US Dollar Rallies on Unemployment Data


01/10/11 St. Louis, Missouri –

The Jobs Jamboree on Friday didn’t turn out to be as robust as the “experts” forecast, as jobs created totaled 103,000 far less than the 170,000 that was forecast… But the media and the White House chose not to focus on that less than stellar result… Instead, they chose to focus on the unemployment rate slipping to 9.4% from 9.7%. In fact The Washington Post’s story on the jobs report was titled: “Unemployment rate falls sharply in December”… Since the media and the White House chose not to “tell the rest of the story” I’m here to do just that! While it was nice to see the unemployment rate slip to 9.4%… Let me remind you that as unemployed people see their unemployment benefits run out, they are dropped from the “official list of unemployed”… I’ve always marveled at the stupidity in that… But it is what it is…and so…having these people drop off the unemployed roster, is just like creating a job for them according to the BLS… and there you go! Voila! A falling unemployment rate!

This accounted for over half of the 0.4% fall… So, we could very well see this continue for the foreseeable future… However, according to John Williams over at Shadow Stats, the “real” unemployment rate remains at 23%… I choose to pin my colors to the mast of someone that doesn’t manipulate, substitute, and make other hedonic adjustments… So, whenever I’m interviewed or I give a presentation, I use the John Williams version of unemployment!

And let’s not lose sight of the fact that at least 250,000 new jobs need to be created each month for our economy to grow… With only 103,000 jobs created, we’re a far cry from a growing economy, and when the markets finally figure this out, maybe we can get back to fundamentals!

OK… So… What did this do to the dollar… Well, all the hoopla about the unemployment rate falling gave the dollar even more strength throughout the day on Friday. And… The overnight markets haven’t stopped selling euros (EUR), Aussie dollars (AUD), gold, and the rest of the non-stock, risk assets. The Japanese yen (JPY) is getting sold and the only two currencies hanging on are Swiss francs (CHF) and Canadian dollars/loonies (CAD). Pound sterling (GBP) is holding on too, but that one puzzles me and I don’t see how that can continue, if the bias to buy dollars continues.

And… I do believe it will continue for now… Now, don’t get me wrong here, I’m not a willy nilly, jump from one side of the fence to the other depending on who’s winning-type of person… No, that’s not me! I do, however, believe that there will continue to be periods of time when the dollar, for some unknown reason, is attractive to investors. It’s been that way for the past, almost 9 years now, and it will continue to be that way. I call it “circuit breakers”, or “speed bumps”…for if the dollar had done nothing but go down during its underlying weak trend that began in February 2002, we would be singing the blues right now, and things would be far worse, and no amount of stimulus or quantitative easing would help, (not that they do now either)…

So, like I said above, the Canadian dollar/loonie is holding on versus the US dollar’s rally. Canada has been the beneficiary of an oil price that’s the highest it’s been in 2 years, and some stronger economic data, like the report that printed on Friday. Canadian unemployment inched downward as 22,000 jobs were created in December, after adding 15,200 jobs in November. The unemployment rate remained at 7.6%. Later this week, Canada will print its trade balance. I would have to think that the stronger economic data stops with that report, though… I believe we’ll see the Canadian trade deficit widen… But before you go jump off a cliff because they have a trade deficit… Let me remind you that their trade deficit is less than $2 billion.

Well… Fed chairman, Big Ben Bernanke, spoke to lawmakers on Friday, following the Jobs Jamboree, and I truly expected some fireworks… But none surfaced. I do have to take issue with one thing he said on Friday… And that is… Bernanke feels that the deficit is caused by the unemployment problem. The Big Boss, Frank Trotter, point that out to me as he walked through the office on Friday. I said… “He said what?” Why didn’t one, just one, lawmaker question him on that? Look… I’ve had my differences with Big Al Greenspan, and now with Big Ben Bernanke, but I have good reason… Shoot, Rudy, if I had been a lawmaker in that room I would have shot back at Big Ben with question after question, as to how that works, and how did we have a growing deficit, before the financial meltdown, and a low unemployment rate? Oh, there are so many questions that could have been asked, but not one lawmaker could think of them… Or they had stage fright… So… in the end, is it Big Ben’s fault that no one questions him?

