Tuesday, September 26, 2006

The Election Season Begins

EUR/USD 1.2685 Hi 1.2765 Low 1.2684
USD/JPY 116.51 Hi 116.66 Low 116.24
AUD/USD 0.7522 Hi 0.7559 Low 0.7517
EUR/JPY 147.83 Hi 148.68 Low 147.78

The Election Season is upon us. You can tell because the media in the U.S. is suddenly a lot more snarky. The first part of the Republican strategy is to blame everything on Bill Clinton. The second part of the strategy is to lie. No, actually that would be ALL of the Republican Party strategy. First, you blame EVERYTHING on Clinton. And I mean EVERYTHING: Terrorism, Iraq, 9/11, Katrina, New Orleans, the slump in U.S. House Prices, whatever. Somehow, somewhere there is a way to tie every problem, every disaster, every hurricane to some failure of the Clinton Administration. In addition, this particular lie plays really well with the Republican's core constituency who know in their guts that everything bad in the world is the fault of namby-pamby liberals.

Second, you lie about how well things are actually going. You get the idea from the kind of headlines we are seeing on Bloomberg these days:

Headline N°1 Bloomberg 26/09/06:
German Business Confidence Fell in September on Economic Growth Concerns.

Headline N°2 Bloomberg 26/09/06:
European Stocks Rise on Speculation U.S. Economy Is Strong.

You get that? If financial markets are going well in Europe it's got something to do with the United States. If there are any weak economic numbers released in Europe, that is entirely Europe's problem. Heads I win, Tails you lose. Bloomberg is, after all, the Republican Mayor of New York. So what if German Business Confidence fell less than expected and so what if the U.S. economy isn't exactly smelling of roses these days? People will think what we tell them to think. And if they don't we'll arrest them on suspicion of something. Because we can and we will.

And Karl Rove is reportedly planning an October surprise. Meaning something positive for the Republicans in the lead-up to the November 7 elections. The surprise reportedly involves the economy. I guess that's not the economy where Housing Prices fell for the first time in 11 years in August. Housing Prices, in fact, fell 1.7% compared to a year earlier. This was the second largest fall on record and the largest year on year fall since the 2.1% fall recorded in November 1990. Which, in case you don't remember, was when the U.S. was in RECESSION. No, Karl Rove is more likely talking about financial markets, which you can talk up and massage. There is not much the Plunge Protection Team can do about Housing Prices, which are falling all over the United States, but there is something they can do about propping up U.S. financial markets. They can also try and prop up the USD. Though that would probably be too much of a gargantuan task even for that mysterious cabal. Now, depending on just how hard the Republicans lean on the already DOVISH Bernanke, they may even manage a cut in the FED FUNDS rate. That would be an October surprise. It would play well with the struggling home owners, give a boost to financial markets and generally jolly things up. It wouldn't be so good for the USDs, but that doesn't really matter.

The other potential October surprise would be a deal with Iran. With every Hedge Fund on the planet sitting long OIL and commodities, the merest whiff of a deal with Iran would send OIL into a tailspin. Bush would be hailed a genius, OK maybe that's a bit far fetched, but suddenly he would look like the kind of statesman who can do more than BOMB people. It would be the kind of economic/diplomatic coup which could really play well out there in VOTER LAND.

And if there is any need, then you cheat. All in all this strategy has served Republicans well over the past six years and there doesn't seem to be any reason to believe it won't work this time 'round. The U.S.A. may end up looking like a caricature of the kind of "democracies" which it specialised in imposing on the rest of the world, but hey no-one in coach-potato land is likely to notice or care.

Meanwhile the only real threat to this rosy Republican set up would be the small chance that we have a USD collapse in the meantime. And with the PPT on the case that is unlikely, but not impossible. There are only so many balls which the PPT can keep in the air at the same time. The USD might not be one of them. But then the average American coach potato never goes abroad, doesn't buy foreign currencies and would like to see U.S. industry actually start to produce some jobs. A little USD depreciation would not be unwelcome, provided of course that it can be MANAGED and not too ABRUPT. PPT enter stage right. The Karl Rove plan might just pull off a dream agenda: lower oil prices, high stock markets, a rate cut and a more competitive USD. The Carry Trade Crowd has been warned.

OIL 61.03
GOLD 593.70

OIL is in consolidation mode. GOLD is still supported by the search for an alternative to the USD. With China currently sitting on near USD 1 trillion in FX Reserves and looking to diversify the support for GOLD is likely to be solid. The outlook for OIL, on the other hand, depends on GEOPOLITICS and world growth, both look mildly bearish for OIL right now.

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