Cyclical events have a propensity to happen in economics, and these reoccurring events sometimes come in the form of the silver lining behind that dark cloud. As the U.S. dollar continues its troubling ways while it inches closer to its fifth consecutive year of decline, it has helped close the trade deficit while increasing U.S. exports that have seamed to be so minimal over the years.
The U.S. dollar is inversely correlated to precious metals, especially gold. Overall, the gold price has risen against the dollar. The International Monetary Fund, headquartered in Washington DC, recently admitted their belief that the U.S. dollar is overvalued by at least 30 percent. If true, the U.S. dollar will fall even more.
According to the Commerce Department, core consumer inflation increased 0.1 percent for the fourth consecutive month in June, pushing the yearly gain in core inflation down to the lowest level in three years.
Everbank’s World Markets President, Chuck Butler, says, “That’s all fine and dandy if you don’t have to buy MILK! Or any other food product and the gas to get you to the grocery store! I say with milk above $4 a gallon, it is now more expensive than gas around here… I guess it’s time to drink gas!”
Just yesterday Bear Stearns Companies Inc. (NYSE: BSC) announced they were halting redemptions from a third fund after investors demanded their money back. The previous two Bear Stearns funds filed for bankruptcy protection only two weeks after the company told investors one was essentially worthless and the other had lost more than 90 percent of its value.
Bear Stearns isn’t the only financial firm in trouble. Lehman Brothers Holdings Inc. (NYSE: LEH), Merrill Lynch & Co. (NYSE: MER) and Goldman Sachs Group Inc. (NYSE: GSC), are sinking into deep territory. Bear Stearns was down almost 4 percent today. Bonds of U.S. investment banks have lost about $1.5 billion of their face value this month as the risk of owning the securities increased the most since October 2004.
Fundamentally, the big question is the action of U.S. consumers. Will they pull back on their buying and maybe even start to save? If they do, it will be bearish for the economy and the markets. With the real estate markets in trouble, U.S. consumers may cut back substantially on their spending. Consumer spending constitutes 70 percent of the Gross Domestic Product of the U.S., and two-thirds of U.S. families own their own homes. Personal Income and Spending numbers rose less than expected, suggesting that consumers have started to save.
The markets are volatile. Basically, all this trading volatility represents the investor’s alternating focus on concerns such as housing and rising energy prices and positives like personal consumption in the comfort zone, low interest rates and growing corporate profits.
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