Wednesday, October 04, 2006

Bubbles all Round

EUR/USD 1.2684 Hi 1.2742 Low 1.2667
USD/JPY 118.02 Hi 118.31 Low 117.82
AUD/USD 0.7426 Hi 0.7457 Low 0.7416
EUR/JPY 149.70 Hi 150.49 Low 149.46

Apart from the news that our North Korean friends are planning to test a Nuclear Bomb, everything looks fine. Well apart from the economic slow down in the States. Commodity markets aren't waiting for any further hints and, after taking Commodity prices to record highs on the back of the don't worry China will buy everything story, the only people on the Commodity markets right now are sellers. This should be good for inflation. We've had the price bulge as higher raw materials fed through the system now we get the reverse. I wonder what Trichet will have to say about that? Second round effects of the OIL rise and extreme vigilance? Er, well maybe not.

So the market is now looking for a slightly more dovish statement from Trichet and his buddies on Thursday. Not that we have anything like conviction right now. We're not seeing trading so much as panic driven, stop triggering as everyone tries to figure out where exactly we are in the "so-called" economic cycle.

After waiting for the bubble to burst now we can all celebrate: no more rate hikes, commodity prices are falling and maybe the American consumer can be encouraged to go out and borrow just a bit more so the whole cycle can start over. Only falling Housing Prices may make that particular scenario just a little less likely than say, once we re-adjust our inflationary and interest rate expectations downward and recover from the celebrations, a long period of very slow growth as the American consumer works his way out from under a mountain of debt. This could take just a tad longer than some optimists are expecting. What we are seeing is market moves exaggerated by Hedge Funds and the hunt for the short term gain. Markets on drugs if you will.

Right now though we can all gear up for the November 7 election, which apart from a
sex scandal and polls which look very shabby indeed, is lining up to be just what Karl Rove ordered. The Dow Jones just made a new high, which may not mean much but let's not get picky, and rates are on hold in the States with talk of a rate cut coming up some time soon.

Condoleezza Rice is in the Middle East showing the American public that someone is dealing with the fiasco in Iraq. Rice's plan seems to be to try and encourage nations like Saudi Arabia to step up to the plate, pour in the money and the troops and let the U.S.A. exit asap. Well, good luck with that plan. Though I guess it doesn't matter if the Bush Administration can pull it off. What matters is that they convince the American Public of the game plan.

So everything is covered: the domestic economy might be quietly imploding under a mountain of debt, but things will get better as inflation fades and rates are cut. You can tell things will get better, just look at the stock market. Foreign Policy might have been an area where the Bush Administration had dropped the ball, but hey Terrorism was Clinton's fault anyway, and Condoleezza has the smarts to sort it out. She's in the Middle East right now. Everything is under control. And as for the sex scandal, well that was Clinton's fault too and Monica may have been 24 but she had the mental age of a two year old, so Clinton is the real pedophile.

And the USD is doing just fine. Diversification is an ugly rumour and the Carry Trade Crowd is happy and RICH. The YIELD CURVE may be NEGATIVE, but who cares? Most Americans don't even know what a yield is and they are certainly not concerned that the YIELD CURVE is calling a RECESSION. With a little juggling the recession won't get here till well after the Presidential Elections in 2008. That could be tough. But it certainly won't be anywhere on the horizon for November 7, which is what counts right now.

Tomorrow Trichet gets to state his case. The market will be watching for signs of a moderation in the ECB hawkishness. Those looking to sell the EURO if Trichet actually delivers should be wary. The market has been selling Euros all week in the run up to the meeting and, unless your focus is EUR/JPY, EURO bears may be disappointed.

OIL 58.22
GOLD 569.00

The wave of selling on commodity markets has seen GOLD break to the downside. And until all the short term speculators, the Hedge Funds and the regular Funds have been stopped out of their long commodity positions, more downside can be expected. Central Banks in Asia and in other places around the globe (Russia for example) may well want to diversify away from the USD and into GOLD but there is an avalanche of long positions to cover FIRST. This is not a market for short term players. Those with deep pockets and a long term horizon can and should buy. But only once the dust has settled.

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