Thursday, March 22, 2007

The USD: Not Waving, Drowning

EUR/USD 1.3358 Hi 1.3414 Low 1.3343
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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Tuesday, March 20, 2007

Getting the Hell out of Dodge

EUR/USD 1.3300 Hi 1.3316 Low 1.3272
117.19 Hi 118.06 Low 117.04
AUD/USD 0.8000 Hi 0.8035 Low 0.7962
EUR/JPY 155.87 Hi 156.99 Low 155.59

All you really need to do is follow the money. George W. and all his buddies are lining up telling everyone that the U.S. is never leaving Baghdad. And maybe they aren't. And maybe they will start another conflict with Iran. This time with bigger and better missiles. But that doesn't mean they don't know they are in trouble. All you have to do is follow the money.

Halliburton, Dick Cheney's old hunting ground, is getting out of Dodge. And fast. Suddenly one of the principal beneficiaries of the Iraqi Invasion is leaving the United States and setting up in Dubai. You can listen to Bush all you want. The truth is: they are in big trouble. When the only thing that counts is money and plunder, and for these guys that is all that counts, then following the money is the only game in town.

And what exactly is the problem? Has Middle America suddenly discovered that the Iraqi Invasion was illegal and immoral? I wouldn't count on it. The American media bleats on about the 3,000 or so U.S. Troops who have died during the American WAR OF CHOICE but there is almost no coverage about the 650,000 Iraqi casualties, about the devastation of Iraqi towns and Iraqi infrastructure and the U.S. is certainly not welcoming the 2 million Iraqis made homeless by George W.'s destructive little foray into GEOPOLITICS. Middle America still can't find Iraq on a map and they certainly haven't discovered that Iraqis have rights.

Nope the problem lies elsewhere. George H.W. Bush (the man is an endless source of inspiration) once reportedly remarked that: "The American People" are "The BUD People, The Broke Useless and Depressed. We are the MPBs, Money, Power and Brains. As long as we keep food on the BUDSTERS tables, a roof over their heads, a car in their driveway and gas in their gas tanks to go to and from work. We can keep the BUDSTERS at bay." So much for the "vision thing".

And that is the real problem. The Average Joe in the USA doesn't think there is anything even slightly wrong with using America's big guns, and all the other fun toys they spend endless time and resources developing, to go steal other people's resources. Or to invade sovereign nations. That's just what the U.S. does. So long as the U.S. wins, gets the plunder and manages to shout down the United Nations, the European Union and anyone else who dares get in their way. The assumption, of course, is that the use of FORCE is not only a feasible policy option it is the U.S. preferred foreign policy option. Just so long as the lifestyle of the Mr. Joe Average is not adversely impacted. And that's where the real problem is right now. And it's a biggie.

The lifestyle of Mr. Joe Average is not being just adversely impacted but economic prospects for Middle America look grim. It's all very well if the Sub-Prime Mortgage Market should disappear down a black hole, after all the Sub-Prime Market only really involves minorities, but should CONTAGION start to be a problem, and it's hard to see how it won't, then Mr. Joe Average is going to get mad and he's going to start looking for someone to blame. And the billions of dollars wasted on the Invasion of Iraq and the Invasion of Afghanistan, which have provided NO DISCERNIBLE benefit to Mr. and Mrs. Average, are likely to be a good starting point for the BLAME GAME. A lot of those billions went right into the pockets of Halliburton and other war profiteers. So they're leaving town while the going is good. Or at least before the impact of the economic plunder which has taken place under George W. becomes obvious.

The good news is that the BoJ didn't hike today. On the back of that fairly unimpressive piece of good news (well that the best there is at the moment) the USD/JPY managed to rally all the way back up to 118.00 in European trading. But it didn't stay there very long. And even if the FED indicates that NO RATE CUT is coming (none is) that still won't do all that much for the USD/JPY. What happened when Cheney went to Japan is significant. The Japanese met him with due courtesy and then dismissed his visit as a big non-issue in their press. The USD/JPY has been under pressure ever since.

USD/JPY is going lower. The Carry Trade is being closed all over town. Hedge Funds are in trouble. We just don't know which ones yet. The USD/JPY is headed back to the recent 2007 low and there is no real reason for it to stop there.

Other U.S. Financial Markets will struggle as the USD comes under further pressure. But the main game, for now, remains the USD/JPY and the unwinding of one of the bigger speculative bubbles of the past few years. Easy come, easy go. No point picking bottoms quite yet.

OIL 56.62
GOLD 660.20

GOLD is seeing more strength as everyone scrambles for an alternative to the USD. Onwards and upwards while the price of OIL languishes as the entire world reassesses global economic outlook. That is as the markets try and figure out what a U.S. Recession is likely to do for the price of OIL. All up, no news on either market.

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