Wednesday, November 01, 2006

Raving Loonies

EUR/USD 1.2752 Hi 1.2770 Low 1.2742
USD/JPY 117.04 Hi 117.16 Low 116.73
AUD/USD 0.7743 Hi 0.7743 Low 0.7729
EUR/JPY 149.31 Hi 149.39 Low 149.05

The Financial Times is still going with its strategy of talking up the Anglo economies while heaping scorn on everyone else. It's hard to understand why they are doing this, but the remarkable bias and the extra-ordinary use of misleading statistics by the venerable newspaper make the conclusion inevitable. Monday was a doozy in this regard. Front page, and entirely without irony, the FT carried the headline that the U.S. is leaving Europe far behind in R&D. Things are obviously not well in Europe. Ominously the FT notes that "Germany is the worst performer among the larger European countries". (Subliminal message: the Euro is doomed.)

Turn to page 4 (same Monday edition) and there is a break down which provides yet more detail. And which darling of the financial markets holds N°1 spot in R&D SPENDING? Why it's FORD. N° 3 place is held by General Motors. And according to the FT "Evidence is growing to support the premise..... that.... Companies that spend more on research and development tend to perform better than their competitiors in sales and profits growth." I'm not sure what that evidence is. None is provided. On Page 11 we have another column which is broadly positive about Detroit even though it is noted that "Both General Motors and... Ford are still bleeding cash, will post multibillion dollar losses this year" and are losing market share. In fact, according to the FT, "GM and FORD together commanded 40.9% of the US car and light-truck market... down from 49.9% two years earlier". Oh dear.

Over to Page 13 where Wolfgang Munchau points out that "Germany has regained the competitiveness it lost after unification" and its "current account surplus is approaching 9% of GDP". Munchau is not happy about this (what FT journalist would be?) because "the build-up of internal imbalances (in the EuroZone) is such a serious issue". (Subliminal message: the EURO is doomed.) He makes no attempt to explain why it is a serious issue, so I guess we should just take his word on that. No matter, let's get back to that troublesome lack of R&D spending in Germany. Despite the fact that Germany is not SPENDING the requisite amount of money on R&D, it does seem to be making rather a lot of money selling its stuff to the rest of the world. At least that's what the German Trade SURPLUS tells us. So something is not right here. Either the Germans have found a way to make their R&D money go further or the Americans are wasting their R&D money on conferences in Las Vegas where they discuss how to produce products that no-one wants.

Conclusion: the U.S. has found another way to SPEND money (now that's a novelty) and we think that this new kind of spending is really good but in the real world of bottom lines and selling products there is no indication at all that the money is producing results. In fact there is quite a lot of evidence to suggest that, as with much of the spending going on in the U.S., its just MORE money down the drain. Unless of course GM and Ford are spending their R&D dollars on something altogether different from the quest to come up with a decent car that they can sell profitably.

In the same vein the FT has done rather a lot of Italy bashing lately. (The Euro is doomed.) The upshot of most of the FT analysis is: Italy will be forced to leave the Euro and maybe even default on its Government Debt. (The Euro is doomed.) In the interests of balance here is a link to a report by Eric Chaney at Morgan Stanley which takes another look at the Italian data and comes up with rather different conclusions:

Italy is on the mend.

What the FT obviously needs is a join-the-dots person. I know that the editorials are supposed to do that but when the facts don't fit with the editorials then someone is not doing their job. Either they should stop reporting the facts altogether or start to provide opinions which are in some way related to what is happening in the real world. If it continues with it current editorial bias the FT runs the risk of becoming a quaint relic of a past era when crustless cucumber sandwiches were the high point of fine dining. And it still doesn't mean the FT can convince anyone that the EURO is doomed. Credibility is something, as Tony Blair has found, which once lost is somewhat difficult to recover.

Anyway enough of that. More bad data out of the United States yesterday. Quelle surprise!! And the USD is still under pressure. We have Non-Farm Payrolls out at the end of the week. Construction Spending is out today. No good news is expected there. Overall, slowing economic conditions are expected to continue in the United States. And, for now, those conditions are expected to keep a lid on the USD. Over in Australia the Treasurer, Mr. Peter Costello, is making noises to the effect that the best of times are over. Commodity prices, according to Mr. Costello, have already peaked. Which is interesting because during the entire Commodities BOOM Australia, a Commodity Exporter, never really managed to turn its Trade Deficit around. Anyway, the Inflationary beast and the Credit Growth beast are not slain in Australia yet so the market is expecting another interest rate hike soon. This, together with USD weakness, has seen the AUD bid pretty much against everything. And that is another accident waiting to happen.

OIL 58.41
GOLD 614.00

GOLD is doing its UP, UP and AWAY thing and OIL looks soft. I haven't got a lot to say about either, but here is a rather amusing article about the USD and why it is DOOMED. The article is written by someone with a political agenda SO LARGE that he can make the following statement without laughing:

"As long as oil is denominated in dollars, the central banks will be forced to stockpile American scrip regardless of its value. It’s no different than holding a gun to someone’s head."

Hmmmm. He might not be laughing but I nearly choked myself to death on that one. I'm not going to bother explaining why the guy is beyond help. Needless to say, the mere fact that these type of articles are making the rounds makes me nervous about selling the USD at this juncture. When the raving loonies discover a trend then, at the very least, it's time to tighten up your stops and prepare to quietly walk away if necessary. The USD downtrend may not be over but a PAUSE in that trend can not be ruled out.

