Monday, November 06, 2006

Economic Policy by Proxy

EUR/USD 1.2709 Hi 1.2725 Low 1.2689
USD/JPY 118.34 Hi 118.48 Low 117.79
AUD/USD 0.7696 Hi 0.7713 Low 0.7670
EUR/JPY 150.42 Hi 150.56 Low 149.85

There is an election in the U.S. tomorrow and we care because all those Republicans who voted to invade Iraq will be tossed out and replaced by Democrats who voted to invade Iraq. Saddam Hussein has been given the death sentence for War Crimes or Crimes against Humanity, or something of that ilk, and the world is now waiting to see what sentence will be passed on Bush, Cheney, Rumsfeld etc. for invading a sovereign nation without U.N. sanction and without provocation, laying waste to that nation and killing upwards of 600,000 Iraqis. And the U.S. isn’t even done yet. The people who invented carpet bombing know how to do destruction. So more death and destruction will happen.

The U.S. has spent an awful lot of money on weapons of mass destruction over the past 50 years and as Madeleine Albright wisely pointed out: “What’s the point of having this superb military you’re always talking about if we can’t use it?” Indeed.

So, given that the U.S. is sitting on this huge arsenal and is obviously willing to use it on a whim, no-one expects to see Bush on trial at The Hague any time soon. But conclusions have been drawn and lessons have been learnt. Over the weekend six more Arab Nations, some with Oil reserves some without, announced their interest in developing nuclear technology. Not that they don’t trust their old buddy Uncle Sam, but you never can tell. It's better to be just a little bit better armed than Saddam Hussein if you want to avoid a similar fate. The world might not be a safer place now that Saddam Hussein is no longer in charge but at least we all know where the danger lies.

Nothing will change tomorrow. The outstanding paranoia of the United States which has led to the biggest military build up in history is not going disappear with more Democrats in the Senate. U.S. economic policy is not going to be any better or more balanced. The current U.S. Administration isn’t even trying to manage the economy. So we are left with the same old game: guessing what the FED will do next, because there really isn’t any one else in charge.

The release Friday of U.S. Payroll numbers got the FED guessing game going again. And now the view is (hey this is new) the FED is in PAUSE mode. This is marginally better for the USD than the economy is falling of a cliff and the FED will need to EASE soon, but not as good as the economy is booming, inflation is picking up and the FED will have to HIKE soon. So for now we go with the FED is PAUSED and buy back some of your USD shorts.

Since the economy is now booming, well not collapsing anyway, we are also going with sell U.S. Treasuries as fast as you can and buy Stocks. The fact that one dismal little statistic can create such a radical reassessment of where the economy is heading is slightly depressing. However, with an election tomorrow the Bush Administration is cheering, a bit.

This week the Bank of England is expected to raise rates. This is another "economic policy by proxy" phenomenon happening here. The Government in Britain is good at setting up committees, creating league tables, introducing MBA-talk where it is completely useless but the economy is being driven by credit creation. And the problem seems to be that so much of that credit creation is directed into Consumption and Residential Real Estate. Now there are things that can be done about that at the Government level but that is not happening. So the easy answer is to raise rates. A couple of rate hikes and hopefully credit creation will collapse and if that happens to take a few Productive Industries down at the same time, well too bad. Nuanced, well-directed economic policy is definitely in the “Too-Hard Basket” so we go with One-Size-Fits-All Monetary Policy and a few more wild economic swings which tend, in the long run, to be very hard on Industry and economic well being. Today's politicians are, however, certainly not interested in or capable of dealing with the long run. It doesn't follow that Central Banks necessarily are.

While the FT may not be happy, the fact that the ECB is hamstrung, a little, because it has to make monetary policy fit all the divergent EURO Nations fills me only with joy. The less leeway we give to these people the better. Central Bankers of the world, on the whole, have a fairly dismal track record and there is no reason to believe that endless fiddling with interest rates is the way forward. So less is more when it comes to monetary policy and Governments will have to work harder to deal with economic conditions, distortions, bubbles, the misallocation of resources and what have you. Which is, after all, what they are paid for.

The GBP seems to have seen all the gains it is likely to on the back of the interest rate story. We may have to wait for the BoE to do the deed but EUR/GBP is starting to look like a buy. Anything below 0.6680 certainly is.

OIL 59.38
GOLD 628.50

OIL is currently three times the level Rupert Murdoch predicted it would be post the Iraqi invasion which he, and every single one of his newspapers, strongly supported. So, in addition to being wrong, Mr Murdoch has blood on his hands. OIL is, however, slightly below its recent peak. This is adding to some of the bullish stock market chatter out there.

What we have in reality though is a very nasty conflict in Iraq, a Bush Administration which neither understands the Middle East or indeed anywhere else and believes that force is the answer to EVERYTHING, an Iranian Administration which is not playing ball, unsettling noises from other OIL producers who are obviously concerned about U.S. Foreign Policy and a fairly nationalistic approach to Energy Policy in Russia. This is not the sort of environment in which there is much possibility that the price of OIL will fall through the floor any time soon. OIL shorts will have to be fast on their feet.

Meanwhile GOLD continues to rally. GEOPOLITICS may not be all over the front pages but Israel is keeping up its seige of Gaza and there are all sorts of nasty rumours about what is likely to happen in the region some time soon. Inflationary pressures are not dead, China is still buying commodities and making deals with primary producers everywhere and the U.S. Administration is doing its collective best to remind the world of Humphrey Bogart's role in the Caine Mutiny. In short the GEOPOLITICAL situation would require careful handling by skilled leaders and we don't have any on hand at the moment. So the outlook for GOLD still looks good.

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