovery in risky assets is in part driven by better economic fundamentals. We avoided a near depression and financial sector meltdown with a massive monetary, fiscal stimulus and bank bail-outs. Whether the recovery is V-shaped, as consensus believes, or U-shaped and anemic as I have argued, asset prices should be moving gradually higher.

But while the US and global economy have begun a modest recovery, asset prices have gone through the roof since March in a major and synchronised rally. While asset prices were falling sharply in 2008, when the dollar was rallying, they have recovered sharply since March while the dollar is tanking. Risky asset prices have risen too much, too soon and too fast compared with macroeconomic fundamentals.

So what is behind this massive rally? Certainly it has been helped by a wave of liquidity from near-zero interest rates and quantitative easing. But a more important factor fuelling this asset bubble is the weakness of the US dollar, driven by the mother of all carry trades. The US dollar has become the major funding currency of carry trades as the Fed has kept interest rates on hold and is expected to do so for a long time. Investors who are shorting the US dollar to buy on a highly leveraged basis higher-yielding assets and other global assets are not just borrowing at zero interest rates in dollar terms; they are borrowing at very negative interest rates - as low as negative 10 or 20 per cent annualised - as the fall in the US dollar leads to massive capital gains on short dollar positions.

Let us sum up: traders are borrowing at negative 20 per cent rates to invest on a highly leveraged basis on a mass of risky global assets that are rising in price due to excess liquidity and a massive carry trade. Every investor who plays this risky game looks like a genius - even if they are just riding a huge bubble financed by a large negative cost of borrowing - as the total returns have been in the 50-70 per cent range since March.

People's sense of the value at risk (VAR) of their aggregate portfolios ought, instead, to have been increasing due to a rising correlation of the risks between different asset classes, all of which are driven by this common monetary policy and the carry trade. In effect, it has become one big common trade - you short the dollar to buy any global risky assets.

Yet, at the same time, the perceived riskiness of individual asset classes is declining as volatility is diminished due to the Fed's policy of buying everything in sight - witness its proposed $1,800bn (£1,000bn, €1,200bn) purchase of Treasuries, mortgage-backed securities (bonds guaranteed by a government-sponsored enterprise such as Fannie Mae) and agency debt. By effectively reducing the volatility of individual asset classes, making them behave the same way, there is now little diversification across markets - the VAR again looks low.

So the combined effect of the Fed policy of a zero Fed funds rate, quantitative easing and massive purchase of long-term debt instruments is seemingly making the world safe - for now - for the mother of all carry trades and mother of all highly leveraged global asset bubbles.

While this policy feeds the global asset bubble it is also feeding a new US asset bubble. Easy money, quantitative easing, credit easing and massive inflows of capital into the US via an accumulation of forex reserves by foreign central banks makes US fiscal deficits easier to fund and feeds the US equity and credit bubble. Finally, a weak dollar is good for US equities as it may lead to higher growth and makes the foreign currency profits of US corporations abroad greater in dollar terms.

The reckless US policy that is feeding these carry trades is forcing other countries to follow its easy monetary policy. Near-zero policy rates and quantitative easing were already in place in the UK, eurozone, Japan, Sweden and other advanced economies, but the dollar weakness is making this global monetary easing worse. Central banks in Asia and Latin America are worried about dollar weakness and are aggressively intervening to stop excessive currency appreciation. This is keeping short-term rates lower than is desirable. Central banks may also be forced to lower interest rates through domestic open market operations. Some central banks, concerned about the hot money driving up their currencies, as in Brazil, are imposing controls on capital inflows. Either way, the carry trade bubble will get worse: if there is no forex intervention and foreign currencies appreciate, the negative borrowing cost of the carry trade becomes more negative. If intervention or open market operations control currency appreciation, the ensuing domestic monetary easing feeds an asset bubble in these economies. So the perfectly correlated bubble across all global asset classes gets bigger by the day.

But one day this bubble will burst, leading to the biggest coordinated asset bust ever: if factors lead the dollar to reverse and suddenly appreciate - as was seen in previous reversals, such as the yen-funded carry trade - the leveraged carry trade will have to be suddenly closed as investors cover their dollar shorts. A stampede will occur as closing long leveraged risky asset positions across all asset classes funded by dollar shorts triggers a coordinated collapse of all those risky assets - equities, commodities, emerging market asset classes and credit instruments.

Why will these carry trades unravel? First, the dollar cannot fall to zero and at some point it will stabilise; when that happens the cost of borrowing in dollars will suddenly become zero, rather than highly negative, and the riskiness of a reversal of dollar movements would induce many to cover their shorts. Second, the Fed cannot suppress volatility forever - its $1,800bn purchase plan will be over by next spring. Third, if US growth surprises on the upside in the third and fourth quarters, markets may start to expect a Fed tightening to come sooner, not later. Fourth, there could be a flight from risk prompted by fear of a double dip recession or geopolitical risks, such as a military confrontation between the US/Israel and Iran. As in 2008, when such a rise in risk aversion was associated with a sharp appreciation of the dollar, as investors sought the safety of US Treasuries, this renewed risk aversion would trigger a dollar rally at a time when huge short dollar positions will have to be closed.

This unraveling may not occur for a while, as easy money and excessive global liquidity can push asset prices higher for a while. But the longer and bigger the carry trades and the larger the asset bubble, the bigger will be the ensuing asset bubble crash. The Fed and other policymakers seem unaware of the monster bubble they are creating. The longer they remain blind, the harder the markets will fall.
END QUOTE

Gary D. Halbert, ProFutures, Inc. and Halbert Wealth Management, Inc.
are not affiliated with nor do they endorse, sponsor or recommend the following product or service.

Conclusions

I titled this E-Letter "Are We Sure the Recession is Really Over" because I think this concern is still heavy on the minds of most Americans. Certainly, the latest 3Q GDP report is a welcome sign that we have turned a corner, at least for now. But as I have also pointed out above, the reported gain of 3.5% in the 3Q leaves many questions we should be concerned about.

