Tuesday, March 27, 2007

Don't Worry Be Happy

EUR/USD 1.3333 Hi 1.3356 Low 1.3320
USD/JPY
118.21 Hi 118.42 Low 117.85
AUD/USD 0.8085 Hi 0.8111 Low 0.8064
EUR/JPY 157.63 Hi 158.04 Low 157.17

Right now the Happy-Clappy crowd is happy because the YIELD CURVE in the U.S. has (maybe) turned POSITIVE. That is short term rates are now lower than longer term rates, depending on which bit of the curve you look at. Because no-one really knows what is going on with monetary policy in the States, the YIELD CURVE is all over the place. Still the 10 year yield (4.61%)is now lower than the 30 year yield (4.82%)and the 2 year yield (4.59%) is lower than the 10 year yield. Regardless of all that, the FED FUNDS rate at 5.25 is higher than the entire curve. So while bits of the yield curve are positive, the short end is still NEGATIVE. The idea that the Happy-Clappy crowd is running with is that the FED is behind THE CURVE. That is: the FED will eventually be forced to cut interest rates as economic conditions worsen. And IF the YIELD CURVE is a good leading indicator of the economic activity then the now partially Positive Yield Curve must mean things are looking up. That is the kind of reasoning you would expect from the Happy-Clappy crowd.

Except U.S. Statistics suggest that "things" aren't looking up at all. The Housing Market, that huge PONZI SCHEME which is in the process of collapsing, still looks ugly. Housing numbers released yesterday were bad and today saw the release of the Home Price Index which confirmed what we already know: there is no reason to be optimistic about the Residential Housing Market in the U.S. for, oh, let's say the next five years or so. For the Happy-Clappy crowd that is not a problem. The FED will ride in to the rescue, CUT RATES, and everything will be fine again.

Only the FED doesn't seem to see it that way. Nobody at the FED is talking RATE CUTS, everyone is talking INFLATIONARY RISKS, and the pundits aren't listening.

And while we are at it the rise in YIELDS, which has led to the change in the shape of the YIELD CURVE, is not necessarily something to be gleeful about. What you have is worsening domestic economic conditions and yields which continue to rise. Support for the U.S. Treasury market seems to have diminished. Which is not surprising given the Fiscal Record of the George W. Administration. Why this is anything but unmitigated bad news is beyond me. However, those looking for good news and comfortable with straight-line correlations and very simple ideas are going with what they have. And the (sort-of) POSITIVE YIELD CURVE is the best they can come up with right now.

Meanwhile back at the farm the USD is struggling. It is (just) managing to hold it's head above 118.00 versus the YEN but seems to be sinking against the EURO. Although the Happy-Clappy crowd are sure that the sell-off in U.S. Treasuries will see international capital come pouring back into the U.S., such optimism is PREMATURE. Wise investors avoid a market on the slide. And it's way too early to say that U.S. Treasuries have bottomed out. The FED is not riding to the rescue of the domestic economy and foreign investors are not lined up ready to rush into the U.S. Treasury market as it slowly but steadily crumbles.

The outlook for the USD is grim. Eventually the Happy-Clappy crowd will seize on this phenomenon as good news because it means that the U.S. is becoming more internationally competitive. In the way that Mexico became more internationally competitive. It's the way you become internationally competitive by FIRST becoming really poor. Painful, but the IMF and the World Bank are keen on it. So maybe that is the game plan. It's what you do when you have run out of options.

OIL 62.67
GOLD 663.30

The posturing surrounding the Iranian seizure of 15 British Marines has given the price of OIL a little fillip. The OIL corporations and the SAUDIS must be happy. But fears of recession in the U.S. are keeping a lid on things. Not that the war mongers have given up. There is still a chance for a serious new conflict in the Middle East. Wasn't the plan for a break out in hostilities (ie. an attack on Iran) for April?? In this surreal atmosphere we sit and wait. And so do the markets.

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Comments:
New consumer confidence numbers may point to housing-led recession: http://infohype.blogspot.com
 
Hardly a surprise, is it?
 
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