The Economy Guy

The Stock Market dropped big time today as the fear of a recession hit home.  The DJ30 fell 316 points.  That’s over 425 points in two days, BUT it is still a sideways move overall.

The Bond market was the big story today.  There was a “flight to quality” as people fear the recession problem, selling their stocks and dumping the money in bonds.  The 10 year treasuries have fallen over 0.3% in two days.  This is a massive move – a true flight to quality.  Should you get excited and wait for those mortgage rates to follow the 10 year Treasury down?  Well, if the stock market continues its sea-saw sideways movement, stocks will be going back up soon (even though there is a bundle of bad news expected next week), and bonds will fall (= higher interest rates).  If there is a break-out in stocks on the downside (an unlikely event), then maybe we’ll get those lower mortgage rates.

Gold hit another ALL TIME HIGH of $977 during the day.

The Dollar fell again today, except against the Euro.  There was profit taking in the Euro after the big run up of the last two days.  All other currencies (Yen, Swiss Franc, etc.) rose against the Dollar today.  I have a personal interest in this falling Dollar as I’ve bet against the Dollar.  My personal feeling is that the Dollar will continue falling next week, as more bad news on the US economy comes out.

Dinner Conversation for Tonight…

Companies in Europe have hedged their bets (financially speaking) on their exports (as exports are the main source of European Industrial revenue), but those hedges are now running out.  That means the lower dollar will hit those companies hard as they continue to export to the US from Europe.  Some European companies like BMW and Volkswagen have or will build manufacturing plants in the US, and take advantage of the low dollar.  Take BMW.  They will be laying off 5600 people in Germany as they produce more cars in South Carolina, and hire 4700 Americans.

What do you think about this movement of jobs from Europe to the USA?  It is the opposite of the political talk about losing jobs to Mexico and China that crowds out this positive news.

In the news today….

Consumer Spending for January was reported as up 0.4% over December.

Inflation is reported about 0.4% per month for January.  Taking this with Consumer Spending, and adjusting for inflation, this means that “inflation adjusted” Consumer Spending was 0.0% increase – or NO INCREASE.  It is important to include inflation in your thinking when reading economic numbers.

Income is up 0.3% in January.  Adjusting for inflation, there is a MINUS 0.1% increase in income.  Not a good sign.

The Personal Savings rate in the US is MINUS 0.1% – no surprise as this reflects the decrease in income.  A negative savings rate for the US is disastrous in the long run.  People are living off of credit, and with their home equity falling, they are turning to credit cards in mass.

The Federal Reserve is going to continue having their “special” auctions for the banks in the US.  They have announced they will be auctioning another $60B in March.  AND, the Fed has stated they will continue those auctions “as long as necessary.”  These auctions started in December, and so far they have “auctioned” $160B to US banks.  The message here is that the FED is bailing out the banks because the banks have a BIG liquidity crisis.  The banks are bringing their “crap securities” to the FED, and using it as collateral to borrow money.  The end result = inflation.  Taking the next logical step – inflation brings a lower Dollar.  A lower dollar brings higher oil and gold, and that brings institutional, spiraling inflation.  This picture does not end very pretty.

Here are today’s Numbers:
Dow Jones 30 Industrial – 12,266 (Down 316 points)
10 Year Treasury Bond – 3.53% (Down 0.18%)
Euro – $1.5171
Gold – $975 (Up $8) – a NEW interday HIGH of $977
Oil – $101.84 (Down $0.75)
Gasoline – $2.67 (no change)