Thursday, July 27, 2006

Condoleeza Rice Goes Down in History

EUR/USD 1.2739 Hi 1.2753 Low 1.2706
USD/JPY 115.60 Hi 116.43 Low 115.54
EUR/JPY 147.29 Hi 148.07 Low 147.18

Well Condoleeza Rice has something to add to her C.V. now that she successfully blocked all calls for an immediate cease-fire in Lebanon. Her actions in Rome yesterday will go down in history. What a great way to be remembered. The spurious justification is you can’t have a cease-fire NOW, because the details haven’t been agreed. Well that certainly makes sense. Let’s have more killing and destruction in the meantime.

The outcome of the Rome meeting was hardly a surprise. When the U.S. announced its speed shipping of more missiles to Israel last week, the intentions of the U.S. Administration were obviously not PEACE. The Rome meeting was just a face-saving charade: a P.R. exercise for Western voters. The Israelis, who seem to understand P.R. a little less, have since announced that at the Rome meeting THE WORLD gave Israel permission to continue their attack on Lebanon. The Israelis didn’t stop there. The Israeli Justice Minister also announced that since the residents of Southern Lebanon have had sufficient time to leave their homes, anyone still in the area must be connected to Hezbollah. The implication here is that anyone still in Southern Lebanon (the old, the infirm, the stubborn, those with nowhere to go, the young, the slow, the disorganised, the resigned) is NOW a legitimate TARGET for the Israeli army. Israel is is expected to increase the intensity of its campaign. Southern Lebanon and its residents will be a new car park.

Not,of course, that the Israelis want any witnesses. In keeping with tradition, they have attacked U.S. Observers and media outlets and can be expected to attack any foreign journalists who may be in the area. Dead men can’t talk. The liet-motif of gangsters everywhere.

The trouble with gangsters, however, is that they can’t be trusted. An alliance of convenience today, may not be so convenient tomorrow and voilà suddenly you are the guy in the cement shoes. So far it seems the Israelis haven’t considered the possibility that the U.S. will one day cancel its blank cheque and leave them exposed in a region which, right now, is not exactly Israeli friendly. LINK Perhaps they should have a little chat with a guy in the cell in Baghdad: Saddam Hussein. Once a much-touted ally of the Anglo-American alliance and now a man awaiting execution while his country lies in ruins.

But no matter, the people who start wars rarely think about how they are going to end. They assume they will win. History suggests that that isn’t always the case. No matter how well armed you are.

What Condoleeza Rice did yesterday was to further undermine the standing of the U.S.A. in the eyes of the world. She, and the Bush Administration, assume that there will be no negative consequences: the rest of the world will continue to fund the U.S.A. and the U.S.A. will be able to continue imposing its terms in strategic alliances and trade. They could be in for a bit of a surprise. NOW increased political isolation can be added to shifting interest rate differentials, a huge external deficit and a Federal Government Deficit which is out of control, as a reason to sell the USD.

But back to mild old Ben Bernanke. Well he did his thing. Reassured everyone that the situation was under control. The economy is “moderating”, inflation is present but not a major risk, the FED is on the case and certainly won’t do anything rash. Translation: rate hikes are on hold. For now the Stock Market is going with the “rates are on hold” story and ignoring what “moderating” growth and higher OIL prices will do for company profits. That can’t last.

The FOREX Market didn't need any prodding. The USD bears ran with “the rates are on hold” story. And with Miyako Suda at the BoJ making noises about further rate hikes in Japan, the USD/JPY is leading the charge. The short term target for the USD/JPY is 112.00. The USD bear trend is only just starting to hot up. All we need is more missteps by Bush and Co., and given their record, that is only a matter of time.

OIL 74.35
GOLD 645.70

With no cease-fire in Lebanon, ugly rumours about Stage Two of the neo-con Middle East plan, and little incentive for people in the wider world to hold the USD, GOLD saw buying interest yesterday. More can be expected.

Similarly with Iran clearly in the cross-hairs of the U.S. neo-cons, OIL prices have only one way to go: UP. Iran, after all, is sitting on very large oil reserves. In the short term Iran could chose to stop oil exports altogether, should the U.S. turn up the heat. While an outright attack on Iran would do to OIL prices what the invasion of Iraq did: see them double.

Any slowing (sorry “moderation”) in U.S. economic activity will be too little, too late to have an impact on OIL prices. The short term target is USD 80, but USD 100 a barrel seems to be the consensus forecast.

