Tuesday, October 31, 2006

Let Them Eat Cake

EUR/USD 1.2767 Hi 1.2784 Low 1.2677
USD/JPY 117.04 Hi 118.06 Low 116.84
AUD/USD 0.7732 Hi 0.7642 Low 0.7670
EUR/JPY 149.44 Hi 149.82 Low 149.17

On November 7 there is an election in the United States and the one thing that the Bush Administration knows about elections is this: they (the Bush Administration) are really clever and the electorate is really dumb. This means with a few clever tricks, some dirty election campaigning and a little bit of spin about how well the country is being run and how well the war in Iraq is going, Bush and his cronies can win this election.

One of the cleverest ideas put forward by the cleverest of the clever in the Bush Administration, Karl Rove, is that just in time for the November 7 election an October surprise would be delivered. This October surprise had something to do with the economy and soaring stock markets. Everyone knows that when the U.S. Stock Market soars the U.S. electorate feels good and votes back the party responsible. Which is what happened in 2000. NOT.

So anyway the Dow Jones just made a record high and the plebs are STILL not
. Which is strange. I mean all these people should be cheering their stock portfolios. Oh, these people don’t all have stock portfolios? Well by George, that’s news. What are these people doing with their savings? Oh they don’t have savings, it’s all tied up in their residential real estate. Well how very bizarre. And what is happening to the Residential Real Estate market? Oh, going down is it? How very unfortunate. And all those people who are so much better off because of Hurricane Katrina, perhaps they will vote for Bush? No, perhaps not.

Ah yes, the historical parallel is fascinating: an unpopular, out-of-touch Administration, a new medium of communication and the emergence of pamphleteers. How long before they storm the Bastille? Well I suppose things could be worse, they could indict George W. for electoral fraud or war crimes. It seems that the mere existence of the International War Crimes Tribunal, which the USA had no part in creating, DID shut down the CIA torture factories for a time, so the War Crimes possibility is not entirely off the agenda and 650,000 dead Iraqis are unlikely to be forgotten quickly, well not in the Middle East anyway.

Perhaps George W. and his buddies are counting on the cleverly timed November 5 sentencing of Saddam Hussein in Baghdad to bolster the popularity of his "decidership". Yes, I can just see it: Middle America will go wild over that one.

While Consumer Confidence follows the Residential Real Estate market down the toilet and the outlook for Employment is starting to look shaky whatever happens to the Dow Jones is unlikely to really get Mr Joe Average hyped. What are the Middle Class in America eating these days? Cake? Empathy, sympathy and a basic understanding of how the great unwashed actually live out their miserable lives always plays well with the electorate.

But back to the markets. Weak GDP data released on Friday has everyone talking. And the market is agog with speculation: is there perhaps a recession coming? Or is it a "soft landing"? And how can you tell the difference? When does a "soft landing" start to look like something else? Just how bad will the fall out from the COLLAPSE in the Residential Real Estate market be? (Answer: very.)

Will the FED ease and should we sell the USD right now? And so the USD was sold off. Well with a recession coming and the FED maybe, perhaps, according to how things look in a couple of months, likely to CUT RATES there was a bit of a scramble to exit long USD positions, of which there seems to be a surfeit at this time. The outlook for the poor old BUCK continues to be poor.

All the data subsequently released in the States, including today’s
Consumer Confidence
figures, don’t look promising. You can spin it, and boy are they trying, but the reality on the ground is grim.

Meanwhile statistics released in Europe have been positive (Credit Growth, Industrial Production, Business Confidence) and the ECB is making those noises again. We have a ECB meeting this week and "EXTREME VIGILANCE" is expected to make a come back. No rate hike is expected in Europe but more rate hikes are coming your way soon. Trichet isn’t concerned with the spill over impact of the U.S. slow down on growth in the EuroZone. He’s already made that clear. So think EURO think RATE HIKES. The BoJ is also meeting this week but the outlook in Japan is so confused that no-one really knows what is going on (but more on that later).

For now what is really happening on the market is that everyone is transfixed by the slow motion train wreck which is under way in the United States economy. So selling USD on rallies is still the way to go. And nothing much is likely to change that for quite some time.

OIL 58.07
GOLD 605.50

Even Alan Greenspan seems to have noticed something is up with the USD’s status as an international reserve currency. Not that the great man is making a very big deal about it, but he has noticed. Although Greenspan suggested the shift in reserves is favouring the Euro it seems that the shift is favouring anything that is NOT the USD. And so the price of GOLD is rising.

Should the present U.S. Administration find a way to restore international confidence in the USD, in the U.S. capacity to manage an economy and foreign policy AT THE SAME TIME, the price of GOLD would see selling pressure. The big question is can George W. walk and breathe at the same time? The answer is unclear. To expect competent economic management and competent foreign policy AT THE SAME TIME is really pushing the envelope. Foreign Policy and Economic Policy are in the "Too Hard" basket, despite all the revolutionary (well startling and weird anyway) ideas that characterised the beginning of the George W. mandate (if you want to call it a mandate). And so the status of the USD as an international reserve currency is looking more and more like some mad fantasy. In a few years no-one will be able to explain how anyone bought into the fantasy in the first place.

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