Friday, December 08, 2006

The Clever Look for Clues

EUR/USD 1.3342 Hi 1.3351 Low 1.3237
USD/JPY 115.01 Hi 115.91 Low 114.95
AUD/USD 0.7919 Hi 0.7925 Low 0.7868
EUR/JPY 153.44 Hi 153.73 Low 152.94

Well we keep getting more data and the really clever are sifting through it looking for clues. Today saw the release of November Non-Farm Payrolls for November in the States. Big deal. Now we will have all the pin heads out there talking about their significance and why they are important and "if there was a real chance of recession in the States then there wouldn't be any job growth". Blah, blah, blah. If there was ever an argument AGAINST sending lots of people to University this is it. These very smart people, the priests of our age, would have us believe that if you turn the data around in just the right light then its REAL significance will become apparent. A significance which is not apparent to the untrained eye at first glance. So I'll leave the interpretation of the minutiae of the data to the very learned.

Let's stick to the facts. And the facts are not inspiring. Unless you believe finding yourself in the sea of debt without an income is inspiring. And that, in a nutshell, is where the United States finds itself right now. Although the very learned may believe that there is a magic way of digging yourself out of a financial nightmare. In fact there isn't. The United States is in debt to the rest of the world, it does not produce more than it consumes, in fact it consumes more than it produces. Hence levels of U.S. external debt are destined to grow. The U.S. is not running a Trade Surplus, it is not running a Current Account Surplus in fact deficits in both are at RECORD LEVELS. That is they are levels never before recorded in U.S. history. As you may intuit that is not good. In addition, the U.S. finds itself at war in two foreign countries, essentially without allies. Both wars are going badly. The U.S. Administration has not proved itself adept at anything much and is unlikely to be able to resolve its Foreign Policy dilemma with flying colours. Hence the low profile of the supposed Foreign Policy "whizz kid", Condoleezza Rice.

But it gets worse. At this crucial time in its history, with a desperate need for foreign capital inflows JUST to keep the show on the road, the U.S. finds itself surrounded with suspicion. Which is what happens when you start major aggressive wars against the advice of the U.N. and disparage your critics openly. Not that the New York Post has changed its mind. Oh, no. Now, in addition to the French and the U.N., the authors of the recent report on Iraq are being disparaged as "Surrender Monkeys". The war in Iraq must go on and it must be won. To this end Mr. Rupert Murdoch, the American Citizen, has decided to volunteer all of his adult children for active duty in Iraq. Just kidding. But then you knew that didn't you?

So the U.S. finds itself in debt, not producing enough to finance its way in the wider world, at war, without friends and in a world where nobody likes them and/or trusts them any more. And if you still trust the current U.S. Administration here are two words: Tony Blair. Tony Blair bought into the George W. international game plan early on in order to escape criticism for his less than stellar domestic performance. As a direct result his international track record has now completely eclipsed his domestic track record as a complete disaster. Another own goal for Tony.

There is no easy way out of this mess. No magic solution. 10,000 extra jobs here or there are not suddenly going to make the U.S. economy a model economy because the U.S. economy is not a model economy and it is not turning a corner. Unless for corner you mean slippery slope. If the U.S. had found a real way out of its financial morass by say inventing some spectacular new industry we would have noticed by now. We would all be buying products "Made in the U.S.A.". And we're not. You may have noticed. So if the optimists are reduced to digging around in the minutiae of the data we have a problem. And to suggest that the U.S. Bond market is selling off because a U.S. recovery is coming rather than because the offshore investor is NOT (coming that is) is disingenuous to say the least.

Meanwhile in the EuroZone Trichet had his little conference, attempted to polish up his reputation and hiked rates. He also rather pointedly refused to notice what is happening to the exchange rate but his buddies back in Paris have sure noticed and they are not happy. Rate hikes, for now, are OFF the agenda in Europe and all options are on the table. And that means, if things in the U.S. really start to turn ugly, rate CUTS are on the table. "A priori" (I do wish he would learn to pronounce "a priori" and "unwind") nothing is excluded. Not that this "ALL OPTIONS" turn of events is going to do much more than slow the USD descent. Mr. Trichet may rub his hands in glee at being the Central Banker with the mostest (315 million people) but things in the EuroZone are going to be infinitely more complicated as a result of a U.S. economic downturn. And neat, tidy supposed straight-line correlations aren't going to be enough to save Trichet's bacon if things get tricky. So after the FED PAUSE we have the ECB PAUSE. What we don't have is a case for a USD rally.

OIL 63.36
GOLD 634.70

If the USD rally is over, as appears likely, then so is the GOLD correction. It's back to PLAN A. And Plan A involves DIVERSIFICATION, selling USDs and buying GOLD.

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