There are still many weak spots in our economy. Most notable, the unemployment rate weakened even more than almost anyone expected in October, reaching the highest level in a quarter century, and is very likely headed even higher for a few more months at least. It will almost certainly remain high throughout 2010.

The worst of the housing and credit crisis appears to be behind us, but bank lending remains substantially below pre-crisis levels, even as short-term interest rates are at historical lows. The Fed continues to buy up toxic assets at unprecedented levels. At some point, this will have to stop and reverse itself, just as interest rates will have to be increased at some point.

The point is, while we may have emerged from the recession, there are many risks that could throw us right back into a further economic contraction in the next year or two. Nouriel Roubini's analysis just above regarding the US dollar is just one of several scenarios that could result in a "double-dip" recession in the next year or two.

As I discussed at length in my September 29 E-Letter, we are in the early stages of a commercial real estate bust that could very well be the next shoe to drop in the credit crisis. I will have a lot more to say about that next week, unless something more pressing comes about. In any event, we will be hearing a lot more about the commercial real estate problems in the weeks and months ahead.

While we all welcomed the latest GDP report, conflicted as it was, there are few indications that economic growth will continue at that rate going forward. As mentioned earlier, most estimates I am seeing on 4Q GDP growth are in the 1-2% range. Forecasts for 2010 are only marginally better.

Finally, the stock market overshoot since early March has surprised even the most optimistic forecasters. All of my most trusted sources believe that the equity markets are overbought and very susceptible to a downside correction, or worse anytime now. If Roubini's concerns about the dollar are realized, it could be much worse than a garden variety correction.

Everything I have discussed this week argues for having actively managed strategies in your investment portfolio, strategies that have the ability to move out of the markets, or hedge long positions, in case any one of the negative scenarios arises. If you agree, give us a call at 800-348-3601, or e-mail us at info@halbertwealth.com.

** If you are wondering just how bad the House healthcare reform bill that passed last Saturday is, be sure to read the link in SPECIAL ARTICLES below. It's awful!

Finally, our thoughts and prayers go out to all of the families of the innocent soldiers who were killed and injured in the tragedy at FortHood that occurred on November 5.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

What the Pelosi Health-Care Bill Really Says
http://online.wsj.com/article/SB10001424052748704795604574519671055918380.html

Silence Is Golden...

ChuckButler — Mon, 09 Nov 2009 15:27:51 GMT

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In This Issue..

* A HUGE dollar sell off overnight...
* BLS admits the Birth/Death model was wrong...
* The 20th anniversary of the fall of the Berlin Wall...
* Kiwi is best performer overnight...

And Now... Today's Pfennig!

Silence Is Golden...

Good day... And a Marvelous Monday to you! A Spectacular weekend, weather wise, here in the Midwest... And Indian Summer, is what my dad would have called it. The news from the Sports teams wasn't so spectacular, but we had the weather going for us!

Welcome to Monday's edition of A Pfennig For Your Thoughts... I'll start off today with a note about the currencies, then do a recap of Friday, and then a look ahead to the rest of the week... So... Strap yourself in, and make sure to keep your arms and legs inside at all times during the ride!

I checked the currencies last night, as is my tradition of taking a peek at the Japanese open... And the dollar was getting sold... I thought to myself, self... I bet G-20 got things going here! And then this morning, when I turned on the currency screens, I saw that the dollar really got sold overnight, and in the morning session of Europe. The Big Dog, euro is flirting with 1.50 again, the Aussie dollar (A$) is flirting with 93-cents, and the Swiss franc is not only flirting, but holding hands with parity against the dollar!

So, what's behind this big move in the currencies VS the dollar? Well... The move has been fueled by G-20... And it's not anything that the G-20 members said... In fact, G-20 said nothing, nada, zero, zilch, a great big goose egg, on the currencies... Traders are taking this to mean that the G-20 member nations don't have a problem with the weak dollar, and that's akin to giving them the green light to sell the dollar further... Proving once again that Silence is Golden... (to non-dollar currency and precious metals holders!)

I had said in one of my recent videos that I do for the Sovereign Society and my "paid for" Newsletter, The Currency Capitalist, that I truly believed that the weak dollar and the rise of the non-dollar currencies would be a "hot topic" at the next G-20 meeting... So, I was wrong with that thought... So, since G-20 was given the reins of the currencies, they haven't said a word... I find this to be very significant folks... You know, it's not like if G-20 said the dollar's fall was too deep, they could do anything significant about it... But the fear of something would be enough to wrap a tourniquet around the dollar's bleeding. But... They didn't! And so we go on with the dollar selling, which in reality is what the U.S. Gov't really wants anyway! A general slow depreciation of the dollar is the way the Gov't would like to see the trading go...

So... There we have it! A non-dollar currencies rally, that's wrapped around G-20's silence on the weakness of the dollar.

Friday... We saw the Jobs Jamboree, really surprised on the "good side" of the job losses which according to the BLS (Bureau of Labor Statistics) was "only" 190,000 for October... Now, that's quite the fall from the +500K job loss months we saw 6 months ago... The Unemployment Rate, however, spiked to 10.2% in October... The first time the Unemployment Rate has been above 10% since the recession of the early 80's...

And then there was this, regarding Job losses... Chris Manning of the BLS stated last month that payrolls were overestimated in the twelve months ending March by 824,000. The source of this error was the birth/death model. BLS used "plug" numbers for the number of births and deaths. These "plug" numbers were wrong. They led to estimated positive contributions to employment that were too high. Most of the error (675,000 out of a total 824,000 jobs) occurred in the first quarter of this year. The birth/death model was adding significantly to payrolls when all other payrolls were falling. In reality the contribution from net births and deaths was in fact negative.

How long... has this been going on? (A great old song!) But, haven't I ripped this Birth/Death model for years now? And here you go! Even a BLS employee says they were wrong to add these jobs!

So... The question is when do this job losses get posted? Well... I don't think you'll see that folks... It's just the way the Gov't does things... Hides them, cheats you, and then says, "we made a mistake" and goes on about their business of hiding and cheating you!

Oh... And one more thing here regarding the Jobs Jamboree... According to BLS, payrolls fell at a 188,000 a month rate over the last three months. But their own household survey says employment fell at a 589,000 a month rate.