Tuesday, October 31, 2006

Let Them Eat Cake

EUR/USD 1.2767 Hi 1.2784 Low 1.2677
USD/JPY 117.04 Hi 118.06 Low 116.84
AUD/USD 0.7732 Hi 0.7642 Low 0.7670
EUR/JPY 149.44 Hi 149.82 Low 149.17

On November 7 there is an election in the United States and the one thing that the Bush Administration knows about elections is this: they (the Bush Administration) are really clever and the electorate is really dumb. This means with a few clever tricks, some dirty election campaigning and a little bit of spin about how well the country is being run and how well the war in Iraq is going, Bush and his cronies can win this election.

One of the cleverest ideas put forward by the cleverest of the clever in the Bush Administration, Karl Rove, is that just in time for the November 7 election an October surprise would be delivered. This October surprise had something to do with the economy and soaring stock markets. Everyone knows that when the U.S. Stock Market soars the U.S. electorate feels good and votes back the party responsible. Which is what happened in 2000. NOT.

So anyway the Dow Jones just made a record high and the plebs are STILL not
. Which is strange. I mean all these people should be cheering their stock portfolios. Oh, these people don’t all have stock portfolios? Well by George, that’s news. What are these people doing with their savings? Oh they don’t have savings, it’s all tied up in their residential real estate. Well how very bizarre. And what is happening to the Residential Real Estate market? Oh, going down is it? How very unfortunate. And all those people who are so much better off because of Hurricane Katrina, perhaps they will vote for Bush? No, perhaps not.

Ah yes, the historical parallel is fascinating: an unpopular, out-of-touch Administration, a new medium of communication and the emergence of pamphleteers. How long before they storm the Bastille? Well I suppose things could be worse, they could indict George W. for electoral fraud or war crimes. It seems that the mere existence of the International War Crimes Tribunal, which the USA had no part in creating, DID shut down the CIA torture factories for a time, so the War Crimes possibility is not entirely off the agenda and 650,000 dead Iraqis are unlikely to be forgotten quickly, well not in the Middle East anyway.

Perhaps George W. and his buddies are counting on the cleverly timed November 5 sentencing of Saddam Hussein in Baghdad to bolster the popularity of his "decidership". Yes, I can just see it: Middle America will go wild over that one.

While Consumer Confidence follows the Residential Real Estate market down the toilet and the outlook for Employment is starting to look shaky whatever happens to the Dow Jones is unlikely to really get Mr Joe Average hyped. What are the Middle Class in America eating these days? Cake? Empathy, sympathy and a basic understanding of how the great unwashed actually live out their miserable lives always plays well with the electorate.

But back to the markets. Weak GDP data released on Friday has everyone talking. And the market is agog with speculation: is there perhaps a recession coming? Or is it a "soft landing"? And how can you tell the difference? When does a "soft landing" start to look like something else? Just how bad will the fall out from the COLLAPSE in the Residential Real Estate market be? (Answer: very.)

Will the FED ease and should we sell the USD right now? And so the USD was sold off. Well with a recession coming and the FED maybe, perhaps, according to how things look in a couple of months, likely to CUT RATES there was a bit of a scramble to exit long USD positions, of which there seems to be a surfeit at this time. The outlook for the poor old BUCK continues to be poor.

All the data subsequently released in the States, including today’s
Consumer Confidence
figures, don’t look promising. You can spin it, and boy are they trying, but the reality on the ground is grim.

Meanwhile statistics released in Europe have been positive (Credit Growth, Industrial Production, Business Confidence) and the ECB is making those noises again. We have a ECB meeting this week and "EXTREME VIGILANCE" is expected to make a come back. No rate hike is expected in Europe but more rate hikes are coming your way soon. Trichet isn’t concerned with the spill over impact of the U.S. slow down on growth in the EuroZone. He’s already made that clear. So think EURO think RATE HIKES. The BoJ is also meeting this week but the outlook in Japan is so confused that no-one really knows what is going on (but more on that later).

For now what is really happening on the market is that everyone is transfixed by the slow motion train wreck which is under way in the United States economy. So selling USD on rallies is still the way to go. And nothing much is likely to change that for quite some time.

OIL 58.07
GOLD 605.50

Even Alan Greenspan seems to have noticed something is up with the USD’s status as an international reserve currency. Not that the great man is making a very big deal about it, but he has noticed. Although Greenspan suggested the shift in reserves is favouring the Euro it seems that the shift is favouring anything that is NOT the USD. And so the price of GOLD is rising.

Should the present U.S. Administration find a way to restore international confidence in the USD, in the U.S. capacity to manage an economy and foreign policy AT THE SAME TIME, the price of GOLD would see selling pressure. The big question is can George W. walk and breathe at the same time? The answer is unclear. To expect competent economic management and competent foreign policy AT THE SAME TIME is really pushing the envelope. Foreign Policy and Economic Policy are in the "Too Hard" basket, despite all the revolutionary (well startling and weird anyway) ideas that characterised the beginning of the George W. mandate (if you want to call it a mandate). And so the status of the USD as an international reserve currency is looking more and more like some mad fantasy. In a few years no-one will be able to explain how anyone bought into the fantasy in the first place.

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