24 October 2007.

Are We There Yet?

The official narrative is one of cautious optimism. (Well that is what they are paid for.) But the discussion has shifted focus. Now pretty much everyone expects the USD to devalue, with the exception of Jim O'Neill at Goldmans who is peddling the quaint idea that the small fall in the U.S. Trade Deficit will see USD buyers come rushing back. Why slightly reduced SELLING pressure associated with the slightly less negative trade performance of the United States should translate into actual USD buying is not clear. However, that was his story, at least up to a few weeks ago.

In the real world it's hard to identify much buying interest in the USD coming from anywhere. No-one wants to own USDs and it seems that lots of people are interested in getting rid of the USD assets they already own. So the big question now is: can the USD devaluation be managed in an ORDERLY fashion or not? As if that makes a big difference. Do you want the short, sharp blow to the head or would you prefer a lingering death?

The idea being that the "lingering death" option, while fatal for the U.S. economy as a whole, would allow U.S. Assets (read the Stock Market and U.S. Treasuries) to continue performing positively. Especially if the FED waves its magic wand at the end of the month, cuts rates and injects 'liquidity' back into the system. Liquidity being the buzz word. No-one knows what it is or what it means but everyone is pretty sure that if there is enough liquidity then the whole financial market house of cards can hold up even while households hit the wall all over the United States.

Of course, everyone also knows that cutting rates is risky because it could undermine offshore support for the USD. Which is why no-one is talking about the U.S. Current Account Deficit, which is big and scary, or the sad fact that Foreign Capital has started to head for the exits.

In July Net Foreign Capital Inflows were negligible and in August, well, Net Foreign Capital Inflows would have been more properly named Net Foreign Capital OUTFLOWS. Because that's what happened to the tune of USD 69.3 billion. So the U.S. in August 2007 failed to attract the foreign cash it needs to keep the USD stable and the show on the road by about, oh, around USD 140 billion. (The USD needs to attract around USD 70 billion in new money every month and it lost that amount instead.) This is not good news for the USD. In fact this is very bad news.

USD targets keep being adjusted to the downside with the only question being: orderly or complete panic? And in that friendly international market environment Ben Bernanke, the brave, must decide whether or not another rate cut can be delivered, seen as how the U.S. economy is starting to look like it needs life support.

The U.S. is dependent on foreign capital inflows and foreign capital inflows are hard to maintain if it becomes clear that the USDs you buy today are going to be worth quite a lot less tomorrow. Rate cuts make it harder still (to keep those flows coming) because they reduce the yield premium which is supposed to partially compensate for risk.

Well maybe Bernanke's up for the risk. And maybe asset markets will cheer him on but the USD sure won't and it hasn't exactly been looking perky lately. Another rate cut and the USD takes another hit and the question is: what will asset markets do then?

So far the scramble to reduce risk has seen U.S. Treasuries perform relatively well, particularly considering the, er, less than prudent fiscal management of George W. and company. Although the positive performance of U.S. Treasuries is only exciting if you are natural-born USD holder. If you live somewhere else, like say Japan or the EuroZone, the performance of U.S. Treasuries is unlikely to have set your hair on fire, once you factor in currency fluctuations or, if you prefer, USD depreciation.

OIL 85.35
GOLD 762.10

It is interesting to note that there are three world leaders who have an interest in getting the price of OIL as high as it can go: Putin, Ahmadinejad, and George W. Bush (who has well documented ties to the OIL industry). Funnily enough, these three leaders have been instrumental in escalating tensions in the Middle East. There have been veiled threats, talk of WWIII and so on and so forth. And guess what? The price of OIL has risen even in the face of less than spectacular outlook for global economic growth. Good job boys. Mission accomplished.

And a higher OIL price might keep shaky regimes in place and feather nests here and there, but it's going to do precious little to improve the general economic outlook. What the world saw in the 1970s and the 1980s were called OIL SHOCKS for a reason. Some people, though, got very rich and the same is happening today.

So where were we? Oh yeah, an imploding household sector in the U.S., capital flight from the USD, higher OIL prices (which certain people are quite happy to see remain high) and lots of dead bodies associated with the recent Sub-Prime Mortgage market fiasco. Only no-one knows where the bodies are buried. Risk aversion is going to remain on the agenda for quite some time, Ben Bernanke or no Ben Bernanke, and that's not good for asset markets.