I shake my head in disgust... But, shoot Rudy, we all know how "the game is played" so, we just adjust our numbers and go on...

So... I guess you heard that the House passed the Health-Care Overhaul Bill this past weekend... I'm not going to go into this for this would be a "hot button" for a lot of people... I just want to know what this is going to cost, and don't believe anyone in the Washington D.C. that tells you that it won't cost anything! Their track record on that stuff is horrendous! Which also means that if they tell you it's going to cost $1 Trillion, it's going "really cost" double or triple that!

So, we just keep adding on to our deficit, folks... The people in D.C. are so worried that they need to spend more, instead of reducing spending... I really think that anyone that voted for this new spending program, needs to get "fired" the next time their term is up...

OK... Enough of that! The Data Cupboard is empty today, and doesn't really get re-stocked with Tier 1 data until Thursday... So... The data isn't going to help the dollar out the front-end of this week.

The IMF issued a report this past weekend that isn't helping the dollar... The IMF said that there are "indications that the U.S. dollar is now serving as the funding currency for Carry Trades" was one of the things that hurt the dollar... The other thing was that the IMF felt that the dollar was still "overvalued"... Which in anybody's book means it can fall further!

The IMF also said that the euro had "experienced the most appreciation among major advance economy currencies and that it remains on the strong side of its equilibrium."

Hmmm... So... First it was the silence by G-20, and then the slap in the face by the IMF that has the dollar on the run this morning... I wonder what direction this will go once the New York traders arrive at their desks, and see what the overnight markets have done to the dollar... My guess is they will first take some profits, and then add on to the dollar's woes... But that's just a guess, who knows what those "fickle" traders will do!

So, like I said above, the euro, A$, Swiss are all moving higher VS the dollar... But the "winner" for best performing currency overnight is the New Zealand dollar / kiwi! At one point overnight, kiwi traded at 74-cents... It has since given back some ground, but the move overnight was impressive! Kiwi got a nice bump when Dairy Giant Fonterra raised their forecast dairy payout... With farmers' incomes representing .7% of the GDP, this was good news for the economy, and thus the thoughts begin to switch to a rate hike by the Reserve Bank of New Zealand (RBNZ), which just last week was downplaying any such rate hike... This might change their mind...

Today is the 20th anniversary of the fall of the Berlin Wall... That was HUGE in our lifetime wasn't it? I'm reminded of President Ronald Reagan telling the Communists 2 years earlier to "tear down this wall"...

And... Chris Gaffney left me this note from Friday...

"The government extended the first time homebuyers $8,000 tax credit on Thursday. While this tax credit was intended to help alleviate the glut of housing left by the credit crunch and resulting downturn, housing analysts have found the tax credit did little for home sales. Between 80 percent and 90 percent of the people who have bought homes using the credit would have purchased those homes without it. Sounds a lot like the cash for clunkers program; Taxpayer money wasted in order to try and make the data look good in the short term.

But not only did they extend the first time homebuyer's credit, they also approved what I think is a really stupid addition. The expanded program introduces a $6,500 tax credit for people who already own homes but want to buy new ones. Unlike the cash for clunkers program, the old homes which these buyers now occupy will not be destroyed; they will be placed onto the market. So what does congress think this $6,500 credit is going to accomplish?? It isn't going to decrease the number of homes on the market. It will help the banks, title companies, and mortgage lenders, who make money on the transaction. But it won't help the homeowners who are facing foreclosure, or the taxpayers who don't take advantage of."

Yes, Chris... That's what's going on here... And again, people are still wondering why China has such a problem with the direction of the U.S. and our deficit?

And Gold... The shiny metal reached $1,100 on Friday... And with the dollar weakness overnight, Gold has moved even higher... I know it sure seems to be that Gold has moved really quickly through the $1,000 level, and it did! I'm still waiting for the "correction" to buy some more... But, right now, it looks like that correction might not every materialize!

Speaking of this... I'm also still waiting for a decoupling of the risk assets... Getting back to the fundamentals... It could be happening right now, folks... We can only hope!

And then there was this... I received an email the other day from a reader, who said to me that he thought I enjoyed seeing these things happen in the U.S.... WHAT? I do not revel in these things I talk about... I merely point out what I think will happen given a tax cut, or more deficit spending, or protectionism, etc. It doesn't take a rocket scientist to figure these things out! And... Besides... I live here, my kids live here, my granddaughter lives here... I think in some way that as long as I point these things out, and ways for people to profit from them, that I'll make things better for them...

Ok... That was good to get out of the way this morning... Let's go to the recap and then the Big Finish, eh?

To recap... G-20 was silent about the currencies and weak dollar, which has given traders the green light to sell the dollar further. The IMF didn't help the dollar either, saying that the dollar was still "overvalued". The BLS admitted the Birth/deal model had made HUGE errors in the past years, and

Currencies today 11/9/09: American Style: A$ .9280, kiwi .7380, C$ .9280, euro 1.4990, sterling 1.68, Swiss .9395, European Style: rand 7.43, krone 5.62, SEK 6.87, forint 181.75, zloty 2.8140, koruna 17.0975, RUB 28.7525, yen 89.90, sing 1.3850, HKD 7.75, INR 46.4475, China 6.8263, pesos 13.34, BRL 1.7045, dollar index 75.10, Oil $78.44, 10-year 3.51%, Silver $17.71, and Gold... $1,108.40

That's it for today... A tough weekend for our football teams... My beloved Missouri Tigers lost again, while the undefeated high school Flyers and the 8th grade Flyers became undefeated no more... UGH! Oh well, on to wrestling for my little buddy, Alex! I took my beautiful bride to see an old band mate of mine Saturday night! Old buddy, Preston, was still quite the showman on stage, with his drums! The band sounded great! My spring training buddies, made tentative plans for our annual trip to Jupiter on Friday... 16 weeks till pitchers and catchers report folks... And with that... It's time to see what's on my desk from Friday, and get going on today's trading! I hope you have a Marvelous Monday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837

The Glide Path Option

JohnMauldin — Sat, 07 Nov 2009 04:54:00 GMT

The Present Contains All Possible Futures
The Ugly Unemployment Numbers
Argentinian Disease
The Austrian Solution
The Eastern European Solution
Japanese Disease
The Glide Path Option
Philadelphia, Orlando, and Phoenix

The present contains all possible futures. But not all futures are good ones. Some can be quite cruel. The one we actually get is dictated by the choices we make. For the last few months I have been addressing the choices in front of us, economically speaking. Today I am going to summarize them, and maybe we can look for some signposts that will tell us which path we're headed down. For those who are new readers and who would like a more in-depth analysis, you can go to the archives at www.investorsinsight.com and search for terms I am writing about. And I will start out by briefly touching on today's ugly unemployment numbers, with data you did not get in the mainstream media.

