"It's a recession when your neighbor loses his job; it's a depression when you lose your own."

-Harry S. Truman

Issue #252: Friday, August 1, 2008

News Flash: The U.S. Actually Was in a Recession LAST Year

They Just Didn't Tell You

Today's comment is by Chris Gaffney CFA, Vice President of World Markets at EverBank, the only U.S.-based bank we've found that offers multi-currency deposits.

Good Day Currency Traders!

The U.S. gross domestic product (GDP) report came in lower than expected yesterday and handed dollar bears a hidden surprise (more on that a bit later).

In addition to the poor GDP numbers, personal consumption dropped and the GDP Price Index showed a decrease.

Also, the employment cost index was flat, and the weekly jobless claims were slightly higher than expected at 448,000. It doesn't sound like a lot, but it means more Americans filed initial unemployment claims last week than anytime in the last five years.

In fact, the only positive piece of data released in the U.S. yesterday was the volatile (and somewhat unreliable) Chicago Purchasing Managers number (it measures the "Chicago Business Barometer"). This one "positive" piece of news showed the number inched up above 50.

Oil Rode to Rescue the Buck

With all the miserable data, the dollar sold off rather sharply and the euro jumped a full cent to trade over 1.57 for a short while. But the dollar bears didn't celebrate for long. The dollar sharply reversed course as crude oil prices rode to its rescue.

The price of crude oil and the U.S. dollar have had a very tight relationship lately. The correlation is now at 0.9%.

Just as the dollar began to fall from the GDP releases, crude oil began a sharp US$3 drop and saved the U.S. dollar from further losses.

Oil prices have dropped over 11% in the past month. This has helped prop the dollar up in spite of the miserable economic reports here in the United States.

What?! - The U.S. Economy Actually
Shrank in 2007?

As I said, the GDP report gave dollar bears a hidden surprise. Let me explain...

First off, the second quarter GDP numbers were slightly lower than economists expected (1.9% vs. expectations of 2.3%). That's not such a big deal considering we all know growth is slowing this year.

Here's what's more interesting: The report also revised the fourth quarter 2007 GDP numbers lower. In other words, the report confirmed the U.S. economy actually shrank in the fourth quarter of 2007. That definitely caught everyone's attention.

You see, last year the Commerce Department reported the U.S. GDP for fourth quarter ‘07 was a 0.6% gain. At the time, the news media used the figure as proof that we weren't really in a recession. Now the Commerce Department has come clean and admitted the true number.

According to the latest report, the world's largest economy contracted at a .2% annual pace in the fourth quarter of last year.

This number now confirms the general picture of weakness which both Chuck Butler and I have been discussing here over the last year. And in spite of the temporary boost from tax rebates, I think the recession in the U.S. will only deepen.

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Professors and Central Bankers Agree:
We're Nowhere Near a Bottom Yet!

Harvard University Professor Martin Feldstein agrees with me. He said:

"The U.S. may now be in a 'very long' recession with little that the Federal Reserve can do to help." Feldstein used to be an advisor for President Reagan, and headed for the National Bureau of Economic Research until June of this year, so he knows what he's talking about.

Former Fed Chief Alan Greenspan also chimed in yesterday in a CNBC interview. The Former Fed-Head said falling home prices are "nowhere near the bottom" and the resulting market turmoil isn't showing signs of abating.

I say: Greenspan should be an expert on the housing crisis - he helped to create it! I just wonder what the current FOMC members think when Greenspan sits back and comments on the mess he left them with. You know Bernanke would love to just give it all back to him to deal with.

With all the experts commenting on how bad the U.S. economy is, Treasury Secretary Hank Paulson decided he should ride in for the rescue again. Paulson said he expects the government's fiscal stimulus plan will boost economic growth in the second half of the year, offsetting a housing downturn and high energy prices.

I have to ask: What planet is this guy on? How many times does he have to say "the worst is almost over, it will be better next quarter..." before he realizes it's just not happening.

Here is a quote from Paulson: "While our economy faces substantial difficulties that will continue to drag on growth in the short term, it is important to remember our long-term fundamentals are strong."

Apparently, Paulson didn't get the memo about the record US$490 billion budget shortfall. He also probably forgot all about rescuing Fannie and Freddie. So "Strong Fundamentals" he says?

I think Paulson has been drinking too much of the Kool-Aid the administration has been pushing.

Hope everyone has a Fantastic Friday, and a great weekend.
Chris Gaffney, CFA and
VP of World Markets at EverBank

P.S. So where should investors turn? According to the Economist's 'Big Mac Index' the best values are in Asia. As of July 26, when the Economist published its 2008 index, 10 Asia-Pacific region currencies were undervalued against the U.S. dollar, many significantly so. According to the Economist, currencies in Hong Kong, Singapore, China, and Japan are all below their true worth. At EverBank, we've been talking about the Asian currencies for years - but it's always nice when the mainstream media catches up. In fact, EverBank offers a special Asian portfolio so you can invest in all the Asian currencies at once. Get the details here.

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