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Wednesday, July 26, 2006

Skating on Thin Ice

EUR/USD1.2586 Hi 1.2601 Low 1.2558
USD/JPY116.82 Hi 117.26 Low 116.65
EUR/JPY147.06 Hi 147.50 Low 146.79

Bernanke is back on again this afternoon. His job is simple: convince the markets that there is nothing fundamentally, structurally wrong with the U.S. economy and that everything is going to plan. Think of him as the economic equivalent of Condoleeza Rice: democracy is being born in the Middle East. Everything is going to plan. Yeah right. And if you don’t believe me just ask the lucky people in Lebanon and Iraq. Either country would make a great holiday destination right now.

Bernanke’s brief is to reassure domestic markets that the FED is aware that tighter monetary policy poses risks for domestic economic growth. The assumption being, of course, that an aware FED will not raise rates high enough to tip the economy into recession. This is of course a lie. The FED has to tip the economy into recession because current levels of domestic consumption are being financed by offshore capital inflows. That is: current levels of economic activity in the United States would not be possible without large sums of money coming into the country every day. This dependency makes the U.S. dependency on foreign oil look like very small bananas. If the whims of foreign oil producers make you uncomfortable, don’t even start to think about the goodwill of foreign savers.

Signs of nerves, hints of problems, anything but smooth-talking confidence in Bernanke’s own abilities would be badly received. His main strategy, in line with the strategy of the Bush Administration as a whole, is to deny the existence of big problems, focus on minor difficulties (wages growth, inflation) and announce bad news only when it has become obvious to everyone else on earth. Think of it as message massaging. What is actually taking place is never in question, but how you present it to the wider world determines whether or not you get away with it.

Bernanke’s problem is not that higher rates will eventually choke off the U.S.’s debt-financed, consumption-driven economic expansion. They will. Bernanke’s problem is that the FED needs to choke off the debt-financed, consumption-driven growth (which has created this huge external funding requirement) without sending domestic markets into a tail-spin or scaring off foreign capital inflows in the meantime. And that is a BIG PROBLEM.

The litmus test on how well he is selling his story is the USD. If the USD stays steady or even appreciates, the markets and foreign investors have bought the story.

Meanwhile in Oil Producing Countries in the Middle East there is ominous talk about reviewing the USD currency peg.

Let me spell this out. If OIL exporting nations no longer peg to the USD they will not necessarily keep holding large FX reserves denominated in USDs. That is: they will buy less USDs. That would be one more source of foreign capital down the toilet. And there is not really a long list of foreign countries lining up to offer Uncle Sam financial assistance right now.

The USD has seen precious little safe-haven buying during the recent flare up in the Middle East. No doubt the PPT has been at work, but results have been disappointing. What’s more people like Robert Rubin, Larry Summers and Paul Volcker haven’t exactly been cheerleading the blow-out in the U.S. current account deficit (which is a measure of that external funding requirement). Isn’t that, like, unpatriotic? I mean, there is a war on. Can’t we arrest these guys? Or something.

Meanwhile, Right Wing Think Tanks (an oxymoron in the making?) are apoplectic that the Bush Administration is actually talking to its allies. (As opposed to bombing them, I suppose.) They suggest that Rice has gone all soft on the Middle East, that calling any kind of cease-fire would send the wrong signal to "the terrorists". Yada. Yada. Yada. They were obviously in a different dimension when the present escalation got underway. LINK Not, that it can be expected that they will change their belligerent rhetoric when presented with the facts. The target is Iran. From their point of view they can’t get to Iran unless the present conflict spirals out of control. A cease-fire is the last thing they want.

OIL 73.97
GOLD 630.50

What the Right Wing Think Tanks seem to have missed is that the balance of power in the world has shifted. The U.S. currently depends both on foreign capital and foreign oil. Lots of both. When you become a debtor nation, as the U.S. most assuredly is, you can no longer call the tune. You have to play ball with your creditors. That is the reality. Up till now the creditors in question were still suffering from post-colonial stress. They did what Uncle Sam told them to: namely hand over their cash for safe keeping. Ha. Ha. A couple of generations have grown up since the end of colonialism. And nobody is buying the idea that the rest of the world has to fund the U.S. any more.

Right now the Bush Administration has to talk to its allies, to its enemies and anyone else who will listen. There is no question that the U.S. can just do what ever it wants and tell everyone else later. Times have changed.

Ironically it is the neo-con push for an Iraqi invasion that helped push OIL prices through the roof and increased U.S. dependence on foreign capital (to pay for the bombs, you understand). One day these delusional souls may start to come to terms with how the world actually is, as opposed to how they think it should be.

For the rest of the world it’s a bit like having a mad aunt in the attic. Only this one has nuclear bombs.