But first, let me welcome the readers of EQUITIES Magazine to this letter. The publisher is sending the letter to you directly. This letter is free, and all you have to do to continue receiving it is type in your email address at www.investorsinsight.com. Likewise, I have arranged for my regular readers to get a free subscription to EQUITIES Magazine, if you would like. You can go to www.equitiesmagazine.com. For those who don't know, I write a brief monthly column for them.

The Ugly Unemployment Numbers

The headlines said unemployment, as measured by the "establishment survey," was down by 190,000; and even though that was slightly worse than forecast, market bulls were cheered by the fact that the number was not as bad as last month's. It is an improvement that we are not falling as fast.

Well, maybe. What I did not see in many of the stories I read was that the number of unemployed actually soared by 558,000, to 15.7 million, as measured by the household survey. The establishment survey polls larger businesses; the household survey actually calls individual households.

Let's look at the real number in the establishment survey. If you don't seasonally adjust the number, the actual change in unemployment for October was 641,000, or about 450,000 more than the seasonally adjusted number. And the Bureau of Labor Statistics added 86,000 jobs that they simply guess were created through the so-called birth-death ratio. Interestingly, the birth-death ratio number is not seasonally adjusted, so it is just added to the unemployment number. http://www.bls.gov/web/cesbd.htm

The total (U-6) employment rate is at a record high of 17.5% (this includes those who are part-time for economic reasons). There are now over 10.5 million people who have lost their jobs since the beginning of the downturn.

My favorite slicer and dicer of data, Greg Weldon (www.weldononline.com), offers up an even more horrific number. As I have noted before, if you have not looked for work in the last four weeks, the BLS does not count you as unemployed. Quoting Greg:

"Moreover, when we combine the monthly change in the number of Unemployed, with the number Not in the Labor Force, we might consider the result to be a proxy for the actual 'change' in the underlying labor market situation ... in which case, October's figure of 817,000 represents the fourth LARGEST yet, behind last month's (September's) second largest figure of 1,021,000 ... for a two-month combined figure of 1.838 million, in newly Unemployed, or no longer 'in' the Labor Force ...

"... the second LARGEST two-month total EVER posted, barely trailing the December-08/January-09 total 1.955 million.

"Bottom line ... basis this measure AND the 'Total Unemployment Rate,' we could conclude that not only is there NO 'improvement' in the labor market, but moreover, that it continues to DETERIORATE, intently."

There are plenty more implications in the data, but let's turn to the topic of the day.

The Present Contains All Possible Futures

Like teenagers, we as a US polity have made a number of bad choices over the past decade. We allowed banks to overleverage and, in the case of AIG (and others), sell what were essentially naked call options of credit default swaps, based on their firm balance sheets, far in excess of their net worth; and that put our entire financial system at risk. We gave mortgages to people who could not pay them, and did so in such large amounts that we again brought down the entire world financial system to the point that only with staggering amounts of taxpayer money was it brought back from the brink of Armageddon. We assumed that home prices were not in a bubble but were a permanent fixture of ever-rising value, and we borrowed against our homes to finance what seemed like the perfect lifestyle. We did not regulate the mortgage markets. We ran large and growing government deficits. We did not save enough. We allowed rating agencies to degrade their ratings to a point where they no longer meant anything. The list is much longer, but you get the idea.

Now, we are faced with a continuing crisis and the aftermath of multiple bubbles bursting. We are left with a massive government deficit and growing public debt, record unemployment, and consumers who are desperately trying to repair their balance sheets.

If present trends are left unchecked, we will need to find $15 trillion in the next ten years, just to pay for US government debt, let alone state, county, and city debt. And perhaps some loans for business will be needed? Where can all this money come from? The answer is that it can't be found. Long before we get to 2019 there will be an upheaval in the market, forcing what could be unpleasant changes.

We are left with no good choices, only bad ones. We have created a situation that is going to cause a lot of pain. It is not a question of pain or no pain, it is just when and how we decide (or are forced) to take it. There are no easy paths, but some bad choices are less bad than others. So, let's review some of the choices we can make. (Again, I am being very general here. You can go to the archives for more specifics. This is a summary letter.)

Argentinian Disease

One way to deal with the deficit is to do what Argentina and other countries have done: simply print the money needed to cover the deficits. Of course, that eventually means hyperinflation and the collapse of the currency and all debt. There are writers who think this is an inevitable outcome. How else, they ask, can we deal with the debt? Where is the political willpower?

One large hedge-fund manager in Brazil humorously remarked that Argentina is a binomial country. When faced with two choices (hence binomial) they always made the bad choice. Could it happen here?

Hyperinflation is not an economic event; it is a political choice. I think last Tuesday's election is a sign that the voter population is beginning to pay attention to the need for something more than talk of change. There is growing discomfort with the size of the deficits. Further, the Fed would have to cooperate in order for there to be hyperinflation, and I think there is only a very slight (as in almost zero) chance of that happening. Could Congress change the rules and take over the Fed? Anything's possible, but I seriously doubt there is any appetite in saner Democratic circles for such a thing to happen.

I think the chances of hyperinflation in the US are quite low. It would be the worst of all possible bad choices.