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5 September 2007.

Damage Control

The hope that the Federal Reserve will cut interest rates is a bit like the hope that President Bush will reduce troop levels in Iraq. If you keep hinting that it's a possibility it takes some of the pressure off without you actually having done anything. The status quo stays the same. And right now the status quo is a problem.

Ben Bernanke got all sorts of pats on the back from the PUNDITS when he engineered his not-quite-an-interest rate cut on August 17. Buckets of ink have been used in newspaper columns explaining how the little problem with liquidity which financial markets experienced in August was just that: a little problem. And every delusional market commentator out there was spinning the line that now everything can go back to usual and Mrs. Watanabe can come galloping back with her carry trade prowess and save the USD and by extension, of course, U.S. financial markets and maybe even the beleaguered sup-prime market. To be fair there is not much else that can be done other than talk things up. It's called Damage Control.

And in as much that the USD/JPY is up from its recent lows the talkfest has been successful. But really if that's success then Iraq is great vacation spot right now.

Meanwhile back at the ranch Mr. Trichet gets to make an appearance this week and the consensus is that a rate hike, which had been pencilled in, is now off because even though the PUNDITS and Mr. Paulson and Ben Bernanke want us to believe that things are not as bad as they are, in fact, they are worse. Ponzi would have been proud. Me, I'm thinking Albania circa 1996.

Which I suppose explains the security detail which President Bush travels with. A bullet-proof, bomb-proof, chemical-proof limousine certainly comes in handy when the populace gets antsy. The populace isn't exactly happy right now. And the U.S. Housing Market collapse is only just getting into the swing of things. As for the sub-prime debacle which goes with it, no-one really know where that is going because no-one really knows who is going to end up holding the baby. What we do know is that Hedge Fund Land is in trouble, lots of banks all over the place are in trouble and this perverted derivative creation has spread like cancer. And it isn't over.

How bad can this get? Well how does unprecedented sound to you? Because that is where it is going. Of course some people are screaming that the FED must cut right now before we have financial market melt-down. Not that cutting rates will do anything much, except maybe speed up the collapse in the USD. Which I suppose would get things over quickly.

And that's just the Financial Market side of things. Add in the GEOPOLITICAL side of things and the situation is a shade worse. Actually that's not true. When you add in the GEOPOLITICAL side of things the situation is catastrophic. George W. and his cronies have been making noises recently about Iran. The idea is that sooner or later the U.S. is going to "take out" Iran. Cowboy style. And there are supposedly plans afoot and guns in place and what have you.

In the other camp with Iran are China and Russia. This is not good. President Putin has been issuing warnings and China has been making noises while delusional U.S. commentators suggest that China would never take the "nuclear" option (that is: dump its U.S. Treasuries) because that would mean mutually assured destruction.

Well maybe, maybe not. Certainly China would take a loss. But Chinese economic development is not a carbon copy of Japanese economic development. What China has managed to achieve over the past thirty years or so is essentially a transfer of technology. The Chinese have a big enough and an under-developed enough domestic economy to continue growing even if the U.S. market disappears off the radar. Especially now that they have achieved the technology transfer they so desperately needed. All that offshoring wasn't just about taking jobs away from the U.S. it was about taking factories to the Chinese. We are not talking mutually assured destruction we are talking U.S. bankruptcy. Which is slightly different.

So there we have it. The great USD sell off continues and U.S. Financial Markets are NOT going to be the place to be for quite some time. Armageddon? Well maybe the financial kind and "in one hour so great riches is come to nought." Watch this space.

OIL 74.89
GOLD 688.60

GOLD remains bid, which is hardly a surprise, and all the cowboy posturing from Bush in the Middle East is helping OIL stay bid in spite of increasing talk of a global economic slowdown. When will we they start talking recession I wonder?

At least Daddy's OIL friends will be pleased.

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1 August 2007.

The End of Pretend Money

There was a hilarious line of thought going around the market recently which centred on the naive belief that if the Japanese decided NOT to raise rates in August then the Yen Carry Trade could be saved. In short the Happy Clappy crowd seemed to believe that Humpty Dumpty could be put back together and everything could go back to how it was. And how it WAS was pretty good with virtually free money from the Yen Carry Trade providing the 'liquidity' (read pretend money) for every speculative trade on the planet. The upshot being that speculative traders everywhere would, after this little 'correction', be able to get back to their rewarding momentum trades and we would all live happily ever after.

