Notes From Underground: when it comes to the markets, is no news good news??

This weekend was a slow news weekend for impact-worthy events. The Chinese PMI data was somewhat tepid but not as weak as expected. Again, we state that we don’t trust the Chinese data at all. We must remember how the U.S. data is so badly flawed, so why should we trust the economic releases of an economy that is so ostensibly government controlled? Good, bad or ugly, we have very little respect for Chinese data. We hope we are clear on that but we report it only for the initial impact it can have on trades.

Tomorrow night we get the announcement from the Australian Central Bank. No change is expected as the Aussies are at 4.5 percent and the recent CPI numbers showed a slowing in inflation, which puts them ahead of the curve. Also, the Aussies are engaged in a political election so the RBA may be reticent to raise rates. More importantly, the Aussies will want to see if the global growth story improves as the world economy shows signs of sputtering. Later in the week, we hear from the Bank of England and the ECB and we also expect no change. Both the Pound and the EURO have appreciated since the last meetings so we would be surprised if either bank raised rates or even issued an aggressive statement.

Following up on our piece on the Bullard comments, we note the increasing public discourse taking place on the fear of deflation. In tomorrow’s Financial Times, we get a story about Bernanke facing U.S. growth mysteries. The story alludes to how Bernanke and others at the FED are perplexed on why the U.S. has failed to experience higher growth rates in spite of all the actions taken to halt the recession. We offer a guide to the perplexed: Read the work of Richard Koo and his analysis of a “Balance Sheet Recession.” The release of Friday’s GDP report clearly showed that the American consumer is more concerned with paying down debt than revving up the engines of conspicuous consumption. U.S. corporations are hoarding cash because they fear the effects of increased debt if we were to head into a deflationary spiral. If deflation takes hold the last thing you want is DEBT and that is why Bernanke is so frightened of deflation. On Monday, Bernanke will be speaking at 9:15 a.m. CST and we will see how nervous the FED chairman seems to be and. We will hear from Geithner at 3.00 p.m. We wait to hear if the Treasury Secretary speaks on the Bush tax cuts and how they will be allowed to expire.

The numbers that came out of Japan on Friday added more worry to a global slowdown. Japanese unemployment unexpectedly rose and industrial production dropped 1.5 percent when a 0.2 percent increase was expected. Japan has a very serious problem and that is the EUR/YEN cross. The euro has weakened more than 15 percent against the YEN since the beginning of the year and this has led to a huge surge in German exports while Japanese export growth is slowing, except in Asia–but we believe that will change. Japan and Germany are major competitors in the market for high-priced, advanced engineered goods and the price advantage favors Germany. When the Lexus was lunched in 1990, the EUR/YEN was around 180–it is currently 113 and we can expect to see German auto markets to begin to regain market share from the Japanese, especially since German wage rates have been so well contained during the last decade. Lower wage rates and a gigantic currency advantage is fueling the German export explosion, which is coming on the back of an overvalued YEN. What is good for Germany does not translate to all of Europe because most European economies are not in the industrial ability of the Germans. How long can the YEN remain strong probably depends more on the U.S. DOLLAR and the uncertainty of fear of deflation. So, IS NO NEWS REALLY GOOD NEWS?

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One Response to “Notes From Underground: when it comes to the markets, is no news good news??”

  1. Arthur Global Practice Says:

    No comments. GREAT!

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