Now… I’ll give him that the current deficit contains the unemployment problem…but that’s just a small piece of the structural deficit… I saw a great short interview with David Walker, a guy that I used to quote all the time when he was the head of the General Accountability Office, for he was the only person in the former administration that would say, “Hey, we need to stop spending”! Well, David Walker, quit his job because no one would listen to him, and he worked with Addison Wiggin in the film I.O.U.S.A. David Walker is now the CEO of Comeback America… and when asked about the deficit, he had this to say…

“The Congress and the Fed are doubling down to try to help improve the economic recovery and jobs. But what they are not doing is dealing with the real threat, which is the structural deficit. It is imperative that Congress begin to take steps to deal with the structural deficit, because that represents the threat to our country and our families in the future.”

He went on to say, “Well, first, we need to take a tough line on spending for fiscal 2011 and 2012 with regard to discretionary, including defense. After all, discretionary spending went up over 20% between fiscal 2008 and fiscal 2010. Buy what we really need to do is not focus as much on the short term deficits, but put mechanisms in place to deal the true threat that’s structural. We need real pay as you go rules on the spending and tax side that eliminate the trillions of dollars of loopholes, tough but realistic discretionary spending caps that do not exempt the base defense and homeland security budget, but the war costs would be exempted, and debt to GDP targets that would be set for the future in a way that wouldn’t undercut the economic recovery or efforts to deal with unemployment, but would have automatic spending cuts and, or tax surcharges if they are not hit.”

He finished by saying, “We need something real, we need something substantive. It’s time for results, not rhetoric.”

Thank you, David Walker… You should run for President!

OK… Well… The Aussie dollar was weakened last week by the floods that will interrupt the economy and exports… This week, the Aussie dollar will be weakened by the news last night that China’s trade surplus narrowed… Aussie retail sales were stronger than expected in December, but that was of little help for the Aussie dollar.

Speaking of China… Yes, their trade surplus narrowed in December by a large amount… In US dollar terms, the monthly balance went from $22.89 billion to $13.10 billion… And overall, the Chinese trade surplus was down over 6% versus 2009, to $183.1 billion… Exports fell and imports gained, which is bad medicine for a trade surplus! I hope the lawmakers in the US back off their rhetoric about putting tariffs on Chinese goods… The rising Chinese renminbi (CNY), along with the lingering recessions in the Eurozone and the US are reducing the trade surplus…

One more thing about China… I found this and thought, “WOW!”… The dollar should get sold on this news… But NOOOOOOOO! It didn’t happen. Apparently, we’ve all become comfortably numb… Oh! Here’s what I saw… You be the judge… A senior PBOC (People’s Bank of China) official said that China’s proportion of USD in its FX reserves was too high…

The problems of the imbalances continue, folks… The imbalances existed before the financial meltdown, and they still exist today, with no signs of unwinding…

So… the euro is looking like it is replaying January 2009, here in 2010. If you recall, last January, the euro was falling steadily each day, because of Greece… This year it’s Ireland, and the fear that contagion problems will surface for the other periphery countries of the Eurozone. Last year, the euro fell to 1.18, before turning around… But remember the calls for it to collapse back then? Well… It didn’t! And it won’t now… But weaken it will, as long as there are questions about the periphery countries and their fiscal needs.

Then there was this… from the UK Telegraph this past weekend…

“Imbalances between East and West will grow and grow”… Just ahead of the Seoul summit back in November, Mervyn King, Governor of the Bank of England, sounded the following warning… Unless the G20 collectively recognize imbalances as a problem and agree policies to unwind them over time, “then I fear that the next 12 months will be an even more difficult and dangerous period than the one we’ve been through”. The first condition achieved some recognition at the summit, but not the second. Agreement on solutions remains as far away as ever…and that is real bad news, as it cannot go on forever. Someday it will stop…and when it does, the world as we know it will disappear.”

That’s what I was talking about earlier…

To recap… The dollar rally continues with the euro being the main currency to take on water versus the dollar. The jobs data was not as robust as expected, and over half of the 0.4% fall in the unemployment rate can be attributed to those that have given up looking for a job, or had their unemployment benefits run out. China’s trade surplus fell in December by 6% from 2009. And David Walker, gives us his thoughts on the deficits…

Chuck Butler
for The Daily Reckoning