Money News - U.S Economy Update

Wednesday, March 21, 2007

WASHINGTON -The Federal Open Market Committee decided today to keep its target for the federal funds rate at 5-1/4 percent.

Recent indicators have been mixed and the adjustment in the housing sector is ongoing. Nevertheless, the economy seems likely to continue to expand at a moderate pace over coming quarters.

Recent readings on core inflation have been somewhat elevated. Although inflation pressures seem likely to moderate over time, the high level of resource utilization has the potential to sustain those pressures.

In these circumstances, the Committee's predominant policy concern remains the risk that inflation will fail to moderate as expected. Future policy adjustments will depend on the evolution of the outlook for both inflation and economic growth, as implied by incoming information.

Although most economists and market experts are voting on the side of the Federal Reserve keeping interest rates steady for the sixth consecutive time when the agency meets this week, options traders are beginning to say the Fed may cut rates three times this year as the worsening housing slump threatens the economy's growth.

Sources said options on Federal Fund futures at the Chicago Board of Trade show a 24 percent likelihood the central bank will lower its target rate for overnight loans to 4.5 percent from the current 5.25 percent.

With home foreclosures and defaults mounting, Bloomberg said traders in options anticipate lower borrowing costs than economists or futures contracts, the most widely used barometer of Fed policy.

Futures show rates will drop to 4.75 percent by year-end, and economists expect 5 percent. The February Consumer Price index rose 0.4%, which was "stronger-than-expected." The food index rose 0.8 percent in February, which follows a 0.7 percent increase in January.

According to John Williams' Shadow Government Statistics site we read that the "Net of methodological gimmicks that have been used in recent decades to dampen the reporting of inflation, February's Pre-Clinton CPI annual inflation (based on 1990 methodology) was 5.7%, while the SGS Alternate Consumer Price Measure (based on 1980 methodology) was 10.0%." Doug Noland of the Credit Bubble Bulletin at PrudentBear.com computes that "The CPI is now up 2.4% with Core CPI’s 2.7% increase making nine straight months above 2.5%." Bloomberg thinks that it was "Rising fuel, food and medical costs" that "pushed U.S. inflation higher last month." Hourly earnings adjusted for inflation fell 0.3 percent on average for a second month in February.

Paul Kasriel of The Northern Trust Company, who opines that perhaps we are just getting started in this housing bust thing, in that "In an average housing downturn, real residential investment expenditures decline by about 25% peak to trough." So, far, though, "through the fourth quarter 2006, these expenditures have fallen by only about 13%, or slightly more than half of an average housing recession."

One interest-rate expert was quoted as saying, "The fear is it spills into the economy, it spills into the banking system and creates a credit crisis."

Mr. Kasriel offers proof of economic fallout, he looked at the unemployment report and noticed that it has already started, in that "the participation rate (the labor force as a percent of civilian noninstitutional population) declined to 66.2% – the second consecutive monthly decline." "peaked at an annualized $553 billion in third quarter 2005 and was contracting at an annualized pace of $5 billion in fourth quarter 2006. The implication of all this is that an important source of financing for consumer spending has disappeared. Thus, growth in consumer spending is set to moderate as a result." "Consumer spending is 70% of the economy".

The appearance of the U.S. Comptroller, David Walker, on 60 Minutes and telling the sad tale of the coming economic collapse, has caused quite a bit of a stir. I am sure that he is correct down to the last decimal point.


From Taipan Financial News:
TFN Global Alert - 3/21/07 Eight times the size of the Magellan Fund!

China's New Government Fund to invests $400 billion in commodities…

Like a fat kid on a teeter-totter, the global economy is in a state of imbalance.Like a pudgy boy, the United States is consuming massive amounts of goods and building ever-larger trade deficits. The developing world is the skinny kid, legs kicking in the air, promising cake to the stout one because, after all, his family runs the bakery.

This metaphor is bolstered by the fact that emerging markets are following the Japanese path to first-world status: export-led growth. The baker just makes bread, lots of it, and will worry about balancing his books later.

In the late 1960s and early '70s the U.S. government ran a war in Vietnam and a war on poverty at home. This led to massive inflation -- some of you remember mortgage rates in the teens. Today, the U.S. government is running a never-ending war on terror that is estimated to cost some $1.3 trillion. We now have troops in 100 countries -- that's almost half the world, by the way.

Here is the debt as of 10:43 a.m. on March 19, 2007, according to the U.S. U.S. Treasury

Current 03/19/2007
Debt Held by the Public$5,032,628,085,890.53
Intragovernmental Holdings $3,801,827,726,066.37
Total Public Debt Outstanding $8,834,455,811,956.90

The U.S. economy runs at a 3% annual growth rate and makes about $13 trillion in GDP. But it owes $3.8 trillion to other countries.

IMF POSTS PAYMENTS DRAFT

The International Monetary Fund (IMF) posted its first draft of the sixth edition to the “Balance of Payments and International Investment Position Manual.” Among the revisions were accounting changes for gold loans, which are not publicly disclosed at present, stating that all gold loans should be broken out into their own category to avoid double-counting of reserves.

The Chinese economy runs at a 10% annual growth rate and is currently around $8 trillion in GDP. However, instead of owing half of annual GDP like the U.S., the Chinese have a surplus of 12% of GDP.

Plus, they own U.S. dollars. The dollar has fallen some 30% over the past few years. It will continue to fall simply because someone has to pay the interest on that $8.8 trillion, and it is easer for politicians to devalue than raise taxes.

The Chinese government's new investment fund update

If you were a mass exporter with a voracious need for basic commodities to churn through your factories, and had a driving need to diversify out of U.S. dollars, what would you be investing in?
China's central bank governor, Zhou Xiaochuan, said the country will stop stockpiling its foreign reserves.

Instead the Chinese will "cut a small piece of reserves" for a new agency to be set up for the management of its foreign reserves.

The word on the street is that the Chinese government will put $200-$400 billion into the new fund.
This would make it the largest investment fund in the world! In fact, it would be four to eight times the size of the Magellan Fund, which has $50 billion in assets.

"The Shanghai Futures Exchange (SHFE) may soon launch zinc futures contracts, although the implementation date is unclear as the exchange is still awaiting final approval from the China Securities Regulatory Commission (CSRC), an official with the SHFE said." -Resource Investor

China is set to announce new policies to control refined copper imports for processing and finished product exports. The new policies are aimed at reducing energy consumption and combating high pollution in the copper processing sector, and would badly hurt imports by copper processing companies, industry insiders told Interfax. -Resource Investor

The way I see it, the second half of 2007 is shaping up to be the biggest bull market in commodities and energy ever.

The best way to play it is to buy the current dip in hard assets, get out of the dollar and into second- and third-tier commodities -- especially those you believe the Chinese have an interest in.