After a shaky start and concerned about the jobless claims the market began to rally and did so in quick fashion to fill the gap down from Monday. Bernanke came under flak and there seems to be more questions than answers resolved, it really comes down to - did Bernanke do what he thought was right vs. doing so within the scope of the law. Some argue that time was pressing and something needed to be done quickly, while others argue that it still needs to conform to regulation. While it might not seem like a big deal, the larger concern that looms is that the Fed’s role, power, and oversight is expected to be greatly enhanced and additionally it looks like Summers (who had Obama’s ear) is eyeing for Bernanke’s seat. There is certainly some agendas that are playing into the cards and in my opinion this is not the time to play politics as the economic recovery should take priority.
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Consumer Spending rises?
The Commerce Department said that consumer spending rose .3%, followed by no change in April, which came in line with economic forecasts. Some economist reflect that the increase was significantly impacted by the stimulus checks and are concerned about future growth. Chris Rupkey (chief financial economist for Bank of Tokyo) stated that while the recession is ending the purchases are likely to be modest until job losses ease and companies start hiring. He is right that is the key – a government injecting of capital “stimulus” will no doubt reduce consumer debt and increase purchases, but that is a onetime injection (unless we see more of them). The consumer needs to eventually stand on his own earnings and equity, not off of government stimulus. While consumer spending rose (as expected) the other side of the coin showed wages and salaries however dropped .1% in May, reflecting the effects of the job losses.
As I continue to mention it is the consumer that drives the economy and until jobs are created, job losses stop, consumer spending is based on EARNED income and not stimulus, and wages grow moderately vs. inflation. Until we see those stars align the future recovery is going to struggle.
http://www.bloomberg.com/apps/news?pid=20601087&sid=aETQTTCxeUhw
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China renewing their call for a reserve currency
China’s central bank is gain making a strong request (or demand) for a new global currency to replace the dollar and suggested the International Monetary Fund should manage more of the members’ foreign-exchange services. “To avoid the inherent deficiencies of using sovereign currencies for reserves, there’s a need to create an international reserve currency that’s delinked from sovereign nations,” People’s Bank of China.
China has the world’s largest currency reserve of more than 1.95 TRILLION dollars and has taken the first steps to begin a large diversification project, including (along with Russia and Brazil) purchasing IMF debt rather than U.S. treasuries.
The truth, which maybe we Americans are too arrogant to realize, is that we NEED China to continue to purchase our government debt (U.S. Treasuries) to keep our spending alive. The counter argument is they NEED us more to sell their wares. True, but the U.S. (while a large consumer) is not the only consumer of Chinese products. Additionally the dependent on U.S. consumers purchasing Chinese products vs. the growth of their domestic and other foreign purchases was on the decline before the recession and after the recession we saw a huge slow down (almost a halt) as U.S. consumers quickly became tapped out (no money and no credit). China suffered, as their GDP shrank from double digits to single digits – but is still a massive growth rate. They saw they could survive and grow without the massive reliance being the focal point of trade, now it is time to cut the cord and they know that.
The reality is this is not going to happen overnight and their probably be huge struggle to move in this direction, however – we are seeing the BRIC (Brazil, Russia, India, China) moving on their own. It is quite possible they move in this direction without the blessing of the rest of the world. They hold all the cards, they could create their own new world currency with the IMF and then demand payment in that currency for any of their goods. That would FORCE the rest of the world to either move in that direction or face the currency exchange risk and possible massive inflation.
I think the cards are in the BRICs hand, they are the big stack at the table and they can pretty much call the shots.
Keep an eye on this story…. It is sending some volatility into the dollar as it continues to slip against foreign currencies. Expect MORE volatility not less.
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Futures Pre-market
The futures are off in the pre-market a little, we did close the Monday gap and close to those resistance levels so it might be hard to get some follow through to the upside.
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Support / Resistance
We are almost back to those resistance levels – we might see some resistance here.
INDU 8250 / 8500 (Right below the 8500 mark – we might struggle to get through that and see the market come off a little.)
NDX 1425 / 1475-1500 (The NDX is more volatile than most other indices – between 1475 and 1500 it is a resistance zone – we are right at the edge of that zone.)
SPX 900 / 950 (We are right in the middle and are looking to give up a little at the opening.)
RUT 500 (Made a good move up yesterday to get above 500, but we may revisit it this morning. Watch the close.)
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Gold 950 (We did have a pullback, but not down to 900 – now we are moving up as the dollar is questioned again by the Chinese.)
Silver 14+ (We are bouncing back up with gold)
Oil 70? (We fell off and now are back up – the dollar is playing a role in this.)
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Conclusion
Bernanke is getting grilled by Congress, Summer is rumored for the job, more power to the Fed is being considered, Congress STILL hasn’t been able to get a report (audit) on the Fed (suspected to have more than 9 trillion in debt), but the Fed continues to print money to buy treasuries and mortgage debt securities. This is absurd and while the rest of the world sees it, has commented on it, is concerned enough to call for a reserve currency – our Congress, Administration, and Media act as if “Green Shoots” are springing up everywhere. Are we really that blind to the circus that is going on.
I read an excellent essay on political policy as a measurement of GDP/Debt ratio and how we CAN recover or NOT. If you are interested in the essay, send me and email and I will forward it to you.
Stay Frosty – while the VIX is below 30, I think we could have a serious pop again in the future (sometime this year.)
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