The Austrian Solution

Here I refer to the Austrian school of economic theory, based on the work of Ludwig von Mises and Friedrich Hayek, et al. There are those in the Austrian camp who argue the need to do away with the Fed, return to the gold standard, allow the banks that are now deemed too big to fail to go ahead and fail, along with any businesses that are also mismanaged (such as GM and Chrysler), and leave the high ground to new and more properly run.

In their model, government spending is slashed to the bone, as are (in most cases) taxes. The advantage is that, in theory, you get all your pain at once and then can begin to recover from what would be a very bad and deep recession. The bad news is that you risk getting 30% unemployment and another depression that could take a very long time to climb out of.

Now, let me say that I have GREATLY simplified their argument. If you want to learn more you can go to www.mises.org. It is an excellent web site for all things Austrian. While I am not Austrian, I have spent a lot of time reading the literature and have certain sympathies for this view.

That being said, this also has almost no chance of being implemented. In Congress, only my friend Ron Paul is its advocate. Most Austrian followers are Libertarian by nature, and that is just not a political reality for the coming decade.

The Eastern European Solution

As it turned out, Niall Ferguson (last week I wrote about his brilliant book, The Ascent of Money) was in Dallas last night, and I was graciously invited to hear him. He gave a great speech and signed books, and then we went to a local bar and proceeded to solve the world's problems over Scotch (Niall) and tequila (me), and went farther into the night than we originally intended. He's a very fun and knowledgeable guy.

As we were talking about possible paths, he brought one to mind that I hadn't thought of. He reminded me of the period after the fall of the Berlin Wall, as the nations of Eastern Europe broke from the former Soviet Union. They started with very weak economies and simply overhauled their entire governments and economies in a rather short period of time, though not in lockstep with one another. Privatization, lowered taxes, etc. were the order of the day.

We here in the US are always talking about the need for reform. We need to reform health care or education or energy. In Eastern Europe they did not reform in the sense that we use the word. In many cases they simply started from scratch and built new systems. They had the advantage that there was general agreement that things did not work the way they had been, so there was more room for change.

Today in the US there are large constituencies that resist change. We only get to tinker around the edges, when real structural change is needed. Sadly, we agreed that here there is not much chance of major change. We can't even get the obvious changes needed in the financial regulatory world.

Sidebar: I am outraged at the paltry proposed financial "reforms." Rahm Emanuel said that no crisis should be allowed to go to waste. The Obama administration is wasting this one. How can we allow banks to be too big to fail? Where is the reinstatement of Glass-Steagall? If we are going to allow large banks to exist, then their leverage must be reduced to the point where their failure would not risk the system and require taxpayer dollars. I don't care if that makes them less profitable. They are making those large profits because they have taxpayers implicitly behind them, and I get no dividend payments from them, the last time I checked. Where is Fannie and Freddie reform (and their breakup)? No mention of an exchange for credit default swaps? (And yes, I know that such an exchange would reduce the number of swaps and the profitability of them. That is the point. They are dangerous if allowed to become too big a market.) This bill reads as if bank lobbyists wrote it. Where is the populist outrage? We have let the fox set up the rules for running the hen house. Shame on us all if we allow this to happen.

Japanese Disease

I have written a lot over the past year about the problems facing Japan. Their population is shrinking, as is their work force. They are running massive fiscal deficits and have done so for almost 20 years. Government debt-to-GDP is now up to 178% and projected to rise to over 200% within a few years. They started their "lost decades" with a savings rate of almost 16%, and are now down to 2% as their aging population spends its savings in retirement. They have had no new job creation for 20 years, and nominal GDP is where it was 17 years ago.

As bad as our problems are here in the US, their bubble was far more massive. Values of commercial property fell 87%! Their stock market is still down 70%. They had twice as much bank leverage to GDP as the US. (Think about how bad off we would be if bank lending was twice as large and had even worse defaults and capital shortfalls!)

And yet, they Muddle Through. Productivity has kept their standard of living reasonable. Up until recently their exports were strong. The trading floors of the world are littered with the bodies of traders who have shorted Japanese government debt in the belief that it simply must implode. While I believe that it eventually will, if they stay on the path they are on, Japan is a very clear demonstration that things that don't make sense can go on longer than we think.

Richard Koo (chief economist of Nomura Securities, in Tokyo) argues passionately that Japan had a balance-sheet recession, and that the only way for Japan to fight it was to run massive deficits. Banks were not lending and businesses were not borrowing, as both groups were trying to repair their balance sheets, which were savaged by the bursting of the bubble. It is said that at one time the value of the land on which the Emperor's Palace sits in Tokyo was worth more than all of California. Clearly this was a bubble that puts our housing bubble to shame.

So, I understand the point that there are differences between Japan and the US . But there are also similarities. We too have had a balance sheet recession, although here it was mostly individuals and financial institutions that have had to retrench and repair their balance sheets.

Japan elected to run large deficits and raise taxes. As I wrote in the October 16^th letter (http://www.investorsinsight.com/blogs/thoughts_from_the_frontline/archive/2009/10/17/muddle-through-r-i-p.aspx), "Savings equal Investments:

GDP (Gross Domestic Product) is defined as Consumption (C) plus Investment (I) plus Government Spending (G) plus [Exports (E) minus Imports (I)] or:

GDP = C + I + G + (E-I)

I don't want to go on at length again, but basically, the literature I quoted suggests that government stimulus and deficits have no long-run positive effect on GDP. In fact, the work done by Christina Romer, Obama's chairman of the Council of Economic Advisors, shows that tax cuts have a three-times-greater positive effect on GDP, and tax increases have the same level of negative effect.

In the equation above, if you increase government spending it will have a positive effect in the short run on GDP, but not in the long run. In essence, the increase in "G" must be made up by savings from consumers and businesses and foreigners.

But "G" does not enhance overall productivity. Government spending may be necessary but it is not especially productive. You increase productivity when private businesses invest and create jobs and products. But if government soaks up the investment capital, there is less for private business.

And that is Japanese disease. You run large deficits, sucking the air out of the room, and you raise taxes, taking the money from productive businesses and reducing the ability of consumers to save. Then you go for 20 years with little or no economic or job growth.

