Sunday, May 1, 2011

The Real Fairytale!

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By Mike Conlon | April 29, 2011

This morning is all about fairytales as the Royal Wedding in the UK has drawn the attention of watchers worldwide and has also closed London for business today as it is a bank holiday. However, the real fairytale may be the news and data we have been seeing here in the US and the policy responses to them.

Yesterday’s declining GDP figures here in the US show that Bernanke’s QE2 policy has been a near-failure and is going to drag the US and then the global economy down again. The Fed’s insistence and denial that they have caused commodity inflation is intellectually dishonest, and now the effects are starting to come home to roost.

As input costs increase, businesses have to squeeze costs to maintain profitability and one of the most efficient ways to do this is to fire workers. Businesses then pass along these costs to the consumer, who can’t afford these new higher costs as the majority of their disposable income goes to pay for increases in the price of food and energy.

The US consumer makes up some 70% of US GDP, so if consumer spending on discretionary items decreases, then demand for good will also decrease, putting further strain on businesses. Thus the deflationary cycle begins again. The weak US dollar is a direct reflection of this sentiment, and how much lower it can go without causing a major global economic crisis is anyone’s guess.

In the Euro zone, most economic data was negative this morning including German retail sales figures, but CPI came in higher than expected and the Dollar is weak so the Euro is trading higher.

Canadian GDP is due out later this morning which is expected to show neither expansion or contraction.

In the forex market:

Aussie (AUD): The Aussie is mostly higher as weak Dollars are driving demand for carry trades and yield-seeking.

Kiwi (NZD): The Kiwi has also rebounded today as trade balance figures due to higher exports came in better than expected.

Loonie (CAD): Canadian GDP figures have just come in and are worse than expected, showing a quarterly decline of .2% vs. an expectation of no-change, pushing the YoY figure down to 2.9% vs. the expectation of 3.1%. Canada’s close economic ties to the US are the possible culprit, as well as higher inflation. (Click chart to enlarge)


Euro (EUR): The Euro is mixed as a weak Dollar is driving it higher as are higher then expected CPI figures, showing a gain of 2.8% which was slightly higher than the expected 2.7%. German retail sales figures though came in negative, and confidence figures have been falling.

Pound (GBP): Today is a bank holiday in the UK in honor of the Royal Wedding. The Pound is slightly lower against all but the Dollar.

Dollar (USD): Another day, another weak dollar. Personal income and spending data came in slightly higher than expected, and later this morning consumer confidence figures are due.

Yen (JPY): The Yen is strengthening as the US dollar is losing some of its safe-haven status and money flows out of USD and into Yen. Despite the problems in the Japanese economy, it is starting to look like a more attractive place to invest than the US. (Click chart to enlarge)


The fairytale we have been living in for the past year is soon coming to an end. Like any good story, it has to end somewhere and whether or not there will be a happy ending is up for debate.

What we do know so far is that QE2 has not been the economic savior we have been looking for, and Bernanke is no white knight looking to come to the rescue. Instead we have been given an unlikely choice of hero thrust into a situation way over his head, with a lack of proper tools and skills to get the job done.

Like all fairytales, we want them to work out in the end. However, the global economy is not fantasyland and the more real we become about the situation, the more dire it looks.

So let’s save the fairytales for Royal Weddings, shall we?

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