Wednesday, February 28, 2007

The Fall of Babylon

EUR/USD 1.3193 Hi 1.3244 Low 1.3186
118.36 Hi 118.76 Low 117.92
AUD/USD 0.7880 Hi 0.7889 Low 0.7853
EUR/JPY 156.18 Hi 156.94 Low 155.87

Funny what a difference a 25 point rate hike in Japan can make. Not that the pundits and the pinheads are worried. Oh no. These are the same guys they wheeled out at the beginning of the Asian Crisis. They are saying the same things: the underlying economic fundamentals are fine, there is no longer-term problem. It was a lie then, it's a lie now. The fundamental underlying problems of emerging Asian economies were many and manifest. And the Asian Crisis was much longer and much harder than all the pinheads forecast. Of course, this time 'round for the most part we have a new generation of pinheads but the message is the same: the current correction in world stock markets is nothing to worry about. The EXIT from the CARRY TRADE is nothing to worry about. Hedge Funds are nothing to worry about.

Well we'll see about that.

We may get a bounce. Big deal. Even if the FED starts doing a BOJ by simply spewing out DOLLAR bills, that won't work. The Nikkei hit a record high of 38,915.81 on the 29th December 1989. Yesterday the Nikkei closed at 17,604.12. And that brilliant result comes after decades of easy money and after a number of years when the BoJ simply printed as much money as the system could absorb. The FED, of course, has already prepared for this possibility. Hence M-3 numbers are no longer published. But when money turns into wallpaper you don't necessarily want to hold it. Unless you particularly admire the design.

Of course the fundamental economic picture in the U.S. is healthy. You can tell by the numbers. Yesterday saw the release of the Durable Goods numbers. They were great!! No actually they were dismal. But for now the Consumer, reportedly, doesn't seem to be concerned. If you believe the surveys. When the U.S. Consumer finally becomes concerned about the economy it will be ALL OVER, bar the shouting. And Cheney will be in his bunker.

Well I guess we could have a repeat of the Weimer Republic debacle and we all know what followed that. What I like about these guys is how deterministic they are. They follow the same tired old script and hope nobody is watching. Like a bunch of morons playing chess with the same game plan. One thing they got right though is that mostly nobody is watching. Much more pertinent is the Anna-Nicole Smith saga. Or the Britney Spears saga. Or the fat kid story in Britain.

So they are going with a repeat of history. But it's not that easy. And these guys are neither smart nor charming. Which makes things a little difficult. Determination and a devious game plan may not be enough, even with their passionate intensity. And George W. doesn't even have that.

The USD is still in trouble. Weak economic activity will help support the U.S. Bond market in the short term, at least in USD terms, but that is unlikely to be enough to encourage ongoing offshore buying of USD bonds, which is crucial to the long term health of that market. Ultimately the scarcity of savings in the U.S., together with the insane spending plans of the Bush Administration, will keep a floor under bond yields in the United States. The upshot is that there will be no relief for the credit-dependent U.S. Consumer in the medium to long term. Bad news for an economy which relies so completely on consumption to fuel growth and it will also eventually be very bad news for those export-orientated economies around the globe which rely on the U.S. Consumer Market. So much for world growth and the feel-good economy.

OIL 60.84
GOLD 675.30

They took another whack at GOLD yesterday. They keep trying. Which is what you would expect. Should the story out on financial markets change from growth to DEFLATION, which is likely, GOLD is likely to see something of a correction, particularly in non-USD denominated terms. In USD terms the downside for GOLD appears limited.

Bursting ECONOMIC bubbles are not going to help commodities in the short to medium term. Although there is still plenty of potential for further conflict in the Middle East, unless another major flare up ACTUALLY takes place (and we all know that there are PLANS for that), the likelihood of another major surge in the price of OIL appears limited. Weak world growth is not good news for commodities.

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