Thursday, October 05, 2006
Leverage versus the Real World
EUR/USD 1.2713 Hi 1.2722 Low 1.2692
USD/JPY 117.64 Hi 117.95 Low 117.52
AUD/USD 0.7470 Hi 0.7480 Low 0.7448
EUR/JPY 149.57 Hi 149.96 Low 149.27
Once upon a time there was civilisation, good government and the rule of law. Then the barbarians took over. Guess what? The barbarians are back. You can tell because they have two principal exports: mindless violence and little green bits of paper. The Americans are doing just great exporting both to the rest of the world. Everyone wants to own these little bits of green paper because they give you more little bits of green paper at the rate of around 5.25% a year. In addition, with these little green bits of paper you could, potentially, buy your own capacity for mindless violence and then the world would be a much better place. At least for the war mongers and the arms dealers.
Anyway right now there is a fight going on. That fight is about reality. Or rather perceptions of reality. In the make believe world the U.S.A. is bringing democracy to the Middle East, Condoleezza Rice is in the Middle East right now working towards that aim. In the make believe world repealing laws which previously protected against unlawful arrest and inhumane treatment of prisoners will make Americans safer. In the make believe world the very heart of all the conflicts out there is the clash between radical Islam and progressive America. Or if you like between Islamo-Fascism and American values, however they may be defined. As Joseph Heller would say: we are fighting for "Mom's apple pie". Pity no-one in America reads the classics anymore. Except the Bible. Which is a classic too and everyone in progressive America, including George W., supposedly reads it. Except for the bit about "Do not kill" and "Let your 'Yes' mean 'Yes,' and your 'No' mean 'No'.
But then they seem to have a problem with definitions in America. You know you're in trouble when even really little words like "is" can't be defined precisely. What does torture mean? What does the Geneva Convention mean? Isn't it just a legal document which we can redefine with the help of crafty lawyers? What does anything mean anyway? It's all relative and EVERYTHING can be spun. Just watch.
Don't bring them on, just bring back the Middle Ages. Mission accomplished.
And while all that is happening U.S. markets have caught onto the idea that the economic slow down in America is now OVER and the next cyclical economic upturn is about to begin, with a little help from the FED. So the Stock Market is making headlines. Good headlines, headlines which may distract the American public from the fact that the value of their real estate is falling through the floor, with more to come.
In this make believe world real trends don't matter. What matters is leverage. With enough leverage, and a little bit of spin, trends can be created. So it doesn't matter that the U.S. hasn't run a trade surplus since the beginning of time. It doesn't matter that the U.S. is dependent on the flow of foreign savings to finance growth. After all, the U.S. is using these capital inflows to build infrastructure, to educate and train their workforce, to build productive capacity. In this way the money borrowed will provide a return which will be one hundred times more than the cost of funding. Er, no actually that doesn't appear to be the case. Over the past decade or so the U.S. has used the money to inflate assets such as Housing and Technology Stocks, and to wage war on Iraq and Afghanistan. None of these "investments" will see a positive return. Indeed, the deflation of some inflated assets is already under way. And even Bernanke doesn't believe that that particular trend is over yet. FED PAUSE? You betcha.
And the wars, while good for some, will ultimately just bleed the U.S. Treasury. This sounds more like Osama's plan than Karl Rove's. But then Osama probably has a bit more of a long term horizon than say the next U.S. election.
So much for the real world. In the make believe world of leverage and spin real-world trends don't matter. What matters is that the USD currently provides a better rate of return, if you consider short term interest rates, than any other major currency. So, provided that there is not a major depreciation in the USD, you are better off holding USD than say JPY or EUR. Of course a 2% depreciation of the USD versus the Euro will wipe out that extra return. A 5% depreciation of the USD versus the JPY over a year will do the same. We are not talking huge margins here. But for now the market is happy with that. When the market turns, as surely it must in this leveraged world, the results will be ugly.
U.S. fundamentals remain USD negative. The Carry Trade Crowd is testing the top of the USD range right now. A failure to sustain a break above recent USD highs will lead to a bail out. And bail outs in this highly leveraged, short-term trading market can be brutal.