This is the path we currently seem to be on. The Japanese experience says that it could last a lot longer than people think before we hit the wall; because if savings rise in the US, and if banks, instead of lending, put that money on deposit with the Fed, as they are now doing (in order to repair their balance sheets), the US could run large deficits for longer than most observers currently believe.

We will need 15-18 million new jobs in the next five years, just to get back to where we were only a few years ago. Without the creation of whole new industries, that is not going to happen. Nearly 20% of Americans are not paying anywhere close to the amount of taxes they paid a few years ago, and at least ten million are now collecting some kind of unemployment benefits or welfare.

Choosing large deficits does not reduce the amount of pain we will experience, it just seemingly reduces it in the short term and creates the potential for a serious economic upheaval when the bond market finally decides to opt for higher rates. This path is a bad choice, but sadly, in reality it is one we could take.

The Glide Path Option

A glide path is the final path followed by an aircraft as it is landing. We need to establish a glide path to sustainable deficits (could we dream of surpluses?). That is because at some point there will be recognition, either proactively or forced upon us by the bond market, that large deficits are unsustainable in the long term.

If Congress and the president decided to lay out a real (and credible) plan to reduce the deficit over time, say 5-6 years, to where it was less than nominal GDP, the bond market would (I think) behave. Reducing deficits by $150 billion a year through a combination of cuts in growth and spending would get us there in five years.

The problem is that there is real pain associated with this option. Remember that equation above. Absent a growing private sector, if you reduce "G" (government spending) you also reduce GDP in the short run. You have to take some pain today in order to do that. But you avoid worse pain down the road: a bubble of massive federal debt that has to be serviced will be very painful when it blows up, as all bubbles do.

The Glide Path Option means that structural unemployment is going to be higher than we like (which is actually the case with all the options). And the large tax increases that come with this option will by their very nature be a drag on growth (and cause a double-dip recession in 2011). We can debate tax increases all we want, but I sadly think we will soon have a VAT tax. There are no good options. I just hope that we cut corporate taxes enough when we do create a VAT, that it will make our corporations more competitive, which will be a boost for jobs.

That's pretty much it. This is not a problem we can grow ourselves out of in the next few years. We have simply dug ourselves into a huge hole. This is not a normal recession. There is not a "V" ending to this recession. We are going to have deal with the pain. It will be the pain of reduced returns on traditional stock market investments, a lower dollar, low returns on bonds, European-like unemployment, lower corporate profits over the long term, and a very slow-growth environment. But if we choose this path, we will get through it in the fullness of time.

And of course, then we will eventually have to deal with the $70 trillion in our off-balance-sheet liabilities in Medicare and Social Security and pensions. Sigh. But that's for another time.

Philadelphia, Orlando, and Phoenix

I really am more optimistic than this letter makes me seem. But if you ignore reality, then you have no chance to figure out how to make the best of your situation. It is the efforts of hundreds of millions of individuals trying to make their own lot a little better than will get us back to a robust economy.

Monday I fly to Philadelphia and then the next day to Orlando for two speeches, and then the following week a quick trip to Phoenix, then home to start to plan for Thanksgiving. I will be in New York the first weekend of December (the 4^th) for Festivus, a great fundraiser for kids sponsored by Todd Harrison and the team at Minyanville (http://www.rpfoundation.org/), Interestingly, they hold it every year at a "Texas" barbecue joint. Look me up if you are there.

Tiffani has been out the last two days of this week. She is due in seven weeks or less, and her hips are expanding. The pain is too much right now for her to walk up the stairs to the office, so she is working from home. The doctor says this is the one time that her pain is not a sign of something bad. She is being a trooper and not taking any pain meds.

It has been 30 years since I was around a pregnant lady for more than a few hours, and it does bring back some memories. Watching her grow and change has brought back the sense of awe over how our bodies are designed.

Ryan and Tiffani have decided on the name Lively for my first granddaughter, to add to the two new grandsons this year. From zero to three grandkids in just six months! Kind of makes me dizzy.

I really enjoyed my time in South America. Rio is quite beautiful and I want to go back and spend some time.

Have a great week. There will be enough good friends and family that I know I will. And tomorrow night I finally get to go to a Dallas Mavericks game. We may have a real team this year.

Your always optimistic at the beginning of the season analyst,

John Mauldin

Dollar drifts lower....

ChuckButler — Fri, 06 Nov 2009 15:30:36 GMT

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* Dollar drifts lower...
* Looking for silver linings...
* NOK to increase rates...
* Aussie dollar continues to move up...

Dollar drifts lower....

Good day... And good morning to everyone. I wanted to start out this morning's Pfennig by saying my thoughts and prayers go out to all of the families of the fallen soldiers and civilian at the tragedy down at Ft. Hood. It is tough enough when we here about losses of our soldiers overseas in the 'combat zones'; but such a large loss of life right here in the US is deeply saddening.

The dollar moved lower throughout the trading day on Thursday as investors felt more confident with the global recovery and the US stock market climbed back above 10,000. Yesterday's weekly jobs numbers were slightly better than expected, and set the market up for this mornings monthly jobs report which will probably show fewer job losses in October compared to September. But there will still be job losses, not gains; and the 'official' unemployment number will inch closer to double digits. We all know if you count those individuals who are underemployed (part time workers who would like full time jobs) and those that have given up on their job search, the actual unemployment number is more like 16%.

Another number which was encouraging for economists was the large jump in non-farm productivity. US worker productivity spiked up an annualized 9.5% in October as employers found ways to squeeze more work out of existing employees instead of hiring new ones. This jump demonstrates one of the positive aspects of a severe economic slowdown. Contrary to what some reader's of the Pfennig seem to believe, neither Chuck nor I are happy that the US continues to be mired in this economic recession. But business cycles are inevitable, and the more we 'spend to extend' the longer it will take for the recovery to take hold. The jump in productivity is one positive which comes out of an economic downturn. In the good times, companies become fat and happy, with many companies becoming very in-efficient. The severe slowdown causes companies to rethink all of the processes, and worker productivity increases. This need for higher efficiency also encourages innovations to the manufacturing and service sectors.

