U.S. Bailout or Bust!
Unless you've been living in a cave the past week or on one heck of a Vegas bender, you know the news has been dominated with more bad news for the United States and some major fears of having a second Depression are being openly spoken as a genuine possibility. If you've been keeping track, you probably already have one heck of a list collected already of different "Doomsday" economic quotes. "Rome is burning," "The sky is falling," "Depression's looming," etc.
Add in another gigantic bank failure, in fact Washington Mutual was the largest bank failure in U.S. history, and talks about bank lines, and people are naturally getting really antsy about the state of the economy. Fear seems to be ruling most investments tied around the dollar, and until some type of certainty becomes clear, there's probably nothing but more bad news on the horizon.
The arguments for and against the $700 billion aid bill are numerous, but in the end the problem is there doesn't seem to be any agreement on what actually will work to make things better (or worse) than they already are.
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Starting in the Pacific
Ironically, it might be New Zealand that was the most stable in its news. The news wasn't good once again for the Kiwi, but the effect wasn't particularly negative because most of these reports were seen as confirmation of what we already knew: New Zealand is in recession. The numbers on the 2Q account deficit GDP ratio and NZD GDP reports were both released. The second quarter the economy shrunk 0.2%, which was slightly better than the -0.3% from last quarter, and better than the -0.5% predicted.
To the Land of the Rising Sun
Since news was quiet in Australia this week, the next stop is Japan, who released several major reports this week that could impact the Yen. The first report released was from the BOJ members releasing the minutes of the Bank of Japan meeting. There was large concern about the outlook for the U.S. economy and how that could spill over into huge volatility in the global financial markets. The bankruptcy of Lehman Brothers shook the global economy, and the fear is that a severe U.S. banking crisis wouldn't just stay within the States, but would spill out on everyone else, as well.
Japan's export growth has slowed, as well, in large part because of a huge drop in the shipment of cars to the United States, as once again their economic woes continue to spill over and affect other economies, as well. The exports still grew 0.3% from a year earlier, but that is a steep decline from the 8% increase from the previous month. This continued drop in exports adds to the strong likelihood that Japan's economy will be in recession next year.
Japan's consumer price index was also released, showing a 1.4% jump in prices, a little higher, but comparable to the 1.2% that was predicted, not bad.
East to Europe
The news for the Euro wasn't particularly good this week, either, and Americans aren't the only ones with falling confidence in the economy. German's business confidence fell to a three year low in September, as once again the staggering problems appearing in the United States have every major economy pessimistic about the chances of economic growth over the world. The German IFO was at 94.8, and fell to 92.9. Meanwhile, economic activity actually shrunk in the second quarter, starting fears of a potential recession in the European Union's largest economy.
This is a little bit of contrast to German consumers, who actually have more confidence. German consumer confidence improved to 1.8 from 1.5 in September, but that's only a minor bounce back, and doesn't change the fact that a breakdown of the German economy right know shows most of the components in negative territory.
Right now the main focus is to stay hawkish against inflation, meaning the interest rates are not likely to be cut any time soon.
Back Across the Pond
Canada released a couple of important reports this week. Retail sales for Canada increased a measly 0.1%, which was well below the 0.6% of last month, and half of the forecasted increases. Retail sales numbers look better without autos, improving 0.4%, or exactly what was predicted.
The Canadian Consumer Price Index (CPI) was released as well, showing an increase in inflation of 1.7%, worse than the forecasted 1.5%. While this isn't great news, it's certainly putting them in a better over all state of mind than the neighbors to the south.
Dominating the News...
I saved the United States for last this week because there's absolutely no question that news on the U.S. economic situation is dominating the news worldwide. When you have a pessimistic meeting coming from the Bank of Japan based on the United States economy, and the same pessimism from Germany based in part on the U.S. economy, then you know things are looking bad.
Anyone heavily invested in the stock market can tell you what this past year has done to them, and the worst might not be over. This report was full of bad news before Thursday night's/Friday morning's revelation of Washington Mutual's failure: the largest bank failure in U.S. history.
The concern comes now over the $700 billion economic package that some call necessary and others call a Wall Street bailout, while others call it both. The plan, in theory as Congress and the Senate are still negotiating it out, would have the government buy $700 billion in bank mortgage debt in an attempt to stabilize the housing market. In return the government would get a large portion of those companies, and possibly even stand to profit if and when the housing market made a strong recovery.
The wild responses around this plan have been crazy. On Monday the Dow fell nearly 400 points, gold and oil skyrocketed (oil fortunately gave most of that back up), and the dollar took quite a skid early on in the day. No one seems completely sure how this will affect the economy, and it's politically unpopular as it's seen as a "Wall Street bailout."
