Beige Book Recap, Global Forecasts on U.S. Economy, Scary Employment and Housing Stats, Gabrielle Churns, and More!

by Addison Wiggin & Ian Mathias

  • Fed releases the “Lily White Book”… a litany of anecdotal evidence refutes their findings
  • Private job stats hit a 4-year low, record layoffs in financials, temp employment paints scary forecast
  • Pending home sales worst on record… traders take it out on the dollar
  • U.N., OECD, Grantham all down on the U.S. economy… who’s watching Cheney’s stash?
  • Gold breaks step with equities…strikes out on its own… destination: $700…
  • Gabrielle gathers strength in the Atlantic… a microcap way to play this active hurricane season
  • Why your daughter got scammed on her iPhone…
  • A free look into the minds of Chinese military strategists… and more on our favorite South American dictator…

The Fed’s “Beige Book” was released yesterday , so named for the color of the paper stock its cover is printed on. Today, we begin with a formal suggestion: The Fed should rename the book the “Lily White Book” on account of what’s printed inside.

“Outside of real estate,” said the Fed in regard to market activity in August, “reports that the turmoil in financial markets had affected economic activity during the survey period were limited… Credit availability and credit quality remained good for most consumer and business borrowers.”

“The weakness in the housing market deepened across most districts,” the Fed added, “with sales weak or declining and prices reported to be falling or flat.”

“Crazytown,” commented Extreme Ian while assembling the notes for today’s issue. “The absolute worst of the subprime shock… and this is all they have to say?”

Yesterday’s edition of the Lily White Book covers economic activity across the United States from July 17-Aug. 27.

We offer the following rebuttal to the Fed’s rosy outlook in the spirit of the late Kurt Richebacher … not because we’re gloomy per se, but to heap opprobrium on those who deserve it.

Exhibit A: The United Nations couldn’t resist taking a shot at the U.S. economy yesterday. The U.N. predicted a sharply slowing U.S. economy this year in their annual economic report.

The U.N. predicted 2% domestic growth, slightly more than the OECD, but still behind global rates of “similar” nations. The U.N. forecast 2.8% growth in the eurozone and 2.3% growth in Japan… if these predictions come true, this will mark the first time since 2001 that Europe and Japan have outpaced the U.S. China and India are expected to be the year’s big winners, with 10.5% and 8.5% growth, respectively.

Exhibit B: The OECD, an international hodgepodge of economic thinkers, cut their forecast for U.S. growth yesterday, from 2.1% to 1.9%. In a manner not totally familiar to U.S. policymakers, chief OECD economist Jean-Philippe Cotis cited what he expects will be weak growth in the third and fourth quarters and recommended a Fed 0.25% rate cut on Sept. 18.

Heh. That’ll stick in the craw of a least one freedom fries-loving, anti-Frog American…

But these quasi-governmental bureaucratic hack havens aren’t all they’re cracked up to be, either. So we turn to factual anecdotes about layoffs, temp jobs, hiring patterns and pending home sales to get a broader feel for what’s happening in the U.S. economy.

“Planned U.S. layoffs rocketed in August as the housing slowdown and subprime mortgage debacle led to record job cuts in the financial sector,” the AP reported this morning.

Citing a report by the employment consultants Challenger, Gray & Christmas Inc., the AP reported “announced layoffs” surged 85% from July-August — the highest since February. Financial job cuts were the highest in August since Challenger, Gray & Christmas began tracking in 1993.

Countrywide Financial, for example, cut another 900 jobs this morning, bringing their total to 1,400 since the trouble in Subprimeville began.

As we reported last week, too, temp jobs are falling off faster than expected. So we might expect broader employment to follow suit.

Temp jobs have historically led broader employment trends… in this case, into the toilet.

General hiring has already slowed. Private sector companies hired the fewest employees in August since 2003 , said yesterday’s ADP employment report. The payroll services firm reported 38,000 jobs added in August, down from 41,000 in July, and the smallest gain since July 2003.

The Labor Department will release its own notoriously massaged employment report this Friday.

“The next five months will show us just how strong (or weak) employment is,” comments Mish Shedlock of The Survival Report . “It will be especially interesting watching the next few sets of birth/death numbers from the BLS. One of these months there is going to be a massive “unexpected” downward jobs revision. More than likely, that will be used as an excuse by the Fed to cut (or further cut) rates. It won’t help.”

Pending home sales dropped more than expected in July, too… down 12.2%, the largest drop in the index’s seven-year history . Now resting at a score of 89.9, the National Association of Realtors calls this index reading the worst since September 2001.

What’s more, July’s drop was a few fathoms greater than economists predicted: Wall Street’s best minds guessed a 2% fall in contracts being signed for existing home sales.

Lastly, we present a star witness: “Even if the credit crunch passes without a major catastrophe,” notes Jeremy Grantham in the latest issue of Fortune magazine, “the prices of stocks, bonds and real estate have a long way to fall.”

If you recall, Jeremy predicted a “global bubble” back in late April. Much to the amusement of his peers, he predicted global sell-offs in the near future in nearly every market. Safe to say he nailed that one.

What to make of all the data in the economy and turmoil in the markets? “Risk will be repriced,” Grantham predicts:

“Last year, a broad base of risk measures — including volatility (VIX), junk and emerging debt spreads, CD rates, high-quality versus low-quality stock values — reflected the lowest risk premiums in history. On some data, indeed, investors actually appeared to be paying for the privilege of taking risk.