OIL 59.40
GOLD 571.00
OIL is holding as the market digests OPEC's intention of reducing output. This seems to be a not particularly nice thing for U.S. allies to do at a time like this. But then the Bush Administration needs to go back and review "How to win friends and influence people". The chances that the U.S. "friends" in OPEC will take into consideration U.S. needs right now are, well, quite small.
USD/JPY 117.64 Hi 117.95 Low 117.52
AUD/USD 0.7470 Hi 0.7480 Low 0.7448
EUR/JPY 149.57 Hi 149.96 Low 149.27
Once upon a time there was civilisation, good government and the rule of law. Then the barbarians took over. Guess what? The barbarians are back. You can tell because they have two principal exports: mindless violence and little green bits of paper. The Americans are doing just great exporting both to the rest of the world. Everyone wants to own these little bits of green paper because they give you more little bits of green paper at the rate of around 5.25% a year. In addition, with these little green bits of paper you could, potentially, buy your own capacity for mindless violence and then the world would be a much better place. At least for the war mongers and the arms dealers.
Anyway right now there is a fight going on. That fight is about reality. Or rather perceptions of reality. In the make believe world the U.S.A. is bringing democracy to the Middle East, Condoleezza Rice is in the Middle East right now working towards that aim. In the make believe world repealing laws which previously protected against unlawful arrest and inhumane treatment of prisoners will make Americans safer. In the make believe world the very heart of all the conflicts out there is the clash between radical Islam and progressive America. Or if you like between Islamo-Fascism and American values, however they may be defined. As Joseph Heller would say: we are fighting for "Mom's apple pie". Pity no-one in America reads the classics anymore. Except the Bible. Which is a classic too and everyone in progressive America, including George W., supposedly reads it. Except for the bit about "Do not kill" and "Let your 'Yes' mean 'Yes,' and your 'No' mean 'No'.
But then they seem to have a problem with definitions in America. You know you're in trouble when even really little words like "is" can't be defined precisely. What does torture mean? What does the Geneva Convention mean? Isn't it just a legal document which we can redefine with the help of crafty lawyers? What does anything mean anyway? It's all relative and EVERYTHING can be spun. Just watch.
Don't bring them on, just bring back the Middle Ages. Mission accomplished.
And while all that is happening U.S. markets have caught onto the idea that the economic slow down in America is now OVER and the next cyclical economic upturn is about to begin, with a little help from the FED. So the Stock Market is making headlines. Good headlines, headlines which may distract the American public from the fact that the value of their real estate is falling through the floor, with more to come.
In this make believe world real trends don't matter. What matters is leverage. With enough leverage, and a little bit of spin, trends can be created. So it doesn't matter that the U.S. hasn't run a trade surplus since the beginning of time. It doesn't matter that the U.S. is dependent on the flow of foreign savings to finance growth. After all, the U.S. is using these capital inflows to build infrastructure, to educate and train their workforce, to build productive capacity. In this way the money borrowed will provide a return which will be one hundred times more than the cost of funding. Er, no actually that doesn't appear to be the case. Over the past decade or so the U.S. has used the money to inflate assets such as Housing and Technology Stocks, and to wage war on Iraq and Afghanistan. None of these "investments" will see a positive return. Indeed, the deflation of some inflated assets is already under way. And even Bernanke doesn't believe that that particular trend is over yet. FED PAUSE? You betcha.
And the wars, while good for some, will ultimately just bleed the U.S. Treasury. This sounds more like Osama's plan than Karl Rove's. But then Osama probably has a bit more of a long term horizon than say the next U.S. election.
So much for the real world. In the make believe world of leverage and spin real-world trends don't matter. What matters is that the USD currently provides a better rate of return, if you consider short term interest rates, than any other major currency. So, provided that there is not a major depreciation in the USD, you are better off holding USD than say JPY or EUR. Of course a 2% depreciation of the USD versus the Euro will wipe out that extra return. A 5% depreciation of the USD versus the JPY over a year will do the same. We are not talking huge margins here. But for now the market is happy with that. When the market turns, as surely it must in this leveraged world, the results will be ugly.
U.S. fundamentals remain USD negative. The Carry Trade Crowd is testing the top of the USD range right now. A failure to sustain a break above recent USD highs will lead to a bail out. And bail outs in this highly leveraged, short-term trading market can be brutal.
