Tuesday, November 14, 2006

The Warm Post-Election After Glow

EUR/USD 1.2825 Hi 1.2845 Low 1.2800
USD/JPY 117.62 Hi 118.20 Low 117.40
AUD/USD 0.7652 Hi 0.7666 Low 0.7618
EUR/JPY 150.85 Hi 151.38 Low 150.57

Positive GDP data released in Japan overnight, together with the growing consensus that Japan may just lift its Cash Rate to 0.5% at some point over the next three months, hasn’t really done a lot to help YEN bulls, or USD bears for that matter. There is a tug of war going on. Is the U.S. economy in trouble? Yes. Is it in bigger trouble than the Japanese economy? Probably yes, but it’s hard to tell. Will the BoJ move before the FED? Again yes, but it’s not a slam dunk. Yet.

The story which is making the rounds at the moment is that, despite the Real Estate Meltdown, the U.S. Consumer is alive and kicking. Which may or may not be true. Data scheduled to be released today in the States will be poured over for signs that the U.S. Consumer can and will keep the U.S. economy, and by extension the Global Economy, ticking over. While cheaper OIL prices, stable interest rates and some election generated optimism may give the U.S. Consumer a short term boost, longer term the weight of accumulated debt will be felt.

There is a warm glow about what is happening in the States right now. A lot of people are cheering because Donald Rumsfeld has left office, because the Democrats took both houses in the elections and the idea is that something has turned the corner, in a positive way. The semi-official view of U.S. politics is this: George W. Bush is not really in charge, he is just a puppet-type figurehead. The real power behind the throne is/was in the hands of the Neo-Cons. According to this logic once these Neo-Cons were neutered, or removed from office, as Rumsfeld has been, then the U.S. Government will return to “normal”. The idea here is that George W. Bush is not really the architect of the War on Iraq and he is just some kind of down-home guy who is out of his depth in Washington. There doesn’t seem to be much justification for this belief. George W. is still President and he still has a very clear political agenda, which has had so far a lot of unfortunate consequences, particularly for the unarmed citizens of Iraq and for U.S. home owners. The upshot is that the belief that the removal of some of the dark forces behind the throne will fix the problem is probably a trifle optimistic.

What is significant in the recent election results though is that with the return of the populist politics the downward trajectory in U.S. Wages is probably over. There is a limit to how far you can squeeze wages. We have already seen the start of this in the recent GDP figures. Private Sector Wages and Salaries rose 8.5% in Q3.

Indeed, a great deal of the so called surge in U.S. Productivity in the past couple of decades was really the flip side of the squeeze of Labour costs. There are essentially two ways you can increase productivity: invest in whizz bang technology and education so that your Labour Force produces more with less or force down the Cost of Labour. The U.S. basically took the second option. But there is a limit. And if something has turned the corner in the U.S. that’s it: the Wages Share of GDP is more likely to rise than fall from here on in. And that means Corporate Profits will be squeezed. Though the Stock Market bulls aren't talking about that. Not now.

What’s more Wages rises are a no-no in Central Bank land. The price of everything can double and that’s OK but that doesn’t mean that the average Joe will be allowed a Wages rise sufficient to keep paying the bills. If that happens our unelected officials in Central Bank land start muttering darkly about secondary-round inflation. So if you don’t want to see rates rise keep fighting off those Wage rises. Let them eat cake.

In short, more populism in Washington means a greater likelihood that the FED may have to raise rates at some time in the future. So pay careful attention to the Inflation numbers which are also due for release today. Any sign of inflationary pressures and the very recent recovery in the USD could find further legs. This is a short term trend, but a trend nevertheless.

OIL 58.36
GOLD 625.10

Over at Morgan Stanley Stephen Roach is going with his: China slowdown story. And that story might be the big surprise going in to 2007. While the market is still broadly bullish on commodities, world growth and, well, pretty much everything, Commodity Markets are showing signs of stress.

And the big Commodity Market currency, which was supposed to rally on the back of interest rate differentials and commodities is under pressure. As global economic growth continues to slow that story is likely to get more press and the AUD, which doesn’t really have anything going for it except short term speculative buying interest, is unlikely to be much of a positive story in 3 months or so. At which point you can expect more headlines about unfortunate International Trade statistics, Foreign Debt, Current Account Deficits, the Australian drought and slowing domestic economic activity. Selling the AUD against the JPY and the EUR and the USD are all likely to pay dividends. Though the carry, of course, will be negative. Slightly less against the USD.

While Commodity prices as a whole remain under pressure, the case of OIL and GOLD continue to respond to slightly different stimulus. Strange things are happening in the Middle East. There have been resignations from the Government in Lebanon, Iran and Israel are one again trading veiled threats. Nothing positive is happening in Iraq and nothing positive is likely to happen there for quite some time. Tony Blair may be trying to revive his political legacy by brokering some kind of a Peace Accord but so far his success has been zippo. And that goes right from the start of his mandate, so there is no particular reason to believe that he has suddenly found the way forward.

GOLD and OIL are only likely to follow the rest of the commodity market southwards if GEOPOLITICS does not return to the front pages any time soon. Oh, and if the present show of USD strength continues. Neither is a given.

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Comments:
Its still puzzling to me as to why Blair supported Bush so steadfastly down the rathole that has become Iraq. I mean we all know what a dangerous moron Bush is, but Blair has appeared to always be so intelligent regarding most things, then to throw his lot with the neocons regarding Iraq--it just doesn't make sense.

www.minor-ripper.blogspot.com
 
I think Blair's intellectual ability has been over-estimated. He speaks well and that seems to have been enough to convince a lot of people in Britain. I don't think there is a lot of evidence to suggest that the man is brilliant.
 
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