Tuesday, June 05, 2007

Punching Above Your Weight

EUR/USD 1.3530 Hi 1.3555 Low 1.3486
USD/JPY 121.30 Hi 121.95 Low 121.12
AUD/USD 0.8357 Hi 0.8410 Low 0.8336
EUR/JPY 164.06 Hi 164.10 Low 163.92

One of the disadvantages of coming from a rich family and having your path in life paved out for you by Daddy's connections, problems solved with a phone call and trouble quietly covered up, is that you don't understand a real crisis when you see it and you really don't understand your own limitations. And so it is with George W. and by extension the United States. George W.'s presidency may be in real trouble but he doesn't seem to understand that there is a problem. So he goes blithely on, assuming that if it comes to a show-down he can just call in the big guns and everything will be fixed. Pronto. And anyway he doesn't really care.

And so after having led the United States and the "Coalition of the Willing" into a hopeless military adventure in Iraq, George W. seems intent on laying the grounds if not for an outright military confrontation with Russia and potentially China, then at least he is opening the way for a new COLD WAR. Oh goody. Everyone knows that the United States has more bombs than anyone else. So there is nothing to worry about. I mean look at how far all that military equipment got the Americans in Iraq: heavily armed and sinking in the quicksand. Well at least they can boast that they have bombed half the country, destroyed most of the infrastructure and have been directly or indirectly responsible for killing nearly 1 million Iraqis and rendering another 4 million homeless. So they might not be winning but they sure have demonstrated how destructive they can be. So everybody better watch it.

And watch it they are. Putin called George W.'s bluff this week. And now George W. had better hope that democracy in the Czech Republic is NOT working. After all THREE QUARTERS of the Czech population are reportedly opposed to the U.S. military bases being planned there. Though it shouldn't really be a problem. Most people in Europe are opposed to the introduction of the European Constitution and the new French President has been talking about getting one up and running in the next two weeks.

George W. knows that democracy is mostly a charade so he's not worried about popular opinion. And he's right. There's nothing much the people can do about politics. Even getting him impeached seems to be beyond the ability of the American public. But that doesn't mean he isn't playing a very dangerous game. After landing in the Czech Republic today George W. went on the offensive. He criticised Russia and China. Good move George. Oh and Egypt and Saudi Arabia. Even better. Obviously George W. doesn't understand just how reliant the United States is on foreign capital inflows.

Without foreign capital inflows the U.S. economy will tank so fast there won't be time for any planning. And a great deal of the money needed to keep the economy ticking over in the United States, to fund the Federal Government, to fund all this exciting new military expansionism comes from, er, well places like Russia, China and Saudi Arabia. And we are talking capital inflows from Foreign Central Banks mostly. And Central Banks report to the Governments in those countries. So it wasn't a great move. But then George W. doesn't really understand what a potential crisis really looks like. Nor does he understand when he's punching above his weight. Which is what he's doing right now. But financial markets have figured it out pretty quickly.

And not surprisingly the reaction has begun. With the USD already under pressure versus the EURO, given the divergent interest and economic outlooks in the two blocs, NOW the USD is also sinking against the JPY. Which is significant. Because it was mostly the carry trade which was keeping the USD afloat. And the carry trade's core is the USD/JPY. If, as appears likely, we start to see CARRY POSITIONS closed then the USD could be in very, very serious trouble.

And if the USD is in trouble then U.S. Financial Markets are in trouble. The U.S. Treasury market knows that already. It keeps getting slammed. Doesn't matter what economic news is released, good inflation, bad inflation, growth, no growth, jobs, no jobs, U.S. Treasuries just keep taking hits. Yields on 30 Year Paper have broken through 5.0% and keep rising.

The only part of the financial market which has really held up over the past year or so in the States has been the U.S. Stock Market. But it can't last. It doesn't matter how many mergers or buy outs get announced at the last minute. All the cheerleading in the world won't be enough. As Corporate Profits start taking hits, as they are, we are going to see selling pressure emerge on the U.S. Stock Market. And that will only encourage more USD selling. Because the U.S. has only managed to attract capital inflows on the assumption that everything is pretty fine and dandy in the United States. When it becomes clear that that is not the case then capital flight will become a problem. And in that situation provoking the people providing the finance is insanity.

But George W. is cool. He knows there are big guns behind him somewhere. He has back up, connections, he can make phone calls and then all the problems will be solved. Pronto. Only maybe not. He obviously thinks that the PPT and Hank Paulson can just magic away any financial market instability.

More downside for the USD is on its way. There is no good news in sight for U.S. Treasuries if they can't find buyers and U.S. Stocks are unlikely to survive the type of economic slow down which is inevitable if foreign funding for the economy slows. Oh and by the way foreign funding has slowed.

OIL 65.51
GOLD 675.80

With the USD under pressure and GEOPOLITICS looking ugly everywhere from Eastern Europe to Turkey, the bid is back in the GOLD market. Given the current U.S. Administration's crisis management skills expect GOLD to remain bid.

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