OIL 59.40
GOLD 571.00
OIL is holding as the market digests OPEC's intention of reducing output. This seems to be a not particularly nice thing for U.S. allies to do at a time like this. But then the Bush Administration needs to go back and review "How to win friends and influence people". The chances that the U.S. "friends" in OPEC will take into consideration U.S. needs right now are, well, quite small.
Wednesday, October 04, 2006
Bubbles all Round
EUR/USD 1.2684 Hi 1.2742 Low 1.2667
USD/JPY 118.02 Hi 118.31 Low 117.82
AUD/USD 0.7426 Hi 0.7457 Low 0.7416
EUR/JPY 149.70 Hi 150.49 Low 149.46
Apart from the news that our North Korean friends are planning to test a Nuclear Bomb, everything looks fine. Well apart from the economic slow down in the States. Commodity markets aren't waiting for any further hints and, after taking Commodity prices to record highs on the back of the don't worry China will buy everything story, the only people on the Commodity markets right now are sellers. This should be good for inflation. We've had the price bulge as higher raw materials fed through the system now we get the reverse. I wonder what Trichet will have to say about that? Second round effects of the OIL rise and extreme vigilance? Er, well maybe not.
So the market is now looking for a slightly more dovish statement from Trichet and his buddies on Thursday. Not that we have anything like conviction right now. We're not seeing trading so much as panic driven, stop triggering as everyone tries to figure out where exactly we are in the "so-called" economic cycle.
After waiting for the bubble to burst now we can all celebrate: no more rate hikes, commodity prices are falling and maybe the American consumer can be encouraged to go out and borrow just a bit more so the whole cycle can start over. Only falling Housing Prices may make that particular scenario just a little less likely than say, once we re-adjust our inflationary and interest rate expectations downward and recover from the celebrations, a long period of very slow growth as the American consumer works his way out from under a mountain of debt. This could take just a tad longer than some optimists are expecting. What we are seeing is market moves exaggerated by Hedge Funds and the hunt for the short term gain. Markets on drugs if you will.
Right now though we can all gear up for the November 7 election, which apart from a
sex scandal and polls which look very shabby indeed, is lining up to be just what Karl Rove ordered. The Dow Jones just made a new high, which may not mean much but let's not get picky, and rates are on hold in the States with talk of a rate cut coming up some time soon.
Condoleezza Rice is in the Middle East showing the American public that someone is dealing with the fiasco in Iraq. Rice's plan seems to be to try and encourage nations like Saudi Arabia to step up to the plate, pour in the money and the troops and let the U.S.A. exit asap. Well, good luck with that plan. Though I guess it doesn't matter if the Bush Administration can pull it off. What matters is that they convince the American Public of the game plan.
So everything is covered: the domestic economy might be quietly imploding under a mountain of debt, but things will get better as inflation fades and rates are cut. You can tell things will get better, just look at the stock market. Foreign Policy might have been an area where the Bush Administration had dropped the ball, but hey Terrorism was Clinton's fault anyway, and Condoleezza has the smarts to sort it out. She's in the Middle East right now. Everything is under control. And as for the sex scandal, well that was Clinton's fault too and Monica may have been 24 but she had the mental age of a two year old, so Clinton is the real pedophile.
And the USD is doing just fine. Diversification is an ugly rumour and the Carry Trade Crowd is happy and RICH. The YIELD CURVE may be NEGATIVE, but who cares? Most Americans don't even know what a yield is and they are certainly not concerned that the YIELD CURVE is calling a RECESSION. With a little juggling the recession won't get here till well after the Presidential Elections in 2008. That could be tough. But it certainly won't be anywhere on the horizon for November 7, which is what counts right now.
Tomorrow Trichet gets to state his case. The market will be watching for signs of a moderation in the ECB hawkishness. Those looking to sell the EURO if Trichet actually delivers should be wary. The market has been selling Euros all week in the run up to the meeting and, unless your focus is EUR/JPY, EURO bears may be disappointed.
OIL 58.22
GOLD 569.00
The wave of selling on commodity markets has seen GOLD break to the downside. And until all the short term speculators, the Hedge Funds and the regular Funds have been stopped out of their long commodity positions, more downside can be expected. Central Banks in Asia and in other places around the globe (Russia for example) may well want to diversify away from the USD and into GOLD but there is an avalanche of long positions to cover FIRST. This is not a market for short term players. Those with deep pockets and a long term horizon can and should buy. But only once the dust has settled.
