A Tale of Two Numbers

Monday, July 20, 2009

Last week saw a convergence of two distinct pieces of information regarding the US economy, information that contradicts one another as to the state of the world’s largest economy.

And, as we are seeing from around the globe, the pattern is the same - Corporate earnings were released and for the most part, it seems as if many companies are struggling – but still edging out a profit.

Some in the banking sector, the companies that have been accused of starting the fire, were at record highs as the companies took advantage of the volatile markets to turn a profit.

The fact that Goldman Sachs and Citigroup and several other US funded bailout recipients declared enormous profits; the fact that these companies are now set to dish out huge bonuses once again gives investors the sense that all is better.

The system is working and the economy is getting stronger. But this thought is misleading – and if you “go with the flow” when trading, especially the Forex, you could wind up in a big mess.

There is a misconception that the health of big investment companies is relative to the health of the overall economy. Paul Krugman, the noted NY Times columnist, wrote on Sunday that what is good for the banks is not good for the common people. And I tend to side with his point of view here.

The rationale is this: Banks make earnings by exploiting the very people they are purported to serve. The financial crisis gave the banks an excuse to increase fees and raise loan rates on those who sought them, because the economic situation was bleak.

They also made money by taking tax dollars and using them as a back-up as they ventured into risky positions, not bearing much risk at all due to the taxpayer.

Forex traders should be weary when a bank that needed double digit Billions to stave off insolvency only five months ago, comes in with record breaking gains.

Forex traders also should not look to the state of the banks to determine the fate of the overall economy – one has nothing to do with the other.

The second batch of numbers that came out last week had to do with manufacturing in the US – and the number keeps on declining.

What drives a currency is the output the country produces. GDP is based on many factors, yet only 1.3% of it is attributed to banks and investment companies. The heart of the issue is production, manufacturing, building stuff to sell overseas, and in this category, the heart of the matter, the US is in trouble.

With 10% unemployment looming – with factories and warehouses and large retail outlets closing - with the commercial real-estate market in its biggest slowdown ever, the six digit bonuses that a greedy bank hands their traders is side-news that has no bearing on anything.

Last week the Dollar was up and down like a yo-yo as the Forex online traders shuffled in and out of Dollar positive positions as the different data came out. We need to be looking at the overall state of the economy – not just one little, small and irritating piece of it in order to assess the real scope of the problem.


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