Monday, January 22, 2007

It's Geopolitics, Stupid !!

EUR/USD 1.2934 Hi 1.2979 Low 1.2923
USD/JPY 121.72 Hi 121.81 Low 121.20
AUD/USD 0.7887 Hi 0.7908 Low 0.7880
EUR/JPY 157.47 Hi 157.65 Low 157.04

While there is a whole army of guys sifting through the economic data looking for clues to the health of the U.S. Economy, aka the U.S. Consumer, the real action is on the GEOPOLITICAL front. And there sure is a lot of action right now. Although the U.S. would like to believe that it makes all the rules in the International Arena it appears that there are more and more players who don't hold quite the same view. And the belligerence of the U.S. Administration is starting to have real consequences. Unsurprisingly none are positive.

In the three months to November OPEC members sold 9.4 percent, or $10.1 billion, of their U.S. government debt securities according to Treasury Department data. This is a pity because the U.S. has a big savings hole and OIL producers have surpassed Asian central banks as the largest pool of global savings, accumulating an estimated $500 billion in 2006 alone.

Somehow I don't think it was concern over the U.S. Inflation rate which caused OPEC members to dump U.S. Treasuries. So stop watching the economic data and start following GEOPOLITICS because that's what's important right now. OPEC dumped Treasuries last year and the trigger was GEOPOLITICS not inflation.

The Republican newswire, better known as Bloomberg, tried to make the best of the news by suggesting that OPEC selling of U.S. Treasuries was all about falling OIL prices. That makes no sense at all. If falling OIL revenues left OPEC with less money to invest in the three months to November 2006, and remember during that time OIL prices were still close to historical highs, then a case could be made for OPEC buying fewer U.S. Treasuries during that period. But that's not what happened. OPEC was a NET SELLER of Treasuries. Which means that one of the biggest supply of funding for the bankrupt U.S. Treasury may just have dried up.

And this is happening when the cost of the IRAQI conflict is going through the roof. Oh and just when the Bush Administration is talking about its plans for a bigger and better conflict in the Middle East.

It's starting to look like some people might have a problem with those plans.

The Chinese and Russians may have voted with the U.S. on sanctions directed at Iran but it doesn't look like the Chinese are keen to give the U.S. a blank cheque internationally. On January 19 China launched a missile designed to bring down satellites. They succeeded and just two days later the Chinese announced their intention to review their Foreign Exchange Holdings. Coincidental timing? I doubt it. In the Financial Times Richard McGregor blithely notes that Chinese FX Reserves are "now mostly locked up in US Treasury bonds". Er yes. So that's another source of funding potentially down the toilet.

Meanwhile Senator Ted Kennedy is trying to arrange a boycott of the latest Bush Plan for the Middle East, aka the SURGE. He doesn't really have to bother. The real source of funding for the U.S. right now is external and it looks like the principal funders, with perhaps the exception of the Japanese, have plenty of reasons to withhold funding. That external boycott will be considerably more effective than any rearrangement of finance which Senator Kennedy can arrange.

So while all the tea leaf readers study the data they should perhaps pay more attention to International Cash Flows. Unless the Bush Administration radically changes course there seems to be early indications that AT LEAST SOME of the international capital available to fund the U.S. 900 billion external funding requirement might not be so readily available in the future. Indeed, it seems that that funding has already started to be withdrawn.

It could be that the Bush Administration is clever enough to find a way through the labyrinth. Perhaps they can succeed in Iraq, whatever the current definition of success, perhaps they can reduce the spectacular U.S. external funding requirement without triggering a domestic economic recession, perhaps they can arrange for the Japanese to provide even more funding in order to compensate for the likely funding shortfall from China and the already apparent shortfall from OPEC. But given the performance of the Bush Administration thus far, it is far more likely that they make a complete mess right across the board. Bad news of course for U.S. Financial Markets, for U.S. Stocks, Bonds and the USD. So same old, same old.

OIL 52.15
GOLD 633.90

There are mutterings in the market that Saudi Arabia is acting to keep the OIL price down in order to pressure their Iranian friends. Perhaps it's true. It makes a nice story. But if global demand for commodities was as strong as it is supposed to be the Saudi refusal to agree an emergency meeting wouldn't be enough to keep OIL prices falling.

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