Problem is, if the housing market doesn't stop plummeting, and if credit doesn't get unfrozen, then there are going to be some serious problems that could plunge the U.S. into a severe recession, if not a depression.
There has been major bank news seemingly every day, and it can be hard to sort out. Golden Sachs and Morgan Stanley, the nation's two largest investment banks, both had government approval to change their status to bank holding companies. This will allow them to set up commercial banks, and this is hopeful to help stabilize the banking sector of the economy. Both banks will be under stricter federal regulation now.
The bankruptcy of Lehman Brothers is still sending shock waves out, and the bail out of AIG though necessary, also lead to the credit markets seizing up. Consumer confidence has plummeted, as can only be expected when all the news is bad and no one seems completely sure of what's going on. Add in a potential $700 billion "bail out" by tax payers that may or may not work, and there's not a lot of reason for the ordinary man to have too much faith in the system right now.
U.S. Secretary Treasury Henry Paulson and Federal Reserve Chairman Ben Bernanke have both been to Capitol Hill repeatedly insisting on this plan as the only way to stave off absolute disaster. The initial plan was immediately shot down, as Republicans were hesitant to hand over that large a sum of money, and Democrats were furious about even being asked to do so under the condition of no supervision, no regulation, no restriction on CEO pay, and no compensation or safety net.
These two men are going to be called back repeatedly until a deal is hammered out, and while progress sounds like it generally has been made, and it's hard to believe that something wouldn't eventually come out of this, especially as more and more institutions previously thought too strong to fold (see Washington Mutual for the latest example) continue to buckle in the beginning of what looks like a domino effect.
U.S. personal consumption is way down as the majority of consumers are desperate just between keeping a home (or making rent), paying for gas, and trying to pay down debt and save a little.
Washington Mutual's failure resulted as the FDIC took over based on the banking and debt records, and sold the assets to JP Morgan Chase, which will be a huge boost for them and once again really redefines the landscape of the American banking system once again.
So much of how the USD rebounds (or continues to plunge) will depend on what kind of a relief package is put together, when, and if it has the intended effect of unfreezing the credit markets.
Even lost in all this bank news are the normal reports that the U.S. releases on the health of the economy and the USD. The USD Durable Goods Orders for August was released on Thursday and there's more bad news. The expected drop of 1.5% was way off, as the actual numbers showed a decline of -4.5%. New home sales plunged even further to a 17 year low after a staggering 11.5% drop. Amazingly, the news for the U.S. economy has been so bad that dollar traders almost seemed numbed to this news.
This certainly isn't good news, and kills any talk at all that was optimistic about the housing problems at least slowing down. The annualized 2nd Quarter report for the U.S. economy came out, as well, showing only a 2.8% growth as opposed to the 3.3% that was predicted. This report seems to confirm the more pessimistic and dour forecasts on the U.S. economy, its outlook, and the effect on the dollar.
Every eye is going to be on Washington D.C. as this deal gets hammered out, and assuming it gets passed, then picked apart. Real estate, credit, and banking still hammer the U.S. economy on a level that might even threaten a world wide recession, and it's going to be interesting to see what happens with this bill next.
Until we know more, all economic reports on the USD take a back seat to the bill being hammered out in Washington.
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Market Sentiment
In this section, we will try to gain further insight into the Forex market. We will do this by looking at a poll of market participates and what I call global strength.
Currency Poll
Polls are used to measure the sentiment of market participants. The results are used as a contrarian indicator because they express optimism at market tops and pessimism at market bottoms. Therefore, a high percentage of votes can be used as an indication that the market will do the opposite.
Our poll is only concerned with how the four major pairs will close the next week: up, down, or even. The results are belop.
Poll Results:
EUR/USD
Close Up: 57%
Close Down: 38%
Close Even: 4%
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USD/JPY
Close UP: 37%
Close Down: 55%
Close Even: 8%
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GBP/USD
Close UP: 58%
Close Down: 34%
Close Even: 9%
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USD/CHF
Close UP: 34%
Close Down: 56%
Close Even: 10%
Global Strength
Global strength looks at the individual currencies to determine how they are doing globally on a year to date basis. My hope is that this will give you a view of the market typically not view, thereby; giving you an edge. We will look at the following currencies: USD, EUR, GBP, CHF, JPY, CAD, AUD, and the NZD. We will compare each currency separately and then we will compare them all together. The currencies are shown in number of pips up or down on a year to date basis across the pairs shown. (Note: Just click on the picture to view.)
USD
EUR
JPY
GBP
CHF
CAD
AUD
NZD
All Currencies
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