Today we learned that September retail sales rose by a rapid 1.5%, while September industrial production rose by a meager .1%, (following a downwardly revised decline of .1% in August), which continues the dangerous trend of increasing consumption against inadequate production. This reality was further underscored by yesterday’s August trade deficit figures, which expanded by 7% to $54 billion (the second highest monthly gap on record).
Wall Street continues to react positively to higher than expected retail sales, while disregarding the disturbing fact that robust sales result from money borrowed from foreigners to purchase imported products. This short-sighted view ignores the fundamental long term damage that foreign financed consumer debt causes to the underlying health of the U.S. economy.
However, the data is not so easily dismissed in the foreign exchange markets, where the U.S. dollar fell sharply this week, hitting an 8-month low against the euro. In addition, the December U.S. dollar Index futures contract fell to a new low. This weakness would be even more pronounced were the systemic flaws in the American economy more widely understood, or if Asian central banks abandoned their misguided intervention on the dollar’s behalf.
Oil prices continued to climb a “wall of worry” this week, as Wall Street continued to scapegoat speculators, for what is in reality a fundamental price rise driven by inflation, increased demand, and inadequate supply. Today, in a spectacle reminiscent of King Canute verbally commanding the tide to stop, Alan Greenspan attempted to talk down the oil markets by reassuring the public that current prices are the result of temporary flukes rather than manifestations of his own inflationary monetary policy. However, rising oil prices, like the tide, could not be stopped, with oil closing the week at a new high, just shy of $55 a barrel.
U.S. stock index futures have also shown increased technical weakness this week. Given the extreme level of complacency evident in the market, and that this is October (a traditionally rough month for stocks), additional near-term weakness looks highly probable, and could potentially be quite substantial. Perhaps equity traders are finally beginning to take notice of the problems that more astute foreign exchange traders have already seen. Unfortunately, the real problems will prove to be far greater than those currently being discounted in foreign exchange markets.