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Daily Pfennig 11/28/08: Black Friday...

11/28/2008

A Pfennig For Your Thoughts

In This Issue…

• Black Friday...
• Data continue negative in the U.S...
• China cuts rates...
• Chinese currency reserves to hit $2 trillion...

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And Now... Today's Pfennig!


Black Friday...

Good day... And welcome to another "Black Friday." I am writing this from the road, so I didn't have to fight all of the shoppers at Best Buy and Sports Authority. Our offices are on the third floor of a building which houses these retailers, so it is almost impossible to find a parking spot on the day following Thanksgiving, even at 5:00 AM. It sounds like retailers may be disappointed with the results of this year's biggest shopping day, as there really aren't any "must have" items, and consumers are being a little tighter with their wallets.

Consumer spending as reported in the U.S. on Tuesday slid the most in seven years last month. Another report released by the Commerce Department showed business investment also tumbled last month. Orders for U.S. durable goods fell twice as much as forecast. And spending in Europe, the UK, and Japan is also dropping. UK consumer spending dropped the most since 1995 and business investment also fell. The global slowdown has hit consumer and business confidence, encouraging them to reign in their spending. This can become a vicious cycle, as the slowdown in consumer and business spending causes the global economy to continue to slow, bringing confidence levels down even more. I expect the global slowdown to intensify, and look for a major drop in U.S. GDP over the next few quarters.

Leaders hope to break this pattern by increasing government spending and stimulus packages. The European Union proposed $259 billion in stimulus measures and President-elect Barack Obama is pushing for another stimulus package here in the U.S. While I am talking about Obama, did you see he announced former Fed Reserve Chairman Paul Volcker as his main economic advisor? Both Chuck and I are fans of Mr. Volcker, but then we both figured Paulson and Bernanke were good choices also. I guess we will have to see if Volcker can resurrect another "magic bullet" to get us out of this vicious cycle. Things are just about as bad as they were back in the '70s and '80s, but he has "been there, done that." Hopefully his past experiences will help him steer the new administration in the right direction.

Chuck was watching the data print Wednesday morning, and left me these thoughts:

"New-Home Sales Sink 5.3% to Lowest Level in 17 Years U. Mich. Confidence - new low since '80 Chicago PMI collapses Consumer Spending Fell to 7-Year Low in October Americans' Food Stamp Use Nears All-Time High

"And can't imagine what in the world the people that make the official call on a recession the NBER (National Bureau of Economic Research) are thinking... I called this a recession back in January, and they have yet to make the call... Amazing!

"Of all that bad data, the only one that will have a good outcome in the end, is the Consumer Spending falling to a 7-year low. We've gone on with this spending more than we make for far too long! Now, if we could just get the Gov't to do the same!

"And I would imagine that course of action for Consumer Spending will be staying steady Eddie for some months to come, and more and more we see +500K numbers each week on the Initial Jobless Claims... It's going to get ugly, folks... And I'm afraid that a lot of pain is going to have to be suffered before this ship gets straightened out... So, be careful out there!"

I agree with Chuck, the decline in consumer spending is actually a good thing. The only problem is that our economy depends on consumers to borrow and spend, so the belt tightening is going to really drag this slowdown out. Even if Obama convinces Congress to spend another couple hundred billion, the government can't make up for consumers who have decided to shut their wallets.

This is what happened in Japan over the past several years, as Japanese consumers stopped spending. This created a deflationary spiral as prices of consumer goods continued to fall, encouraging Japanese shoppers to just wait a while longer, as they were able to purchase goods cheaper in the future. While this helped move Japanese consumer balance sheets back into the black, it was a major drag on the Japanese economy. The BOJ fought against this deflationary spiral by bringing interest rates down to zero and holding them there for a number of years. Japan is still in a low inflation environment, and the Japanese continue to have one of the best saving rates in the world.

But I just don't think the U.S. consumer will stay away for too long. Sales, offers of "layaway" plans, and spend-now, pay-later programs will likely lure shoppers back into the stores. But I do believe retail sales will continue to be weaker than in the past, and the slowdown of consumer spending will continue to be a drag on the U.S. recovery. Again, I don’t expect the U.S. to recover for a number of years. The U.S. slowdown will continue through 2009 and into 2010.

Chinese officials made the biggest interest rate cut in 11 years in an effort to keep their economy from slowing below their goal of 8%. The interest rate cut follows the announcement of a 4 trillion yuan ($586 billion) stimulus package earlier this month. There have been some civil unrest and protests by unemployed workers, so this is an attempt by the Chinese leaders to get the economy moving in the right direction again.

I read a story on Bloomberg this morning, which predicted China's foreign exchange reserves would top $2 trillion for the first time later this year. China's holdings have increased 25% this year, while those of Japan and Russia shrank. Apparently, Russia has been selling off its currency and gold assets in an attempt to prop up the ruble. China continues to build up their reserves, and the huge amount is concerning to the currency markets. China will not hesitate to use these reserves to stimulate their economy, and what currency are a majority of these reserves held? U.S. dollars!! In order for China to put these reserves to work, they will need to sell the dollars and get the money pumped back into the Chinese economy. These reserves are a major risk for holders of US$.

Currencies today 11/28/08: A$ .6528, kiwi .5481, C$ .8073, euro 1.2766, sterling 1.5336, Swiss .8257, ISK (No Quote), rand 10.135 krone 6.9762, SEK 8.0655, forint 203.165, zloty 2.9574, koruna 19.717, yen 95.34, baht 35.53, sing 1.5108, HKD 7.7504, INR 50.10, China 6.8306, pesos 13.243, BRL 2.3274, dollar index 86.49, oil $53.50, silver $10.23, and gold... $813.00

That's it for today... As I said earlier, I am writing this from the road as my son and I are heading up to Chicago for a hockey tournament. We left home last night after stuffing ourselves with a great Thanksgiving dinner and made it about half way before having to stop (there is something about turkey that just knocks me out!). His team has their first game in a couple of hours, so I'll cut this short and get back on the road. Hope everyone has a Fantastic Friday, and a wonderful weekend.

Chris Gaffney, CFA
Vice President
EverBank World Markets
 1-800-926-4922 
 1-314-647-3837 
www.everbank.com
PFENNIG DISCLOSURE 

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