When leaders mislead – Tell us the real story please!

Wednesday, July 15, 2009

Monday saw the return, albeit a moderate return, of risk appetite into the Forex trading arena. Listening to the analysts and news reports of trader sentiment, you get a sense that the worse is behind us, that the economic crisis that has been billed as the worst since the 1930’s is struggling to survive.

I am skeptical as always when it comes to this, as my view on the market is a more long-term one. I do not see the double digit unemployment and rampant spending by the US and some European countries as a product of circumstance that will go away, rather I hold these indicators as a problem born from a problem – and it will be the cause for bigger problems down the road.

Let us look at two specifics, European growth and US unemployment. Monday, ECB president, Jean-Claude Trichet, backed off of his dire assessment of the economy that has marked the last four months of his tenure.

He stated that the EU can see growth in this fiscal year, rather than the latter half of 2010 as he has maintained prior to this. Speculation by Forex online chatter and “professional” analysts, have attributed his doomsday views to lack of clarity on the issues – the picture was not fully painted and therefore he could not assess appropriately.

So my question is: what changed from three weeks ago when he last made his 2010 recovery statement? What new information did he acquire that reversed nearly half a year of policy? I don’t think anything changed and I dare not speculate as to what Trichet’s motivation is. But my gut, and it is usually right, tells me this is not over – we will see a return to his naysay with regard to a 2009 recovery.

Now US unemployment has been rising for nearly a year now, and it is on the fringes of the 10% mark – a psychological and technical barrier that spells out how bad the economy is.

In recent months, there has been a fallback on the actual number of people filing for unemployment each month, a sign that traders interpret as an easing of the crisis. But my instincts and my knowledge of this situation is on target and I am telling you the numbers are not telling the whole story, unemployment is worse than 10% and I will tell you why.

The way the US calculates the “unemployed” is deceptive. You need to have applied for federal benefits in order to be considered jobless. One of the criteria for filing is that you must look for a job, and prove you are searching by providing letters (form letters most human resource departments give new applicants) from your hunting prospects.

Given the fact that the baby-boom generation, people 50-65, are among the highest group of the unemployed, and given the fact that this group is also the lowest in terms of new employment – as many employers want fresh blood, not someone who has more experience than the managers – many of this generation who are unemployed are not seeking it anymore.

US benefits run for 7 months, after that you are on your own – and you are no longer considered unemployed because you are no longer on the federal governments radar. With key states like Michigan, having over 20% unemployment, and California with over 14% and Georgia with over 13%, not to mention Tennessee, Alabama, Louisiana and the Carolina’s – all hit hard by the recession, it is not logical to assume that the national average is under the 10% mark.

With many people working part-time jobs at McDonald’s or the Gap, earning minimum wage in a country where the minimum wage is less than the cost of living – yes, technically the numbers might be right – but is the economy growing?

Just watch for the mortgage defaults on AAA rated individuals – no one is talking about it – but I promise you here, that you will be shocked in a month or so when you see a resurgence of mortgage defaults, and not on sub-prime, but prime mortgages.

We will talk more about this in a few weeks when we get the official data – then I will ask Mr., Trichet and Obama, “Is all this spending really working?”


Anonymous July 22, 2009 at 12:04 AM  

Risk appetite seem to be on the retreat with European equity markets renting lower and US equity futures now pointing to a lower open. While the earning season has yet to provide any real surprise we still have plenty of crucial reports in the week to come.
http://www.ac-markets.com/forex-news/economic-calendar.aspx... a forex economical calendar.
Regards, Pallavi!!!

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