Wednesday, October 11, 2006

Alternative Statistics for Alternative Realities

EUR/USD 1.2550 Hi 1.2559 Low 1.2525
USD/JPY 119.43 Hi 119.81 Low 119.40
AUD/USD 0.7445 Hi 0.7451 Low 0.7425
EUR/JPY 149.87 Hi 150.13 Low 149.81

I love the way things work right now. First, we have the statistics which may or may not create the desired view of reality. Right now the powers-that-be would like to propogate the view that the United States is competitive. This is a pretty heroic aim, given that the only thing going on in the United States right now is outsourcing and retrenchment. And then there is the little problem that the United States doesn't sell anything much to the rest of the world, with the possible exception of military equipment and a few i-pods, which in any case are made in China. We know this because there is something called the Trade Account. According to the statistics kindly provided by the people who collate this information the U.S. hasn't been able to sell anything much to the rest of the world for a very long time and the situation is DETERIORATING.

The existence of the Trade Deficit is a problem for the boys trying to present the U.S. as this competitive, cutting edge economy. But it is not a MAJOR problem. All that is required is that you create ALTERNATIVE statistics. Alternative statistics are the economic equivalent of SPIN. It's so in tune with the zeitgeist. First we have the FACTS, which we would really rather ignore, and then we have the SPIN which makes us and, more importantly the ELECTORATE, feel happy, in control and reassured about our place in the world. And so we have nice little men creating what is called the Global Competitive Index. It was necessary to create this fictious piece of pseudo-data because in reality when it comes to actually competing internationally the U.S. sucks, big time. The U.S. is running one of the biggest external trading deficits ever seen in the modern world. It also seems to have a small problem generating domestic savings, controlling its Federal Government Spending, rebuilding cities called New Orleans and controlling violence and crime.

According to the Competitive Index, however, things aren't nearly so bad. The U.S. only just dropped off the TOP SPOT. Hey, that's great !! The U.S. really is competitive. We knew it. All we had to do was create the right type of statistic to prove it. And we've done that. So let's not talk about hard data any more. The hard data is so UNINSPIRING. Let's talk about all these pseudo-numbers which are so much more pleasant. And if we can get the markets to buy into our ALTERNATIVE reality, then everything will be fine for a little while longer.

What I especially love about the current line of thinking is this: if the U.S.A. enjoys such a competitive edge compared to much of the rest of the world then why can't it run a Trade Surplus? Or at least why can't it reduce its hideous Trade DEFICIT? Something is going seriously wrong. Here is this country with this great competitive edge, fuel prices which are ONE THIRD of fuel prices in Europe, and STILL it is running an external account which makes it look like a third world nation. Now, third world nations in the throes of industrialisation sometimes suck in imports and capital in order to build an industrial base from scratch. Is this what the U.S.A. is doing without telling anyone? Sucking in money to build brand new, state-of-the-art factories and infrastructure? No, I don't think so.

I have one question: how high in the competitive rankings does the U.S.A. have to go before it can actually compete with the rest of the world? If the U.S.A. was Number One in the Global Competitive Index and STILL ran a Trade Deficit, as appears to be the case, doesn't that mean that the very significance of the word "competitive" has changed and no-one has told us?

But there is more to the alternative view of reality than simply boasting about how great things are in the United States. The same useless index can and has been used to make unpleasant comments about the economic performance of other countries. Maintaining perceptions and international confidence in the U.S.A. and the USD is soooo important when you need those capital inflows. So in a similar fashion fair and balanced publications like the London Financial Times have published misinformed letters and articles which suggest that Italy has lost its competitive edge. I like how they do this without ever mentioning the fact that Italy is NOT in fact running a major trading deficit, does not rely on foreign capital inflows and domestic savings finance an estimated 97% of its very ugly Government Debt. 97% being a conservative estimate. There are a whole lot of other statistics which need to be discussed in order to understand the Italian economy and I will do that at some later date. Needless to say that most commentators feel quite happy going with the Global Competitive Index and ignoring everything else.

Now I appreciate the urgency of the need to keep the international financial structure ticking over, I really do. However, it would be good from the perspective of good news reporting that we could at least have opinions which in some way tie in with the real world and the real data. As opposed to the alternative DATA which has been created ad hoc to present the ongoing economic decline of the United States in the best possible light.

The USD remains relatively stable following the comprehensive rebasing of the employment figures in the United States Friday. This, together with an altogether more HAWKISH tone of various FED officials has convinced the FX market that the USD is a buy. Or at least not a sell. Meanwhile the BOND market doesn't look the slightest bit pleased that the FED is coming across as gung-ho about inflation. U.S. Treasuries still look very ugly. Which kind of begs the question: if foreigners are piling into the USD what are they doing with their USDs once they get them? The answer might upset some of the people at the FED. It could be quite possible that the recent USD run-up has been entirely speculative. No real capital inflows are taking place. If that is the case the happy-clappy crowd which is fine with the positive spin on the unimpressive U.S. data might find out that holding USDs for the slightly more than 48 hour horizon is fraught with risks.

Meanwhile in the old and gloomy EuroZone recently released Industrial Production data has been positive all round. Italian industrial output rose 1.2% on the month in August and was up 3.5% on the year. There were annual increases in all sectors apart from consumer goods. French Industrial Production numbers were also positive. Industrial production in Germany came out as a positive surprise in August, thanks to an increase in manufacturing output. Industrial output grew 1.9% on the month. Figures rose 7.2% in a yearly basis, this is the strongest jump since January 1991. Similar growth was last seen in November 1994 when a 7.0% annual increase was recorded. And Trichet is starting to talk darkly about broad based economic recovery and they WILL be looking at those interest rates again.

Still the FX market has all but ignored these numbers preferring to go with the excitement about the U.S. statistical revisions. In the longer term this is unlikely to be a winning strategy.

OIL 58.22
GOLD 577.00

While the great Commodity Bubble is taking it on the chin, the downside for both OIL and GOLD have remained relatively contained. The key to GOLD is what happens to the USD. Should the USD rally, by some miracle, continue then a general unloading of GOLD can be expected.

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