USD/JPY 118.02 Hi 118.31 Low 117.82
AUD/USD 0.7426 Hi 0.7457 Low 0.7416
EUR/JPY 149.70 Hi 150.49 Low 149.46
Apart from the news that our North Korean friends are planning to test a Nuclear Bomb, everything looks fine. Well apart from the economic slow down in the States. Commodity markets aren't waiting for any further hints and, after taking Commodity prices to record highs on the back of the don't worry China will buy everything story, the only people on the Commodity markets right now are sellers. This should be good for inflation. We've had the price bulge as higher raw materials fed through the system now we get the reverse. I wonder what Trichet will have to say about that? Second round effects of the OIL rise and extreme vigilance? Er, well maybe not.
So the market is now looking for a slightly more dovish statement from Trichet and his buddies on Thursday. Not that we have anything like conviction right now. We're not seeing trading so much as panic driven, stop triggering as everyone tries to figure out where exactly we are in the "so-called" economic cycle.
After waiting for the bubble to burst now we can all celebrate: no more rate hikes, commodity prices are falling and maybe the American consumer can be encouraged to go out and borrow just a bit more so the whole cycle can start over. Only falling Housing Prices may make that particular scenario just a little less likely than say, once we re-adjust our inflationary and interest rate expectations downward and recover from the celebrations, a long period of very slow growth as the American consumer works his way out from under a mountain of debt. This could take just a tad longer than some optimists are expecting. What we are seeing is market moves exaggerated by Hedge Funds and the hunt for the short term gain. Markets on drugs if you will.
Right now though we can all gear up for the November 7 election, which apart from a
sex scandal and polls which look very shabby indeed, is lining up to be just what Karl Rove ordered. The Dow Jones just made a new high, which may not mean much but let's not get picky, and rates are on hold in the States with talk of a rate cut coming up some time soon.
Condoleezza Rice is in the Middle East showing the American public that someone is dealing with the fiasco in Iraq. Rice's plan seems to be to try and encourage nations like Saudi Arabia to step up to the plate, pour in the money and the troops and let the U.S.A. exit asap. Well, good luck with that plan. Though I guess it doesn't matter if the Bush Administration can pull it off. What matters is that they convince the American Public of the game plan.
So everything is covered: the domestic economy might be quietly imploding under a mountain of debt, but things will get better as inflation fades and rates are cut. You can tell things will get better, just look at the stock market. Foreign Policy might have been an area where the Bush Administration had dropped the ball, but hey Terrorism was Clinton's fault anyway, and Condoleezza has the smarts to sort it out. She's in the Middle East right now. Everything is under control. And as for the sex scandal, well that was Clinton's fault too and Monica may have been 24 but she had the mental age of a two year old, so Clinton is the real pedophile.
And the USD is doing just fine. Diversification is an ugly rumour and the Carry Trade Crowd is happy and RICH. The YIELD CURVE may be NEGATIVE, but who cares? Most Americans don't even know what a yield is and they are certainly not concerned that the YIELD CURVE is calling a RECESSION. With a little juggling the recession won't get here till well after the Presidential Elections in 2008. That could be tough. But it certainly won't be anywhere on the horizon for November 7, which is what counts right now.
Tomorrow Trichet gets to state his case. The market will be watching for signs of a moderation in the ECB hawkishness. Those looking to sell the EURO if Trichet actually delivers should be wary. The market has been selling Euros all week in the run up to the meeting and, unless your focus is EUR/JPY, EURO bears may be disappointed.
OIL 58.22
GOLD 569.00
The wave of selling on commodity markets has seen GOLD break to the downside. And until all the short term speculators, the Hedge Funds and the regular Funds have been stopped out of their long commodity positions, more downside can be expected. Central Banks in Asia and in other places around the globe (Russia for example) may well want to diversify away from the USD and into GOLD but there is an avalanche of long positions to cover FIRST. This is not a market for short term players. Those with deep pockets and a long term horizon can and should buy. But only once the dust has settled.
