the US dollar is prettiest pig in the herd

Foreign Exchange - Currency Outlook

This week we get more data than we can possibly absorb or understand, let alone put into perspective. We get the ISM report for both manufacturing and services, personal income, NAR Home sales, monthly chain store sales, Fed Beige Book, the ADP estimate of payrolls and on Friday, the biggie -payrolls. Market News says the median estimate in its survey is a drop of

"605,000 jobs in February, from 598,000 in January and 577,000 in December. Estimates range from -750,000 to -535,000. The unemployment rate is expected to rise 0.3% to 7.9% in February, with estimates ranging from 7.8% to 8.1% From December 2007 to January 2009, non-farm payroll losses have totaled 3,572,000 (December 2008/January 2009 may be revised). As a point of comparison, during the 2001 recession, job losses stretched out to 2003, ending in a total loss of about 2.5 million workers."

Note that the US Treasury's "stress test" for banks offers assumptions about everything, including employment. The baseline scenario asks banks to evaluate their asset book on the unemployment rate at 8.4% in 2009 and 8.8% in 2010, or 8.9% and 10.3% in the pessimistic scenario. At least one analyst (Westpac) says the "Treasury's worst-case call on unemployment is probably too upbeat,” according to Market News.

We agree, especially since the other assumptions are also soft - real GDP down only 2% this year and a bounce up of 2.1% in 2010. Really? Market News says "The alternative adverse scenario is based on a 3.3% GDP contraction this year followed by a modest 0.5% recovery in 2010. Other Treasury assumptions were that house prices are expected to drop 14% in 2009 and 4% in 2010, in the baseline scenario. A worst-case scenario assumes a 22% drop this year followed by a 7% decline in 2010."

We say each number has to line up with each other and while we do not doubt the excellence of Treasury’s economists, these numbers seems to reflect a back room political compromise. If they told us the real numbers, we would all have a heart attack. This is exactly what happened to TARP, we suspect. There are not enough trillions of dollars to buy all the bad paper, and there are not enough trillions for stimulus and homeowner aid to keep GDP at only a drop of 3.3%.

But if they told the banks to estimate outcomes on a drop in GDP by 5-7% for three years running and the attendant unemployment and housing price numbers, we' all go crawl under a rock. There are times the government wisely does not tell the truth, and this is probably one of them.

Warren Buffett said over the weekend that the economy will be "in shambles" this year. We believe him. But if the robust US will be in shambles, imagine what condition other countries will be in. The US is still the least-bad and the US dollar is prettiest pig in the herd and it is not the time to buy Euros yet.

Pounds to US Dollars = 1.4029
Pounds to Euros = 1.1149
Euro to Pounds = 0.8965
Pounds to Australian Dollars = 2.2217

Bye For Now

Barbara Rockefeller
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