Thursday, March 15, 2007

Attack of the Pinheads

EUR/USD 1.32O7 Hi 1.3237 Low 1.3192
117.20 Hi 117.61 Low 116.99
AUD/USD 0.7883 Hi 0.7889 Low 0.7847
EUR/JPY 154.80 Hi 155.55 Low 154.69

Well there the word has gone out: there is no problem. And the pinheads are on the attack and the message is: there is no problem. The Sub-Prime Market meltdown is not a problem. The collapse of the Residential Housing Market in the United States is not a problem. The unwinding of the Carry Trade is not a problem. And in any case where is the proof that the Carry Trade is even being unwound? I mean apart from the fact that the USD/JPY just fell off a cliff. And there are still consumers out there. Of course. And everything is just fine and dandy. George W. is in the White House. Now there is a trustworthy, honest, COMPETENT individual with a fine track record of achievement. Well actually no, but he stonewalls so well, doesn't he? That skill has to come in useful at some point. Surely.

Two of my favourite little stories during this past week of sorry financial market performance come from two impeccable institutions with no track record for publishing misleading information: Bloomberg, the Republican newswire, and the Financial Times. Now I don't know what's up with the Financial Times but the political agenda is unmistakeable.

The talking pinhead on Bloomberg this week opined that because people lined up for a shop opening where free sunglasses were on offer this proves DEMAND is still strong. Ipso facto the economy is not a problem. I like it. In the first place these people in Hong Kong were lining up for "free" sunglasses and in the second place in a consumer culture, such as the one we live in today, "spending" is never a problem. The problem is having the money or credit to finance the "spending". As every economist knows DEMAND is potentially infinite. But that doesn't make the wheels of commerce turn. There have been millions of people in India and China for decades, nay centuries, and no-one ever got excited about it.

Without the means to finance consumption all that Indian and Chinese DEMAND doesn't add up to a hill of beans. Still this particular pinhead was pushing the line that, of course, there is no problem. We still have people willing to spend. Yeah right.

But my particular favourite was the large article which appeared on Page 3 of the Financial Times on March 8. The point of the article was to convince everyone that the Japanese were destined to send their savings abroad for higher returns. This as a kind of inevitable truth, dependent of course on the fact that interest rates in Japan are so miserably low. To illustrate this questionable point Pilling and Turner came up with the example of Mr. Tomio Nakayama who "About three years ago... put about Y2m into an Australian dollar bank account. Yen accounts at the time were offering a pitiful 0.01 per cent interest rate, making the rate for Australia dollars, then 12 percent, spectacularly attractive." I think the world needs to find out who this Mr. Nakayama person is. Not because of his financial market expertise. No, it's much bigger than that. Mr. Nakayama seems to have found the key to time travel. Bank rates in Australia haven't been 12% since, oh, somewhere in the early 1990s. Simple fact checking would be good. Still the bottom line for the article: the unwinding of the YEN Carry Trade is not a problem.

What are these guys hoping to achieve? It's not like pensioners in Japan are going to suddenly send even more money abroad to support the creaking edifice of Anglo-Saxon capitalism. And even if these guys could convince every speculator on the planet to buy USDs that would only be a short-term palliative solution.

The real trouble is that there is not a single Anglo-Saxon country on the planet which is not dependent on large, ongoing injections of foreign capital. Without those capital inflows their economies are at risk. They have no domestic savings to speak off, their households are in debt and none of them even remember the last time they saw a Trade Surplus. Starting with New Zealand, which has a current account deficit of epic proportions, through the U.K. to, the biggie, the United States, every single Anglo-Saxon economy is dependent on foreign capital inflows.

And the REALLY BIG PROBLEM is that, now that it has become clear that the United States is led by people who appear to be completely unhinged from reality, the enthusiasm of foreign investors for yet more USD denominated debt has whithered a little. No a lot actually. The Japanese were the largest sellers of U.S. Treasuries last year. China just announced that in addition to diversification of its Foreign Exchange Reserves (read its intention to sell USD) it also intends to hold hard assets: read strategic assets. They won't need USDs for that.

So the USD is still in trouble. We have had our little NFP bounce. And now we can get back to basics. And the basics are bad. In addition, it now appears that the plans for an attack on Iran have moved along a little. Oh the joy, the joy.

This week Rep. Pelosi and the democratic leadership decided to pull language from the Supplemental Appropriations bill which stated that no funds may be authorized for military operations in or related to Iran unless specifically authorized by the Congress. So if you thought voting DEMOCRAT was the answer, it's time to think again. The U.S. might not have the money but they're not giving up their war plans.

OIL 58.58
GOLD 647.50

The prospect of global economic recession, led of course by the United States, has taken the zing out of the OIL price. What these corporate OIL guys really need is another war in the Middle East. That would get the price of OIL out of the doldrums. Don't worry they are working on it.

And GOLD is in a holding pattern. Ultimately GOLD will outperform, largely as a measure of the total lack of confidence in Central Banks and Governments. This is an entirely rational, explainable lack of confidence and it's not going to go away any time soon.

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