Thursday, February 15, 2007

Let's Talk Capital Flight

EUR/USD 1.3127 Hi 1.3155 Low 1.3118
USD/JPY
120.19 Hi 120.80 Low 119.78
AUD/USD 0.7782 Hi 0.7841 Low 0.7824
EUR/JPY 157.83 Hi 158.63 Low 157.33

Ben Bernanke testified yesterday and suddenly nothing else matters. It doesn't matter that HSBC was forced to admit that the U.S. Housing Market, particularly the sub-prime market which it unwisely bought into, is struggling. It doesn't matter that U.S. economic statistics continue to surprise on the downside and it doesn't matter that George W. is gearing up to open ANOTHER front in the ENDLESS war on terror. All that matters is that RATES in the States are on hold. Oh and it matters that Ben Bernanke has noticed inflationary pressure may have moderated. Well, well done Ben!!

Trichet, the man with the patrician manners and the face of a HAG, has also noticed inflationary pressures have moderated but it appears that the Headline Rate of Inflation is no longer his primary concern. Or rather it is his concern but he has ways and means of knowing how the "Inflationary Threat" will evolve over time. He doesn't need tea leaves and he doesn't study the entrails of slaughtered bulls. Oh no, what he does focus on is Credit Growth and Money Supply. Credit Growth has been rising rapidly in the EuroZone recently. And this is not good. Do we have a number, Mr. Trichet, which would be GOOD?? Which particular single digit would you prefer?

Now Credit Growth is a fairly lumpy piece of data. It can hide all kinds of sins and all kinds of virtues. People in the EuroZone might all be borrowing like mad to buy the latest plasma screen on offer. But then again this is not the United States where conspicuous consumption is a national sport. Perhaps they are borrowing so that they can invest in more productive equipment.

The consequences of the TYPE of borrowing taking place is very important. Productive investment reduces inflationary pressure by allowing us to produce more with the same input. Borrowing which merely finances DEMAND obviously creates DEMAND-LED inflationary pressure.

Trichet doesn't seem to be interested in finer distinctions. He is looking at the number as a whole and seems to have already decided where inflation is heading. UP, that's where. And with inflation, interest rates are also heading up in the EuroZone. We wouldn't want to get too excited here and allow a sustainable economic recovery or anything subversive like that. No. And keep your wages growth low or we will hit you over the head with a sharp rise in interest rates and then you will be sorry. In his next life Trichet will be working at Wal-Mart and living in a trailer. Unfortunately for now he is head of the European Central Bank.

Not surprisingly the EUR/USD is bid as the markets react to the divergent interest rate outlooks. The EUR/USD is also reacting to the divergent economic story. And now the divergent economic story is spreading to the USD/JPY. This is not good. Well not for the USD anyway.

The outlook for the USD remains clouded AT BEST. Today saw the release of Net Foreign Purchases in the States. These numbers measure foreign capital inflows. Now the U.S. needs foreign capital like never before and the numbers weren't good. JUST to keep the USD steady the U.S. needs to attract upwards of USD 70 billion every month. In December the purchase of long term assets came to just USD 15 billion. But when short term assets were also considered there was a net Capital FLIGHT. Which means that not only is the U.S. NOT attracting sufficient capital to keep the USD afloat, money already invested in the country is leaving. The PPT will really need to get to work to keep everything ticking over as required.

Last year Japanese investors were the largest sellers of U.S. Treasuries. That means while a lot of people were selling U.S. Treasuries the Japanese were selling the most. So it seems that Japanese investors did take advantage of the favourable exchange rate to EXIT the country. Of course the Republican newswire known as Bloomberg attempted to put a positive spin on the data. But if you add things up we have Japanese investors leaving, OPEC selling USDs and China looking to DIVERSIFY (read sell USDs). And the U.S. still has this unbelievably LARGE external funding requirement known as the Current Account Deficit. Which incidentally reached a RECORD last year.

So the USD is in trouble. And the Carry Trade crowd hasn't even really started to PANIC. Yet. Not to worry. Cheney is due to make a trip to Japan soon. Pressure will be brought to bear. The U.S. doesn't want Japan to raise rates quite yet. That would only increase the selling pressure on the USD. Which, of course, would be ultimately negative for the U.S. Financial Markets. Which would mean that George W. and his devious friends would have a) involved the U.S. in costly and illegal wars, b) overseen the sharpest deterioration in the U.S. Federal Budget EVER and c) screwed up the domestic economy. That's quite a hat trick. Though when you consider who is involved I guess it's not all that surprising. What do these guys do for an encore? Better not ask.

OIL 58.26
GOLD 674.00

The scary global economic scenario is keeping a lid on the price of OIL. But the price of GOLD keeps rising. The PPT, which we know really doesn't exist (if you don't exist you can't go to jail), seems to be struggling here. They are losing the battle to keep the floor under the USD. Treasuries are at risk. And GOLD looks set to continue its UP, UP and AWAY trajectory. What happens to people who don't exist and nevertheless don't manage to fulfill their brief? I guess we will never know.

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