Monday, October 02, 2006
Something's Gotta Give
EUR/USD 1.2692 Hi 1.2696 Low 1.2661
USD/JPY 118.16 Hi 118.42 Low 117.85
AUD/USD 0.7447 Hi 0.7459 Low 0.7440
EUR/JPY 149.95 Hi 150.05 Low 149.48
Well it's going to be an interesting week. In Europe we have the ECB meeting and everyone is expecting a 0.25 point hike. The fascination will centre around whether Trichet and his team choose to emphasize "extreme vigilance". Indeed, even the term "extreme vigilance" is being poured over and analysed. What does it mean? How does it translate? What a fuss. The ECB is the old school kind of institution which thinks that credit growth is a no-no. The Germans haven't yet recovered from the Weimar Republic monetary policy fiasco and the French don't want to appear any less rigorous than the Germans. And so we go with "extreme vigilance" and the gradual squeezing out of supposed monetary accommodation in the EuroZone.
The fact that the German track record with regard to monetary policy is spotty seems to have escaped everyone's notice. After all, Weimar was a German fiasco and the approach of the Bundesbank to monetary policy post German Unification won't exactly go down in history as a text book example of how to manage inflationary expectations. Post Unification the Bundesbank over-reacted to a one-off inflationary threat and took the EMS to breaking point. Oh and they did a pretty good job engineering a recession in Europe from which Germany is just recovering.
No matter, they have gravitas, good suits and they don't joke around. And don't you think that the French can't keep pace with that, because they can. Rigour, the French can do rigour. Just watch. Let's hope that the French can also recognize overkill when they see it. Anyway we'll get 25 points this week and maybe another 25 points by the end of the year. After that a lot will depend on what happens to the global economic environment. Don't mention the war and don't mention that the Bundesbank wasn't as good as their shining reputation.
Meanwhile in the U.K. there seems to have been something of a cock-up in the statistics department. While there has been a lot of guffawing in the U.K. press about the recent Greek decision to revise GDP numbers, a serious miscalculation at the British National Statistics Office means that inflation in the U.K. is considerably lower than previously stated. Expectations of further rate hikes in the U.K. have been downgraded and now no-one expects a rate hike in the U.K. this week. But then again no-one expected the last rate hike either. Sterling came out of the revision a little battered but, while Central Banks continue to move out of USDs and into alternatives, the longer term outlook for the currency remains positive. Sterling is still seen as the Euro proxy with interest rate benefits. And Central Banks of the world are buying.
Friday sees the release of Non-Farm Payrolls in the States. No-one is expecting the U.S. economy to rebound in the short term. The employment statistics will be poured over to see if the slow motion crash underway in the U.S. Housing Market is impacting economic activity in other areas. The only argument going on out there is: soft or hard landing? The jury is still out.
For now the markets are relatively calm. Volatility is near record lows and everyone is going with the friendly Carry Trade. What's interesting about that is that Hedge Funds have been blown away recently in the midst of what is supposedly a quiet market. One fund managed to lose 11% last week. If the fairly mild correction recorded in U.S. Treasuries last week could lead to these kind of losses then the potential for a more serious correction in the Treasury market could see things really get interesting.
For now, despite all the talk of slowdown, the Treasury market has not responded. And the market is overwhelmingly bullish Treasuries. So there is potential for another Amaranth-type misadventure. Watch this space.
OIL 62.90
GOLD 607.30
GOLD remains steady. OIL is in a range.
The chatter in the markets is: what's with COPPER?? The idea is that the Housing market problems in the States and a global economic slowdown next year will take the shine off COPPER. Given the spectacular rise in COPPER over the past two years, the big idea out there is that there is an accident waiting to happen. Meaning: the vultures are lining up waiting for COPPER to break to the downside. Questions are being asked about existing speculative positions. It could be interesting. Now, which Hedge Funds are very, very long COPPER? We'll soon find out.
But back to OIL. Just as the whole Iran scenario was starting to look positive, and OIL prices were falling, Rice is back out there talking about Iran. Condoleezza Rice is back on the interview circuit. It doesn't look good. Rice is talking up the nuclear risk as she heads for another round of talks with U.S. allies in the Middle East. This news, in the absence of anything more significant, will keep the floor under OIL for now. Alone in the Commodity Universe, GOLD and OIL continue to outperform.