For good measure some deluded newspapers were spouting the view that Japanese housewives would help this along because of course Mrs. Watanabe and her friends had just come into a whole lot of new cash, or something. No-one was too keen to explore that line of thought in all its gory detail because it wouldn't stand up to much examination. But they threw it in just for good measure.

Meanwhile back in the real world what the Asians were actually discussing was what they could do with their trade earnings, of which there is rather a lot, if they decided not to keep lending the money to the Americans. The Asian Development Bank had got in on this. In Japan there were noises about how the large stash of cash currently sitting in U.S. Treasuries could be used to pay off the correspondingly large Japanese Government Debt. The Chinese were 'diversifying'. Nowhere in Asia was anyone talking about pouring even more money into what was essentially seen as a losing proposition. That is: exchanging real goods for ever larger quantities of small bits of green paper (aka the USD) which could only be exchanged for slightly larger bits of paper (aka U.S. Treasuries) which essentially meant exchanging real stuff for nothing much and certainly for nothing useful.

The Happy Clappy crowd missed that bit. But then they don't read the foreign press and they enjoy a self-delusional lifestyle generally. So while the Western Press fed anyone who would listen the line that Asia had no choice but to continue financing the U.S. economy and the U.S. Government the Asians were looking at their alternatives. And this shopping around for choices has been going on for a while now. This does not bode well for the USD/JPY and the Carry Trade and, of course, this is bad news indeed for people in Hedge Fund Land because funny money generated by the Carry Trade was how the people in Hedge Fund Land amplified their trades to the power of a billion. And this has unfortunate consequences when winning trades turn into losing trades. Like now.

But there is more. The Happy Clappy crowd was also led to believe that the melt down in the U.S. Housing Market could somehow be contained. It's only Sub-Prime, it's only a small share of the market, it doesn't matter and anyway who cares Ben Bernanke will come to the rescue. We hope. Only Helicopter Ben has discovered that he has exactly no lee-way when it comes to domestic interest rates because the real money is coming from overseas and overseas investors want to see the FED prop up the USD and to hell with the U.S. economy. That's a policy conundrum which seems to have finally registered with the FED, hence all the talk of inflation risk, which is really the USD collapse risk.

Where does it all lead? Well first off the USD/JPY downtrend has only just begun. When you think USD/JPY think down because that's where it's going.

And if the USD/JPY up trend is over and the Carry Trade is over, which they are, then this means that all this exciting 'liquidity' disappears and what we have is a credit crunch, which won't be good, particularly for economies which are debt dependent. The countries which will fare the worst as liquidity dries up are those countries which have seen a credit explosion in the past decade. Countries with low or no domestic savings, high domestic debt levels and no contingency plans are in for a very difficult time indeed. Think debt, think Anglo-Saxon economies, think crunch.

For a while it worked. Asians were encouraged to work very hard, produce goods to sell to the rich Westerners, bank the money and never spend it. In fact, they lent the money back to the Westerners in order to keep the whole process alive. But now questions are being asked and the issue is unlikely to be resolved in favour of those countries which are used to receiving large, never-ending capital inflows (aka as other people's money).

It was after all an American who said: 'You can fool some of the people all of the time and all of the people some of the time but you can't fool all of the people all of the time'.

And the Euro? Well the new French President, Mr. Nicholas Sarkozy, has been making loud noises about ECB monetary policy and the EURO uptrend, which he doesn't like. Not surprising really given the impact on the European economy. So the EUR/USD uptrend may have stalled but the EUR/JPY downtrend has just started and the real action will be in the big Carry Trade favourites: AUD/JPY, NZD/JPY and USD/JPY.

While the rush for the exits takes place U.S. Treasuries and Government Bond Markets are expected to outperform. Because the USD remains at risk, however, the U.S. Treasury market is expected to underperform other Government Bond Markets. By quite a bit.

OIL 78.00
GOLD 673.40

The focus for now is not on GOLD or OIL. Both are reasonably bid but action on other markets is likely to take the heat out of these. In the longer term GOLD is likely to outperform while OIL takes a hit as global economic conditions worsen. And incidentally the outlook for Stocks just keeps getting worse.