Another piece of data due out this morning will illustrate another positive aspect of the economic slowdown. US Consumer credit is expected to show another $10 billion drop. The highly leveraged US consumer is continuing to draw in their purse strings, ignoring calls from the administration to resume their old borrow and spend attitudes. While some of this belt tightening has been forced on consumers by the credit crunch, hopefully we will see this adjustment continue. This isn't good news for retailers as we approach the holiday season, but if the global imbalances are to be corrected, US consumers are going to have to continue to increase their savings rate and decrease debt.

So there are a few silver linings to the economic cloud hanging over the US. The United States will eventually emerge from this economic storm with a leaner and meaner manufacturing sector and a much weaker dollar enabling it better compete in the global arena.

Both the ECB and BOE kept rates unchanged, just as Chuck had predicted. Officials at the Bank of England slowed the pace of bond purchases, but still approved the additional purchase of 200 billion pounds. A rebound in factory output, which rose 1.7% (the largest gain in 7 years) combined with a .2% increase in UK producer prices caused the change of direction by the BOE.

ECB President Jean-Claude Trichet signaled the beginning of the end of emergency stimulus measures in Europe. Trichet said next month's offer of 12 month loans would be the last. Data released yesterday was unable to paint a clear picture of the economic recovery in the Euro-area. German factory orders rose for a seventh month in September, as exports helped the recovery. But another report showed European retail sales fell for a 16th month, declining more than economists had predicted.

The Euro rallied a bit after the ECB decision, but Citigroup is predicting an even larger rally. A report by Citigroup stated that the technical trading patterns predict the Euro will climb to $1.5064 short term, and move up to $1.5285 over time. It continues to look like Europe will recover, and the euro will move higher vs. the US$.

The Norwegian krone also moved higher as Norway's central bank Deputy Governor Jan Qvigstad said it is 'most probable' the deposit rate will be moved another quarte point higher by the beginning of 2010. Officials of the Norges Bank are attempting to hold down some of the appreciation of the krone as Norway continues to increase interest rates to combat rising inflation. Norway's oil rich economy was one of the first to emerge from recession, so the central bank is also taking the lead on increasing interest rates. Yield differentials, along with a strong economy should keep the NOK among the world's top performing currencies.

Speaking of the top performers, I was updating the return charts for the currencies yesterday and was amazed at the returns on the Brazilian real and Australian dollars YTD. Brazil is up 31.42%, and the Australian dollar has increased 28.05% during 2009. The Australian dollar continued to strengthen yesterday as the central bank signaled it will continue to increase interest rates in the coming months. "A further gradual lessening of monetary stimulus is likely to be required over time," the Reserve Bank said in Sydney today. A rally in commodity prices, along with increasing interest rates will push the AUD toward parity with the greenback.

Yesterday was Chuck's Friday, as he took today off to spend some time with Alex who was off school. But before heading home, he asked me to include the following in today's Pfennig:

And then there was this... Yesterday, I totally forgot to mention my complete distaste for naming a designated hitter (DH) the MVP of the World Series... He doesn't play the field... And only batted 13 times during the Series... Baseball people like myself, just cringe when the DH is in play... Giving the MVP to a DH goes along with the thought that is prevalent in sports today... To give every kid a trophy... Oh well... Let's move on to other things because it's YOUR Friday!

I am a little late in getting this out, so I am able to tell you the official US Unemployment rate rose into double digits during the month of October, hitting 10.2%. This will probably give some life to the US$, as investors run away from risk and move back into US treasuries for temporary safe haven.

To recap... Silver linings of the current economic storm cloud: increased worker productivity and decreased consumer credit. The ECB and BOE kept rates unchanged. Aussie dollars continue to move closer to $1, and Chuck really doesn't like the DH!

Currencies today 11/5/09: American Style: A$ .9161, kiwi .7247, C$ .9342, euro 1.4881, Sterling 1.6587, Swiss .9848, European Style: rand 7.5482, krone 5.6747, SEK 6.9866, forint 184.70, zloty 2.8567, koruna 17.27, RUB 28.96, yen 90.60, sing 1.3925, HKD 7.75, INR 46.815, China 6.8274, pesos 13.29, BRL 1.719, dollar index 75.71, Oil $79.60, 10-year 3.5%, Silver $17.50, and Gold... $1,093.55

That's it for today... The Blues finally scored a goal at home, but lost to Calgary last night in overtime. The sun is shining again today, and apparently we are supposed to have a rain-free weekend!! The big EverBank sign went up on the new office building next door, we will be moving into our new digs in less than a month. Hope everyone has a Fantastic Friday and a Wonderful Weekend!!

Chris Gaffney, CFA
Vice President
EverBank World Markets
1-800-926-4922
1-314-647-3837

Rates To Remain Near Zero...

ChuckButler — Thu, 05 Nov 2009 15:19:00 GMT

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In This Issue..

* Dollar reverses sell-off...
* BOE & ECB meet today...
* New Zealand is not Australia...
* Funny accounting...

And Now... Today's Pfennig!

Rates To Remain Near Zero...

Good day... And a Tub Thumpin' Thursday to you! It's Tub Thumpin' because it's a Thursday and it's not raining! Yay for us! Well... Not only was I wrong, but the Bloomberg Economic Calendar was wrong too... The FOMC was not a 2-day meeting after all! Just one day, so no time to pull out the board games and cards...

I nailed that FOMC statement yesterday... WOW! You might begin to think that I have some inside info on the Fed Heads, the way I've been able to basically call every move they've made since the beginning of this whole meltdown in August of 2007! But that's not important here... The important thing is that the Fed said that "economic growth is not enough to hike rates, and therefore they will keep interest rates at near zero for an "extended period"...

Hmmm... Where have I heard that before? Any way, I thought that by continuing to use the words "extended period" that the dollar would get pummeled... And momentarily, it looked as though it might, as the offset currency to the dollar, the Big Dog, euro, raced to trade above 1.49... But a funny thing happened on the way to the forum, and the invisible hand reached down and reversed this move in a NY Minute! The work of the PPT? Probably... The Plunge Protection Team, probably stepped in to keep the dollar from a free-fall... That's my take on it any way!