USD/JPY 118.16 Hi 118.42 Low 117.85
AUD/USD 0.7447 Hi 0.7459 Low 0.7440
EUR/JPY 149.95 Hi 150.05 Low 149.48
Well it's going to be an interesting week. In Europe we have the ECB meeting and everyone is expecting a 0.25 point hike. The fascination will centre around whether Trichet and his team choose to emphasize "extreme vigilance". Indeed, even the term "extreme vigilance" is being poured over and analysed. What does it mean? How does it translate? What a fuss. The ECB is the old school kind of institution which thinks that credit growth is a no-no. The Germans haven't yet recovered from the Weimar Republic monetary policy fiasco and the French don't want to appear any less rigorous than the Germans. And so we go with "extreme vigilance" and the gradual squeezing out of supposed monetary accommodation in the EuroZone.
The fact that the German track record with regard to monetary policy is spotty seems to have escaped everyone's notice. After all, Weimar was a German fiasco and the approach of the Bundesbank to monetary policy post German Unification won't exactly go down in history as a text book example of how to manage inflationary expectations. Post Unification the Bundesbank over-reacted to a one-off inflationary threat and took the EMS to breaking point. Oh and they did a pretty good job engineering a recession in Europe from which Germany is just recovering.
No matter, they have gravitas, good suits and they don't joke around. And don't you think that the French can't keep pace with that, because they can. Rigour, the French can do rigour. Just watch. Let's hope that the French can also recognize overkill when they see it. Anyway we'll get 25 points this week and maybe another 25 points by the end of the year. After that a lot will depend on what happens to the global economic environment. Don't mention the war and don't mention that the Bundesbank wasn't as good as their shining reputation.
Meanwhile in the U.K. there seems to have been something of a cock-up in the statistics department. While there has been a lot of guffawing in the U.K. press about the recent Greek decision to revise GDP numbers, a serious miscalculation at the British National Statistics Office means that inflation in the U.K. is considerably lower than previously stated. Expectations of further rate hikes in the U.K. have been downgraded and now no-one expects a rate hike in the U.K. this week. But then again no-one expected the last rate hike either. Sterling came out of the revision a little battered but, while Central Banks continue to move out of USDs and into alternatives, the longer term outlook for the currency remains positive. Sterling is still seen as the Euro proxy with interest rate benefits. And Central Banks of the world are buying.
Friday sees the release of Non-Farm Payrolls in the States. No-one is expecting the U.S. economy to rebound in the short term. The employment statistics will be poured over to see if the slow motion crash underway in the U.S. Housing Market is impacting economic activity in other areas. The only argument going on out there is: soft or hard landing? The jury is still out.
For now the markets are relatively calm. Volatility is near record lows and everyone is going with the friendly Carry Trade. What's interesting about that is that Hedge Funds have been blown away recently in the midst of what is supposedly a quiet market. One fund managed to lose 11% last week. If the fairly mild correction recorded in U.S. Treasuries last week could lead to these kind of losses then the potential for a more serious correction in the Treasury market could see things really get interesting.
For now, despite all the talk of slowdown, the Treasury market has not responded. And the market is overwhelmingly bullish Treasuries. So there is potential for another Amaranth-type misadventure. Watch this space.
OIL 62.90
GOLD 607.30
GOLD remains steady. OIL is in a range.
The chatter in the markets is: what's with COPPER?? The idea is that the Housing market problems in the States and a global economic slowdown next year will take the shine off COPPER. Given the spectacular rise in COPPER over the past two years, the big idea out there is that there is an accident waiting to happen. Meaning: the vultures are lining up waiting for COPPER to break to the downside. Questions are being asked about existing speculative positions. It could be interesting. Now, which Hedge Funds are very, very long COPPER? We'll soon find out.
But back to OIL. Just as the whole Iran scenario was starting to look positive, and OIL prices were falling, Rice is back out there talking about Iran. Condoleezza Rice is back on the interview circuit. It doesn't look good. Rice is talking up the nuclear risk as she heads for another round of talks with U.S. allies in the Middle East. This news, in the absence of anything more significant, will keep the floor under OIL for now. Alone in the Commodity Universe, GOLD and OIL continue to outperform.
