Friday, December 01, 2006

Don't Panic but if you do Panic First

EUR/USD 1.3320 Hi 1.3324 Low 1.3220
USD/JPY 115.52 Hi 116.40 Low 115.47
AUD/USD 0.7912 Hi 0.7924 Low 0.7873
EUR/JPY 153.88 Hi 154.12 Low 153.04

One question: how bad do things have to get before they impeach President George W. Bush?

I don't think we will have to wait long before the question is answered because "things" are just about to worsen considerably.

There are a lot of things a politician can get away with: foreign policy failure, lying to the electorate, electoral fraud, general incompetence and a terminal lack of charisma. But, generally speaking, one thing a politician can never get away with is impoverishing the people he represents. Kill 650,000 innocent civilians in Iraq and the populace is not pleased but then Iraq is a long way from home. Electoral fraud can make people antsy but not antsy enough to actually get off the couch and vote at the next election. Electoral turn out in the U.S. might have been high on November 7 but it is still abysmally low in comparison to turn outs in much of the rest of the developed world.

But once a politician screws up the economy in such a way that the results are visible to all concerned, well, in that case the people in couch potato land get mad. And once they get mad they look for a focus and when they look for a focus they will find: George W. Bush. Oh, and Fox News and Rupert Murdoch. But News Corp already seems to be quietly repositioning itself for the New World Order without George W. and his sidekick Tony Blair. Not that News Corp will get off unscathed. Make enough enemies and they lie in wait for you and what they wait for is a time of vulnerability. That time is now. It's called pay back. This is how Real Politics is really played.

Principally, though, it's Time Out for the Decider. We don't know the how but we do know the why and it's only a question of time.

He might not know it yet. There are, in fact, questions about what exactly he does know. While at the same time there are fewer and fewer questions about what he doesn't know. He doesn't know that you never start a war unless there is a very good reason to. He doesn't know that you never start a war unless you KNOW you can win it. He doesn't know you never start a war ill-prepared, unfunded, without real allies in a faraway, foreign, hostile land when your nation is already up to its eye balls in debt.

But he is about to learn about that. As are the American people. And when they find out what the real economic consequences of the Bush Administration's combined economic and foreign policy failure will be for them, Mr and Mrs Joe Average, then they are likely to get angry enough to actually do something. Which is not good news for George W. Bush. The concentration of executive power in his hands might delay the inevitable but it is unlikely to be enough to save him. It ain't over but the fat lady is getting ready to sing.

Unfortunately, whatever happens to George W. from here on in will not be enough to stop the economic train wreck from happening in the United States. Today's data, of course, was not good. This is likely to be the flavour of the data for a while yet. Nothing has been done to address any of the economic problems facing the United States. In fact the situation has been made considerably worse as a result of the financial burden of the Never Ending War on Terror and the George W. Tax Cuts.

The USD is in deep trouble. The U.S. Stock Market is about to find out what that means. For now, U.S. Treasuries are holding up as the whole financial market factors in RECESSION. U.S. Treasuries, for an offshore holder, are still poison because of the risk, nay near certainty, of a further substantial depreciation in the USD. Which means that the U.S. Treasury market is not "risk free" right now, it is simply likely to be the best performing sector for a U.S. Domestic Investor. For a Foreign Investor there is nothing remotely attractive on offer in the United States right now.

What is likely to happen from here is this:

First the USD gets hit. Then Stocks. Initially Treasuries will rally. U.S. Treasuries will underperform Fixed Interest instruments in the rest of the world and are ultimately expected to see selling pressure. Unless, of course, by some miracle innocent offshore investors can be persuaded to rock up to the next few Treasury Auctions. And that's something I wouldn't bet on.

When it's all done, in addition to the damage associated with the Real Estate Implosion, the average American is likely to find himself considerably poorer.

Why do I think that George W. could not have a more fitting legacy?

OIL 62.80
GOLD 655.00

GOLD is up, some more. Surprise, surprise. Should we see real panic next week then the case for GOLD will be stronger still.

This particular financial market crisis is not over yet.

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Thursday, November 30, 2006

Prepare for Game Over

EUR/USD 1.3201 Hi 1.3211 Low 1.3141
USD/JPY 116.12 Hi 116.58 Low 115.96
AUD/USD 0.7876 Hi 0.7883 Low 0.7822
EUR/JPY 153.33 Hi 153.48 Low 152.89

Well they wheeled out mild old Ben Bernanke and he made ALL the right noises. The furious financial market speculation about the U.S. economy falling into a black hole was put to rest. Well not really. Bernanke basically made the case that a FED EASE was not yet a slam dunk. Inflation is still lurking. And with this carefully timed, carefully worded sound bite Bernanke saved the USD. Well not really. But the USD plunge sort of stalled. After all the PPT is back from their Thanksgiving break and the Europeans are not happy to see the Euro breaking up all over the place. French officials have been making distressed noises. No reports so far of more than jaw boning by the Europeans though the ECB has a role to play in smoothing the USD descent. So the USD is still in trouble but not losing ground at the speed of light. For now.

