Monday, November 20, 2006

Stabbing in the Dark

EUR/USD 1.2838 Hi 1.2854 Low 1.2817
USD/JPY 118.06 Hi 118.21 Low 117.77
AUD/USD 0.7685 Hi 0.7703 Low 0.7677
EUR/JPY 151.59 Hi 151.71 Low 151.07

There is a certain style of financial market trading which relies on strategies such as these: double up to double your luck, triple up to really…. well never mind. Traders who engage in these type of strategies traditionally take a position and when they see that these positions are losing money then they simply close and take an equal position in the opposite direction. After losing money by, say going short Treasuries, they then manage to lose more by going long. In vernacular terms this is called: "Taking a stab in the dark when you really don’t have a clue".

To see what happens when you apply this type of strategy to the wider world you only have to look at the Anglo-American strategy for the Middle East. In Britain Tony Blair is now suggesting that Iran needs to be brought into the fold. That is: the Anglo-Americans must somehow convince the Iranians to take the Iraqi mess off their hands in exchange for warmer economic and political relations. The Iranians, who had cause enough to be unhappy with Britain and the U.S. before the Iraqi invasion, don’t seem to be particularly keen. This is not surprising given that in the previous Western sponsored war in the region, the Iraqi attack on Iran, hundreds of thousands of Iranians died. Many more deaths are more or less guaranteed if Iran chooses to become involved in the Iraqi debacle. Blair seems to think he is ensuring his legacy by coming up with the idea of embracing Syria and Iran, and he may well be, but its not the legacy he’s hoping for.

Meanwhile Mr. Rupert Murdoch is kindly publishing the thoughts of Henry Kissinger on the subject in the London Times. Both Murdoch and Kissinger have impeccable track records in this arena. Murdoch, together with all his “For-Sale” newspaper editors, was a keen proponent of the Iraqi invasion. According to Murdoch the impact of the invasion was essentially going to be lower OIL prices. This would have been good for the Western economy, only it didn’t happen. In a perverted kind of way, though, Murdoch was at least open about the motivation for the invasion. Kissinger has a rather more tainted track record. Global domination and paranoid thinking seems to be more Kissinger’s style. So more comment from his direction is warmly welcomed.

Meanwhile George W. is in Asia making bizarre noises to the effect that the U.S. should not have withdrawn from Vietnam. Why he should choose to make these noises in Vietnam is a little beyond me. Does he expect the Vietnamese to cheer the idea of a permanent occupation by a hostile foreign army? At any rate this is the lesson that George W. seems to have taken away from his visit to the now unoccupied, peaceful and economically vibrant Vietnam: "We are not leaving". Obviously George W. seems to think that the American withdrawal from Vietnam was a mistake which ultimately led to peace and Vietnamese economic resurgence. Certainly we don’t want anything like peace and economic vibrancy in the Middle East. This appears to be the bizarre "lesson from Vietnam" which should now be applied to the U.S. invasion of Iraq. It does make you wonder just how George W. perceives the world, doesn’t it?

Oblivious to what George W. is actually saying, the Democrats are making plans to withdraw and George W. seems to have taken this as an opportunity to propose an expansion of the U.S. engagement in Iraq. George W. is still President and a President with a great deal of executive power. He is also a President who never takes the blame when things go wrong, jettisons those who don’t get him where he wants to go and continues doggedly to pursue policies which have failed. Word has it that Karl Rove will be the next to go.

Nevertheless the world is in safe hands and, as a tribute to improved global security, the Japanese are also making noises about their need for a greater defensive capability and, potentially, nuclear weapons. So, after Iran, North Korea, Saudi Arabia, Algeria, the United Arab Emirates, Egypt, Morocco and Tunisia, we now have Japan worried and looking to increase its military capabilities. The world just keeps getting safer.

Although GEOPOLITICS is a little fraught right now in the economic sphere there is nothing to worry about. Governments of the world may have completely lost their ability to address even the most simple economic problem but, no fear, the Central Banks of the world have everything under control. Over the weekend the G-20 announced that interest rates will be heading higher. This is in case you hadn’t noticed that they already are. After panicking and driving interest rates down to almost nothing following the bursting of the Dot-Com bubble Central Banks are now doubling up and planning to go the other way. Yes, stab in the dark strategy is everywhere.

Financial markets, of course, cheered. Depending on how you define cheer. Stock markets everywhere are down. The USD/JPY got a little boost from the sharp sell off on the Nikkei and the less than spectacular outlook for Japan. But the USD doesn’t look like a very safe bet right now. Data released Friday reminded everyone of just how bad a market implosion can be and the Residential Real Estate market in the United States is not a market implosion that can be easily quarantined. So potential downside for the USD is wide open. With Bush in the Whitehouse, Bernanke the mild at the FED and the Democrats back in charge of both Houses, but without the requisite executive power or a coherent PLAN, the question of LEADERSHIP has never been more pertinent.

Not that leadership in the rest of the world is heartening. But leadership which is quite that bad at such a critical juncture is pretty hard to match anywhere else in the world. "Sell the USD rally" is still the way to go and with Japan looking a bit iffy, EUR/USD is likely to be the biggest beneficiary.

OIL 58.45
GOLD 624.50

GOLD remains bid. And given current circumstances how could it be anything else? GOLD bears need to find a credible alternative. Right now there are none.

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Read about how W spent his time while visiting Vietnam...
His 15 minutes "outside" his hotel room were no doubt very productive.
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