Wednesday, September 05, 2007

Damage Control

EUR/USD 1.3588 Hi 1.3630 Low 1.3567
USD/JPY 115.69 Hi 116.49 Low 115.41
AUD/USD 0.8202 Hi 0.8291 Low 0.8182
EUR/JPY 157.16 Hi 158.65 Low 156.77

The hope that the Federal Reserve will cut interest rates is a bit like the hope that President Bush will reduce troop levels in Iraq. If you keep hinting that it's a possibility it takes some of the pressure off without you actually having done anything. The status quo stays the same. And right now the status quo is a problem.

Ben Bernanke got all sorts of pats on the back from the PUNDITS when he engineered his not-quite-an-interest rate cut on August 17. Buckets of ink have been used in newspaper columns explaining how the little problem with liquidity which financial markets experienced in August was just that: a little problem. And every delusional market commentator out there was spinning the line that now everything can go back to usual and Mrs. Watanabe can come galloping back with her carry trade prowess and save the USD and by extension, of course, U.S. financial markets and maybe even the beleaguered sub-prime market. To be fair there is not much else that can be done other than talk things up. It's called Damage Control.

And in as much that the USD/JPY is up from its recent lows the talkfest has been successful. But really if that's success then Iraq is great vacation spot right now.

Meanwhile back at the ranch Mr. Trichet gets to make an appearance this week and the consensus is that a rate hike, which had been pencilled in, is now off because even though the PUNDITS and Mr. Paulson and Ben Bernanke want us to believe that things are not as bad as they are, in fact, they are worse. Ponzi would have been proud. Me, I'm thinking Albania circa 1996.

Which I suppose explains the security detail which President Bush travels with. A bullet-proof, bomb-proof, chemical-proof limousine certainly comes in handy when the populace gets antsy. The populace isn't exactly happy right now. And the U.S. Housing Market collapse is only just getting into the swing of things. As for the sub-prime debacle which goes with it, no-one really know where that is going because no-one really knows who is going to end up holding the baby. What we do know is that Hedge Fund Land is in trouble, lots of banks all over the place are in trouble and this perverted derivative creation has spread like cancer. And it isn't over.

How bad can this get? Well how does unprecedented sound to you? Because that is where it is going. Of course some people are screaming that the FED must cut right now before we have financial market melt-down. Not that cutting rates will do anything much, except maybe speed up the collapse in the USD. Which I suppose would get things over quickly.

And that's just the Financial Market side of things. Add in the GEOPOLITICAL side of things and the situation is a shade worse. Actually that's not true. When you add in the GEOPOLITICAL side of things the situation is catastrophic. George W. and his cronies have been making noises recently about Iran. The idea is that sooner or later the U.S. is going to "take out" Iran. Cowboy style. And there are supposedly plans afoot and guns in place and what have you.

In the other camp with Iran are China and Russia. This is not good. President Putin has been issuing warnings and China has been making noises while delusional U.S. commentators suggest that China would never take the "nuclear" option (that is: dump its U.S. Treasuries) because that would mean mutually assured destruction.

Well maybe, maybe not. Certainly China would take a loss. But Chinese economic development is not a carbon copy of Japanese economic development. What China has managed to achieve over the past thirty years or so is essentially a transfer of technology. The Chinese have a big enough and an under-developed enough domestic economy to continue growing even if the U.S. market disappears off the radar. Especially now that they have achieved the technology transfer they so desperately needed. All that offshoring wasn't just about taking jobs away from the U.S. it was about taking factories to the Chinese. We are not talking mutually assured destruction we are talking U.S. bankruptcy. Which is slightly different.

So there we have it. The great USD sell off continues and U.S. Financial Markets are NOT going to be the place to be for quite some time. Armageddon? Well maybe the financial kind and "in one hour so great riches is come to nought." Watch this space.

OIL 74.89
GOLD 688.60

GOLD remains bid, which is hardly a surprise, and all the cowboy posturing from Bush in the Middle East is helping OIL stay bid in spite of increasing talk of a global economic slowdown. When will we they start talking recession I wonder?

At least Daddy's OIL friends will be pleased.

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