Hey so let’s all cheer. Although the data still looks pretty bad: Durable Goods numbers were terrible, the Residential Housing market is reminiscent of what happened to Japanese real estate when the bubble burst in the early 1990s, only worse. At that point the Japanese were sitting on a pile of domestic savings and the country as a whole was paying its way in the wider world. The case in the U.S.A. is slightly different and George W. is still madly fighting costly wars in far away lands.

U.S. GDP numbers were revised up for Q3, not because domestic demand was any stronger than first reported. No, the reprise seems to have something to do with Inventories and Imports. Great. The debt bubble collapse continues. Though you wouldn’t know it if you listened to the Talking Heads from Officialdom.

The ugly facts on the ground are that the U.S. economy will continue to suffer as the Consumer Debt binge of the past few years comes to its inevitable conclusion. And the FED may not be able to EASE policy because if it does the USD is likely to TANK. That is: to fall at an even faster pace than it is currently falling. And should the USD really see panic selling then the U.S. financial markets are likely to get hit hard, bringing down STOCK markets world wide. What a charming scenario. The "cooling" of the U.S. economy continues and the FED may even be forced to HIKE regardless. Suddenly Bernanke discovers the EXTERNAL sector. What a Eureka moment.

So, even if the economy really falls into a black hole, monetary policy in the States will have to be played out with an eye on the foreign investor. And this is a reason to buy STOCKS? I think not. The Stock Market seems to disagree. For now. But it can’t last. The USD is still in trouble, the U.S. economy is still in trouble, the debt bubble in Consumer Land has burst and the ramifications will be felt for years to come. George W. is still in the White House and still intent on seizing permanent control of Iraqi OIL fields. Though he calls it: "bringing democracy". (I hope he doesn't decide to bring democracy to a place near me.) The cost of the endless War on Terror, or whatever they call it these days, will just keep going up. Bottom line: the funding requirement of the U.S. Government is not about to fall. George W. is not about to increase Taxes. The money has to come from somewhere. Somewhere for our purposes is defined as: the rest of the world.

In this context shoring up confidence in the USD becomes vital. So, while before the BERNANKE analysis pretty much had the U.S. economy in this nice safe bubble, conveniently separated from the unfriendly outside world, suddenly we have other considerations. Consideration N°1: the massive U.S. external funding requirement. The U.S. can’t afford to have foreigners desert Treasury Auctions unless it’s happy to see Yields on U.S. Treasuries rise to say, oh, something like 20-25%. Which is a possibility, but it wouldn’t do a whole lot for the domestic economy and it would probably be badly received in Voter Land.

Consideration N°2: a sharp, sustained fall in the USD would push up domestic inflation as the price of imports rise. But really this is small bananas. A couple of percentage points of extra inflation is not a big deal. What is a big deal is that MASSIVE external funding requirement. The real problem is how to keep the foreigners lining up with new money at every Treasury Auction. If it becomes clear the USD is likely to lose say 30% of its value in a repeat of the Nixon Years then the enthusiasm for more USD denominated paper might wane a little. Oh yes.

The U.S. desperately needs to maintain offshore confidence in the USD.

Given current leadership in the U.S.A. my money is on one result: FAILURE. This would be consistent with the other failures of the Bush Administration in Iraq and New Orleans. At some point, the U.S. will fail to convince enough fools to keep parting with even more money. It’s pretty much game over. All we have to worry about now is the timing.

The USD still remains the litmus test for what is going on and what is going on is ugly. More USD downside is inevitable. The only thing we are talking about here is speed.

OIL 62.49
GOLD 645.70

GOLD remains bid. While the PPT can do a lot to manipulate derivative markets it can’t do much about the solid physical bids out there coming from everyone from Saudi Arabia to China. Although there is no advertising going on the scramble to reduce exposure to the USD continues and GOLD remains one of the few plausible alternatives. There continue to be attempts to undermine the rise of GOLD (and the fall of the USD), recently someone even floated the idea that the IMF should sell a portion of its GOLD reserves because of financial constraints. Who knows this may even go ahead. Maybe the guy who came up with this idea is hoping to see a wave of copy cat selling by Central Banks. Here's hoping. Given the wall of money looking for a home, GOLD’s status as the International Reserve of choice is unlikely to be dented any time soon. If you see a dip: buy it.

The outlook for other, non-reserve commodities, is slightly more complicated. On the one hand an economic crisis will sap demand for commodities over time. In the short term, though, pressure on the USD is likely to see prices supported in USD terms. For now, a weak USD and ongoing trouble in the Middle East is supporting the price of OIL even as we have an economic crisis ready and raring to go. Longer term players should keep that in mind.

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Monday, November 27, 2006

Politics Enters the Equation

EUR/USD 1.3107 Hi 1.3177 Low 1.3085
USD/JPY 116.21 Hi 116.43 Low 115.38
AUD/USD 0.7775 Hi 0.7824 Low 0.7762
EUR/JPY 152.35 Hi 152.51 Low 151.82

Tony Blair has apologised for Britain’s role in the slave trade. Which is nice, particularly when you consider that the apology may improve his standing with the British public. The gesture proves his heart is in the right place. It’s not as if he will have to face any consequences or make amends. After all he had no direct role in the Slave Trade.