Any way... With interest rates remaining at near zero levels here in the U.S. I thought it to be appropriate to pull out this new nickname for Big Ben... "Zimbabwe Ben"... (Thank's Ty!)

The rate hike decision ball gets thrown over to the "pond" to the Bank of England (BOE) and the European Central Bank (ECB) this morning for their versions of: Leave rates at present levels, but try to sound upbeat... I think you'll have the "tale of two Central Banks" here this morning. While both will keep rates unchanged, I think you'll see the BOE opt for more bond purchases in an attempt to shore up Britain's banking system... The ECB will NOT be making any such announcement.

In fact, I believe we'll hear ECB President, Trichet, announce that the ECB is moving closer to withdrawing stimulus from the economy! So, those of you who have the ability to go long euros VS sterling, this would seem to me to be the "trade o' the day"... What do I know, I'm not a short term "cross trader"!

So... With the FOMC finished... And the two European Central Banks on the docket today, somehow the Risk Aversion has crept back into the markets...

I received an email from a reader the other day, asking me why I prefer Australia to New Zealand, as the kiwi had outperformed its kissin cousin across the Tasman from 2002 to 2008.... Well... New Zealand enjoyed a wider yield differential than Australia during that time period, as it posted the highest interest rates in the industrialized world... Now that's saying something right there, and a good reason kiwi outperformed the A$...

But times have changed... And a very timely talk by Reserve Bank of New Zealand Gov. Bollard yesterday, helps explain why A$'s now over kiwi... Here's Gov. Bollard...

"Both countries have survived the crisis well, due to a mix of strong institutions and stimulative policies. However, their immediate prospects are different. Australia has avoided negative growth, and its prospects are driven by strong terms of trade, vast mineral deposits, the Chinese market, and rapid population growth.

New Zealand has had a recession, and the pick-up is slower and more vulnerable - a difference financial markets do not appear to appreciate.

Australia is a lucky country, but we could be a lucky neighbor.

Australia is entering a new minerals boom, investing heavily and encouraged by new finds, re-opening markets, bottlenecks and strong prices. Strong investment and export growth would mean big challenges for Australian policy. This all means an economy that looks less like New Zealand.

However, Australia's potential raised the prospects for New Zealand's manufacturers and services, which have a bigger share of exports than the same sectors in Australia."

OK... Back to me... So... Australia is a "lucky country" but New Zealand could be the "lucky neighbor"... Makes sense to me!

The Brazilian real rally took a walk on the wild side yesterday, gaining 2.5% VS the dollar in one day! But, that's relatively tame for some of the wild moves we've seen in recent times with the real... As long as you are not watching the currency like a hawk, and sweating out each pip move, this is no biggie... Keep your eyes on the horizon...

I find it somewhat humorous that the Brazilian Gov't officials have tried and tried to throw down road blocks for the real, and the investors just keep coming in droves... The 2% tax on Capital inflows did nothing to slow down the real's move VS the dollar, except for the day it was announced... After that, it was Wayne and Garth playing street hockey once more... "Game On!"

OK... I had a few callers and emails yesterday telling me that I was wrong about the Gold sales to the Reserve Bank of India (RBI), saying that it was done in SDR's... I think the confusion exits in the fact that the Gold sale kept getting reported as $6.7 Billion worth of Gold... But to put these questions to rest... Here is a report from the Economic Times of India (leading financial newspaper)
http://economictimes.indiatimes.com/markets/bullion/RBI-buys-200-mt-gold-from-IMF-to-pump-up-reserves-value/articleshow/5194492.cms
The purchase was in SDR 4.8 Billion worth.

Today in the U.S. we'll see the Weekly Initial Jobless Claims data, which will remain above 500,000 per week... And the ICSC Chain Store sales figures, which if consumer spending has gone back to pre Cash for Clunkers levels, would mean these figures would be soft... But I don't think this data gets much playing time with traders, so we'll just carry on...

And then there was this... OK... So... Some people chastised me yesterday for saying that the Gov't can't prove the 650,000 jobs they claim they "saved"... Well... Here's a ditty for you! Did you know that the Gov't is claiming that by giving a person that already has a job, a raise, it constitutes as "saving" that job? Want more funny accounting? Stay tuned, same bat time, same bat channel!

To recap... The FOMC left rates unchanged and said they would remain there for an "extended period of time" this sent the dollar to the woodshed, but reversed on a dime... PPT at work? The BOE and ECB meet this morning to discuss monetary policy. Expect the BOE to announce more bond purchases, and expect the ECB to announce a move to withdraw stimulus.. We learned that New Zealand is not Australia, but lucky to be Australia's neighbor! And try as they might to keep the real from gaining VS the dollar, the Brazilian Gov't's moves have not worked...

Currencies today 11/5/09: American Style: A$ .9085, kiwi .7190, C$ .94, euro 1.4850, Sterling 1.6530, Swiss .9825, European Style: rand 7.6360, krone 5.6975, SEK 7.0540, forint 186.37, zloty 2.8745, koruna 17.55, RUB 29.15, yen 90.32, sing 1.3955, HKD 7.75, INR 47.02, China 6.8276, pesos 13.28, BRL 1.7255, dollar index 75.81, Oil $79.91, 10-year 3.62%, Silver $17.40, and Gold... $1,088.80

That's it for today... Writing from home again, as I have yet, another appointment with a doctor this morning. When you have a blood clot, they monitor the thinness of your blood, and it has to be checked every 3 days... So, I have that going for me! I'm taking tomorrow off, so Chris will have the conn on the Pfennig tomorrow... So, as our little Christine would say... This is my Friday! YAY FOR ME! So with that on my mind... Good luck to my beloved Missouri Tigers as they take on Baylor this weekend, and my little Buddy Alex has his last game on Saturday. Congratulations to the Yankees on their World Series Championship... So... I'm off to see the Wizard... Talk to you again next Monday, and try to have a Tub Thumpin Thursday!

Chuck Butler
President
EverBank World Markets
1-800-926-4922
1-314-647-3837