“For fixed income, some spreads widened slowly at first this year and then unexpectedly widened rapidly in recent weeks. For equities, though, the process has hardly started. Junkier stocks continued to outperform into June, even as the subprime woes spread. At the end of the cycle, high-quality blue chips will once again sell at normal premiums or better…

“Asset prices will be under broad pressure, and risky assets will be under extreme pressure.” Depending on the state of the credit market, Grantham thinks this could all happen very quickly.

Grantham manages about $153 billion in client assets. We learned this morning that Dick Cheney is one of his clients. We’re not sure what to make of this new piece of information yet.

Domestic markets reacted to this litany of unfavorable news — including a massive sell-off of iPhone maker Apple — by shedding about 1% across the board.

“The euro and other currencies rallied versus the dollar all day yesterday after the latest pending home sales data printed,” says our go-to currency man Chuck Butler.

“The report was awful, just awful! Pending home sales in July collapsed. There’s just no better way to describe a 12.2% fall. It’s not a laughing matter.” The euro regained this week’s losses and is back to $1.36, while the pound sterling shot up nearly 2 cents, to the $2.02 mark.

The dollar index has retreated back to the ominous score of 80 — a much watched support line. If the index breaks through 80, look out below.

Gold defied the rest of global markets yesterday and continued its recent climb. Gold’s been in lock step with the rising market since the August correction, but this week, the precious metal is showing signs of independence, jumping in to the $690 range.

“WooHoo! Go gold!” exclaimed Kevin Kerr. If gold breaks 700, Kevin’s gold trade could start making RTA readers a lot of money. As we write, gold prices reached as high as $697. Will gold test the $700 mark? Keep your eyes tuned…

About the sell-off in Apple shares: “Apple is cutting the price of the iPhone by one-third. It’s been on the market for less than three months,” notes Dave Gonigam.

The 8GB iPhone will now set you back $399… a cool $200 cheaper than its debut price. Steve Jobs announced this price cut in a rhetorical footnote during yesterday’s unveiling of snazzy new designs for the iPod and Nano. Wall Street saw right through it… Apple stock was trading flat up until Jobs’ presentation, and then promptly fell 5% by the closing bell.

“The story here is bigger than Apple,” Dave suggests. “It’s about an American consumer who can no longer make room in the household budget for a new gadget, no matter how cool it is. It’s about an American consumer cutting back — and running scared.”

Hedge funds too are enjoying the wincing pain of a credit squeeze. Some $55 billion was yanked out of hedge funds by jittery investors in August.

An area of exceptional low pressure between the Bahamas and Bermuda is expected to become the seventh Atlantic tropical depression of the year , reports this morning. Even though we wrote to you yesterday warning of more hurricanes to come this season, we were surprised to see this one pop up so quickly.

Gabby… in the flesh

If she grows as expected, Gabrielle is forecast to be the first tropical storm to strike the East Coast. Weathermen predict the storm could run from South Carolina to as far north as Cape Cod.

While we wish the best for those in this storm’s path, Gunner’s found a great microcap play that Gabrielle might whip into a frenzy. In his latest Bulletin Board Elite dispatch, he recommended a contractor that specializes in cleaning up Atlantic Coast weather disasters. Ol’ Gabby is expected to earn her stripes by Friday and touch down late this weekend.

She may not reach hurricane strength, but will almost certainly cause some sort of damage… click here to get in on this trade in time.

“The part about Chavez not being a dictator because he was democratically elected makes me laugh,” writes a reader. “The reader who wrote obviously does not understand the word ‘dictator.’ From the dictionary: ‘A person exercising absolute power, esp. a ruler who has absolute, unrestricted control in a government without hereditary succession.’

“Does Chavez have a credible opposition? No. Has he assigned all kinds of executive powers to himself, so that he can pretty well run the country without any input from the people or parliament? Yes. What happens to foreigners who disagree with him? They get thrown out of the country. What happens to citizens that disagree with him? We can only guess. Can and has he confiscated property from anybody that he figures should belong to him or the state, which is at this point the same thing? Yes. Etc., etc., etc.

“Was Hitler elected? Yes. Was Mussolini elected? Yes. Where those people dictators? Not when they first were elected, but they quickly changed the rules to eliminate all credible opposition, so yes. So given the current circumstances, is Chavez a dictator? Definitely. Should we take him seriously? Yes, I think so, because all nut cases in power are dangerous.

“Sorry to be so cynical,” writes a reader, “but don’t you think it’s a little out of [the Chinese communist government’s] character to allow two serving Chinese army officers to actually publish their plans to ‘destroy the Americans’?

“Sounds more like a dumb counterintelligence scheme [if that] of some eejit in some U.S. security agency to keep your countrymen’s paranoia about the Chinese up at full throttle. I would have thought just maintaining a mega-trade surplus and adopting the ancient Yankee ethic of hard work and self-denial is doing the trick for the Chinese in their ‘sinister’ master plan to take over the world.

“Regards and best wishes for the continuing success of The 5 Min. Forecast.”

The 5 responds: Hard work and self-denial may yet be part of the plan. But owing to the wonders of the Internet, you can decide for yourself. A free edition of Qiao Liang and Wang Xiangsui’s Unrestricted Warfare is available to read here. It’s a monster-sized PDF. If your computer can load the page, it’s worth a read.

As if on cue, the Chinese government infiltrated British government networks , U.K. government insiders told the English press overnight. The Times and The Independent both cited two separate unnamed sources, both of which claimed that the Chinese are utilizing “electronic means to hack into systems to discover Britain’s defense and foreign policy secrets.”

That’s three nations — the U.S., Germany and the U.K. — all claiming to have been hacked by the Chinese in the last three weeks.


Addison Wiggin
The 5 Min. Forecast



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