Blair might also consider apologising for the death of 650,000 Iraqi civilians, the destruction of Iraq and the failure of Britain to call for an immediate Cease Fire in the recent Israeli attack on Lebanon. In fact he could do more. To prove his heart really is in the right place and that he is really repentant regarding these "Crimes against Humanity" he could just go ahead and hand himself over to the "The Hague" for prosecution. He doesn’t have to worry too much: capital punishment is no longer sanctioned in Europe, even for war criminals. Such a gesture would certainly go some way to rebuilding his credibility. It would be more than a publicity-seeking empty gesture.

And the case against Donald Rumsfeld keeps getting clearer. According to recent reports he personally signed off on memos sanctioning torture and the flouting of the Geneva Convention. He better not plan on travelling outside of the U.S. too much in his declining years. He has already been ditched by Bush and there are lots of ambitious young prosecutors out there looking to make a name for themselves. Europe is probably not an ideal holiday destination for Rummy over the next decade or so.

But the news is not all bad. Rupert Murdoch is on the back foot. A fairly robust attack on Murdoch’s hold over the British media was launched by a miffed Richard Branson last week. And Murdoch has had to back off his lucrative endorsement of the O.J. confession interview and book deal. His reputation, which let’s face it is already dismal, has been further damaged. The bell tolls.

And the Israelis have announced a withdrawal from Gaza and a Cease Fire. Despite the subsequent launch of a Palestinian rocket into Israel they have also announced they will not respond to the provocation. Now that’s interesting. Last time a few of their soldiers were kidnapped they launched an all-out assault on Gaza and then another on Lebanon. The Lebanese assault went on for more than a month. The assault on Gaza just ran and ran and ran. The game plan suddenly seems to have changed. Right at the time that the U.S. is desperately looking for help to exit the Iraqi quagmire.

Bush may be talking about "not quitting" but wiser heads are searching for allies in the Middle East and finding that there are NONE willing to deal unless the U.S. meets certain conditions. The first condition appears to be a resolution in Palestine. Which means the Israeli attack dogs will have to back off, and they have.

With U.S. Traders and the PPT out for Thanksgiving, with U.S. economic data looking poor and after considerable warning from global Central Banks about DIVERSIFICATION, the USD got hit last week. And the USD and U.S. financial markets are still vulnerable. George W. currently has to deal with a very unpleasant foreign policy agenda, largely of his own making, an open revolt domestically against the Iraqi engagement and, at this juncture, what the Bush Administration can not afford is a major meltdown in the domestic economy and/or on U.S. financial markets.

Now can the Israeli withdrawal after the sudden USD sell-off be just a co-incidence? Or is someone pressing some buttons in order to drag the U.S. and its recalcitrant allies to the negotiating table. After all the mess in Iraq has already cost the Bush Administration one election and, quite possibly, Bush his legacy, which was never going to be brilliant. Now the U.S. desperately needs to find a way out and it needs help. So concessions will have to be made and Israel's expansionist agenda is likely to be sacrificed as political realism takes over from half-baked, neo-colonialist plots.

The USD is still under a cloud. Though the BoJ has suddenly realised the risks of a major JPY appreciation and is now playing down the possibility that rates will rise in Japan anytime soon. Given that the export sector is providing all the momentum for growth in Japan at the moment, that is no surprise. The jawboning has seen a slight recovery in the USD/JPY. This has left the EUR/USD to take all the strain. The Europeans won't be happy. The PPT is back at their desks. Both the PPT and the ECB are likely to enter the market to slow further USD depreciation Round one of USD weakness is over. A small USD bounce is likely but given the magnitude of problems currently being faced by the U.S.A., both at home and abroad, there is no need to do more than take profit on short USD positions. The scope for further substantial USD downside from here into Year End is still huge.

The real story of the day is: STOCKS LOOK LIKE THEY HAVE PEAKED worldwide. Stocks going forward will have to contend with:

1) Slowing global economic growth
2) Overall tighter global monetary policy conditions
3) Ugly geopolitics
4) Rising wage pressures
5) Increased volatility on FX markets

That adds up to some fairly fearsome headwinds.

OIL 59.56
GOLD 644.30

The OIL market is waiting to see just how bad the U.S. economic slow down will be. Should real signs of economic weakness start to appear in Japan and China there will be little scope for a price rise in OIL, despite the reduction in output planned by OPEC and current USD weakness.

GOLD, on the other hand, should remain bid. Signs of real stress on financial markets and further USD weakness will both accelerate the rush to GOLD. Investors are looking for safe havens when there aren't any. Should both USD weakness and financial market strain prove mere holiday distractions then the climb in the price of GOLD is likely slow. For real gains in the price of GOLD from current levels we need to see cracks appear and financial market volatility rise. There is every reason to believe that those cracks will appear right on time.

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