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Tuesday, July 25, 2006

Another U.S. Official Saves the Day

EUR/USD 1.2650 Hi 1.2673 Low 1.2604
USD/JPY 116.72 Hi 116.99 Low 116.51
EUR/JPY 147.68 Hi 147.48 Low 147.29

Condoleeza Rice's surprise visit to Beirut was well timed. Just when the DOOMSDAY CROWD was looking good and the Hezbollah-Israeli conflict seemed sure to ignite a region wide war, in flies Condi. WOW!! This makes Bernanke's timely testimony look like small beer. What timing, what panache !! Yesterday, just as Condi appeared miraculously in Lebanon, in Gaza the Palestinians offered a cease fire, Syria said it was open to talks, Israel noted that it wasn't in principal opposed to the deployment of a U.N. peace keeping force in Southern Lebanon. The only missing piece was Iran. But hey what's not to like ? Things were looking good. With Bernanke coming across all dovish, corporate results surprising mostly on the upside and peace looking possible in the latest Middle East conflict, the scenario was pleasing.

While the media and the markets celebrated, the reality on the ground is just a little less hopeful. Israel is continuing to bombard Lebanon, whose economy and infrastructure now lie in ruins, despite strident calls for a cease-fire by U.N. observers and dark mutterings about war crimes. And the chances of a cease-fire happening any time soon look remote. Rice has not in fact even called for a cease-fire. The idea being that a cease-fire can take place only once Israel has reached its military objectives. Only no-one has been told what these objectives are. It can be safely assumed that more bombing is required. Nuking Iran

Israel just placed an urgent request with Washington to supply more rockets. No questions have been raised about what this means about Washington's complicity in what some have construed to be war crimes. And no question has been raised that Washington will in fact meet this order, pronto. So the military escalation continues. The Lebanese have rejected Rice’s Peace Plan, no-one is even negotiating with Hezbollah (who are in fact the other party in this conflict) and the U.S. hasn’t asked the Israelis to back off. The Criminal Accomplice

The USD saw some buying interest on the recent “positive” developments in the Middle East. Not enough buying interest to break ranges, but just enough to give the USD bears a little scare. What happens from here will depend both on GEOPOLITICS and economic fundamentals. While corporate profits in the States are still looking good, economic data points to continued weakness. Ultimately weak economic fundamentals and deteriorating interest rate differentials should help USD bears win the day. War and the USD

Hungary and India have moved to hike rates. Europe is expected to move next week. China is tightening monetary policy and Australia and New Zealand are expected to move soon. The global shift to tighter monetary policy conditions is continuing. With inflationary pressures surprising on the upside and commodity markets remaining tight, there is no reason to expect a reversal in this trend.

Stock Markets, however, are making hay while the sun shines. Strong economic data in Europe, together with the positive performance of U.S. markets, has seen a return of the bull. For now the positive side of U.S. “moderation”, with the implied end to rate hikes, is allowing markets on both sides of the Atlantic to concentrate on the good news.

OIL 75.47
GOLD 622.40

Commodity markets are a chatter with talk that Hedge Funds have sloped off to play with "soft commodities". No need to worry about the volatility of OIL or GOLD any more. Everything can get back to normal. In addition, with a moderation under way in U.S. growth (note there is nothing as shabby as a slow-down happening in the States) the idea is that demand for OIL will soften and Ben Bernanke's dovish forecast for OIL prices will start to look a lot closer to reality than the Doubting Thomases would have us believe. The commodity price bears point out that weaker growth in the U.S. and tighter monetary policy conditions in Asia should start to hit commodities soon.

So far the fall off in the price of OIL has been brief and unspectacular. OIL is back above USD 75 a barrel. The Middle East "Peace Process” is starting to look a little bit like a positive press blurb designed to keep markets (and the voting public) distracted while military operations continue.

U.S. Officials have certainly proved adept at soothing troubled markets recently. It will take real results, however, before a new trend emerges in commodity prices and GOLD. Inflation is still out there. GEOPOLITICS don't look good and the Bush Administration still looks like an apologist for the Israeli Government.

The most disturbing possibility is that Israel is following a neo-con game plan which hasn’t been made public yet. Judging by the U.S. attitude to the recent escalation, the refusal of Rice to call for an immediate cease-fire, the Bush Administration's response to Israeli initial bombing of Lebanon's port and airport facilities (the Administration blamed Syria and Iran at the get go and expressed no surprise at the Israeli attacks - which shocked and surprised everyone else) it doesn't look like PEACE is on either the U.S. or the Israeli Agenda. And the rest of the world has not taken an aggressive enough approach to the crisis to force a cease-fire. So if PEACE is not on the agenda, what is ? If you want to know, find a neo-con and ask him.

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