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18 July 2007.

Opening the Gates of Hell

While the PUNDITS are distracted by the non-vote which will take place in the U.S. Senate, bigger things are afoot. On the 11h of July Senator Joseph Lieberman, a man with no shame and no conscience, introduced an amendment to a Defense Spending Bill in the U.S. Senate which declared that Iran was committing acts of hostility against the United States. No evidence was presented, none was requested and the bill passed unanimously. Which proves just how Anti-War the Democrats are.

That Senate vote gives George W. Bush a clear casus belli for attacking Iran. This time around the U.S. Government is not even bothering with presenting cooked intelligence to the voting public. In fact no-one is talking about the plans which are afoot at all. The mainstream media is far more interested in the Glasgow bonfire and the made-for-television non-vote on a U.S. withdrawal from Iraq. The American Establishment plans on staying in Iraq. Just nobody is keen to mention that unfortunate fact to the gullible American public. For now we are going with the Iraqi War withdrawal charade to keep Mom and Pop happy.

Meanwhile back in the real world the U.S. aircraft carrier Enterprise was moved to the waters near Iran on July 10. This is the third U.S. aircraft carrier now in that area. But hey don't worry it's just a sort of coincidence.

In fact the U.S. Navy spokeswoman, Denise Garcia, has reportedly stated that "These operations are not specifically aimed at Iran." Well gee I guess we can all relax now. They wouldn't lie to us, would they?

The word on the street is that an "incident" involving Iran is likely to occur in August of this year, when Congress is conveniently out to pasture. This "incident" will then justify the next leg of the U.S. military adventure in the Middle East. Charm, charm, charm. So the U.S. killing machine moves on. What are we up to? 1 million dead Iraqis, 4 million Iraqi refugees and no-one is even counting the wounded, the impact of the depleted uranium or the damage to the Iraqi economy and infrastructure. Oh and the nation which launched this unprovoked and illegal attack has lost some foot soldiers. Tut. Tut. I thought wars of choice were meant to be clean and swift at least for the invading party. Well I guess you can't help a few broken eggs, now can you?

The Iranians, of course, think that there's a way to get around this with logic and tactics. So far they have announced that U.N. inspectors can come back into the country. And they have also announced that the Japanese will have to pay for the OIL they buy in YEN. Well they do seem to know the score. But have they figured in Special Ops and made-for-television events like the Bay of Tonkin "incident" or even 9/11? When you think that over all these Iranian attempts to circumvent an attack seem a bit naive.

But this new war is something to look forward to you if you are an arms dealer or run a private army. For everyone else it will just be one step closer to WWIII.

None of this is bothering financial markets where the big news, well sort of, is that Rupert Murdoch, media mogul and war monger extraordinaire, has finally maybe clinched his deal. Hey great. That should see the Dow Jones (the Index not the Company) hit yet another high and keep all those nervous nellies from panicking. We don't panic until we want panic and we don't want panic yet. Stocks are hanging in there. The USD is doing less well. A new record high in the EUR/USD was reached overnight in Asia. Not to worry Sarkozy is coming to the rescue of the USD. And over in Asia the Carry Trade is helping keep the USD/JPY afloat. The USD index still doesn't look healthy but under the circumstances with two wars to pay for and another on the way it's the best that can be hoped for. What we are seeing is people (well the PPT anyway) sticking their fingers in the hole to try and keep the dike from busting open. When it bursts then it will get interesting.

OIL 74.28
GOLD 670.30

GOLD is creeping higher which is no surprise given that some people are planning for Armageddon and even without Armageddon the USD still looks like a very bad bet. The PPT may be working to fight the rising trend in GOLD but that just looks like sticking more fingers in another dike ready to be swept away. Not really much of a strategy there from the PPT, just desperation.

And OIL, of course, has been given a shot in the arm by the very big mess in the Middle East. Which is good because it means even more money for the Saudis who are reportedly the real source of funds for the insurgents killing U.S. troops. What a tangled web we weave.

Well I guess if the powers-that-be are looking to extend this violence, and odds on they are, then they have yet another casus belli just waiting to be dusted off and presented to the public. More war, more arms, more money to some very dodgey war profiteers. The Devil and his minions are sure having a lot of fun.

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