Wednesday, November 01, 2006

Raving Loonies

EUR/USD 1.2752 Hi 1.2770 Low 1.2742
USD/JPY 117.04 Hi 117.16 Low 116.73
AUD/USD 0.7743 Hi 0.7743 Low 0.7729
EUR/JPY 149.31 Hi 149.39 Low 149.05

The Financial Times is still going with its strategy of talking up the Anglo economies while heaping scorn on everyone else. It's hard to understand why they are doing this, but the remarkable bias and the extra-ordinary use of misleading statistics by the venerable newspaper make the conclusion inevitable. Monday was a doozy in this regard. Front page, and entirely without irony, the FT carried the headline that the U.S. is leaving Europe far behind in R&D. Things are obviously not well in Europe. Ominously the FT notes that "Germany is the worst performer among the larger European countries". (Subliminal message: the Euro is doomed.)

Turn to page 4 (same Monday edition) and there is a break down which provides yet more detail. And which darling of the financial markets holds N°1 spot in R&D SPENDING? Why it's FORD. N° 3 place is held by General Motors. And according to the FT "Evidence is growing to support the premise..... that.... Companies that spend more on research and development tend to perform better than their competitiors in sales and profits growth." I'm not sure what that evidence is. None is provided. On Page 11 we have another column which is broadly positive about Detroit even though it is noted that "Both General Motors and... Ford are still bleeding cash, will post multibillion dollar losses this year" and are losing market share. In fact, according to the FT, "GM and FORD together commanded 40.9% of the US car and light-truck market... down from 49.9% two years earlier". Oh dear.

Over to Page 13 where Wolfgang Munchau points out that "Germany has regained the competitiveness it lost after unification" and its "current account surplus is approaching 9% of GDP". Munchau is not happy about this (what FT journalist would be?) because "the build-up of internal imbalances (in the EuroZone) is such a serious issue". (Subliminal message: the EURO is doomed.) He makes no attempt to explain why it is a serious issue, so I guess we should just take his word on that. No matter, let's get back to that troublesome lack of R&D spending in Germany. Despite the fact that Germany is not SPENDING the requisite amount of money on R&D, it does seem to be making rather a lot of money selling its stuff to the rest of the world. At least that's what the German Trade SURPLUS tells us. So something is not right here. Either the Germans have found a way to make their R&D money go further or the Americans are wasting their R&D money on conferences in Las Vegas where they discuss how to produce products that no-one wants.

Conclusion: the U.S. has found another way to SPEND money (now that's a novelty) and we think that this new kind of spending is really good but in the real world of bottom lines and selling products there is no indication at all that the money is producing results. In fact there is quite a lot of evidence to suggest that, as with much of the spending going on in the U.S., its just MORE money down the drain. Unless of course GM and Ford are spending their R&D dollars on something altogether different from the quest to come up with a decent car that they can sell profitably.

In the same vein the FT has done rather a lot of Italy bashing lately. (The Euro is doomed.) The upshot of most of the FT analysis is: Italy will be forced to leave the Euro and maybe even default on its Government Debt. (The Euro is doomed.) In the interests of balance here is a link to a report by Eric Chaney at Morgan Stanley which takes another look at the Italian data and comes up with rather different conclusions:

Italy is on the mend.

What the FT obviously needs is a join-the-dots person. I know that the editorials are supposed to do that but when the facts don't fit with the editorials then someone is not doing their job. Either they should stop reporting the facts altogether or start to provide opinions which are in some way related to what is happening in the real world. If it continues with it current editorial bias the FT runs the risk of becoming a quaint relic of a past era when crustless cucumber sandwiches were the high point of fine dining. And it still doesn't mean the FT can convince anyone that the EURO is doomed. Credibility is something, as Tony Blair has found, which once lost is somewhat difficult to recover.

Anyway enough of that. More bad data out of the United States yesterday. Quelle surprise!! And the USD is still under pressure. We have Non-Farm Payrolls out at the end of the week. Construction Spending is out today. No good news is expected there. Overall, slowing economic conditions are expected to continue in the United States. And, for now, those conditions are expected to keep a lid on the USD. Over in Australia the Treasurer, Mr. Peter Costello, is making noises to the effect that the best of times are over. Commodity prices, according to Mr. Costello, have already peaked. Which is interesting because during the entire Commodities BOOM Australia, a Commodity Exporter, never really managed to turn its Trade Deficit around. Anyway, the Inflationary beast and the Credit Growth beast are not slain in Australia yet so the market is expecting another interest rate hike soon. This, together with USD weakness, has seen the AUD bid pretty much against everything. And that is another accident waiting to happen.

OIL 58.41
GOLD 614.00

GOLD is doing its UP, UP and AWAY thing and OIL looks soft. I haven't got a lot to say about either, but here is a rather amusing article about the USD and why it is DOOMED. The article is written by someone with a political agenda SO LARGE that he can make the following statement without laughing:

"As long as oil is denominated in dollars, the central banks will be forced to stockpile American scrip regardless of its value. It’s no different than holding a gun to someone’s head."

Hmmmm. He might not be laughing but I nearly choked myself to death on that one. I'm not going to bother explaining why the guy is beyond help. Needless to say, the mere fact that these type of articles are making the rounds makes me nervous about selling the USD at this juncture. When the raving loonies discover a trend then, at the very least, it's time to tighten up your stops and prepare to quietly walk away if necessary. The USD downtrend may not be over but a PAUSE in that trend can not be ruled out.

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