Thursday, March 22, 2007

The USD: Not Waving, Drowning

EUR/USD 1.3358 Hi 1.3414 Low 1.3343
USD/JPY
117.79 Hi 117.95 Low 117.22
AUD/USD 0.8074 Hi 0.8092 Low 0.8055
EUR/JPY 157.39 Hi 157.55 Low 156.82

In these circumstances, the Committee's PREDOMINANT policy concern remains the risk that inflation will fail to moderate as expected.

And that, Ladies and Gentlemen, is an admission that monetary policy settings in the U.S. are no longer going to be dictated by DOMESTIC economic conditions. The PREDOMINANT concern is placating offshore investors in an attempt to keep the USD stable (a rally is out of the question given current circumstances). Such is the way of debtor nations everywhere. Of course, that doesn't fit will the idea that most Americans have of themselves and their economy. No, they still think of themselves as free and independent. A beacon for democracy even. But in the real world of Dollars and Cents, the U.S. is up to its neck in debt and can't afford to see foreign investors stampede for the exits.

Of course, George W.'s expert economic management and incredibly popular foreign policy, not to mention the U.S.'s unmet ambitions for yet more military conquest, has caused a certain amount of disquiet overseas. Where, sadly, most of the people who provide the cash to keep the show on the road reside. The risk to the USD is real, it's growing and the FED knows that.

So when the FED talks of inflation read IMPORTED INFLATION, because that's what they mean. With the Household Sector sinking under a mountain of debt, falling residential property prices, rising domestic interest rates and wages which are going exactly NOWHERE, there is little or no domestically generated inflation in the U.S. right now. I mean where would DOMESTIC inflation come from in that environment?

Inflation in the U.S., such as there is, is being generated as a result of the rising cost of IMPORTS. And the price of imports is rising because the USD is performing badly. And the outlook for the USD is worse still. IMPORTED INFLATION is the big CONCERN. If the USD sinks further, which it will, then rates will have to rise and the Residential Housing Market and the U.S. Consumer will have to fend for themselves. In a dog eat dog world, such as the U.S., that can hardly be a surprise.

It would appear that Helicopter Ben has suddenly discovered the EXTERNAL SECTOR. Bravo Ben. Not before time either, given that the U.S. now relies on foreign finance for near on 7% of its current GDP growth. Without that FOREIGN finance you have a RECESSION. And if you know how to subtract it's easy to work out it would be a biggie.

The U.S. Stock Market is still running with the idea that if economic conditions get any worse then the FED will ease monetary policy. That is, since EVERYONE expects economic conditions to worsen the Stock Market thinks a RATE CUT is coming. And, what's more they think a RATE CUT will fix everything. So they are buying STOCKS. These guys are still living in an era where the U.S. ran the world and what they didn't run they bombed. So even while the FED is telling everyone that, gee whizz, yes we have noticed that the Housing Market is in trouble, that the Household Sector is in trouble and that it's all likely to get considerably worse in coming months, they are also telling anyone who will listen that that's just TOO BAD. Sorry, but we have to try and keep (IMPORTED) Inflation under control. That is our PREDOMINANT concern. The economy, well hey, we're sorry about that.

While the Stock Market lives in the 1950s, foreign investors don't seem convinced. Just look what happened to Treasuries following the FED statement. No rally and today we have a sell off. So it seems that U.S. economic slowdown or no economic slowdown, no-one is rushing to buy Treasuries. With Foreign Investors holding more than half of the U.S. Treasuries already on issue there doesn't seem to be a queue forming to buy more. Why is that I wonder? Oh yeah, the USD. Ooops. That pesky little detail that those darn foreigners don't use USDs back home where they come from. Can't we do something about that? Invade or something? Oh yeah, I forgot, we don't have the money for more invasions. We don't even have the money for current invasions. Darn.

So how long before the USD/JPY breaks below 117.00? Oh, I'd give it a week or so. At the most. The EUR/USD is also back on the upward trajectory. And European Industry is not happy. The Banque of France is not happy. Chirac is not happy. No-one is happy. Regardless, Trichet keeps blattering on about M-3 and how rates HAVE to rise. More. On his say so. The ECB may as well kiss independence goodbye right now. It's called arrogant overreach and when you get there, eventually, they get you. Wheels have been set in motion. Suddenly people in the EuroZone are not so keen on Central Bank Independence. Sub 2% inflation seems like an arbitrary number of no consequence and certainly not something to AIM for to the exclusion of all else. Knives are being sharpened.

But in the short term all this ECB Hawkishness, inspired by Trichet's bizarre imitation of that failed institution, the Bundesbank, is not helping the USD. What do we have? Oh yeah: rate rises in Japan, rate rises in China, rate rise in the EuroZone, monetary tightening in the U.K., in Australia, New Zealand. Anywhere easing right now? All that excess liquidity. Poof. Gone. Bad news for economies which are built on debt. Bad news for the BUCK.

OIL 60.50
GOLD 664.70

As the USD takes another kick in the head, GOLD is rallying again. It's not over yet. This has only really just begun. Want to know how far how fast? Watch the DOLLAR.

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Comments:
A "Federal Reserve Note" is not a U.S.A. dollar. In 1973, Public Law 93-110 defined the U.S.A. dollar as consisting of 1/42.2222 fine troy ounces of gold.
 
Only U.S. residents aren't legally allowed to hold GOLD, only paper money. So I'm really discussing the value of that paper money.
 
I think you got your dates wrong by the way.
 
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